JP Morgan’s threat and needed steps by government

Last week, the United States investment bank, JP Morgan & Chase announced its plans to phase out Nigerian government bonds from its Government Bond Index for Emerging Markets (GBI-EM) by the end of October.

Nigeria is believed to have about 1.5 per cent weighting in the biggest GBI-EM index, which is tracked by about $200 billion of funds. The plan by JP Morgan to exit Nigeria was said to be based on what it considers as the rise in cost of borrowing and limited transparency in the market.

“Foreign investors who track the GBI-EM series continue to face challenges and uncertainty while transacting in the naira due to the lack of a fully functional two-way Foreign exchange, FX, market and limited transparency. As a result, Nigeria will be removed from each of the six GBI-EM indices starting Sept 30,” JP Morgan stated last week.

The JPMorgan Government Bond Index-Emerging Markets, GBI-EM, indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments. The index was launched in June 2005 and is the first comprehensive global local Emerging Markets index. Indeed, the market was accompanied with panic trading, evident in all segments of the market as the naira depreciated to the US dollar in the parallel foreign exchange market, stocks clawed back three days of consecutive gains, and yields on the most actively traded bonds rose, reflecting the decline in their value as soon as the announcement was made.

As Emerging Market, Nigeria looks increasingly towards her domestic market for sources of finance just as investors are looking more closely at local markets in search for higher yields and greater diversification.

This is because as external debt spreads compress and opportunities seem more appealing in local rates, the likely combination of increasing demand and supply will pave the way for deeper and broader local markets, which the GBI-EM captures.

There are serious concerns among many Nigerians of the possible outcome of JP Morgan’s delisting Nigeria from its Government Bond Index Emerging Market, GBIEM. The likelihood of the country losing billions of dollars, as foreign investors may withdraw their equities, is already causing anxiety among the nation’s economic managers.

However, Central Bank of Nigeria (CBN) has faulted the Bank’s assessment parameters, just as the issue has attracted diverse comments from analysts and investors.

The development poses a challenge to the nation’s financial system and indeed the economy as the immediate fallout of Nigeria’s delisting from the GBI will be massive sell off by foreign investors their Nigerian bond holdings with the attendant negative implications for the country’s long term investment funds. The action could also make bond yields to spike and borrowing cost to be high, thus negatively affecting the country’s already challenged economy. For instance the new government may also likely to borrow this year to fund its anticipated high budget deficits and as such higher interest rates could make things difficult for the government.

Even though the Federal Government says it will continue to take economic decisions that will impact positively on the lives of Nigerians, it is our opinion that appropriate monetary policy mechanisms should be put in place to retain the country on the GBI.

There is no doubt that Nigeria, through; CBN has taken some practical steps in ensuring that the growing insatiable appetite for foreign products by Nigerians is curtailed, particularly, through the recent removal of some products, considered inconsequential from accessing forex from the official window.

The next Monetary Policy Committee (MPC) meeting of the CBN slated for September 21 and 22 could be an opportunity for the apex bank to shift into an expansionary mode by reducing the cash reserve ratio (CRR) from 31 per cent in order to increase liquidity that could help the stock market regain the losses resulting from JP Morgan’s decision to delist Nigeria from its index.

But, most importantly, it underscores the urgency for the appointment of cabinet by the Muhammadu Buhari administration. This is with a view to unfolding its economic policy thrust, and working diligently through which confidence would be restored and foreign investors who may be contemplating leaving Nigeria because of the JP Morgan planned delisting would reconsider their decisions.

It behooves on the government to take practical steps towards forming the cabinet, ease monetary policy measures, diversification of the economy and ensuring continued accretion to the external reserves by being frugal in her spending.