Bonds, Currencies, Emerging Markets, Frontier Markets, Funds / ETFs, Stocks

Will JPMorgan Remove Nigeria From Its EM Bond Index?

JPMorgan Chase & Co. extended a deadline to decide whether to remove Nigeria from its emerging market bond indexes tracked by more than $200 billion of funds, as a new government in Africa’s biggest economy settles in,” Bloomberg reports.

JPM Nigeria Africa

Back in January this year, JPMorgan said it would assess Nigeria’s suitability to remain in a key emerging currency bond index it manages because of a lack of liquidity in the African country’s foreign exchange and bond markets. The bank, which runs the most commonly used emerging debt indexes, said it had placed Nigeria on a negative index watch and would assess its place on the Government Bond Index (GBI-EM) over the next three to five months, Reuters reported at that time.

The decision that may see Nigeria kicked out of the JPMorgan GBI-EM indexes because of central bank foreign-exchange trading restrictions will be “finalized in the coming months” and no later than the end of 2015, JPMorgan said in a statement dated Friday, June 5th, according Bloomberg. The African country has a 1.8% weighting in the index.

The key focus will be on consistency and observing a reliable record of liquidity, transparency and minimal hurdles for investors to transact,” JPMorgan said. The extension “takes into account that additional time is required to assess the mentioned factors given the arrival of a new administration,” the news agency added.

Removal from the index would force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows. This in turn would raise borrowing costs for Africa’s largest economy.

A couple of years ago, many investors were optimistic about Nigeria and the stock market was booming, buoyed by strong economic growth and government reforms to improve the country. However, by 2014, the mood soured amid a series of unfortunate events, including the terrorist acts of Boko Haram, an Ebola outbreak and the weakening price of oil, which is the major source of income for the government and has a big impact on the economy.

In Nigeria, oil accounts for around 75% of government revenue.

Nigeria’s Central Bank devalued the national currency in November 2014, which was the first time in three years, as the nation’s currency plunged amid falling oil prices.

Nigeria clearly has a compelling growth story, but as mentioned above has faced a number of challenges in recent times. The government will likely have problems funding development and must find new sources of income. Hopefully, this situation will lead to much-needed reforms and a crackdown on corruption to unlock such income. While lower oil prices will likely have an adverse impact on Nigeria’s fiscal situation and foreign reserves, government debt is only 13% of GDP.

About ETFalpha

Chief ETF Strategist & Co-Founder at EMerging Equity


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