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JP Morgan: Analysts List Fears For Nigeria’s Economy

Posted: Sep 10, 2015 at 12:15 am   /   by   /   comments (0)

By Sola Alabadan,


Reactions continued to great Tuesday’s decision by JP Morgan to remove Nigeria from its Emerging Market Bond Index, a move analysts say would have far reaching implications for the country with little or no demand for her bonds from foreign investors, while investors could move their funds to competing countries, resulting in higher lending rates.

After issuing a warning earlier in the year, JP Morgan on Tuesday said it would start phasing out Nigeria from its influential Emerging Market Bond Index this month and completely eject the country from its index by end of October due to the current restrictions on forex transactions and policies of the Central Bank of Nigeria (CBN).

Despite the spirited argument against the decision by the Federal Government through the Ministry of Finance and Debt Management Office (DMO), as well as the CBN, activities at the Nigerian Stock Exchange (NSE), on Wednesday reacted, with the NSE All Share Index losing  2.89 per cent, in what analysts at Dunn Loren Merrifield say is the biggest single-day drop since January 2015.

This brought year-to-date negative return to 15.01 per cent, according to DLM, besides profit-taking activities.

But Femi Awoyemi, chief executive of Proshare Nigeria, in a text message reaction to he planned delisting of FGN bonds, said JP Morgan is free, just as investors can “take their funds to more ‘profitable emerging markets. You cannot ignore Nigeria for too long. Let’s get our house sorted and take a wise decision on the trilemma we face.”

Analysts at Nairametrics believe the potential implications of this move are far-reaching as JP Morgan Index is currently tracked by over $200 billion Funds.

By taking Nigeria off the index, they continued, there would be little or no demand for her bonds by foreign investors, pointing out that since JP Morgan threatened to yank Nigerian off in January, foreign holding of the nation’s bonds has dropped from a peak of $11 billion in 2013 to $3 billion. They warned that this is likely to shrink further thereby affecting demand for the country’s debts.

The Ugodre Obi-Chukwu-led Nairametrics added: “With Nigeria out of the scene, other emerging markets in Africa like Ghana, Kenya and even South Africa could now be more attractive to investors. They will simply now move their funds to competing countries leaving Nigeria in its wake. Since investors like to follow the money, it is also likely that other forms of investments may elude Nigeria because of this singular move.

“Nigeria will lose its prestige as not just the largest economy in Africa but the economy attracting the most foreign investments. This will be damaging to an economy that has been thumping itself as the destination to be for foreign investors.

“With the exit of most foreign investors, the long term plan of the Debt Management Office of ensuring that the nation’s bond market is deep is now in jeopardy. With little demand, it is unlikely that the government and other private companies seeking foreign currency loans will use the bond market as a possible source. This will make the market shallow and unattractive and could even throw some companies out of business,” they stressed.

The Nigerian stock market that has seen some bullish trends in recent days may also be negatively impacted especially as this announcement may hurt the confidence of foreign investors which make up about 45 to 50 percent of transactions in the Nigerian Stock Exchange.

In view of the fact that local companies and banks also borrow money from foreign investors by selling foreign denominated, as well as Naira bonds, now that the Federal Government is likely to see its borrowing cost go up due to this development, it is likely that banks and other corporates seeking to borrow may have to pay more in interest as well.

Analysts also said the development could lead to higher interest rate in the country since banks that are lucky enough to borrow will have to pass on that cost to someone else. “Small businesses which rely on banks for small loans such as overdrafts, local purchase orders, letters of credit etc. may also see their borrowing rates rise even higher. For individuals with consumer loans they may also be expecting a letter from banks telling them that their loan rates have gone up,” analysts noted.

In case this situation is not handled properly, fears were also expressed that it may trigger another massive devaluation because if the foreign investors pull out their funds, this will create demand pressure on forex and result in devaluation.

Reacting to the JP Morgan decision also on Wednesday, analysts at FBN Capital Limited, noted that the exit of these investors by end-October, “would probably leave a maximum of $1 billion invested by the offshore community in all naira-denominated Nigerian government paper.

“This is a demotion for Nigeria and amounts to reputational damage. Since the FGN as well as the CBN are fire-fighting in the face of the global headwinds, we do not expect a dramatic response on their part.”

The FBN Capital report noted also that “Nigeria is not eligible for re-inclusion in the GBI-EM indices for at least 12 months. We can assume that JP Morgan would not lightly restore Nigeria.”