Nigeria’s return to JP Morgan Index seen not earlier than 9 months away

In this fourth part of BusinessDay’s investors series on Looking in from the outside, Publisher, Frank Aigbogun reports on why it could be nine months hence before Nigeria can hope to get back on the JP Morgan emerging market index and the new thinking about the wisdom of a naira convergence. It is part of the feedback from a weeklong market development programme conducted in London by leaders of FMDQ OTC exchange.

Nigeria’s return to the JP Morgan index of emerging markets is unlikely to happen in less than nine months from now, according to feelers among investors and analysts in London.

Analysts and bankers we met in London were of the view that whereas the new investors and exporters FX window offers Nigeria a second chance to plot its return to the global market, there is little chance the country will be embraced by JP Morgan this year.

In October 2012, Nigeria became the second African country after South Africa, to be listed in the index, which tracks bond yields in emerging markets, after removing a requirement that foreign investors hold government bonds for a minimum of one year before exiting.

However, things turned sour for the continent’s largest economy, when on September 8, 2015 JP Morgan Chase, issued a statement stating that they had begun the process of discharging Nigeria from its index, a process that was completed the following month.

Prior to this, JP Morgan officials had worked with Nigeria for about nine months, to avert the disaster but did not get the desired changes that they demanded.
At our meetings with investors in London, including one with relevant analysts at JP Morgan, it became clear that despite recent market friendly changes made to Nigeria’s foreign exchange rules, there was no hurry to bring Nigeria back to the index tracked by funds with a combination value in excess of $200bn.

“JP Morgan worked with Nigeria over a period of nine months, leading up to action taken on September 8, 2015 and it is our expectation that it will take just about the same time working with Nigerian officials to bring the country back to the index”, one senior analyst said.

According to him, “where ever we go, we are not hearing investors ask us why is Nigeria not back and there is little chance of any major changes until the investors themselves begin to push.”

Earlier in 2015, JP Morgan had served Nigeria a notice of warning, citing investors’ concerns, among other things, the nation’s stifling liquidity crisis.

This FX crisis and Nigeria’s removal from the index, forced several global funds to sell Nigerian bonds, triggering an unprecedented capital flight, raising borrowing cost for the government and creating panic in an already constrained economy, which later pushed the economy into a debilitating recession.

Many believe that kicking Nigeria out of the elite index cost the government considerable political capital, by removing from the country, the prestige and clout it hitherto enjoyed and also raising the country’s cost of borrowing by depressing interest in Nigeria’s bonds.

Not unexpectedly, the local currency, starved of any worthy defence, became mired in subsequent devaluation and attack by speculators. Nigeria’s removal also became a trigger for more than two years of bearish run on the stock market.

Convergence of Naira rates?

Before we travelled to London, I had been an advocate of the convergence of the naira rates, as this is the case in virtually all ideal markets around the world.

Today, you effectively have four rates. The official rate of N305 to the dollar, which is used to convert oil sales for distribution to the tiers of government and which perhaps is the rate used to price petrol imports; N325 is another CBN rate used to sell FX to manufacturers and N360 which applies to BTA and PTA transactions, as well as school fees and the sale of dollars to small business and you have the autonomous or I & E rate of N365.

While meeting with the investors, two issues arose. One was, the preferred point of convergence of these rates. There was the fear that if a forced convergence at a non-market determined point happens, then whatever appetite for Nigeria that is now rising, will just disappear.

The other and perhaps more important issue, was the significant risk that once the rates converge and if oil prices continue to decline, this single rate could once again become the subject of political games.

This concern was voiced at virtually all meetings we had in London and it was also a major issue in the question and answer session held by CBN Governor, Godwin Emefiele with investors.

If there must be a convergence, let it happen to the three CBN rates, while the I & E FX window rate should be allowed to operate independently, was my conclusion. In which case Nigeria will operate a dual FX rate until sufficient confidence returns to the market.

 

Frank Aigbogun