Nigerian bonds will most likely remain on the JPMorgan Emerging Markets bond index despite the recent negative watch placed on them by JPMorgan.
“It is likely that the Nigerian authorities will engage the JP Morgan team in charge of the index and attempt to prevent an exclusion from the GBI-EM,” Samir Gadio, Head of Africa Strategy and FICC Research at Standard Chartered Bank, told BusinessDay in a response to questions.
In a notice on January 16, 2015, JP Morgan announced that it had placed the Federal Government of Nigeria Bonds (FGN Bonds) which are included in its Global Bonds Index – Emerging Markets (GBI-EM) – on Negative Watch List.
J.P Morgan says the development is temporary, as they would monitor developments in the spot FX and local Treasury bond markets and if liquidity improves and investors are able to transact with minimal hurdles, Nigeria will be removed from the Index Watch Negative.
“This Negative Watch placed by the J.P on the six FGN Bonds in the Index does not in any way affect the quality of our bonds. They remain a high grade investment instrument backed by the full faith and credit of the Federal Government of Nigeria,” said a source at the Debt Management Office, Abuja.
The DMO source told BusinessDay that all stakeholders remain committed to active domestic foreign exchange and FGN bond markets and are therefore optimistic that the bonds will be removed from the Negative Watch List, but remain in the index.
“I would be very surprised if Nigeria was ejected from the index entirely, given the size of the economy and potential for future capital raising in the debt and equity markets there,” David Spegel, head of emerging debt at BNP Paribas, said.
“Eventually the whole oil risk issue will be priced into the market and flows of capital and investment will return to Nigeria.”
JPMorgan may have based its decision to place Nigerian bonds on negative watch on two circulars released in Dec 2014 by the Central Bank of Nigeria (CBN).
These circulars were the Foreign Exchange Trading Position of Banks at the close of each Business Day (TED/FEM/FPC/GEN/01/026) & the Utilisation of Funds Purchased From the interbank Foreign Exchange Market ( TED/FEM/FPC/GEN/01/028).
As a result of these rules, the FX market effectively stopped trading on a two way quote basis, which led to incoherent price discovery process for the exchange rate, making it very difficult for Banks to fulfil large client orders.
Traders also said that based on the 48 hour deadline for the utilisation of funds purchased at the interbank market by banks/customers, banks could no longer engage in Forward Exchange Contracts, which settles and are utilised outside of spot.
However, on 12 January 2015 the CBN issued a circular TED/FEM/FPC/GEN/01/001 clarifying and reviewing some of the provisions of its December 2014 circulars.
The new circular revised the Daily Foreign Currency Trading positions from Zero percent to 0.1 percent of shareholders funds, unimpaired by losses and increased the timeline for utilisation of funds to 72 hours.
The utilisation deadline has been moved so that rather than commencing from the date of purchase, it now commences from the value date.
“This effectively removes all barriers to trading Forwards, Swaps and other derivative products and we consider it a positive change,” Stanbic IBTC Bank said in a note to its customers dated January 15.
BusinessDay gathered that the FX market has resumed trading on a two way quote basis although attendant liquidity has dropped from $500,000 to $100,000.
Nigerian bonds were included in the JPMorgan global emerging market (EM) bond index in October 2012.
The yields on the benchmark 16.39 percent bonds maturing January 2022 increased 0.14 percent to 15.50 percent according to Friday’s prices on the FMDQ.
Analysts say the yields on Nigerian bonds (one of the highest in the EM index space) are also an incentive for offshore investors playing the carry trade to invest in the market.
“This is certainly a good opportunity for local pension funds and onshore institutional investors to accumulate bonds,” Gadio said.