The de-listing of Nigeria from emerging markets by JP Morgan

The US-based international lender and financial services holding company, JP Morgan Chase & Co., recently de-listed Nigeria from its emerging market sovereign list. The action was owed to the failure of the Nigerian National Petroleum Corporation (NNPC) to remit three months’ oil revenue receipt to the Federal Government.

This recent occurrence follows Nigeria’s inability to take advantage of rising global oil and gas prices, given its status as a major producer of these essential commodities.

However, this is not the first time that Nigeria will run out of luck in maintaining its emerging market economy status with this multinational banking and financial services company.

To bring about a renaissance, Nigeria’s leaders must commit to healthier fiscal practices by prioritising revenue optimisation strategies and running sovereign investments more transparently

It would be recalled that in October 2015, JP Morgan phased out the country from its emerging market government bond index (GBI-EM) due to the lack of liquidity and transparency in its foreign exchange market. Before then, in January of 2015, JP Morgan had placed Nigeria on a negative index watch on its government bond market index.

Nigeria’s enlistment in the GBI-EM was activated in 2021 based on an active domestic market for Federal Government bonds and the expectations of a buoyant financial structure, among other observed positive macroeconomic outlooks.

Nigeria’s status as an emerging market emanates from its position as a gradually transitioning economy with a large production capacity in its core sectors. Also, the nature of the country’s investment and demand climate, which has been considered attractive with records of foreign direct and portfolio investments gushing into the country’s market, contributed to its emerging market status.

Sadly, experts have warned that the country’s position as an emerging economy may receive a further downgrade by other global banks in a follow up to JP Morgan’s, latest move.

This is because de-listing Nigeria will cost the country dearly in terms of a bruised investor sentiment and unfavourable international transaction costs. Risk-averse international partners and investors may be forced to sell off their naira-backed bond holdings in the wake of the announcement.

Also, many foreign portfolio investors whose investment appetite for Nigerian-based investments is driven by JP Morgan’s emerging markets reference may lose confidence in the country’s investment return potential.

The JP Morgan Emerging Markets sovereign rating recommends that investors be “overweight” in the face of critical fiscal challenges. However, Nigeria’s inability to remit earned funds from oil production and sales between January and March 2022 has signalled an extremely worrisome fiscal situation, which the international lender considers a revenue crisis.

More threatening is the fact that despite a positive oil environment, Nigeria’s ability to pay foreign bondholders may be crippled by the fast ebbing fiscal might and investors are warned by the de-listing to avoid Nigerian bonds even as the government seeks to approach the market soon.

Furthermore, Nigeria’s revenue dilemma continues to impose dire implications on multinational businesses in the face of foreign exchange scarcity. International corporate bodies who fund their regular business with borrowed foreign exchange, for instance, will have a hard time repaying their loans as severe scarcity hits the foreign exchange market.

Read also: Nigeria’s fiscal, FX woes set to linger beyond 2022

While individuals and businesses struggle to fund personal and investment concerns through all available official windows, the limited availability of foreign exchange from these official sources usually enforces a redirection to the back-door market, usually at more costly prices.

Hence, the premium between the official and unofficial FX market windows continues to widen, and the pressure on the naira strengthens. It is useful to note that in the black market, the dollar exchanges for over N600 while on the I&E window it trades at N415.58/$1.

Little wonder therefore that Nigeria’s emerging market position has been replaced with Serbia, a country that currently maintains sufficiently high reserves and retains a solid fiscal consciousness.

Also, JP Morgan has included Uzbekistan in the emerging economies list, given the country’s relatively mild debt irrespective of its potential exposure to Russia.

Already, in-country investments by foreign investors have begun to shrink, given the latest move by JP Morgan.

According to the domestic and foreign portfolio investment report of the Nigeria Exchange Limited, total foreign transactions in Nigeria have declined by 7.17 percent from N45.43 billion to N42.17 billion between February and March 2022.

With a downward trending fiscal position, Nigeria’s business environment may continue to experience unfavourable sentiments in the face of worsening global risks and a heated internal macroeconomy.

To bring about a renaissance, Nigeria’s leaders must commit to healthier fiscal practices by prioritising revenue optimisation strategies and running sovereign investments more transparently. This is perhaps the only way out if Nigeria wants to retain her groove and status with other relevant actors in the global economic system.