The decision of JP Morgan to delist Nigeria from its Government Bond Index (GBI-EM) by the end of October may deal a big blow to the economy as its ripples effect will weigh down the foreign reserves, foreign investment inflows, yield on eurobond and the stock market.
The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments. The index was launched in June 2005 and is the first comprehensive global local Emerging Markets index.
Analysts said the decision posed a threat to Nigeria’s foreign reserves, which is likely to affect foreign investment. It will also impact the Naira, the yield on Nigeria’s debt and the country’s capital market.
The Head, Research & Investment Advisory of Sterling Capital, Mr.Sewa Wusu, said, though it was an opportunity for the nation to commence developing other sectors of the economy with potential for growth to boost foreign exchange earnings, the phasing out from the JP Morgan bond index would definitely have significant downside implication for Nigeria, particularly on the foreign exchange market.
According to him, the announcement is expected to propel a massive sell-off of Nigerian instruments by foreign investors who track the bond index from their portfolios, as the resultant effect is that the country may witness significant capital outflows.
He recalled, the impact of the decision three months ago when JP Morgan first announced its intention before extending it by six months, that most foreign portfolio investors sold down their bond positions due to the currency risk implication.
He noted that the Central Bank of Nigeria (CBN) has done a lot to curtail the extremes in the foreign exchange market due to round tripping and arbitrage opportunities, while stating that there are other critical sectors that can induce positive growth, create jobs and make the country a productive economy and then contribute to increase foreign exchange earnings.
“If JP Morgan says there is no impact on Nigeria’s status in its EMBI or CEMBI suite of indices, why then do we worry as a nation? Or why then is our financial market responding negatively to this news? It is because our external reserves position is weak, solely dependent on oil receipts,” he explained.
To him, instead of adjusting to the fully functional two-way foreign exchange market as expected by JP Morgan, the country’s national interest is very paramount to its development as a nation, hence suggesting that “we can quickly, as a nation, commence the path of developing other sectors of our economy with potential for growth to boost our foreign exchange earnings potential. Clear-cut policies should be adopted to fund these sectors e.g. mining, agriculture, health, construction, education, tourism and transportation etc.” -The Sun