Nigeria's bond, stock index react to JP Morgan decision on bonds, central bank, DMO, finance ministry kick

Nigerian bond yields on Wednesday reacted to the decision of JP Morgan to eject the country's bond from its index by October, spiking across maturities while the stock index fell sharply also.

JP Morgan late on Tuesday said it would remove the bond listings belonging to the West African nation from its index by the end of October, after warning the Nigerian government that currency controls were making transactions too complicated., triggering sell off by investors in the market.

Emefiele, central bank boss

Traders say the removal has forced funds to sell Nigerian bonds, triggering significant capital outflows which would raise the borrowing costs for the government. It has also generated a ripple effect for stock market investors.

The benchmark 2024 bond yield rose to 17 percent on Wednesday from 16.20 percent previous day. The stock index shed 3.02 percent to fall below a 30,000 point psychological level.
    "You can only imagine the chaos that is unfolding here," a regional African investment analyst, said from Lagos.
    "There are many more investors still in equities who are keenly watching how the central bank manages the exit process because if they even sniff the possibility that they won't be able to get dollars in the future they are going to run for the door," he said. Nigeria struggling with a plunge in vital oil revenue imposed currency restrictions to defend the naira  after the burning of dollar reserves failed to halt a slide.
    "The basic story is very clear the currency is too expensive ... the question now is does the central bank devalue the currency to respond, or tighten down even more on other capital measures to try and prolong the inevitable," said Arko Sen, director EMEA strategy at Bank of America Merrill Lynch
    The bank had warned Nigeria that to stay in the index, it would have to restore liquidity to its currency market in a way that allowed foreign investors tracking the index to conduct transactions with minimal hurdles.

Meanwhile the finance ministry, central bank and Debt Management Office (DMO) have reacted to JP Morgan decision to remove the country's bond from its index, expressed strong disagreement wiht the reason given by the financial giant for its decision.

"While we respect the right of the J.P. Morgan to make this decision, we would like to strongly disagree with the premise and conclusions upon which the decision rests," finance ministry, central bank and DMO said in a joint statement late Tuesday.

Below are the text of the statement.

 The attention of the Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN), and the Debt Management Office (DMO) has been drawn to today’s announcement of the decision by J. P. Morgan to phase out Nigeria from its Government Bond Index for Emerging Markets (GBI-EM). While we respect the right of the J.P. Morgan to make this decision, we would like to strongly disagree with the premise and conclusions upon which the decision rests.

It would be recalled that Nigeria was included in the index in October 2012, based on the existence of an active domestic market for FGN Bonds supported by a Two-Way Quote System, dedicated Market 

Makers and diverse investors. However, in January 2015, J.P. Morgan placed Nigeria on an Index Watch as a result of their concerns in the operations of our Foreign Exchange (FX) Market, namely: 1) lack of liquidity for transactions; 2) lack of transparency in the determination of the exchange rate; and 3) lack of a fully functional two-way FX Market.
In our continuous bid to strengthen the Nigerian financial market and enhance our status as a preferred destination for investors, we took measures to improve the market. Despite the fact that oil prices have fallen by nearly 60 percent in one year, which should expectedly reduce the amount of liquidity in the market, the CBN ensured that all genuine and effective demand were met, especially those from foreign investors. On transparency, the CBN mandated that all FX transactions were posted online in the Reuters Trading Platform so that all stakeholders can easily verify all transactions in the market. In addition, the Official FX Window at the CBN was closed to ensure a
level-playing field in the pricing of foreign exchange.
DEBT MANAGEMENT OFFICE NIGERIA It is important to note that a functional two-way FX market already exists in Nigeria. However, given the high propensity for speculation, round tripping, and rent-seeking in the market, it became imperative that participants are not allowed to simply trade currencies but are only in the market to fulfill genuine customer demands to pay for eligible imports and other transactions. In the light of this, we introduced an order-based, two-way FX market, which has resulted in the stability of the exchange rate in the interbank market over the past 7 months and largely eliminated speculators from the market.
Despite these positive outcomes, the J. P. Morgan would prefer that we remove this rule; even though it is obvious that doing so would lead to an indeterminate depreciation of the naira. With dwindling oil prices, we believe that an order-based two-way market best serves Nigeria’s interest at the moment.
While we would continue to ensure that there is liquidity and transparency in the market, we would like to note that the market for FGN Bonds remains strong and active due primarily to the strength
and diversity of the domestic investor base. For the avoidance of doubt, the Federal Government sees Nigeria and the interest of Nigerians as paramount. It will therefore only continue to take economic decisions that will impact positively in the lives of all Nigerians.