When JPMorgan’s indices business threatened to put Nigeria on review for an ejection from its influential emerging market bond indices, Godwin Emefiele, Central Bank of Nigeria (CBN) governor rose to the defense of its position, saying Nigeria has enough liquidity.
But as the naira hits a record low against the dollar on yesterday, analysts say JPMorgan may be right after all.
In a note to clients JPMorgan had put Nigeria on Index Watch negative for its GBI-EM indices as a result of the “lack of liquidity in the spot FX market and local treasury market”.
Although the CBN’s administrative measures do not constitute a capital control, they pose significant challenges to foreign investors’ ability to replicate Nigeria’s exposure basis for the negative watch.
Nigeria currently remains eligible for the GBI-EM suite of indices, however, we will assess the country’s index suitability over the next three-to-five months.
Analysts told Reuters that the Monetary Policy Committee (MPC) might consider devaluing the currency the second time following the eight per cent readjustment done on November 25, Reuters reported.
The naira, which has been hammered by the collapse in oil prices, fell 3.6 per cent to a record low of 191.85 before recovering some ground after the central bank, two banks and an energy firm sold dollars, according to dealers. However, it still booked its weakest close on record at N187.10 to the dollar, suggesting commercial banks think the central bank may opt for a repeat on Tuesday of its November devaluation.
The Central Bank of Nigeria in mid-December introduced a couple of “administrative” measures to strangle bets against the naira, after the currency tumbled sharply in the wake of the oil collapse.
If we are unable to verify sufficient liquidity in Nigeria’s spot FX and local treasury bond market within that timeframe, it will trigger a review of Nigeria’s status within the benchmark for removal.
Conversely, if liquidity improves and investors are able to transact with minimal hurdles, Nigeria will be removed from Index Watch Negative.
Kicking Nigeria out of its indices could have a severe impact on Nigerian government funding at a time when many international investors are already wary of lending to the country. Nigeria accounts for 1.8 per cent of the GBI-EM Global Diversified index.
There is a total of $217 billion investor money benchmarked against the whole GBI-EM suite of indices, but the Global Diversified index is the most frequently used local emerging market debt gauge.
The yield of the local Nigerian treasury bill maturing in April this year climbed 47 basis points to 12.38 per cent last Friday. That is still well above the 15 per cent yield touched at the peak of last week’s turmoil.