Nigeria Must not Succumb to JP Morgan Veiled Threat … India, China Others not on the ‘Blackmailing’ GBI-EM Index

The annoyance of the developed economies is that Nigeria has the guts to introduce measures that will help them manage scarce foreign exchange. But the chief culprit are  the developed economies that give subsidies to their farmers and thus have turned emerging countries that should export food to the world importers of food.
Strings were pulled, and crude oil prices fell. The main victims are perceived enemies of the developed economies. Russia, Venezuela and Nigeria during the regime of former President Goodluck Jonathan.
This brought about our foreign exchange earnings declining by almost 50 percent. The only sane thing for a minister of finance or a central bank governor to do is to manage scarce foreign exchange , especially in the face of dwindling foreign reserves.
The truth be told. Who will encourage the use of scarce foreign exchange to be used in the importation of products that can readily be produced in the country?  Disallowing allocation of scarce foreign exchange for the importation of such items means creating jobs for Nigerians. Allowing the wanton allocation of scarce foreign exchange means paying the wage bills of workers in countries from which Nigeria imports.
So what is the big deal in being listed in the GBI-EM index? The expectation of being listed is that it will attract foreign portfolio investments. But monies from these investor are mostly ephemera. It disappears at a mere whistle because they do not have the interest of any country a heart. It is all about reaping, even at your disadvantaged position. So why the bother?

Countries Not Listed 
India and China are also excluded from the index gauge due to the capital controls that limit access to a majority of foreign investors. Russian bonds are also going to be removed from emerging markets indexes but will remain in other J.P. Morgan indexes that don‘t require a maximum credit rating. Malaysia Pakistan and Ukraine have been taken off the MSCI index as a result of capital restrictions.
These are countries that are determined to guide and protect their sovereignty jealously.
JP Morgan recently announced that Nigeria will be phased out of the Emerging Market Government Bond Index (GBI-EM) index series over the next two months. According to the bank, the limited transparency and the lack of a fully functional two-way foreign exchange market and has given rise to uncertainty and a number of challenges for investors transacting in the Naira. Thus, Africa‘s biggest economy would be partially excluded from the index by September-end and full exit will occur in October-end. Nigeria’s current weighting in the $200 billion index is 1.50 percent
For the Economist Intelligent Unit, if the Central Bank of Nigeria (CBN) continues with its control measures there will be capital flight.
According to it, the decision to remove Nigeria from the index of local-currency government bonds is a blow to its fledgling capital markets, which have benefited from large inflows of foreign monies in recent years. The US bank said on September 8th that the removal of Nigeria from its indices will start at the end of this month and be completed by the end of October. 
It explained that its decision was because of the country’s “lack of a fully functional two‐way foreign exchange market and limited transparency”. Nigeria was included in the GBI‐EM in October 2012, but after the Central Bank of Nigeria (CBN) late last year introduced foreign-exchange trading restrictions to shore up a weak naira currency, JP Morgan placed the country on index watch in January 2015, saying that the capital control measures made it more difficult for foreign investors to replicate its indices.
Items restricted from getting foreign exchange officially include rice, cement, margarine, palm kernel/palm oil products/vegetable oil, meat and processed meat products, vegetable and processed vegetable products, poultry –chicken, eggs, turkey – private airplanes/jet, Indian Incense, tinned fish in sauce – Geisha/Sardines, cold roiled steel sheet and galvanised steel sheets.
Others are roofing sheets, wheel barrows, head pans, metal boxes and containers, enamelware, steel drums, steel pipes, wires, rods, wire mesh, steel nails, security and razor wire, wood particles boards and panels, wood fiber board and panels, plywood  boards and wooden doors.
In addition, sourcing of forex for the importation of toothpicks, glass and glassware, kitchen utensils, tables, textiles, woven fabrics, clothes, plastic and rubber products, soap and cosmetic, tomatoes/tomato paste and Eurobond/foreign currency bond/share purchase has been prohibited.
For any patriotic Nigerian to insists on the importation f these items means the person do not love this country. Why should Nigeria import cement, whereas the ones produced b Dangote are still unsold, or rice when Nigeria’s Ofada rice is the best health wise? 
But the crude oil we export, developed economies are doing everything possible to reduce the use of crude oil in generating energy. In some airports and hotels in these developed counties, light only comes up at the presence of a person. Technology is being advanced daily to ensure they turn to the usage of other energy source other than crude oil. Yet the developed economies wants Nigeria and other emerging countries to continue to import tooth pick to booster their economies.
But in their reasoning, they see a further sell-off of government bonds by investors tracking the GBI‐EM, thereby raising the cost of borrowing for the government. It could also prompt some domestic institutions into knee-jerk sell-offs, further pushing up yields on securities. 
More generally, the expulsion of Nigeria from a major emerging-market index is a blow to the country’s reputation in the international capital markets and a setback to its ambi- tion to achieve greater integration into the global financial markets.
Nigeria’s Ministry of Finance, the Central Bank of Nigeria and the Debt Management Office said in response to the JP Morgan announcement that they strongly disagreed with the premises on which the decision to exclude Nigeria was made. They maintained in a statement that the authorities had taken steps to improve transparency in foreign-exchange transactions and that market liquidity was improving, noting that despite a nearly 60 percent drop in global oil prices in one year the CBN ensured that all genuine and effective demands for foreign exchange were met. 
However, this will probably not have impressed investors given that the CBN’s definition of such “genuine” demands of foreign exchange has been tightened in 2015.
Analysts who are waking up to the JP Morgan blackmail wonder how, people who are outside the workings of an economy will determine what are genuine demands for a sovereign country?
Bismarck Rewane, Chief Executive Officer of Financial Detivatives (FDC) Limited recalled that in October 2012, Nigeria was included in the JP Morgan Emerging Market Government Bond Index (GBI-EM). The GBI-EM indices consist of regularly traded liquid fixed-rate domestic currency government bonds. Nigeria was expected to have a 0.59 percent weight of the $170 billion of assets under management of the index. At the time Nigerian bonds were offering yields of up to 16 percent compared to the GBI-EM Index yield of 5.8 percent. Given the premium and possibility of higher returns, the inclusion brought along with it great prospects of large capital injections into the debt market with some predicting up to $1 billion in the first few months.
However, by 2013 end, Nigeria was struggling to maintain a sufficient level of liquidity – one of the requirements for the inclusion. The currency market especially, had experienced significant blows. The more than 50 percent plunge in oil prices led to an 11 percent depreciation in the last quarter of 2014. This also sparked an out- flow of capital.
The CBN, in December 2014, reduced the Net Open Position (NOP) of Deposit Money Banks (DMB) to zero percent from one percent of shareholders fund, before revising it up to 0.1 percent in January 2015. These measures reduced foreign exchange and bond trading making it difficult for foreign investors to replicate the gauge. Naira daily trading volumes fell to just $20-$30mn compared to $300- $500mn six months before. Nigerian bonds were the worst per- formers after Russia, with dollar investors losing 16 percent.
Nigeria was placed on the negative index watch in January 2015. In June 2015, Nigeria was given a six-month deadline to restore liquidity, taking into account the arrival of a new administration before finally deciding earlier this week to exclude Nigerian bonds from the index. A circular released by the Central Bank of Nigeria (CBN) in response to JP Morgan‘s announcement suggests that Nigeria‘s removal from the index may not be unrelated to the forex system adopted by the CBN- which JP Morgan disagrees with. Despite the relative stability in the exchange rate, JP Morgan believes this current forex system has been less than adequate in resolving the challenges of liquidity and transparency in the forex market.

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