Nigeria faults JP Morgan’s delisting of Nigeria from Bond Index

09 September 2015, Lagos – The Federal Government yesterday faulted JP Morgan’s announcement that it would exclude Nigeria from its local-currency emerging market bond indexes tracked by more than $200 billion of funds, by the end of October.

Recall that JP Morgan hinged the decision on the Central Bank of Nigeria’s (CBN’s) restrictions on foreign-exchange transactions, which it said prompted investor concerns about a shortage of liquidity.

The first phase of the exercise, it said would take place at the end of September, followed by a full exit by the end of October, the New York-based lender said in a statement signed by its spokesman, Patrick Burton.

Faulting the decision, CBN, in a statement last night, signed by its Director of Communications, Ibrahim Mu’azu, said while it respects the right of the J.P. Morgan to make this decision, it expressed its disagreement with the premise and conclusions upon which the decision was made.

In the statement jointly issued by the Federal Ministry of Finance, the Debt Management Office and the apex bank, Mu’azu said 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 the country on an Index Watch as a result of their concerns in the operations of our Foreign Exchange (FX) Market, such as lack of liquidity for transactions, lack of transparency in the determination of the exchange rate; and lack of a fully functional two-way FX Market.

Listing the steps taken by CBN, Mu’azu said 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 regulator 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.

He noted 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.

Mu’azu said CBN’s FX policies have resulted in the stability of the exchange rate in the interbank market over the past seven 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,” he said.

“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”.


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