A Review of the Nigerian Energy Industry

JP Morgan: Emefiele defends CBN policies

11 September 2015, Abuja – The Governor, Central Bank of Nigeria, Mr. Godwin Emefiele, has dismissed concerns about foreign exchange liquidity, despite JPMorgan’s removal of the country from its influential emerging markets bonds index amid fears about the country’s economic management.

Godwin Emefieli, CBN Governor.
Godwin Emefieli, CBN Governor.

The United States bank’s decision was a further blow to Africa’s biggest economy, already battered by falling oil prices and emerging market turmoil just three months after President Muhammadu Buhari rode into office on a wave of optimism.

But Emefiele questioned the reasons behind JPMorgan’s decision. “JPMorgan raised two issues, liquidity and transparency,” he told the Financial Times on Thursday.

“But there [remains] a range in the volume of liquidity from between $350m to almost $400m daily, and that has never been a problem. And we’ve also addressed the issue of transparency. So I don’t really know what the issues are.”

The central bank governor, whose protectionist policies and management of the foreign exchange rate has alarmed analysts, said that dollar demand was still being met, although traders say liquidity has dried up.

The country’s ejection from the GBI-EM index late on Tuesday has already triggered outflows from the $2bn of local bonds the index tracks. Nigeria’s bond market regulator imposed a new spread limit on Thursday, reports said. By mid-morning on Thursday, the domestic stock market had slid nearly 3 percent to hit the biggest two-day decline in eight months.

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With Brent crude below $45 a barrel, “the last thing Nigeria needed was exclusion” from the index, the Chief Africa Economist at Standard Chartered Bank, Ms. Razia Khan, said.

Nigeria will be ineligible for next re-entry for 12 months. “This could well be the crunch time, because it’s when Nigeria most needs its access to markets, external borrowing, and foreign capital,” Khan added.

Some investors voiced concerns on Thursday that Nigeria could also be removed from the MSCI frontier index. But investors say the bond and equity markets sell-off is of less concern than the underlying reasons JPMorgan removed Nigeria from the index three years after the country’s inclusion boosted confidence in it as an investment destination.

The US bank cited tight capital controls introduced by the Nigerian central bank to prop up the naira as one reason for its decision. The naira officially trades near the central bank pegged rate of 197 to the dollar but on the black market has hit 240 to the dollar in recent months. On Wednesday, the naira firmed slightly to 221 to the dollar.

The protectionist policies of Emefiele and his refusal to devalue the naira again — it has already been devalued twice in the past year — have alarmed observers, as has the lack of action taken by Buhari.

“Nigeria needs to acknowledge that oil prices have fallen and that prices, including the FX, must adjust accordingly, even if it hurts in the short term. This is vastly preferable to entering a heterodox system that creates perverse incentives and results in permanent and ever-worsening distortions,” the Head of Research at Ashmore, an emerging markets-focused asset manager, Jan Dehn, said. “Where is Buhari? Is he in control of economic policy at all?”

Nigeria’s ejection from the index follows a tough year for policymakers managing the currency which is traced largely to the “massive macroeconomic shock” of the oil price crash for Africa’s top crude producer, a portfolio manager at Investec Asset Management, Antoon de Klerk, said.

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