Nigeria Buys Time to Boost FX Liquidity on JPMorgan Reprieve

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Nigeria’s new administration was given more time to inject life back into currency trading and avoid being cut from JPMorgan Chase & Co.’s emerging market bond indexes, tracked by more than $200 billion of funds.

A decision on whether to remove Nigeria from JPMorgan’s GBI-EM indexes will be “finalized in the coming months” to give the government time to settle in, the New York-based lender said in a statement dated June 5. Africa’s largest economy has a 1.8 percent weighting in the gauge.

“It is in no one’s interest to have Nigeria removed from the index,” Samir Gadio, the head of African strategy at Standard Chartered Plc in London, said in an e-mail on June 6. “From an investor standpoint, Nigeria is the highest-yielding diversifier in a GBI-EM context. That said, further normalization in FX market conditions will probably be needed to ensure long-term GBI-EM inclusion.”

JPMorgan placed Africa’s largest oil producer on “index watch negative” on Jan. 16, saying central bank measures in December had reduced foreign-exchange and bond trading and made it difficult for investors to replicate the gauge of government bonds denominated in local currency. The lender had said it would make a decision within five months. Average yields on Nigerian government bonds were 14.1 percent on June 5, the highest among 31 emerging markets tracked by Bloomberg.

‘Wrong Assumptions’

Restricted naira liquidity may force President Muhammadu Buhari, who took office on May 29 after ushering in the country’s first democratic transition of power, to ease trading conditions, Bloomberg strategist Mark Cudmore said last month. About $4 billion of Nigerian local-currency bonds could be affected by JPMorgan’s decision, he said.

Nigeria wants to remain in the indexes and is confident it will do so, Ibrahim Mu’azu, a spokesman for the Abuja-based central bank, said by phone on Monday. The regulator was in contact with JPMorgan around the time of the January decision to clarify its policies, he said.

“They took their decision based on some wrong assumptions,” Mu’azu said. “They were talking about liquidity in the bond market and we have not failed anybody with that.”

Most foreign bond investors are still able to exit their positions because the central bank prioritizes them when it sells dollars in the interbank market, Gadio said in a note to clients on Monday.

Key Focus

“The key focus will be on consistency and observing a reliable record of liquidity, transparency and minimal hurdles for investors to transact,” JPMorgan said. The extension “takes into account that additional time is required to assess the mentioned factors given the arrival of a new administration.”

Central Bank of Nigeria Governor Godwin Emefiele, confronted with lower crude prices and a naira that weakened 14 percent against the dollar in 2014, enforced trading restrictions to stabilize the currency. He has said the measures are designed to curb speculative demand for dollars and any investor is still able to enter and exit the market freely.

The reprieve “buys the new administration time to decide how to deal with the FX liquidity issue,” Rick Harrell, a sovereign analyst at Boston-based Loomis Sayles & Co., which oversees $241 billion, said by e-mail on Sunday.

Loosen Restrictions

Nigerian regulators started talks with dealers about how to loosen the trading restrictions at the beginning of May, according to people familiar with the matter, who asked not to be identified because it is private. Naira-denominated bonds returned 1.1 percent this month in dollar terms, the most among 31 emerging markets in the Bloomberg Emerging Market Local Sovereign Index after Serbia.

The naira has closed within a range of 197 to 200.7 per dollar every day since the end of February, when authorities introduced measures to prevent traders from buying greenbacks without matching orders from customers. It fell 0.3 percent to 198.95 by 4:40 p.m. in Lagos, after tumbling to a record-low of 206.32 on Feb. 12, the day before the new system was introduced.

JPMorgan’s decision is “on the radar screen of investors,” Antoon de Klerk, a fund manager at Investec Asset Management Plc, said by phone from London last week, before the extension was announced. “They’re very concerned about it. It’d be a near tragedy if Nigeria was to be kicked out. Based on liquidity at the moment, I think Nigeria is out.”

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