In a drastic twist of fortunes JP Morgan has threatened to eject Nigeria from its widely benchmarked emerging market index. According to reports from foreign media the bank sites the recent spate of policies issued by the CBN which restricts the liquidity and flow of dollars from the country. Whilst not exactly capital controls, the fear is that this may just be a step in that direction and expectedly foreign investors might be at risk.
JP Morgan therefore decided to place Nigeria on negative which is equivalent to being placed on a watch list for eventual removal if things don’t improve. Here is an excerpt of their statements as reported by the media
“Nigeria has been placed on Index Watch Negative for the GBI-EM suite of indices given the lack of liquidity in the spot FX and local treasury bond market, which challenges the ability of foreign investors to replicate the benchmark. A negative watch is issued when the characteristics of a local market severely deviate from the determining factors behind index eligibility (see: Introducing the J.P. Morgan Index Watch, April 2014).”
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. 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.”
Just a few days ago the CBN reversed its zero open position policy and increased it to 1% a move that in retrospect may have been informed by the impending threat from foreign investors to ignore future Nigerian bonds. It will be interesting to see how the CBN reacts to this new development.
See FT article here