Analysts state implications of JPMorgan’s delisting move
The analysts from Renaissance Capital and Afrinvest Securities Limited said that the soon-to-unfold unsavoury developments would range from more exits of foreign holdings, depletion of reserves to the crowding out of the private sector investments through high cost of funds.
JPMorgan had last week announced that Nigeria would be phased out of its bond index made up of local currency bonds issued by emerging market governments, tracked by a pool of $183 billion, after being placed under watch since January 2015.
Given the situation, the financial market sentiment is still likely to continue to feel the negative impact, as the domestic investor sentiments become the new major force driving the Nigerian fixed income market.
However, the equities market may still continue to experience a mix of foreign and domestic sentiments as Nigerian equities still remain in the Morgan Stanley Capital Index (MSCI) for frontier markets.
For the sub-Saharan Africa Economist Yvonne Mhango and the sub-Saharan Africa Banking Analyst/Head of Research – Nigeria, Adesoji Solanke, both from Renaissance Capital, the risk of depreciation on naira is still hanging given the lingering oil price uncertainty and eroding foreign exchange reserves.
They said the risk has fallen on the shoulders of the Monetary Policy Committee members to allow a more flexible naira (depreciation) at the next meeting slated for September 22.
But analysts at Afrinvest Securities Limited in a note to The Guardian said that in as much as JPMorgan has its criteria for countries enlisted in its indices and the right to delist any country that falls short of its listing requirements, the same can be said of the Central Bank of Nigeria (CBN).
“We are also of the opinion that the apex bank has its exclusive right to ensure it achieves its primary responsibility of maintaining internal and external price stability,” the Head of Research at the securities company, Ayodeji Eboh, said.
According to him, while there have been observed sharp reactions in the market, there are expectations of stability in the medium to long-term, especially as the economy closes in on policy direction from the administration with cabinet inauguration.
However, he noted that in the immediate, the country faces a $2.8 billion capital flight in foreign holdings of Nigerian government bonds, with a weight of 1.5 per cent of the total $183.8 billion in JPMorgan’s index.
“This will further pressure the external reserves as these funds, which have been gradually exiting since 2014, will be expected to leave the financial system.
“A further impact is expected to be felt as the exit of foreign investors may increase government’s dependence on domestic investors, thereby narrowing the pool of funds in the bond market.
“Ultimately, this may increase the risks of crowding out private sector investments due to higher borrowing cost, as a result of government borrowings,” he further said.
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