Forex, bond rates rise on JPMorgan’s delisting

 Mixed impact awaits banks, devaluation fears wane 

The exclusion announcement of Nigeria from the JPMorgan’s Government Bond Index-Emerging Markets (GBI-EX), stoked a backlash for the Inter-bank foreign exchange and money market rates, with a palpable mixed impact in the offing for the banking sector.

The Interbank foreign exchange market, which had witnessed stability at an average of N198.93 per dollar since the beginning of February, rose by 0.1 per cent to 199.02 on Wednesday.

Besides, the current forwards prices and speculations suggest the local currency may lose 18 per cent within six months and 25 per cent over the next year. Meanwhile, the removal of Nigeria from JPMorgan bond index has waned the prospect of imminent devaluation, though the optimism remained that it would be done before the end of the year and in the region of N230/$.

Average yields on government’s securities rose 13 basis points to 16.06 per cent, the highest among 18 countries included in the GBI-EM indexes, according to Bloomberg data.

Also Nigerian Stock Exchange’s All Share Index fell 3.2 percent on Wednesday, the most since January 14, extending losses from this year’s peak on April 2 to 18 per cent. Already, the bourse has recorded net foreign outflows of N28.4 billion ($143 million) in the seven months through July.

But the Governor of the Central Bank of Nigeria, Godwin Emefiele, has repeatedly assured that Nigeria wants to remain in the indexes and that there’s enough liquidity in the currency market for foreigners to buy and sell naira bonds. “According to market sources,” the Sub-Saharan Africa Economist at Renaissance Capital, Yvonne Mhango, said the exclusion will lead to an outflow of about $2 billion of passive funds from Nigeria, as investors in the index seek to rebalance their bond portfolios.

Meanwhile, another analyst said the action of JPMorgan portends a mixed fortune for the nation’s deposit money banks, depending on the level of their respective stakes on government securities.

The Head of Research Nigeria and sub-Saharan Banks Lead Analyst at Renaissance Capital, Adesoji Solanke, in a note to The Guardian, noted that the implications for the banks is that short term rates on investment securities would tend upwards.

The development, according to him, would benefit five banks, which huge stakes in government securities were in Treasury Bills, as opposed to bonds.

However, he said that there is an expectation of market losses for banks, particularly those with proportionately higher investments in bonds given the upward movement in yields.

The upward movement in the yields is mostly driven by pricing in of the risks associated with government bonds over the ongoing exclusion by JPMorgan.

This will hurt equity all the more, as well as additional pressure on Capital Adequacy Ratio of banks, particularly, two major banks, which has recorded the lowest capital ratios in the sector, against regulatory minimum of 15%.

Besides, with the easing of foreign exchange restrictions looking unlikely in the near term, banks will remain under pressure from low foreign exchange earnings in the second half of the year.

The Sub-Saharan Africa Economist at Renaissance Capital, Yvonne Mhango, added that further implication of JPMorgan’s decision is the fact that Nigeria would not be eligible for re-inclusion until 12 months.

The economis however, predicts further tightening of foreign exchange rules in the near term, given that Nigeria will lose about $2 billion of capital at a time when the regulator is “avidly trying to conserve reserves.”

So far, foreign exchange restrictions have come in the form of capping the amount it can be sold for, as banks can only see dollars at a 50 kobos spread.

Others are capping international ATM withdrawals using local currency debit cards at $300/day, with some banks also capping POS and online payments to $300-1,000/day. Banning banks from lending foreign exchange to companies that do not generate foreign exchange revenues, among others.