10th September, 2015
Some financial experts on Wednesday in Lagos expressed mixed reactions on JP Morgan’s decision to phase out Nigeria from its Government Bond Index for Emerging Markets (GBI-EM) by the end of September.
They expressed their views in separate interviews with the News Agency of Nigeria (NAN) on the JP Morgan GBI-EM indices, which are comprehensive emerging market debt benchmarks that track local currency bonds issued by governments.
According to the rating agency, Nigeria has failed its liquidity and transparency tests and has not offered a fully functional two-way Foreign Exchange (FX) market.
The Director-General of the Lagos Chambers of Commerce and Industry (LCCI), Mr Muda Yusuf said that the naira exchange rate should be allowed to reflect the fundamentals of the FX market.
Yusuf said that a rate which market fundamentals could not support would not be sustainable.
He suggested the adoption of a market approach with a periodic intervention by the CBN as the capacity permits.
”The CBN should allow the FX market to function without compromising its oversight functions to ensure that the market does not become a platform for money laundering.
”The CBN should be compelled to engage with relevant economic ministries in order to bring about coherence in the management of the Nigerian economy.
”These other key ministries and agencies include the Nigeria Customs Service, Federal Ministry of Finance, National Planning Commission and the Federal Ministry of Industry, Trade & Investment.
”There has to be a proper coordination between the key ministries and the CBN to give a credible direction to the economy and ensure a better quality of economic management.”
The LCCI boss urged the CBN to put in place policies that would encourage inflow of forex without necessarily creating a tolerance for money laundering.
”This we believe can only be done through intelligence. The fight against money laundering can be more effectively undertaken by intelligence and the right information, rather than shutting the forex market,” he added.
However, the Head of Research at Sterling Capital Ltd., Mr Sewa Wusu, said that phasing out Nigeria from the JP Morgan bond index would have downside implications for Nigeria, particularly the foreign exchange market.
Wusu said that the announcement could propel a massive sell-off of Nigerian instruments by foreign investors who track the bond index from their portfolios.
“Though we saw the impact of this some three months ago when JP Morgan first announced their intention before extending it by six months to December, most foreign portfolio investors sold down their bond positions due to the currency risk implication.”
According to him, there is the likelihood that the current move may have a limited impact in the short term, because many foreign investors have previously liquidated their Nigerian bond holdings.
Wusu said ”the level of capital outflows from this current episode will be relatively infinitesimal.
”If you look at the total JP Morgan bond portfolio of about 208.29 billion dollars, Nigeria`s FGN bond only constituted about 1.5 per cent which is about 3.12 billion dollars.
”This implies that this amount will be sold off from the index potentially.
”For Nigeria it is more worrisome, but for JP Morgan it is not, because they alluded to the fact that there is no impact to Nigeria’s status in their EMBI or CEMBI suite of indices.”
Wusu said that the situation would raise borrowing cost for the country at the international capital markets, and that international confidence on the Nigerian instruments could be weak.
He added that it was high time for Nigeria to look inwards to diversify its economy away from crude oil.
Wusu noted that the CBN had done a lot to curtail the extremes in the foreign exchange market due to round tripping and arbitrage opportunities which led to JP Morgan’s threat.
“We can quickly, as a nation, commence the path of developing other sectors of our economy with potential for growth to boost our foreign exchange earnings potential,” Wusu added.
In his contribution, Dr Chijioke Mgbame of the Department of Accountancy, University of Benin, also noted that the threat could affect activities at the capital market.
“Instead of getting cheap funds, the exclusion would increase the interest rate accruing from borrowing at the international market.
“JP Morgan’s exclusion would also lead to the loss of investors’ confidence on our financial markets,’’ Mgbame said.
He, however, said, “they should have shown some understanding since Nigeria just transited from one administration to another”.
Mgbame urged that Federal Government to do all in its power to revive the manufacturing sector, and stimulate the economy for production.
Contributing, Prof. Sheriffadeen Tella of the Department of Economics, Olabisi Onabanjo University, Ago Iwoye, Ogun, noted that unless Nigeria continued to block the leaking holes in its finances, developed institutions would not take it seriously.
The CBN said, “While we respect the right of J.P. Morgan to make this decision, we would like to strongly disagree with the premise and conclusions upon which the decision rests.’’
The CBN said it would continue to take economic decisions that would impact positively on the lives of the citizens, a situation that would be impossible if the Nigerian Naira is allowed to have a ‘free fall’ against foreign currencies.
It said that in midst of the dwindling oil prices, an order–based two-way market best serves Nigeria’s interest at the moment.
“Despite these positive outcomes, J. P. Morgan would prefer that we remove this rule; even though it is obvious that doing so would lead to indeterminate depreciation of the Naira.”
Meanwhile, the Naira according to the CBN, closed at N197 to a dollar at the Interbank Foreign Exchange Market on Wednesday.
NAN reports that the currency had continued to exchange for between N195 and N197 to the dollar for quite a while.