the global community, going by emerging indications.
Respected global financial services institution, J.P Morgan on Tuesday
announced plans to remove the country from its Government Bond
Index-Emerging Markets (GBI-EM) series beginning this month.
Although the institution noted that the measure would not impact
Nigeria's status in the Emerging Market Bond Index (EMBI) or its
Corporate Emerging Markets Bond Index (CEMBI), financial analysts
expressed fears that the decision could result in massive capital
flight.
JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are
comprehensive emerging market debt benchmarks that track local
currency bonds issued by Emerging Market governments.
However following a series of administrative measures which according
to J.P Morgan impeded the ability of foreign investors to replicate
Nigeria's weight in the GBI-EM suite of indices, in January 2015,
Nigeria was placed on Index Watch.
According to J.P Morgan, foreign investors who track the GBI-EM series
continue to face challenges and uncertainty while transacting in the
naira due to the lack of a fully functional two-way FX market and
limited transparency. They noted that a series of administrative
measures by the Central Bank of Nigeria impeded the ability of foreign
investors to access the Foreign exchange market.
"As a result, Nigeria will be removed from each of the six GBI-EM
indices starting September 30th. The weight change will be implemented
linearly over a two-month period with half of the adjustment applied
on September 30th, 2015, and the remaining on October 30th, 2015.
It noted that currently, the weight of Nigeria in the GBI-EM Global
Diversified (the most frequently used EM local treasury index) is 1.50
per cent.
Once the removal process is completed the institution noted, Nigeria
will not be eligible for re-inclusion into the GBI-EM indices for a
minimum of 12 months.
"Nigeria's index eligibility after this period is contingent upon a
consistent track record of satisfying the index inclusion criteria,"
stated J.P Morgan.
GBI-EM, is a restrictive index that limits inclusion to only those
countries that are readily accessible and where no impediments exist
for foreign investors.
Nigeria entered the GBI-EM series in October 2012 after the Central
Bank of Nigeria removed the one year lock-in period for foreign
investment in government bonds.
As of November 2013 the following 18 emerging market economies were
part of the GBI-EM Broad index: Brazil, Chile, China, Colombia,
Hungary, India, Indonesia, Malaysia, Mexico, Nigeria, Peru,
Philippines, Poland, Romania, Russia, South Africa, Thailand, and
Turkey.
The Nigerian economy has continued to take a battering in recent
weeks, showing that it is not immune to global headwinds and signaling
an imminent relapse into a recession.
Nigeria's woes aren't particularly unique as more and more emerging
economies continue to struggle under the harsh realities of dipping
commodity and capital markets. However, economists are unanimous in
their verdict that the managers of the Nigerian economy seem to be
making a fine job of hiding their heads in the sand. In isolation, the
Naira's 27% fall against the dollar over the last 18 months may
highlight the nation's fiscal weaknesses, but when placed side by side
other commodity backed economies, there is a trend that indicates that
Nigeria may just have not seen the worst.
The Russian Ruble has also seen a loss of 52% in the same period;
Brazil's Real lost 37%, with Colombia's Peso dipping by 41%. Since
July 2014, crude oil has fallen steadily from $100 per barrel to its
current price of about $53.13 per barrel. Much of the price decline
has been driven by Organisation of the Petroleum Exporting Countries
(OPEC) strategy of creating an oversupply situation in order to
deliberately drive prices down and stifle US shale production.
It also appears that Nigeria has so far lost all of its US crude oil
market to locally produced shale derived crude oil; from a high of
about 1.3 million barrels per day, 59% of Nigeria's total production.
A large portion of Nigeria's Asian market seems under threat from the
emergence of Iran, which is eyeing the 500,000 barrels per day Indian
market.
Ironically, much of the Asian demand that Nigeria is enjoying, was
built out of embargoes on Iran, which had been supplying the same
light, sweet crude Nigeria has to offer; and with price and proximity
a strong factor, it is hard to not see Nigeria losing out.
With China being Nigeria's number one import trading partner, it is
very unrealistic to think that the cold in the Asian giant will not
stretch its reach to Nigeria. Especially, since in an effort to make
the buying and selling of goods much easier, Nigeria introduced the
yuan into its foreign exchange system, by converting part of its
reserves to the yuan.
It is estimated that the Central Bank of Nigeria (CBN) holds between
5%-10% of its foreign reserves in yuan, alongside dollars and euros.
It was hoped that at the port of entry, Chinese clients selling
manufactured goods could pay excise and taxes, and get their goods
into the local economy speedily. The immediate impact of the
devaluation of the yuan would take a hit on Nigeria's holding value,
and the decision to transact in Chinese money could see further
pressure on the Naira.
The fortunate area here though is that the goods being traded are
still priced in American dollars.
If the yuan is devalued, buying anything priced in dollars becomes
more expensive for the Chinese. Therefore, the sale of commodities
such as platinum, copper or coal may become more expensive, which
could reduce demand. So while there is no immediate impact, in the
medium to long-term, the sales of Nigerian oil and the Naira could
take a knock further down the road.
Economist and lecturer at the University of Abuja, Dr. Ben Obi, says
that the slow pace of the new administration to tackle the headwinds
facing Nigeria may further compound the country's problems.
"I think it's clear for all to see, the CPI is on the rise, revenue is
still shaky and very recently we saw poor GDP and job creation numbers
in the second quarter of the year," he said. "When you take all these
and add trade shocks and global headwinds to it, we should be taking
urgent steps to curb the economy's slump. The GDP numbers particularly
are a ten year low and it is unlikely that much will change for the
third or even the fourth quarter, if the nation continues at such a
pace."
Research analyst, Sola Oguntade, believes that the nation may have
squandered its international goodwill as it concerns foreign
investors.
According to him, while the federal government's much publicised
anti-corruption initiatives are laudable, they should not be the
reason to neglect the state of the economy.
"Global investors will invest in any economy they understand," he said.
"Look at the unstable parts of Africa, or even loan defaulting Greece,
investors will still go there, because to a large extent, they can
predict the direction of the economy and easily price their risk. In
Nigeria, we are facing challenges on multiple fronts – crude
oil/revenue challenges, while there is still that foreign exchange
dark cloud hanging over the CBN. So, in my opinion, the president
needs to place his cards on the table (as it concerns economic
management), so that investors can take a position."
-DailyTimes
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