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Analysts say Nigeria’s JPMorgan exit is an embarrassment, expect Emefiele to recant

11 Sep 2015
Financial Nigeria

Summary

"The expulsion is an embarrassment to the economic reputation of the Nigerian government, given that its index inclusion back in 2012 was generally viewed as confirmation of Nigeria’s emergence as an acceptable destination for international financial flows."

Governor of Central Bank of Nigeria, Mr. Godwin Emefiele

Ayo Salami, Chief Investment Officer at Duet Asset Management – which manages $5.5 billion in equity in hedge funds and other alternative investments – and Teneo Intelligence Analyst, Manji Cheto, wrote  separately on the implications of Nigeria’s eviction from JPMorgan’s emerging market index.

Ayo Salami: “… A lot of foreigners had already exited the local fixed income market. Estimates suggest that foreign holdings of Nigerian bills and bonds had declined from about $8 billion to around $2 billion. Given the selling pressure, domestic yields have been rising and currently 180-day yield stands at about 15.5% (vs 13% in January 2015). If the remaining $2 billion were to be withdrawn, domestic banks and pension funds have the capacity to absorb the offer and net impact on yields should not be more than an additional 0.5% to 1%. … Nigeria’s fundamental problems are well known – slowing growth, falling oil price, falling government revenues, rising current account deficit, pressure on the FX rate etc. Nothing has changed today, that most investors were not aware of yesterday. However the expulsion is an embarrassment to the economic reputation of the Nigerian government, given that its index inclusion back in 2012 was generally viewed as confirmation of Nigeria’s emergence as an acceptable destination for international financial flows.”

Manji Cheto:  “The November [monetary policy committee meeting] will be an important event to watch … By then, the effects of the expected capital outflow of passive funds would have begun filtering through the Nigerian economy. Should this translate to a further widening of the exchange rate between the parallel and interbank markets, Emefiele could yet again find himself battling a sinking currency. Having already tried (without success) to shore up the naira with FX reserves – about $8 billion has been spent since Emefiele took charge at the central bank in June 2014 – he is unlikely to go down this path again (reserves currently stand at a low of just over $30 billion).

“Emefiele has so far been able to somewhat justify his strategy on the basis that President Muhammadu Buhari’s delayed cabinet appointments have created a degree of uncertainty on the fiscal side. This argument will weaken once a decision on the cabinet is reached by the end of this month.”


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