J. P Morgan Chase and Co. is the largest financial services holding company in the United States and the world’s fifth largest bank with total assets of 2.6 trillion U.S. dollars.
J.P Morgan added Nigeria to its index in 2012 and on Jan. 16, 2015, it placed Nigeria on a negative index watch and finally expelled Nigeria on Tuesday.
According to J.P Morgan, Nigeria is expelled from its Government Bond index for Emerging Markets for lack of liquidity for transactions, transparency in the determination of exchange rate, among others.
Reacting to the development, the Head of Strategy, Citibank, Sharaf Muhammed, said Nigeria stands to lose a lot financially as a result of its expulsion, noting that when the country borrows money by selling bonds, they pay investors based on the prevailing bond yields.
This means next time the Nigerian government goes out to borrow it will no longer attract a 10 percent yield, but it will now borrow from investors at a yield of 12.5 percent or even more, the financial expert told reporters.
This will cost the government more money in servicing interest, thus taking money it could have used for capital projects for debt servicing, Muhammed said.
The banker said by taking Nigeria off the index, it might result to little or no demand for Nigeria bonds from foreign investors.
Muhammed said this might also result to Nigeria losing its prestige as not just the largest economy in Africa, but the economy attracting the most foreign investments.
He said if the situation was not handled properly it might create demand pressure on forex and trigger another devaluation of the naira.
Some experts also expressed their views on the JP Morgan GBI-EM indices, which are comprehensive emerging market debt benchmarks that track local currency bonds issued by governments.
In his contribution, the Director-General of the Lagos Chambers of Commerce and Industry (LCCI), Muda Yusuf said the naira exchange rate should be allowed to reflect the fundamentals of the FX market.
Yusuf said 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.
He added that the apex bank should be compelled to engage with relevant economic ministries in order to bring about coherence in the management of the Nigerian economy.
However, the Head of Research at Sterling Capital Ltd., Sewa Wusu, said phasing out Nigeria from the JP Morgan bond index would have downside implications for Nigeria, particularly the foreign exchange market.
Wusu said the announcement could propel a massive sell-off of Nigerian instruments by foreign investors who track the bond index from their portfolios.
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. Enditem