Nigeria to see $1bn inflow as JP Morgan adds to bond index

by Research 16. August 2012 08:25

Nigeria is to be included in the JP Morgan Emerging Markets Government Bond Index – (GBI-EM) in a phased approach, by the fourth quarter of 2012, which is expected to lead to an increase in portfolio flows of up to $1 billion (N160 billion), into FGN Bonds and a positive impact on the Naira (NGN).

The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices offers investors exposure to emerging market debt and tracks local currency bonds issued by Emerging Market governments.

The FGN Bonds to be included in the index are one of the 2014 instruments [not specified]; one of the 2019 bonds [not specified] and the January 2022 bond, due to their secondary market liquidity, according to a JP Morgan market notice released yesterday.

“The consensus in the market is that Nigerian bonds will have a weight of around 0.59 percent in the GBI-EM index,” Samir Gadio, an emerging markets strategist at Standard Bank, London said.

“This is not much in proportional terms, but may imply that at least $1 billion will come into FGN bonds”, Gadio said.

Nigeria’s bond market has been growing in size and sophistication since 2006, with the launch of the Primary Dealers Market Makers platform, which ensured some broadly consistent trading activity in on-the-run bonds and two-way quotes over-the-counter.

The total FGN Bond market capitalisation is put at N3.7 trillion ($23.99 billion), according to data from investment firm Dunn Loren Merrifield, with liquidity being fed by a relatively developed banking system and a nascent -and fast growing –pension fund industry.

Nigeria’s secondary market bond trading volumes now exceed those of Egypt and Morocco and represent around 20 percent of South Africa’s turnover in normal times, according to Gadio.

The lifting of the one-year minimum hold period on Nigerian bonds for foreign investors by the Central Bank of Nigeria (CBN) in June 2011, may also be a catalyst for increased flows of so called ‘hot money’ into Nigerian Bonds.

“The total ‘hot money’ in the system today is under $5 billion (N790 billion). About $3 billion (N475 billion) of that is in long-term instruments,” said Sanusi Lamido Sanusi, CBN Governor, after a Monetary Policy Committee (MPC) meeting in May 2012.

Foreign institutional ownership of Nigerian debt securities is estimated at 15 percent of the total stock of outstanding Federal Government (FGN) bonds and Treasury bills (N5.96 trillion), according to FBN capital.

The CBN which has strived to maintain price stability on the back of falling foreign exchange (FX) reserves and a weaker currency may not mind having more portfolio inflows into Nigerian Bonds, as the offshore investment into Naira (NGN) denominated assets helps to strengthen the value of the local currency which acts as the de-facto CBN monetary policy anchor.

“Nigeria’s ability to keep inflation in check will depend – as ever – on FX stability and a continued focus on FX reserves accumulation will be needed to underscore NGN stability,” Razia Khan, head of Africa research at Standard Chartered said.

Nigeria’s FX reserves are down 3 percent since June to $36.6 billion, according to the latest CBN data. Inflation rose to 12.9 percent year-on-year in June, up from 12.7 percent in May, the National Bureau of Statistics (NBS) said last Month.

The Naira yesterday rose to N157.65 to the dollar, the highest in 3 months on the back of CBN increase of banks reserve ratio to 12 percent from 8 percent.

Nigeria’s benchmark Bonny light crude closed at $113.84 per barrel, up 7.8 percent so far in August, but down 11.4 percent from its highs of $128.47 reached earlier in March.

Gadio says he expects a significant rally in the FGN bonds of up to 50-100 basis points in the near future, following the inclusion in the index.

“We think the Nigerian fixed income space has reached a stage that makes it qualitatively different from many other frontier bond markets and increasingly difficult to ignore internationally,” he said

source: businessday online

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