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Investors’ scramble for high-yielding frontier market bonds and an improvement in foreign exchange liquidity in Nigeria could restore Africa’s most populous nation on global bond indexes, Barclays and JP Morgan.
The two indexes expelled Nigeria due to currency restrictions that sparked a liquidity crisis, hammered foreign investors and made it difficult to repatriate profit.
US-based JP Morgan kicked Nigeria out of its frontier bond index in October 2015 and this was soon followed by an expulsion from Barclays bank’s emerging market local currency index in February 2016.
“Investors are more comfortable with where the FX liquidity is today and more confident to come and take advantage of opportunities in Nigeria, although index eligibility is still an issue,” said Ignacio Temerlin Head of Africa Debt Capital Markets, Citi Bank.
The latest proof of investors’ appetite for risk assets with high yields came when Tajikistan, a small nation in Central Asia with a population of 8.7 million, sold a 10-year $500 million bond at 7 percent in September 2017. It was oversubscribed.
The bond represents 7 percent of Tajikistan’s gross domestic product and dwarfs the $74 million the country holds in foreign exchange reserves.
Nigeria’s retention on the Morgan Stanley Capital International (MSCI) frontier market index after some 17 months of deliberations is also likely to herald a speedy embrace by Barclays and JP Morgan, analysts say.
“The market trend backs up a possible re-inclusion on the JP Morgan bond index,” said Tajudeen Ibrahim, head of research at Lagos-based Chapel Hill Denham.
“We have seen increased foreign inflow to fixed income, as bond prices are rallying and yields are falling. Combine those with the stabilising foreign exchange market and the increased foreign inflow into bonds, and you are more convinced that it’s only a matter of time before we are restored on that index,” Ibrahim said by phone.
Bond yields across all tenors cooled Monday, with exception to the 10.70 30-MAY-2018 bond which gained 0.06 percent and the 7.00 23-OCT-2019 which gained 0.01 percent. Other tenors were flat, according to data obtained from the FMDQ website.
Portfolio inflows into bonds totalled $USD57.8 million in May, according to CBN data, a month after the Investor and Exporter window was created. Before May, there were no foreign inflows into bonds. The month of June also recorded zero inflows.
However, in July, the month with latest data, inflows came to $USD17 million.
Ibrahim of Chapel Hill Denham expects subsequent months to seen substantial inflows, as the I & E window continues to lift confidence and puts the debilitating liquidity crisis to bed.
In a statement last week, MSCI said Nigerian stocks will remain part of its frontier index and are no longer under review for a possible demotion to a standalone status, following the improved foreign exchange liquidity triggered by newly introduced Investors and Exporters window.
The naira gained 0.25 percent to N359.91 per US dollar Monday at the said I&E window, according to data provided by trading platform, FMDQ.
The Central Bank of Nigeria (CBN) in April, 2017 established the Investors and Exporters (IE) window that allowed for FX transactions at market determined rates in a bid to ease the concerns of foreign investors. The window has handled over $15 billion since inception, according to data compiled by BusinessDay.
Following the creation of the I&E window, the MSCI decision on whether to retain Nigeria in its Frontier market indexes in June, 2017, was postponed to ascertain the effectiveness of the IE window.
“The MSCI decision is like (the latter’s) approval of the
I&E window,” said Ayodeji Ebo, managing director of financial advisory firm, Afrinvest Securities Limited.
“With the MSCI hurdle crossed, returning to the JP Morgan bond index is the next stop,” Ebo said by phone.
In October 2012, Nigeria became the second African country after South Africa, to be listed in the JP Morgan bond index, which tracks bond yields in emerging markets, after removing a requirement that foreign investors hold government bonds for a minimum of one year before exiting.
However, things turned sour for the continent’s most populous nation, when in October 2015, the United States-based lender kicked it out of its index- tracked by funds with a combined value in excess of $200 billion- due to the lack of liquidity and transparency in the nation’s foreign exchange market.
This FX crisis and Nigeria’s removal from the index, forced several global funds to sell Nigerian bonds, triggering an unprecedented capital flight, raising borrowing cost for the government and creating panic in an already constrained economy, which later pushed the economy into a debilitating recession.
Improved oil prices and production and the creation of a separate window for Investors called the Investors and Exporters window have boosted liquidity, staging a comeback for investors.
LOLADE AKINMURELE
