Much ado about the JP Morgan Emerging Market Bond Index
JP Morgan, one of the world’s leading investment bankers, recently announced that, come October ending, they might remove Nigeria from their list of emerging market sovereign bonds index. The announcement was not altogether a surprise. Since January this year they had let it be known that they had placed Nigeria “under watch” and would soon consider whether our country would be fit enough to remain on that “A” list of sovereign emerging nations.
The grouse by the global investment institution centres on 3 issues: first, they are concerned about the drying up of liquidity in the Nigerian foreign exchange market; second, they worry about what they allege to be the opacity and lack of transparency of the foreign exchange market; and thirdly, they complained that Nigeria no longer operates an efficient two-way trading system as far as the foreign exchange market is concerned.
One of the greatest signs of wisdom is ability to listen. Be it individuals or governments, the ability to listen and take criticism in good spirit is one of the signs of political wisdom. The Nigerian media have been all the rage about the JP Morgan announcement. Not a few key actors have taken it rather poorly.
The JP Morgan Emerging Market Bond Index is an investment tracker comprising the sovereign bonds of the leading emerging markets. Nigeria was put on that list in 2012. Before then South Africa had been the sole sub-Saharan African country on the list. There is no doubting that being on that list confers some benefits. Before we were put on that list, foreign investors had invested a mere US$1.8 billion on Nigerian sovereign bonds. The following year, the mere fact of our being on that list magnified foreign investments to the tune of over US$8 billion in our fixed-income market.
I have been a long-term student of investment theory and practice. I know that index investing is the lazy man’s approach to investment management. I know of several investors and asset managers who put all their money on the London Footsie Index. There are others who lump everything into the NYSE or the NASDAQ. Some of these people believe that all the quantum physics-inspired algorithms designed to guide investment decisions amount to nothing but systematic guesswork – as good as trying to find a needle in a haystack.
What is worse, for many foreign investors, Africa is a black box. Indices such as those of JP Morgan’s provide a framework by which they can safely commit their resources. As long as the graph is looking north, they feel they are home and dry.
The mere announcement by JP Morgan sent Nigerian capital markets tumbling last week, losing something like 2.5 percent of total market capitalization. Given the herd-like behaviour of global financial markets, probably more of the scampering by investors is soon to be expected.
The CBN was compelled to release a response on Thursday, 10th September. They argued that the government had lost more than 60 percent of revenues within the past year as a result of the collapse in global oil prices. It is inevitable that this would have some impact on liquidity within the foreign exchange market. They however pointed out that they have taken robust actions to ensure that FX is available for genuine transactions rather than for speculative activities. Secondly, with regard to the alleged opacity of the market, CBN responded that they had put in place a Reuters trading platform that ensures a transparent monitoring of all transactions. Thirdly, they argued that they had modified the two-way trading system (dollar-naira-naira-dollar) by putting in place a mechanism for an order-based two-way trading system. In situations where the economy was awash with dollars during the political-electoral cycle from September 2014 to March 2015, it had become necessary to institute an order-based system so as to dampen the exuberance of speculators.
I recall that during my time at the CBN, JP Morgan were among the few select international custodians that managed our foreign reserves. We had excellent working relations with their top executives at that time. If they had certain misgivings about the conduct of monetary policy, one would have expected them to engage in dialogue with our top monetary authorities. It is certainly unhelpful that they should resort to threats through the media, print as well as electronic, in the manner they are doing. It smacks of blackmail.
There has been a lot of speculation surrounding the impending devaluation of the naira. JP Morgan and their ilk would seem to want a devalued naira. The Nigerian people want a strong and stable naira that will safeguard their individual as well as common treasure. Every responsible administration must listen to international stakeholders, including the global investors. But we cannot run policy on their behalf. Nor can we be expected to be at their beck and call. The sole litmus test of sound economic policy is whether it advances our economy and promotes the welfare and common good of the great Nigerian people.
One of the factors that probably informed their concern may have to do with the absence of a cabinet and economic policy team. President Buhari has resolved that he would not be stampeded into announcing his cabinet team before ending of September. The uncertainty surrounding that decision has obviously had its impact on investor sentiments. If I were on the JP Morgan team I would have given the administration the benefit of the doubt, pending when a cabinet and economic team are in place and we are in a better position to have a better picture of the government’s economic policy thrust.
The mere threat to de-list Nigeria has sent investors ducking for cover. Such herd-like behaviour is quite predictable. What few realise is that shortly before the elections more than US$6 billion of capital flight took place in the Nigerian capital markets. Our sovereign bond investments had been reduced to a mere US$2 billion. An ancient African proverb says that it is a fool who remains on the dance floor after the drummers have departed. We can expect further downturn in terms of investment trends if JP Morgan make good their threat.
However, let me put it on record that the fundamentals of the Nigerian economy remain highly attractive to potential investors. I have been following the JP Morgan Index. The Nigerian sovereign bond was the best performing of the pack, registering a peak of 18 percent returns in early 2014. South Africa was trailing behind at about 6 percent, with India, Russia and Brazil plodding in-between.
The bold initiatives that the Buhari administration has taken so far point to the direction of positive reform that will bode well for our country. Putting together a strong ministerial cabinet and an able economic team will restore hope and confidence and set our country on the path of long-term sustained growth. There shall be showers of blessings. Those who throw their lot with the New Nigeria will reap a rich harvest of returns in gold.
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