New Questions Over Nigeria As JP Morgan Dumps Naira Bonds

Nigerian President Muhammadu Buhari speaks at the United States Institutes of Peace July 22, 2015 in Washington, DC. Nigeria’s President Muhammadu Buhari has pledged to recover ‘mind-boggling’ amounts of stolen oil money and bring those responsible to book, his spokesman said on Wednesday. The 72-year-old head of state, in Washington for talks with US officials, alleged that 250,000 barrels of crude were being stolen every day, with the profits going into individual bank accounts. Buhari, a former military ruler, has carved a reputation as a no-nonsense crusader against graft and has vowed the corrupt and corruption ‘will have no place’ in his government.AFP PHOTO/BRENDAN SMIALOWSKI (Photo credit should read BRENDAN SMIALOWSKI/AFP/Getty Images)

Nigerian President Mohammadu Buhari may be held in great esteem by much of the international political community, after managing to steer the country to its first democratic transfer of power after elections in late March.
After the whiff of corruption that surrounded his successor, Goodluck Jonathan, President Buhari’s pledge to clean up Nigerian government, combined with his austere lifestyle, was a breath of fresh air to Nigerians and foreign leaders alike.
But the international financial community has been less forgiving of the new administration. Earlier in the week, investment bank JP Morgan Chase announced its intention to drop Nigeria from its local-currency emerging markets bond index. JP Morgan had telegraphed the move as far back as January, but the decision still caught the markets by surprise. The Nigerian All-Share index slumped by close to three percent, while the benchmark 2024 bond yield jumped by 40 basis points to 17%.
It’s the lack of liquidity in the Nigerian market that spooked JP Morgan. The Central Bank of Nigeria has restricted currency trading to defend the value of the naira, after the local unit fell to a record low of 206 to the dollar in February. Like most oil exporters, Nigeria is suffering from the plunge in crude revenues, which account for approximately 90% of exports and close to two-thirds of the government’s receipts.
JP Morgan Chase will remove Nigerian debt from its main indices by the end of October, raising fears of a fire sale of government securities. However, many foreign investors had already abandoned the country. Bankers estimate that overseas holdings of local currency debt have fallen to approximately $3 billion, from $11 billion in 2013.
It’s not that investors aren’t hungry for Nigeria’s hefty yields, amongst the highest in the JP Morgan index. But many are growing increasingly worried about the central bank’s management of foreign exchange reserves. In June, the central bank banned the import of some 40 products – from rice to wheelbarrows – in an effort to prevent currency from leaving Nigerian shores. The restrictions have settled the naira into a tight band between 198 and 199 to the dollar.
But the measures have raised fears that the central bank has strayed from its mandate of maintaining price stability and into the murky area of setting industrial policy. Two members of the central bank’s monetary policy committee voiced concerned about the defence of the naira at their July meeting, suggesting that the central bank should allow the currency to float.
The central bank is the only economic policy maker in town at the moment. More than three months after taking office, Buhari has yet to name a cabinet. His appointment of a former Exxon executive as head of Nigerian National Petroleum Corporate earned plaudits, but investors are reluctant to place bets until until Buhari appoints an economic team. Nigeria may be the continent’s biggest economy – with an burgeoning middle class – but economic uncertainty will keep foreign investors on the sidelines.by
Contributor Laurie Laird,forbes