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Lagos - JP Morgan said on Friday it would assess Nigeria's suitability to remain in a key emerging currency bond index it manages because of a lack of liquidity in the African country's foreign exchange and bond markets.
The bank, which runs the most commonly used emerging debt indexes, said it had placed Nigeria on a negative index watch and would assess its place on the Government Bond Index (GBI-EM) over the next three to five months.
Removal from the index would force funds tracking it to sell Nigerian bonds from their portfolios, potentially resulting in significant capital outflows. This in turn would raise borrowing costs for Africa's largest economy, although analysts said they did not expect JP Morgan to take such a step.
Nigeria's central bank on Friday denied there was any shortage of liquidity in the currency market, however.
JP Morgan added Nigeria to the widely followed index in 2012, when liquidity was improving, making it only the second African country after South Africa to be included. It added Nigeria's 2014, 2019, 2022 and 2024 bonds, which make up 1.8% of the GBI-EM Global Diversified index.
Investors have $216bn benchmarked to the GBI-EM, the most popular emerging local debt index. But the bank said the current liquidity issues made it hard for foreign investors to replicate it.
"If we are unable to verify sufficient liquidity in Nigeria's spot FX and local treasury bond market ... it will trigger a review ... for removal," JP Morgan said.
"Conversely, if liquidity improves and investors are able to transact with minimal hurdles, Nigeria will be removed from index watch negative."
The forex and bond markets have come under pressure after the price of oil, Nigeria's main export, plunged. In response, the central bank devalued the naira by 8 percent last year and tightened trading rules to curb speculation.
A Nigerian currency dealer said daily forex trading had fallen to under $100m daily from around $500m four weeks ago, which he blamed on the central bank rules.
David Spegel, head of emerging debt at BNP Paribas, said: "I would be very surprised if Nigeria was ejected from the index entirely given the size of the economy and potential for future capital raising in the debt and equity markets there.
"Eventually the whole oil risk issue will be priced into the market and flows of capital and investment will return to Nigeria," Spegel said.
Nigeria responds
Nigeria's central bank denied there was any shortage of liquidity in the currency market on Friday, rejecting JP Morgan's stated reason for putting the status of its bonds under review.
"We are very surprised by this action by the JP Morgan team, owing to perceived lack of liquidity ... We are pretty certain that the liquidity in the market right now is adequate for the volume of trading."
He added that he was confident the Nigerian naira would adjust to within the bank's target band of 5 percent plus or minus 168 to the dollar.
Nigeria officially devalued its currency by 8% last month against the dollar, but few analysts believe even the new level can hold, given dwindling state oil revenues and declining reserves. Jitters over a February 14 election and possible violence following it have not helped market nerves.
