Nigeria’s stocks sunk on Wednesday after JP Morgan said it would eject Africa’s biggest economy from its influential emerging markets bond index due to tough controls imposed to prevent a currency collapse.
In a move that came earlier in the year than expected, JP Morgan said late on Tuesday it would remove the bond listings belonging to the West African nation by the end of October, forcing fund managers to sell Nigerian bonds, which might raise the country’s borrowing costs.
The decision is a blow to President Muhammadu Buhari, who has promised to diversify an oil-dependent economy hit by a slump in global crude prices but who faces criticism for not having appointed a cabinet since his inauguration on May 29.
With no finance minister in place, foreign investors have been left wondering about government policies and struggling to sell shares or bonds as the central bank adopted tough currency restrictions to halt a slide of the naira.
Anders Faergemann, senior sovereign portfolio manager at PineBridge Investments, told Reuters that he was surprised that Buhari had not started tackling the country’s economic problems more than three months into his tenure.
“As an investor it is flabbergasting that the Nigerian authorities have allowed themselves to be put in this situation,” he said.
All Nigerian stocks listed in the MSCI frontier market index fell by about 3 percent, while bond yields spiked across maturities.
In the equity segment, the market value dropped by N311 billion.The major indicators, the market capitalization and NSE All Share Index declined by 2.98 per cent to close lower at N10.129 trillion and 29,454.09 basis points respectively.
Total volume of shares transacted was 459.458 million worth N4.287 billion in 3,396 deals compared to 226.648 million shares valued at N1.999 billion in 4,531 deals recorded on previously.
While many foreign bonds investors have exited the market since JP Morgan warned Nigeria in January and again in June that it would get kicked out of the index unless conditions improved, stocks investors were now also pondering whether to stay.
The U.S. bank had placed Nigeria on its index watch but a decision had not been expected until later this year.
“You can only imagine the chaos that is unfolding here,” a regional African investment analyst said from Lagos, asking not to be named.
“There are many more investors still in equities who are keenly watching how the central bank manages the exit process because if they even sniff the possibility that they won’t be able to get dollars in the future they are going to run for the door,” he said.
According to Reuters the benchmark 2024 bond yield rose to 17 percent on Wednesday from 16.20 percent previous day. The stock index shed 3.02 percent to fall below a 30,000 point psychological level.
In response to the decision, the CBN and ministry of finance said in a join statement signed by CBN spokesperson, Ibrahim Muazu that “while we respect the right of the J.P. Morgan to make this decision, we strongly disagree with the premise and conclusions upon which the decision rests.”
CBN said it took all the measures to improve the market. Despite the fact that oil prices have fallen by nearly 60 percent in one year, which should expectedly reduce the amount of liquidity in the market, the CBN ensured that all genuine and effective demand were met, especially those from foreign investors.
“On transparency, the CBN mandated that all FX transactions were posted online in the Reuters Trading Platform so that all stakeholders can easily verify all transactions in the market. In addition, the Official FX Window at the CBN was closed to ensure a level-playing field in the pricing of foreign exchange.”
Meanwhile, FBN Holdings was the top decliner on the MSCI frontier market index, down 5.15 percent, followed by Guinness Nigeria, by 5 percent, and Dangote Cement and Guaranty Trust Bank, which were both down by 4.98 percent.
