Nigerian regulators rally to avert market collapse after JP Morgan index action

Nigeria’s bond market regulator stepped in to avoid a market collapse, Thursday, bringing trades to a halt by forcing dealers to widen spreads after JP Morgan’s decision to remove Africa’s biggest economy from a major bond index.

Traders said the FMDQ, a group comprising Nigeria’s main commercial banks and the central bank, widened the bid-ask spreads on bond trading to 1 naira from 0.30 naira to contain volatility, helping moderate a debt market sell-off.

The yield on Nigeria’s benchmark 2024 bond moderated to 16.63 percent on Thursday from previous close of 16.68 percent. It had spiked to 17 percent on Wednesday after JP Morgan said it would remove the West African nation’s debt from its influential emerging markets bond index by the end of October.

“Without it the market would have frozen and there would have been no offer for quotes. We’ve done the best thing in terms of risk management,” Bola Onadele, FMDQ’s managing director, said.

In its announcement late on Tuesday, JP Morgan cited tough controls imposed to prevent a currency collapse. The U.S. bank had previously warned about such a move but the expulsion — which may force fund managers to sell Nigerian bonds and so raise the country’s borrowing costs — came earlier than many had expected.

Analysts estimate foreign holdings of Nigerian bonds at less than $2.75 billion. Traders said domestic pension funds were picking up the slack as foreign buyers exit.

In another development, the central bank reduced the time limit for funding currency purchases to 24 hours from 48 hours to stem a surge in the demand for the dollars, dealers said.

“Investors are concerned about how the proceeds from the sales will be funded based on the current level of the external reserves at $31.5 billion,” said Ayodeji Ebo, head of research at Afrinvest.

“The central bank’s ability to defend the naira may be hampered, hence devaluation may be inevitable. Foreign investors exposed to Nigerian equities will prefer to exit positions ahead of any official devaluation.”

An equity market sell-off which started on Wednesday continued as foreign investors panicked by the bond expulsion sold shares to exit Nigeria.

The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, was down 1.87 percent in early trade.

Courtesy: Reuters