By InvestAdvocate
Lagos (INVESTADVOCATE)-The Central Bank of Nigeria (CBN) on Friday sold dollars to stop the naira’s decline to a record low after JPMorgan Chase & Co. said the debt of the country may be cut from its local-currency emerging-market indexes; according to a Bloomberg report.
According to the New-York based lender, Nigeria was placed on Index Watch Negative for JPMorgan’s GBI-EM indexes after central bank measures announced in December reduced foreign exchange and bond trading, making it difficult for foreign investors to replicate the gauge.
The report quoted Kevin Daly of Aberdeen Asset Management Plc as saying “You’ve got a bunch of global investors who are benchmarked to the GBI and Nigeria is 1.8 percent of the index.”
Daly who has cut his holdings in naira debt to zero among the $13 billion in assets said “I doubt some of those investors would want to own it if it’s not in the index.”
The report affirmed that the naira depreciated to an all-time low of 188.48 against the dollar Friday. “It pared losses after the regulator’s move to trade 0.4 percent stronger at 185.05 as of 4:26 p.m. in Lagos. The currency is poised to end the week 3.5 percent down, the most since Nov. 14,” the Bloomberg report added.
JPMorgan said Nigeria’s inclusion in the index will be assessed over the next three (3) to five (5) months.
The report quoted Adebayo Omogoroye, head of trading at Guaranty Trust Bank Plc as saying “It would be a big blow” if Africa’s most-populous nation was excluded from the indexes.
It further affirmed that average yields on naira-denominated government debt soared 2.5 percentage points in the past three (3) months, compared with a drop of 47 basis points through Thursday for emerging-market local-currency securities, according to Bloomberg indexes.
The CBN limited banks foreign-exchange net-open positions to zero from one (1) percent of shareholders’ funds at the end of each day in December. It loosened the rule this week by increasing the limit to 0.1 percent.
“There was a remedial action by the central bank on January 12 to restore liquidity; it needs to take effect while I think every other measure that needs to be done by the authorities to create liquidity will be done.” Patience Oniha, executive director at the Debt Management Office (DMO), said.
The Bloomberg report added that daily trading volumes for the naira are still just $20 million to $30 million, compared with about $300 million to $500 million six (6) months ago, according to Samir Gadio, head of African strategy at Standard Chartered Plc.
“Sourcing FX has become a nightmare and theoretically, there are no capital controls and you can take out whatever you want. But the reality is that it’s much more difficult,” Gadio said.
Godwin Emefiele, governor of the CBN on January 06, announced that deposit money banks in Nigeria should source dollars from the central bank if they are struggling to access foreign exchange for their clients.
Gadio added that investors will want the regulator to clarify how it will respond to JPMorgan’s review. “There is still a chance they keep their emerging-market status. But they are going to have to take appropriate measures in the coming weeks,” he added.
