Naira Stability, FX Backlog Clearance Drive Nigeria's 7.4% J.P. Morgan Bond Index Inclusion
By Aboki Forex —
The Federal Government says the stabilisation of the naira, clearance of foreign exchange backlogs, stronger economic growth and improving inflation helped Nigeria qualify for inclusion in J.P. Morgan's newly introduced government bond index. Selected Federal Government of Nigeria bonds have been assigned a 7.40% weighting in the J.P. Morgan Government Bond Index-Emerging Markets Edge, covering 16 eligible FGN bond instruments.
In a statement on Monday, the finance ministry said the development marks Nigeria's return to a J.P. Morgan government bond benchmark more than a decade after the country was removed from the bank's GBI-EM index in 2015.
Why Nigeria Qualified
The ministry said Nigeria qualified based on the liquidity of its domestic bond market and the size of outstanding FGN bonds. FGN bonds are actively traded under a two-way quote system, while outstanding volumes for the eligible tenors are above the $250 million minimum required for inclusion.
“Nigeria qualified on two key measures: liquidity, with FGN Bonds actively traded under a Two-Way Quote System, and issuance size, with outstanding volumes per tenor well above the USD 250 million minimum required for the GBI-EM Edge,” the statement reads.
“Nigeria's weighting in the index is 7.40%, among the highest of the 26 markets covered and close to J.P. Morgan's 8% maximum country weighting.
“The inclusion reflects improvements in Nigeria's economic and financial environment, including the stabilisation of the naira, clearance of foreign exchange backlogs, stronger economic growth and improvements in inflation.”
Inflows and Debt Cost
The ministry said the inclusion is expected to attract additional foreign portfolio inflows as funds tracking the index adjust their portfolios to reflect Nigeria's weighting. It estimated that Nigeria's 7.4% allocation represents about $17.47 billion of eligible FGN debt.
It added that increased foreign demand for government bonds could support bond prices and gradually reduce yields, potentially lowering the government's cost of servicing naira-denominated debt.
“Improved liquidity in the FGN bond market could also have spillover effects on other segments of the domestic debt market, including Nigerian Treasury Bills,” the ministry said.
Reforms and Full Reinstatement
The finance ministry said the latest inclusion shows reforms have addressed some of the constraints that led to Nigeria's removal. However, Taiwo Oyedele, minister of finance and coordinating minister of the economy, said more work was needed before Nigeria could be fully reinstated in J.P. Morgan's flagship index.
“This inclusion is a clear, independent endorsement of the discipline behind President Bola Ahmed Tinubu's reform agenda,” Oyedele said. “It reflects the confidence international capital markets now place in Nigeria's economic management, and it lowers the cost of financing our development priorities.”
Oyedele added that the government remained focused on the reforms required to achieve “full reinstatement” in J.P. Morgan's flagship index.
Index Background
The new GBI-EM Edge is designed specifically to track local-currency government debt from frontier markets. J.P. Morgan said the index is intended to give investors a benchmark for markets with high nominal yields, improving market infrastructure and periods of volatility.
Nigeria was first included in J.P. Morgan's GBI-EM index in 2012 but was removed three years later after foreign investors faced difficulties accessing Nigeria's foreign exchange market. At the time, J.P. Morgan said restrictions and limited transparency in the FX market had made it difficult for foreign investors to transact in naira.