The country has been assigned a 7.4% weighting in the Government Bond Index–Emerging Markets Edge, or GBI-EM Edge. That places Nigeria close to the new index’s maximum country weighting of 8% and among its largest components.
Nigeria’s Minister of Finance and Coordinating Minister of the Economy, Taiwo Oyedele, described the inclusion as an endorsement of the government’s economic reforms.
“This inclusion is a clear, independent endorsement of the discipline behind President Bola Ahmed Tinubu’s reform agenda,” he 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.”
However, the new development should not be confused with Nigeria’s full reinstatement in JPMorgan’s larger and more established GBI-EM Global Diversified index.
GBI-EM Edge is a new benchmark created specifically for frontier economies whose domestic bonds are generally less accessible, more volatile and less liquid than those in mainstream emerging markets.
JPMorgan expects to launch the index before the end of September. It will cover 26 countries, while African markets will account for almost 45% of its total weighting, according to a JPMorgan note reviewed by Reuters.
Sixteen Nigerian bonds qualify
Nigeria’s part of the index will comprise 16 Federal Government bonds with a combined eligible value of approximately $17.47 billion.
To qualify, each bond must have an outstanding value equivalent to at least $250 million and no less than two-and-a-half years remaining before maturity.
The Nigerian government said its bonds met JPMorgan’s requirements because their individual issuance sizes exceeded the minimum and they were actively traded under a two-way quote system.
Under that system, approved dealers continually provide buying and selling prices, making it easier for investors to enter or leave positions.
The index itself will track approximately $328 billion in bonds across all 26 markets. Nigeria’s 7.4% weighting determines its relative importance inside the benchmark; it does not mean Nigeria will immediately receive 7.4% of $328 billion.
More importantly, the $17.47 billion figure is the value of the 16 eligible Nigerian bonds, not an estimate of new foreign money entering the country.
Inclusion could attract foreign money
Bond indices can influence where large investment funds put their money.
Passive funds designed to follow an index generally buy securities in proportions similar to their index weightings. Active managers can also purchase included bonds to avoid performing too differently from the benchmark against which their returns are measured.
Nigeria’s 7.4% weighting could therefore encourage foreign fund managers to buy naira-denominated government bonds after the index becomes operational.
However, inclusion does not guarantee a particular amount of investment. The eventual inflow will depend on how many funds adopt the new benchmark, the amount they manage and whether investors consider Nigeria’s returns sufficient to compensate for currency, inflation and liquidity risks.
The new index has an estimated nominal yield of approximately 10.4%, about 4.4 percentage points higher than JPMorgan’s mainstream emerging-market local-currency index.
Nigeria’s qualifying bonds reportedly have an average yield to maturity of approximately 17.1%, making them potentially attractive to investors seeking higher returns.
Those yields also reflect significant risks. A foreign investor can earn a high return in naira and still lose money in dollar terms if the Nigerian currency depreciates sharply.
Nigeria’s removal in 2015
Nigeria first entered JPMorgan’s GBI-EM index in 2012. The country’s inclusion helped attract foreign capital into government securities and was followed by a significant decline in bond yields.
Contemporary reports placed the reduction in yields at between 200 and 300 basis points, although index inclusion was not necessarily the only factor behind the decline.
JPMorgan placed Nigeria on an index watch in January 2015 over concerns about foreign-exchange market restrictions and investors’ ability to obtain dollars when selling Nigerian assets.
The bank eventually removed Nigeria from its GBI-EM indices in September 2015 after saying the country’s currency controls made its bonds difficult for foreign investors to trade.
At the time, Nigeria was estimated to account for about 1.5% of the flagship index, with foreign holdings of index-eligible government bonds estimated at approximately $3 billion.
The country’s removal forced funds following the benchmark to sell Nigerian securities.
The federal government now says the clearance of Nigeria’s foreign-exchange backlog, improved dollar liquidity and greater naira stability helped the country meet the requirements for the new Edge index.
But Oyedele acknowledged that the government’s objective extends beyond the latest inclusion.
“We remain focused on the work still required to earn full reinstatement in J.P. Morgan’s flagship index,” he said.
That distinction is important: Nigeria has returned to a JPMorgan bond benchmark after 11 years, but its journey back to the bank’s principal emerging-market index is not yet complete.
If the new benchmark attracts substantial assets, foreign demand could raise the prices of eligible Nigerian bonds and gradually reduce their yields.
Lower yields would allow the federal government to borrow at a reduced interest rate, potentially easing the cost of servicing domestic debt.
Greater participation could also improve liquidity by increasing the number of investors buying and selling government securities.