Nigeria joined a key JP Morgan local currency government bond index yesterday, and has become the second African country, after South Africa, to be included in a widely followed index. The inclusion is said to have been precipitated by the country’s improving liquidity levels.
The country’s entry into the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) is believed to have a potential of at least $1.5 billion of inflows to the bond market. The inclusion will also raise Nigeria’s profile and is expected to lead to greater foreign participation, given that the country yields offer a significant premium to established sovereign lenders.
“It’s now seen as a market that can’t be ignored internationally and one of the frontier markets where you need to have a position,” said Samir Gadio, emerging markets strategist at Standard Bank.
Analysts also say that Nigeria’s addition to the GBI-EM marks it out as one of the more accessible markets on the continent for foreign investors.
“Nigeria has done a lot of work in recent years in developing its bond market to improve liquidity,” said Leon Myburgh, sub-Saharan Africa strategist at Citi.
Nigeria has a weighting of roughly 0.72 percent in the index and three bonds, maturing in 2014, 2019 and 2022, have been included as they are the most liquid. JP Morgan estimates that about half the $1.5 billion in expected inflows may have already come in, largely from hedge funds and niche investors.
“Now I think we’ll see the people that are less familiar with this market coming through – the benchmark investors, the big real money accounts that may have taken some time to internalise this decision to include Nigeria in the index,” said Giulia Pellegrini, JP Morgan strategist for Sub-Saharan Africa.
Nigerians also hope the GBI-EM entry will also help bolster the case for reforms such as the introduction of securities lending and a deeper repo market.
“We think this will help focus minds and get that moving faster so that the legacy can be a deeper, more diverse market,” said Akin Dawodu, treasurer at Citibank Nigeria.