President Buhari

* JP Morgan evicts Nigeria from key emerging market bonds index
* Move comes amid policy vacuum, decline in stocks
* President has not named cabinet since taking office in May
* Index expulsion forces fund managers to sell bonds

*CBN Reacts to JP Morgan
(Reuters) – Nigeria’s stocks fell on Wednesday after JP Morgan said it would eject Africa’s biggest economy from its influential emerging markets bond index due to tough controls imposed to prevent a currency collapse.
In a move that came earlier in the year than expected, JP Morgan said late on Tuesday it would remove the bond listings belonging to the West African nation by the end of October, forcing fund managers to sell Nigerian bonds, which might raise the country’s borrowing costs.
The decision is a blow for President Muhammadu Buhari, who has promised to diversify an oil-dependent economy hit by a slump in global crude prices but who faces criticism for not having appointed a cabinet since his inauguration on May 29.
With no finance minister in place, foreign investors have been left wondering about government policies and struggling to sell shares or bonds as the central bank adopted tough currency restrictions to halt a slide in the value of the naira.
Anders Faergemann, senior sovereign portfolio manager at PineBridge Investments, said he was surprised that Buhari had not started tackling Nigeria’s economic problems more than three months into his tenure.
“As an investor it is flabbergasting that the Nigerian authorities have allowed themselves to be put in this situation,” he said.
All Nigerian stocks listed in the MSCI frontier market index fell by more than 3 percent, while bond yields spiked across maturities.
The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, recovered some ground from earlier falls but still closed down 2.99 percent on Wednesday.
While many foreign bonds investors have exited the market since JP Morgan warned Nigeria in January and again in June that it would get kicked out of the index unless conditions improved, stocks investors were now also pondering whether to stay.
The U.S. bank had placed Nigeria on its index watch but a decision had not been expected until later this year.
“You can only imagine the chaos that is unfolding here,” a regional African investment analyst said from Lagos, asking not to be named.
“There are many more investors still in equities who are keenly watching how the central bank manages the exit process because if they even sniff the possibility that they won’t be able to get dollars in the future they are going to run for the door,” he said.
The benchmark 2024 bond yield rose to 17 percent on Wednesday from 16.20 percent the previous day.
Nigeria’s hard currency-denominated sovereign debt nudged lower across the curve, shedding around 0.2 cents, while prices of corporate dollar-debt issued by banks gained across the sector.
Diamond Bank’s 2019 dollar-issue gained 1.01 cents to trade at 90.510 cents in the dollar.
Nigeria’s central bank has adopted several currency restrictions to defend the naira after the use of dollar reserves failed to halt a slide.
Traders told Reuters the central bank started rationing dollars to foreign investors last week.
No Cabinet
The naira has lost around 15 percent in the last year, with devaluations in November and February. Some have predicted another may be coming, but central bank governor Godwin Emefiele said in July that the currency was “appropriately priced”.
Currency forwards, a derivative product used to hedge against future exchange rate moves, reflected expectations of a weaker naira with the 1-year non-deliverable forwards on Nigeria’s currency rising 2.79 percent to 268.50
“The basic story is very clear the currency is too expensive … The question now is, does the central bank devalue the currency to respond or tighten down even more on other capital measures to try and prolong the inevitable,” said Arko Sen, director EMEA strategy at Bank of America Merrill Lynch.
Buhari has said he found the treasury “virtually empty”, forcing him to deal with inherited problems, along with the impact of falling oil prices on Africa’s top crude producer, which relies on sales for 70 percent of government revenues.
But investors and business leaders say the lack of a finance minister, and general uncertainty around the cabinet which Buhari has said will be appointed later this month, has resulted in a lack of clear policies that has hurt the economy.
JP Morgan had warned Nigeria that to stay in the index, it would have to restore liquidity to its currency market in a way that allowed foreign investors tracking the index to conduct transactions with minimal hurdles.
On Wednesday, Buhari’s spokesman Femi Adesina declined to comment on JP Morgan’s decision beyond a government statement issued late on Tuesday saying liquidity for financial markets was improving.
In an indication of the dire state of public finances, the head of Nigeria’s sovereign wealth fund said authorities had not made any payments to the fund this year.
The last contribution to the fund, worth $1 billion, came from the previous government in 2014, said Uche Orji, Chief Executive of the Nigeria Investment Authority, which rolls out infrastructure projects and serves as a future generation fund.
“We haven’t got additional funds from the government but the fund is structured in a way that it can go through hard times,” he told reporters in Abuja after meeting Buhari.

CBN Reacts to JP Morgan

Meanwhile the Ministry of Finance, Debt Management Office and CBN released a statement in response to the planned removal of Nigeria from the JP Morgan Chase Emerging Market Bond Index.
The attention of the Federal Ministry of Finance (FMF), Central Bank of Nigeria (CBN), and the Debt Management Office (DMO) has been drawn to today’s announcement of the decision by J. P. Morgan to phase out Nigeria from its Government Bond Index for Emerging Markets (GBI-EM). While we respect the right of the J.P. Morgan to make this decision, we would like to strongly disagree with the premise and conclusions upon which the decision rests.
It would be recalled that Nigeria was included in the index in October 2012, based on the existence of an active domestic market for FGN Bonds supported by a Two-Way Quote System, dedicated Market Makers and diverse investors. However, in January 2015, J.P. Morgan placed Nigeria on an Index Watch as a result of their concerns in the operations of our Foreign Exchange (FX) Market, namely: 1) lack of liquidity for transactions; 2) lack of transparency in the determination of the exchange rate; and 3) lack of a fully functional two-way FX Market.
In our continuous bid to strengthen the Nigerian financial market and enhance our status as a preferred destination for investors, we took measures to improve the market. Despite the fact that oil prices have fallen by nearly 60 percent in one year, which should expectedly reduce the amount of liquidity in the market, the CBN ensured that all genuine and effective demand were met, especially those from foreign investors. On transparency, the CBN mandated that all FX transactions were posted online in the Reuters Trading Platform so that all stakeholders can easily verify all transactions in the market. In addition, the Official FX Window at the CBN was closed to ensure a level-playing field in the pricing of foreign exchange.
It is important to note that a functional two-way FX market already exists in Nigeria. However, given the high propensity for speculation, round tripping, and rent-seeking in the market, it became imperative that participants are not allowed to simply trade currencies but are only in the market to fulfil genuine customer demands to pay for eligible imports and other transactions. In the light of this, we introduced an order-based, two-way FX market, which has resulted in the stability of the exchange rate in the interbank market over the past 7 months and largely eliminated speculators from the market.
Despite these positive outcomes, the J. P. Morgan would prefer that we remove this rule; even though it is obvious that doing so would lead to an indeterminate depreciation of the Naira. With dwindling oil prices, we believe that an order-based two-way market best serves Nigeria’s interest at the moment.
While we would continue to ensure that there is liquidity and transparency in the market, we would like to note that the market for FGN Bonds remains strong and active due primarily to the strength and diversity of the domestic investor base. For the avoidance of doubt, the Federal Government sees Nigeria and the interest of Nigerians as paramount. It will therefore only continue to take economic decisions that will impact positively in the lives of all Nigerians.