Nigeria is likely to be included in JP Morgan’s Government Bond Index – Emerging Markets from October, potentially bringing up to $1bn into one of Africa’s most developed debt markets, the bank said on Wednesday.
The inclusion of the continent’s top crude oil producer, which will become the second African constituent of the index after South Africa, will be phased over three months, from October 1 to December 3, JP Morgan said.
With around $170bn of assets under management benchmarked against the index and given that Nigeria is expected to have a weight of 0.59 per cent in the index by December 3, there could be over $1bn flowing into its local bond market in the coming months, said JP Morgan economist and strategist for Sub-Saharan Africa, Giulia Pellegrini.
Reuters quoted Pellegrini as saying, “This is a game-changer for the Nigerian bond market. With yields currently north of 16 per cent, offering a hefty premium to the current GBI-EM Index yield of 5.8 per cent, that estimate may well be revised to the upside as investors are attracted by the possibility to capture higher returns than in the other local markets in the index.”
Inclusion in the index would also support the efforts of the Nigerian government to deepen the bond market, Pellegrini added.
The total domestic debt stock is currently around $38bn, including Federal Government bonds (accounting for $23bn), as well as state government and corporate bonds.
“It raises the visibility of the Nigerian bond market on the international scene, placing what has been so far deemed a “frontier” market a step closer to more mainstream investment destinations,” she said.
Pellegrini said that three Nigerian bonds, maturing in 2014, 2019 and 2022, would be eligible for the GBI-EM as they were the most liquid, though the list could be subject to change depending on market conditions.
Inclusion of more bonds in the index was possible in the future, he added.
The move followed the announcement in April that South Africa would be included in Citi’s World Government Bond Index in October.
Citi estimated that up to $7.5bn could flow into the country’s bond market as a result.
Since April, foreign inflows have totalled $6.2bn, though it is unclear how much of this is related to the WGBI, and yields on government bonds have fallen sharply.
While Nigeria’s inclusion in the GBI-EM is not of the same magnitude as much larger funds are benchmarked against the WGBI it opens the country up to new foreign investors, said the Sub-Saharan Africa Strategist at Citi, Leon Myburgh.