JPMorgan has added selected Federal Government of Nigeria (FGN) bonds to its new Government Bond Index–Emerging Markets Edge (GBI-EM Edge), a move that could attract more overseas capital to Nigeria’s local debt market and potentially lower public borrowing costs.
Key takeaways
- Nigeria’s eligible sovereign bonds will receive a weighting in JPMorgan’s GBI-EM Edge benchmark.
- Finance Minister Taiwo Oyedele linked the decision to improvements in the naira, foreign-exchange liquidity, growth and inflation conditions.
- Index-following investment funds may increase their holdings of Nigerian government debt as they align portfolios with the new weighting.
- Nigeria has not yet regained full membership of JPMorgan’s flagship emerging-market bond index.
- The country was removed from the GBI-EM Global Diversified index in 2015 after foreign-exchange liquidity problems.
Index inclusion follows economic reforms
Finance Minister Taiwo Oyedele disclosed the development on Monday, saying Nigeria’s entry into the newly launched benchmark reflected progress in the wider economic environment. He pointed to reforms that have supported greater naira stability, reduced accumulated foreign-exchange backlogs and improved the outlook for economic growth and inflation.
Oyedele characterised the decision as an independent validation of President Bola Ahmed Tinubu’s economic reform programme. He said it signalled rising international investor confidence in Nigeria’s economic management and could help bring down the financing cost of projects and other government development priorities.
He also cautioned that further reforms would be needed before Nigeria could be restored fully to JPMorgan’s main benchmark. The finance ministry said the government intends to maintain the reform programme and continue strengthening investor confidence in the domestic market.
Funds designed to track bond indexes are expected to revise their portfolios in line with Nigeria’s new benchmark allocation. The ministry said that rebalancing could create additional foreign demand for FGN securities over time.
Nigeria’s earlier benchmark history
Nigeria’s return to a JPMorgan index comes more than 10 years after it was expelled from the GBI-EM Global Diversified index in 2015, when restrictions on foreign-exchange liquidity made the market less accessible to international investors.
The country had first joined the GBI-EM in 2012. That inclusion brought significant foreign investment into Nigeria’s domestic securities market and helped reduce the government’s borrowing expense by roughly 200 basis points.
For the new GBI-EM Edge, Nigeria qualified on the basis of the liquidity of its FGN bonds and the scale of its outstanding issues. The securities are actively traded through a Two-Way Quote System, in which market participants provide both buying and selling prices.
