JPMorgan Chase & Co. (JPM:US), the biggest underwriter of emerging-market debt, detailed the Nigerian bonds it plans to add to its benchmark indexes from Oct. 1 and predicted the inclusion may lure $1.5 billion to the country.
The most-traded bonds maturing in March 2014, October 2019 and January 2022 will join JPMorgan’s GBI-EM indexes between Oct. 1 and Dec. 3, Giulia Pellegrini, the bank’s London-based sub-Saharan Africa economist, wrote in a note to clients yesterday. JPMorgan first disclosed the plans in August after central bank Governor Lamido Sanusi’s decision last year to attract more funds by removing restrictions on foreign investors holding debt of Africa’s biggest oil producer.
Nigeria sold seven-year bonds at an auction last week at a yield of 12.9 percent, 3.24 percentage points lower than at the previous monthly sale. The nation’s bonds will probably have a weighting of 0.72 percent in JPMorgan’s GBI-EM Global Diversified index by December, according to Pellegrini.
“Nigeria is coming of age and we have certainly seen a number of emerging market bond funds active in the market,” Daniel Broby, deputy chief executive officer at London-based Silk Invest Ltd., said in an e-mailed reply to questions today. “We still see Nigerian yields as attractive but are currently shaving our exposure back a tad,” he said, citing rallies across frontier markets.
The naira, which has been devalued twice by the central bank since 2008 because of falling oil prices and import demand, has strengthened 3.1 percent this year to 157.4 a dollar, the best performer in Africa, according to data compiled by Bloomberg.
Yields on Nigeria’s 10-year bonds retreated 47 basis points to 12.79 percent in secondary market trading today, according to prices on the Financial Markets Dealers Association website.
The debt has gained “as traders position ahead of the official inclusion,” Lagos-based Vetiva Capital Management Ltd. wrote in a note.
While inflation in Nigeria slowed to 11.7 percent in August from a high this year of 12.9 percent in April, it is still above the central bank’s 10 percent target. Price increases have ranged from a record of 15.6 percent in February 2010 to a low of 4.2 percent in April 2007, the year that Bloomberg began tracking the data.
“One risk is a new episode of risk-off sentiment globally, with less appetite for emerging market assets and a lower oil price,” said Samir Gadio, an emerging-markets strategist at Standard Bank Group Ltd. in London. “The second risk is that the authorities may decide to fully deregulate petrol prices, which would push up inflation.”
President Goodluck Jonathan partially reinstated a fuel subsidy after unions staged a weeklong strike in January against his attempt to scrap it. Nigeria imports most of its gasoline needs because it lacks the refining capacity to meet domestic demand.
Oil accounts for 95 percent of the West African nation’s foreign-exchange income and 80 percent of government revenue. Corruption is rampant with Nigeria placed 143rd out of 182 countries in a global Corruption Perceptions Index released in December by Transparency International, the Berlin-based anti- graft watchdog.
Nigeria’s long-term foreign-currency debt is rated B+ by Standard & Poor’s, or four levels below investment grade. It is also grappling with an Islamist militant group called Boko Haram in the north of the country. The group has claimed responsibility for hundreds of attacks over the past two years on churches, government buildings and the killing of police, soldiers, officials, and Muslims who disagree with its goals of creating an Islamic state.
Many investors have “just started to look at Nigeria,” said Gadio. “Yields will fall towards the 10 percent mark and could even reach single digit levels at some point in coming months.”
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