JPMorgan Removes Nigeria From It’s Emerging Market Bond Index

JPMorgan, an American multinational investment bank, has removed  Nigeria from its list of emerging market sovereign recommendations that investors should be ‘overweight’ in Naira.

An overweight investment is an asset or industry sector that makes up a larger percentage of a portfolio or index than is typical. When a bank gives an asset an overweight recommendation, it means the bank believes the asset will outperform its sector in the coming months.

However, Nigeria was removed from the bank’s “overweight” emerging market sovereign recommendations due to the country’s failure to take advantage of high oil prices, according to information from Reuters.

JPMorgan added that Emerging market sovereign debt is at the “mercy” of the Federal Reserve’s interest rate decisions.

What JPMorgan is saying

JPMorgan analysts further explained that the delisting was caused by Nigeria’s NNPC’s inability to transfer any revenue to the government from January to March this year, due to petrol subsidies and low oil production.

  • The bank said, “Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment,”.
  • Serbia was upgraded to ‘overweight’ because risks had been priced in, and the country had large reserves and a fiscally conservative government, according to the report, while Uzbekistan was placed in the same category due to its comparatively low debt despite its Russian exposure.
  • Economic growth in emerging markets is set to slow “sharply” this quarter weighed by China, Russia, and the spread of tighter monetary conditions, JPMorgan analysts said

What you should know

Federal Reserve Bank of the United States hiked key interest rates by 25 basis points in March 2022 and another 50 basis points in May. It also hinted that it might hike rates more times in 2022 alone, as it tries to keep inflation under control in the United States.

  • The dollar’s perceived safe-haven status has resulted in a massive flood of savers and investors into low-risk USD assets such as Treasury bills and gold, at the expense of emerging economies.
  • JPMorgan’s Emerging Markets Bond Index Global Diversified (EMBIGD) index has dropped 16% this year, “with most of the losses having come from rates” and $4 billion in net outflows from emerging markets since mid-April, according to JPMorgan analysts.
  • Furthermore, rising dollar strength would put an additional burden on Nigeria, as the country would have to pay a higher interest rate to entice people to acquire dollar-denominated bonds issued by EM sovereigns and corporations.

This is especially troubling because a drop in the local currency as a result of the reversal of capital flows could make servicing the dollar loan more onerous. If earnings do not rise in lockstep, corporations and organizations that borrowed in dollars may be put under further strain.