Nigeria: JP Morgan change & Emefiele’s failed run unlikely to hurt investor interest, analysts say

By Kanika Saigal
Posted on Thursday, 12 May 2022 18:25

The board of MTN Nigeria Communications PLC joins officials of the Nigerian Stock Exchange to ring the bell to mark the start of trading of MTN shares, in Lagos, Nigeria 16 May 2019. REUTERS/Temilade Adelaja

Research analysts at JP Morgan, one of the US’s largest investment banks, moved Nigeria from overweight to market weight in its list of emerging-market sovereign recommendations this week. But the move will have little impact on investor sentiment towards Nigeria in the short to medium term, say capital market experts.

“The index team in charge of the emerging-market bond index for sovereign debt rebalances country weights each month, but the team does not issue recommendations,” says Samir Gadio, head of Africa strategy in Standard Chartered’s research team.

“There may have been suggestions in the media that Nigeria was delisted by the index provider, but this is not true,” he says.

The change by JP Morgan follows a court ruling that denied a request by the central bank governor, Godwin Emefiele, to run for president on 10 May. Following the controversial bid from Emefiele, there have been calls from both the leading and opposition parties for him to step down. JP Morgan predicts that the naira will continue to weaken, given the central bank governor’s uncertain future.

Investor sentiment

On 11 May, the value of the naira compared to the US dollar fell by around 0.3% from 588 to 591 in the parallel market – but this was largely due to dollar shortages, says Murega Mungai, trading desk manager at AZA Finance.

“Foreign investor presence in Nigeria has reduced over time given exaggerated central bank intervention, an over-dependence on oil and a lack of will towards full deregulation in the foreign exchange markets,” says Mungai.

“However, the central bank governor’s presidential aspirations may serve as a negative point of reference in the future for prospective foreign investors.”

Eurobond yields

Yields on Nigerian ten-year sovereign eurobonds have increased by 20.1 basis points in the last month from 11.476% on 25 April to 11.721% on 9 May, suggesting that while there is greater risk associated with investing in Nigeria’s sovereign debt, it may not have been sparked by the central bank governor’s presidential ambitions.

Indeed, the higher yield is more reflective of the huge sell-off in the eurobond market in Africa this year, with returns for dollar-denominated sovereign debt down around 20% year-to-date. Returns on JP Morgan’s Emerging Market Bond Index are also down 16% year-to-date.

Compared to other African sovereign debt, the market remains overweight Nigerian eurobonds, says Gadio, which reflects the sovereign’s high-yielding international sovereign debt issues and high oil prices.

“Nigerian eurobonds have sold off somewhat more than other issuers in the region during recent market shocks, but this is due to technical factors as they have a larger stock of international sovereign debt of around $15.9bn,” he says.

Nigeria and the news

As Abiodun Keripe, managing director at Afrinvest, says: “Nigeria’s capital markets are disconnected from the news. Instead, international investors are reacting more to Fed rate hikes and are moving away from emerging-market debt because of this.”

In fact, equity markets in Nigeria are up 20% year-to-date, driven by a combination of strong corporate earnings in the first quarter of 2022, strong dividend pay-outs and increased domestic participation.

“Local investors understand the nuances of Nigerian politics and economics,” says Keripe. “By and large, they will choose to ignore the political pageantry on display before the primaries – even if this includes a breach of the constitution and the Central Bank of Nigeria Act following Emefiele’s failed presidential bid.

“Indeed, the fact that Emefiele was stopped in his tracks is a testament to local laws and institutions, and may boost local investor sentiment in Nigeria,” he says.

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