JP Morgan: a wake-up call

As the frenzy over the decision by JP Morgan to phase out Nigeria from its Government Bond Index for Emerging Markets (GBI-EM) effective from October 30, 2015 begins to die down we draw attention to the need to adopt measures that would extricate Nigeria’s economy from whims of foreign investors. The GBI/EM index gives international credibility to economies for foreign investments. Nigeria was admitted in 2012 with JP Morgan suggesting then that the inclusion would translate into inflows of about USD1.5 billion. But by August the 2015 total investments were worth USD2.8 billion, indicating huge foreign investment interest in the Nigerian market. Sadly, however, in January this year, JP Morgan placed Nigeria on Index Watch signaling a withdrawal of interest in reaction to measures by the Central Bank of Nigeria (CBN), which they claim to have impeded the ability of foreign investors to access the foreign exchange market. In response, the CBN, Federal Ministry of Finance (FMF) and Debt Management Office (DMO) issued a joint statement saying, in a nutshell, that their overriding concern is for Nigeria and the interest of Nigerians and would only continue to take economic decisions that will impact positively on the lives of all Nigerians. We hereby identify with and support our government institutions in their efforts to protect the Nigerian economy in the face of seeming threats to our domestic economic interests. In as much as Nigeria desires and needs foreign investment inflows, it is important to begin to appraise the type of foreign investment that should be encouraged. Measures taken in the recent past had included a removal of foreign investment restrictions opening the door to the unprecedented volume of foreign portfolio investments (FPI’s). But these FPI’s move out quickly at the slightest presentation of risk. Just within 10 days of the JP Morgan announcement about USD1.2 billion worth of FPI’s has left the Nigerian financial market and the exit is continuing. They can actually pull out everything in one week or less. Stocks on the Morgan Stanley and Barclays Indices are now volatile. Financial institutions with large investments in bonds could record huge market losses in the near term. The Nigerian economic and monetary authorities should therefore restructure the economy to present stronger incentives for the longer term FDI’s, build domestic factors of production and bridge the deficits in critical infrastructure. They should take measures to stimulate the comatose real sectors, domestic investment and reduce the cost of doing business by influencing interest rates downwards. Additional focus should be on controlling inflation and maintaining a steady foreign exchange regime. Our JP Morgan delisting could be a blessing in disguise to the economy depending on the federal government’s response to it.