Nigeria joined a key JP Morgan local currency government bond index on Monday, becoming the second African country after South Africa to be included in a widely followed index thanks to its improving liquidity levels.
The country’s entry into the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) from Oct. 1 could translate into at least $1.5 billion of inflows to the bond market, the bank estimates.
It will raise the profile of Africa’s most liquid debt market after South Africa and is expected to lead to greater foreign participation, given that Nigerian yields offer a significant premium to established sovereign lenders.
“It’s now seen as a market that can’t be ignored internationally and one of the frontier markets where you need to have a position,” said Samir Gadio, emerging markets strategist at Standard Bank.
The entry of Africa’s top crude oil producer into the GBI-EM comes as South Africa joins Citigroup’s World Government Bond Index, although funds tracking the latter are estimated at $2 trillion compared with $180 billion for the JP Morgan index.
At around $25 billion, Nigeria’s sovereign debt market is still dwarfed by South Africa’s $100 billion. Secondary market turnover is also around a fifth of its more developed peer.
However, analysts said Nigeria’s addition to the GBI-EM marks it out as one of the more accessible markets on the continent for foreign investors.
“Nigeria has done a lot of work in recent years in developing its bond market to improve liquidity,” said Leon Myburgh, sub-Saharan Africa strategist at Citi.
“In most African markets, foreign participation is largely limited to the Treasury bill market, but Nigeria has been able to cross the threshold and see foreign investors enter its bond market as well.”
Nigeria has a weighting of roughly 0.72 percent in the index and three bonds, maturing in 2014, 2019 and 2022, have been included as they are the most liquid.
Yields have fallen around 300 basis points since JP Morgan announced the inclusion on Aug. 14.
The bank estimates that about half the $1.5 billion in expected inflows may have already come in, largely from hedge funds and niche investors.
“Now I think we’ll see the people that are less familiar with this market coming through – the benchmark investors, the big real money accounts that may have taken some time to internalise this decision to include Nigeria in the index,” said Giulia Pellegrini, JP Morgan strategist for Sub-Saharan Africa.
Nigeria could end up attracting more than $1.5 billion in inflows given that its bonds offer a yield premium of around 700 basis points over the index, Pellegrini wrote in a note to clients published on Sept. 25.
Strong growth, a low debt-to-GDP ratio, rising foreign exchange reserves and a stable currency could spur additional inflows, the note said.
Nigerians also hope the GBI-EM entry will also help bolster the case for reforms such as the introduction of securities lending and a deeper repo market.
“We think this will help focus minds and get that moving faster so that the legacy can be a deeper, more diverse market,” said Akin Dawodu, treasurer at Citibank Nigeria.
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