From Isaac Anumihe, Abuja
AMIDST raging crisis in the global economy triggered by fall oil and commodity prices, now setting major crude petroleum exporters including Nigeria on the watch list of investors, JP Morgan, a leading investment banker September 8, unsettled the applecart when it announced its intension to delist the FGN Bond – EM from its index next month. That action was based on its perception that the Nigeria foreign exchange market lacks transparency and liquity to sustain the confidence of the international business community.
However, in an attempt to stave off an impending loss of confidence in the Nigerian economy, the Federal Government promptly clarified that the delisting would not affect the quality of FGN Bonds.
Speaking to Daily Sun on the controversial issue, the Director General of Debt Management Office (DMO), Dr Abraham Nwankwo, insisted that the Nigeria’s economy remains resilient in spite of the alarm by JP Morgan.
He also spoke on the evolution of the FGN Bond market and the achievements its fixed income market has recorded so far.
EXCERPT:
FGN Bonds market
Let me mention that we, Nigerians, developed the FGN Bond market by ourselves . The development of the bond market in Nigeria is essentially a Nigerian initiative by Nigerians.
For emphasis, JP Morgan did not help us to build the market. We started the market in 2003 and continued progressing to the present. It is completely an indigenous Nigerian effort. As I said, we have operated this market successfully since 2003 and it was not until October 2012 that JP Morgan decided to include the FGN Bond in its index. Before then, Nigeria had developed both the primary and secondary markets of the bond sufficiently with full compliment of Primary Dealing Market System (PDMMS) of which, presently, you know, we have 13 PDMMS. These are those who buy and sell FGN bonds and also are in a position to make two-way quotes. In order words, they are in a position to buy FGN Bonds. It was in recognition of the successes that we have achieved that JP Morgan decided to include Nigeria in its index. And so, it is important for us to be certain of the sequence.
The Nigerian Bond market did not develop because JP Morgan included us in their index. JP Morgan included Nigeria in its index because Nigeria had developed a bond market. It is also important to note that Nigeria did not invite JP Morgan to include it in its index. JP Morgan took the initiative to desire, to request, to canvass, to have Nigeria in its index because Nigeria was already performing very excellently, showing all the necessary promises and continued growing from strength to strength trying to develop the market. Thanks to the co-operation of various government agencies and the private sector capital market operators. As you know, JP Morgan and the likes are in the business of trying to showcase top performers. So, of course, when they appreciated and recognized Nigeria as a top performer that deserved to be in their index, we had no objection to that. However, using analogy, the fact that you want to use a country or an individual as a poster boy for the cover of your magazine for some time doesn’t mean that if and when you decide not to use that entity on the cover of your magazine that that entity has really lost anything because not everybody is on the cover of a magazine any time. The point, therefore, is that if for any reason, JP Morgan decided not to have FGN Bond in its index, that should not be over-dramatized because removing the FGN Bond in its index does not in any way imply delisting the bond market itself. The Nigerian bond market exists and continues to exist and had been in existence before the delisting and continues to be in existence whether it is in the JP Morgan index or not. Let me also emphasize very explicitly that you do not have to be in the index to operate.
African countries in JP Morgan index
As a matter of fact, of all the countries of Africa, only two are presently in the JP Morgan index- South Africa and Nigeria. It doesn’t mean that the other countries don’ t have bond market. Even countries like Venezuela are not in the JP Morgan index. So, it is important for Nigerians and other stakeholders to appreciate that, if Nigeria is delisted from JP Morgan index, it does not, in any sense, mean that the bond market is any weaker than others. It continues to be as strong as ever. In this context, therefore, it is important to mention that, from our view, the real problem is not what JP Morgan intends to do. The real problem is how the local media, and the local analysts in particular, have misinterpreted what JP Morgan has announced to do. That is the real problem. There is no reason for the local media and analysts to give the impression that the Nigerian bond market, particularly, FGN Bond markets, depend on the JP Morgan index for it to operate successfully and effectively. But that is not true because as I have demonstrated, the market existed and flourished before JP Morgan listed it and not the other way round.
Therefore, it is important for all stakeholders, particularly, the media in Nigerian and elsewhere to act as a countervailing force in this process of building negative sentiments from the announcement of JP Morgan. Instead of the local media analysts supporting or embarking or joining the bandwagon of building up or speculating negative sentiments, they should be countervailing it by exercising the point that the Nigerian bond market existed before it was listed in the JP Morgan index. It is important to emphasise that the FGN Bond market is predominantly based on a well-diversified domestic base. It is predominantly reliant on a well-diversified domestic base. In as much as we encourage active foreign participation in the bond market, ab initio, the DMO and the government were in no doubt that we needed to make sure that the bond market is predominantly based on local investors so that we will be adequately isolated from the vagaries of the volatility of foreign portfolio investors. You will appreciate, therefore, that, in line with that effort, the DMO and other government agencies as well as private capital market operators have continued to enlighten the general public not just the institutional investors, but the retail investors to participate in the FGN Bond market.
And indeed, a couple of years back, DMO took the initiative of appointing a government broker in the name of Stanbic IBTC. Its main preoccupation is to ensure that investors participate actively and also making sure that their investments in the FGN Bonds are listed and traded on the floor of the Nigerian Stock Exchange. As you know, since 2004, following the pension reforms, the pension sector has been a veritable source of long-time funding in the Nigerian economy and their creditable performance has adequately complemented the efforts of DMO in the sense that, for you to have a viable pension scheme, you needed appropriate long term stable outlets where the fund managers could invest the funds and make sure that they are available whenever they are needed for the settlement of the various pension liabilities.
As you know, our pension sector continues to wax stronger and stronger with its assets continuing to rise and it is reaching N5 trillion presently. As you know, that sector will continue to expand because as the economy continues growing, as the population continues growing, as the employment continues growing and more importantly, as the base, in terms of capturing more people, more sectors into the new scheme as it proceeds, in the next couple of years, you will find out that the fund will even grow more faster. The pension commission and other authorities as you know are making efforts to ensure that even the informal sector is captured into the pension scheme.
So, there is no doubt that the various sources of long term funding in the economy will continue to grow. And that will also feed in adequately into the bond market, including the FGN Bond market. In that regard, of course, I am sure you, as the analysts in the economy, appreciate that our insurance sector is hardly explored and exploited. You are also aware that the National Insurance Commission (NAICOM) and other MDAs are making efforts to modernize that sector and the type of boost you expect in terms of the insurance sector as these reforms go on will possibility be as much, or much larger, as the funds that came from pension reforms. So, these are some of the potential areas for the funding of the bond market to be even more robust. But the point is that as at today, the bond is well-funded as you can verify yourselves. Even, following the global economic and financial crisis, including the one that got picked up mid-2014 as a result of the collapse in oil prices, the FGN Bond auctions had been continuously oversubscribed.
However, as I have indicated that with the reforms going on in other sectors that will build funding to the market, things will get even better, easier and prices are even likely to be more favourable in the next couple of years. So, let me emphasise that the reaction of JP Morgan is essential if you like their perception of development in the foreign exchange market which in itself derives from the collapse in oil prices. So, it is not a reflection of any problem per se in the FGN Bond market. It is a response or a reaction to the perception valid or invalid of developments in the invalid of developments in the forex market. Of course, the Central Bank of Nigeria (CBN) has made its position very clear. And it is in a position to continue to explain to the public the measures it is taking. But suffice it to say that JP Morgan’s action is not a reaction to any deficiency in FGN Bond market. They are simply reacting to perceptions in the foreign exchange market. But we make bold to say that even developments in the foreign exchange market have arisen from what all of us know—the collapse in the oil price and that challenge is not peculiar to Nigeria. It is common to all oil-exporting economies-Russia, Venezuela and others. Indeed, we want to use this opportunity to re-emphasise that the Nigerian economy has proven resilient more than any other country that is an oil-exporting country, following the collapse of oil prices. As you are aware, President Muhammadu Buhari has taken the initiative to ensure short-term stabilization in terms of the fiscal positions of the various governments in the country. And efforts are being made to deal with the long-term problems. So, this should be the context. So, the focus of every well-meaning Nigerian should be to ensure that that effort is being made to sufficiently diversify our economy to have adequate infrastructure, particularly, power, and road networks. To develop the real sector, particularly agriculture, solid minerals, manufacturing, petrochemicals so that in the next three to five years, our economy will be adequately diversified so that the economy will be sufficiently insulated from externally induced shocks such as those that come from the collapse in the price of oil. So, that should be the focus of Nigerians. We should not join the bandwagon of speculation, negative sentiment building around the bond market and around the economy. We should work the other way round. We should appreciate what the country has already achieved in the bond market using its own resources, its own professionals, its own competences. We should appreciate the advances that we have made in some sectors of the economy towards diversification and we should go ahead to build on this to rapidly achieve the diversification we need.
So, our focus should not be on analysing and reacting or responding to perceptions by foreign institutions like JP Morgan and the like. That should not be our focus. Our focus should be how to make our economy strong, diversify it in the shortest possible time, how do we mobilize adequate resources to rapidly diversify our economy, to cause the change we need in employment, in income, in welfare, in diversification. In this regard, not just the welfare and even also, the private sector has a responsibility to use this period of structural collapse in oil prices to make all the efforts to finally diversify the economy so that the economy will be self-sustaining. So, in the medium to long term, that should be the best response to the perceptions and actions of institutions like JP Morgan. That is the business of monitoring and evaluating and perceiving and influencing market statements. But the business of Nigeria should be to build a business economy that will be less-vulnerable to such external sentiments. That should be the bottomline. So, in summary, let me emphasise that Nigeria already has a strong and well-established bond market which had been developing through inherent local capacity without any foreign facilitation. Let me also emphasise that the inclusion of FGN Bonds in JP Morgan index and indeed in the Barclays Capital index came when we have developed the market and those inclusions were mere recognition of our achievements. Therefore, they cannot be the basis for anybody to have concerns about the bond market economy. Therefore, we are urging the Nigerian media in particular and the public in general to appreciate that the Nigerian bond market remains strong, that the DMO and other stakeholders, the Federal Ministry of Finance, the CBN, the Securities and Exchange Commission (SEC) and the private sector, capital market players, the Nigerian Stock Exchange, will continue to work to make sure that the Nigerian bond market continues to grow from strength to strength. That is the commitment we make for Nigerians. We have done the much we have done purely through Nigerian initiative and we will continue. We will appreciate, from time to time, the foreign agencies that show recognition and award us prizes, as they have done in the past. But our focus is on building a bond market that continues to support the growth and development of our economy.
Contact with JP Morgan
We have always been in contact with JP Morgan and other agencies. We don’t need to wait for these issues for us to be in contact with JP Morgan. That is part of our job—having relationships, both local and international, including financial institutions . And on this matter, of course, yes, we have been in continuous contact since they made the first indication in January. We continue to assure them that while the issues they are concerned about have to do with the oil prices, while they have to do with the foreign exchange market, Nigeria will continue to do its best to make sure that the market appeals to both local and foreign investors. Yes, we continue to make contact with them. But as I said, the more important to us is to deal with issues that are relevant and the issues are more or less long term issues.
Why issues in foreign exchange market
There are issues in the foreign exchange market because oil prices collapsed and Nigeria depends overly on crude oil exports for its revenue. Nigeria appreciates this and has already started to diversify its economy so that it would not be vulnerable to such shocks.
Impact on Nigeria’s economy
Source : SunOnline