Nigerian authorities expressed strong disagreement with JP Morgan’s decision to expel it from its widely followed Government Bond Index-Emerging Markets (GBI-EM), saying that the investment bank wanted to remove a forex market rule that helped eliminate speculators and maintain the stability of the naira amid heightened global volatility.

After having contemplated over Nigeria’s expulsion for about eight months, JP Morgan said on September 8 it will start phasing out Nigeria from GBI-EM this month and will completely remove it by the end of October. This will force funds tracking naira-denominated government bonds to sell them, potentially resulting in large capital outflows and higher borrowing costs for the country, already hit by the plunge in oil prices.

JP Morgan had warned Nigeria that it should improve FX market liquidity and transparency, as well as create a fully functional two-way FX market to stay in the index. It waited a few months in order to assess the effects from the change in the country’s political leadership at end-May.

However, the bank assessed that “foreign investors who track the GBI-EM series continue to face challenges and uncertainty while transacting in the naira due to the lack of a fully functional two-way FX market and limited transparency".

In a rare joint statement, the Central Bank of Nigeria (CBN), the Federal Ministry of Finance, and the Debt Management Office (DMO) denounced JP Morgan’s decision, saying liquidity and transparency had been improved through various measures, including the closure of CBN’s Official FX Window and online disclosure of all FX transactions in the Reuters Trading Platform. The authorities rejected JP Morgan’s judgment of a lack of a fully functional two-way FX market.

“Given the high propensity for speculation, round tripping, and rent-seeking in the market, it became imperative that participants are not allowed to simply trade currencies but are only in the market to fulfil genuine customer demands to pay for eligible imports and other transactions. In the light of this, we introduced an order-based, two-way FX market, which has resulted in the stability of the exchange rate in the interbank market over the past 7 months and largely eliminated speculators from the market,” the statement reads.

If the rule is removed, as JP Morgan had recommended, this would lead to an “indeterminate” depreciation of the naira, the authorities claim. Before devaluing the naira and pegging it at a fixed rate against the dollar, the central bank tried to defend it through dollar sales, which led to a significant depletion of its foreign exchange reserves.

Meanwhile, the authorities ensured that “the market for FGN [Federal Government of Nigeria] bonds remains strong and active due primarily to the strength and diversity of the domestic investor base”.

JPMorgan added Nigeria to its local currency government bond index in October 2012, making it the second African country after South Africa to be included in a widely tracked global index. In August 2014, it included Nigeria's 2024 bond in the GBI-EM, in addition to the 2014, 2019 and 2022 bonds that were added in 2012.

Foreign holdings of FGN bonds are below $2.75bn, according to Samir Gadio, the head of Africa strategy at Standard Chartered Bank, quoted by Reuters. This compares to some $8bn in September 2014.

Nigeria still remains in Barclays’ Emerging Markets Local Currency Government Index with 10 FGN bond issues.