International investors may be demoting Nigeria as their darling. JPMorgan Chase & Co. is excluding Nigeria from its local-currency emerging-market bond indices. (A local-currency emerging-market bond is one that is purchased in the local currency, in this case the naira, instead of the dollar. This means that the bonds are affected by any local currency fluctuations.) According to Forbes, JPMorgan Chase will remove Nigerian debt from its indices by the end of October. In response to the JPMorgan Chase announcement, the Nigerian All-Share index fell by almost 3 percent, while the benchmark 2024 bond yield rose by 40 basis points to 17 percent.
According to Bloomberg and Forbes, the short-term cause of investor unease is concern about liquidity following steps taken by the Central Bank to curb imports to support the value of the naira, which over the past year has fallen about 20 percent against the U.S. dollar. Foreign investor sentiment is important. Bloomberg, citing data from the Lagos Stock Exchange, reports that foreigners accounted for 58 percent of portfolio investment transactions in 2014; in 2007 they had accounted for 15 percent.
The primary cause of the naira’s decline and the Central Bank’s measures has been the fall of international oil prices by about 50 percent and its consequences for the Nigerian economy. As recently as July 2014, McKinsey & Co. estimated that Nigeria’s economy might grow at 7.1 percent a year through 2030. However, this year the economy grew by 4 percent in the first quarter and fell to 2.4 percent in the second quarter. The fall in international oil prices highlights the extent to which Nigeria remains a petro-state. Crude oil accounts for 90 percent of the country’s exports and at least two-thirds of government revenue.
Bloomberg and Forbes report that a major factor contributing to investment disenchantment is the fact that President Muhammadu Buhari has yet to designate an economic team, in effect leaving economic policy to the Central Bank. The president has said that he will make cabinet appointments by the end of the month.
Buhari has been in office for one hundred days. That benchmark is the occasion for criticism that he is “Baba Go-Slow” as Boko Haram remains undefeated (despite optimistic military announcements) and he has yet to appoint a cabinet. Yet, despite the impatience, Buhari’s high level appointments thus far have been well received: the military service chiefs, the director of intelligence, the head of the national oil company, his chief of staff, his special assistants, and the secretary to the government of the federation. All appear to be of very high caliber.