Nigeria’s bond market regulator imposed a new spread limit on Thursday, to mitigate the fallout after the country’s expulsion from a major JP Morgan bond index.

On Tuesday, JP Morgan said it would remove the bond listings of Africa’s biggest economy by the end of October, citing a lack of liquidity and currency restrictions.

The decision is a blow for President Muhammadu Buhari, who has promised to diversify an oil-dependent economy hit by a slump in global crude prices. He faces criticism for appointing a cabinet since his inauguration on May 29.

With no government in place, equity and bond investors have been wondering the direction of economic policy after the central bank imposed tough currency controls to halt the naira’s slide.

Traders said the FMDQ, a regulator comprising Nigeria’s main commercial banks and the central bank, widened the bid-ask spreads on bond trading to 1 naira from 0.30 naira to contain volatility, helping to moderate a debt market sell-off.

“Without it, the market would have frozen and there would have been no offer for quotes. We’ve done the best thing in terms of risk management,” Bola Onadele, FMDQ’s managing director, told Reuters.

The yield on Nigeria’s benchmark 2024 bond eased to 16.63 percent on Thursday from the previous day’s close of 16.68 percent. It had spiked to 17 percent on Wednesday after JP Morgan’s announcement.

Stock market investors joined the sell-off, worrying that Nigeria might also be evicted from the MSCI frontier index and dollar shortages would make it hard to exit the market.

“Sooner or later, equity investors will wonder whether this could also lead to action by MSCI,” Renaissance Capital said in a note.

Nigerian stocks were among the worst performers on the MSCI frontier market index for a second day.

FBN Holdings fell the most, dropping 4.98 percent. Access Bank fell 4.9 percent, Union Bank of Nigeria 4.24 percent and United Bank for Africa 4.11 percent.

CENTRAL BANK TIGHTENS DOLLAR FLOWS

In another attempt to reduce naira speculation, the central bank reduced the time limit for funding currency purchases to 24 hours from 48 hours to stem the surge in demand for dollars, dealers said.

Ayodeji Ebo, head of research at Afrinvest, said that investors were increasingly concerned over whether the $31.5 billion in foreign reserves was enough to allow the bank to meet rising dollar demand.

“The central bank’s ability to defend the naira may be hampered, hence a devaluation may be inevitable. Foreign investors exposed to Nigerian equities will prefer to exit positions ahead of any official devaluation,” Ebo of Afrinvest said.

The stock market, which has the second-biggest weighting after Kuwait on the MSCI frontier market index, was down 1.87 percent in early trade but recovered to a slight gain of 0.06 percent by the close.

Analysts estimate foreign holdings of Nigerian bonds at less than $2.75 billion compared with about $8 billion in September last year, said Samir Gadio, head of Africa strategy at Standard Chartered Bank in London. Traders said domestic pension funds were picking up the slack as foreign buyers exit.
*Reuters