The inability of the Nigeria National Petroleum Corporation (NNPC) to transfer three-month oil revenue to the Federal Government has led JP Morgan to remove Nigeria from its emerging market sovereign list.
JP Morgan emerging market sovereign recommended that investors should be ‘overweight’ in citing fiscal challenges, adding that Nigeria failed to take advantage of high oil prices.
The JPMorgan said it delisted Nigeria from the market following the NNPC’s inability to transfer earned funds from January to March to the government due to petrol subsidies and low oil production.The American bank announced yesterday that it moved Nigeria’s debt out of the its ‘overweight’ category.
The move, analysts said could worsen the ability of Nigeria’s companies that borrowed in dollars to repay such credits as dollar crunch persists while also leading to further depreciation of the naira against global currencies.
Nigeria was replaced in the list with Serbia due to the country’s high reserves and a fiscally cautious government and also Uzbekistan due to its relatively low debt despite Russian exposure.
“Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment”, the bank said.It moved Serbia to ‘overweight’ as risks had been priced in and the country had high reserves and a fiscally cautious government, the note said, while relatively low debt, despite Russian exposure led them to put Uzbekistan in the same category.
An ‘”overweight” investment is an asset or industry sector that makes up a larger percentage of a portfolio or index than is typical. When a bank gives an asset an ”overweight” recommendation, it means the bank believes the asset will outperform its sector in the coming months.
Emerging market sovereign debt is at the “mercy” of the Federal Reserve’s interest rate decisions, JPMorgan analysts said in a note on Monday, as the US central bank’s rate raises drain capital from developing markets.
The Fed last week raised its benchmark overnight, interest rate by half a percentage point, the biggest jump in 22 years, as it seeks to tame high inflation, while its rate increases also buffet higher-yielding emerging markets.
JPMorgan’s Emerging Markets Bond Index Global Diversified (EMBIGD) index has fallen 16 per cent this year, the analysts said, “with most of the losses having come from rates” and $4 billion in net outflows from emerging markets since mid-April.
“The external and fundamental backdrop has become increasingly difficult for EM sovereigns. The COVID lockdown in China poses further downside risks”, the analysts said.
They noted that riskier sovereign yields were now 10.6 per cent, the highest level since the first wave of the coronavirus pandemic in April 2020, reducing market access and increasing the risk of debt defaults.
However, the analysts said the “front-loaded pain” for emerging market bonds, which they said had begun underperforming in September 2021, was a positive.
Russia’s invasion of Ukraine in February caused commodity prices to spike, benefiting exporters.
The over-performance of bonds issued by oil exporters now “looks to have played out”, JPMorgan said.
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