Categories: Business

JPMorgan Cuts Nigeria from ‘Overweight’ Over Country’s Fiscal Woes

JP Morgan, an American multinational investment bank has removed Nigeria from its list of emerging market sovereign recommendations that investors should be ‘overweight’ in, saying the country had not taken advantage of high oil prices.

It however, added Serbia and Uzbekistan to the list.

According to Reuters, JP Morgan’s analysts noted that the Nigerian National Petroleum Corporation (NNPC) did not transfer any revenue to the government from January to March this year, due to petrol subsidies and low oil production, which was the reason it moved Nigeria’s debt out of its ‘overweight’ category.

“Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment,” they said.

In Nigeria, its Senate last month approved the total sum of N4 trillion for petrol subsidy in 2022. The figure represented the amount contained in two separate requests by the President to the National Assembly for approval. The President, had in a letter to the Legislature dated 10th February, 2022, sought an additional N2.557 trillion to fund subsidy payments from July to December, 2022.

However, JP Morgan moved Serbia to ‘overweight’ stating that risks had been priced in and the country had high reserves and a fiscally cautious government, while relatively low debt despite Russian exposure led them to put Uzbekistan in the same category.

In addition, Reuters quoted analysts at the bank to have estimated that emerging market sovereign debt was at the “mercy” of the Federal Reserve’s interest rate decisions, as the United States central bank’s rate raises drain capital from developing markets.

Last week, the Fed 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 analysts said. “The COVID lockdown in China poses further downside risks.”

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.