JPMorgan has removed Nigeria from its list of emerging market sovereign recommendations that investors should be ‘overweight’ in, saying the country has not taken advantage of current high oil prices.
The financial advisors also noted that the Nigerian National Petroleum Company (NNPC), did not transfer any revenue to the government from January to March this year, due to petrol subsidies and low oil production, as it moved Nigeria’s debt out of the bank’s ‘overweight’ category.
“Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment,” they said.
Emerging market sovereign debt is at the “mercy” of the Federal Reserve’s interest rate decisions, JPMorgan said in a note yesterday, as the US 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.
Nigeria’s fiscal woes amid a worsening global risk backdrop have raised market concerns despite a positive oil environment.
JPMorgan’s Emerging Markets Bond Index Global Diversified (EMBIGD) index has fallen 16% this year, “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,” they said.
They noted that riskier sovereign yields were now 10.6%, 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, they said the “front-loaded pain” for emerging market bonds, which had begun underperforming in September 2021, was positive.
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.
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.
