The expulsion of Nigeria from JPMorgan’s Government Bond Index is an embarrassment to the economic reputation of the Nigerian Government, according to Ayo Salami, CIO of Africa Liquid Strategies at Duet Asset Management.

JPMorgan Chase and Co has announced that the largest African economy will be removed from its Government Bond Index-Emerging Markets (GBI-EM) by the end of October 2015, after restrictions on FX transactions prompted investor concerns over a liquidity shortage.

The country has a 1.5% weighting in the GBI-EM index, which is tracked by $183.8bn of funds globally, according to the bank.

JPMorgan, the largest financial services holding company in the US, added Nigeria to its index in 2012 and on January 16, 2015 placed the country on a negative index watch.

Salami said that index inclusion back in 2012 was generally viewed as confirmation of Nigeria’s emergence as an acceptable destination for international financial flows.

He added that the move was not unexpected, however the timing is earlier than anticipated since the previous expectation would be completed around December.

“The immediate impact of Index exclusion on the domestic economy is likely to be minimal, since a lot of foreigners had already exited the local fixed income market,” he said.

Estimates suggest that foreign holdings of Nigerian bills and bonds had declined from about $8bn to around $2bn.

“Given the selling pressure, domestic yields have been rising and currently 180-d yield stands at ca.15.5% (vs 13% in Jan 15). If the remaining $2bn were to be withdrawn, domestic banks and pension funds have the capacity to absorb the offer and net impact on yields should not be more than an additional 0.5% to 1%,” Salami said.

“Given that this event was reasonably well flagged, those foreign investors still left in Nigeria are unlikely to have suddenly become more pessimistic about the outlook for the markets or the economy. Nigeria’s fundamental problems are well known –slowing growth, falling oil price, falling Government revenues, rising C/A deficit, pressure on the FX rate etc. Nothing has changed today, that most investors were not aware of yesterday,” he added.

In terms of policy, Salami expects continuation of CBN’s policy of administrative controls to limit demand for foreign exchange.

“Inexplicably the CBN has chosen to sacrifice economic growth on the altar of currency stability. The 2Q15 numbers showed a deceleration in real GDP growth to 2.35% from 6.54% a year ago,” he said.

“Growth has been falling for the last four quarters and the manufacturing sector is now in recession with negative growth over the last two consecutive quarters. The CBN’s policy choice is not sustainable in the longer run. The only hope for success with the CBN’s current policy is a recovery in the oil price,” he said.

"Should the oil price fail to recover, the CBN will ultimately have no choice but to abandon the current rigidity of its FX regime and allow the NGN to find a more competitive rate. Regrettably, by this time avoidable damage would have been inflicted on the domestic economy,” he added.

Nigeria will not be eligible for re-entry for at least 12 months from the date of exclusion, according to JPMorgan.