BY MICHAEL EBOH & RITA OBODOECHINA

The increased composition of foreign portfolio investment in Nigeria’s foreign exchange reserve buildup will put the economy of the country at risk and leave the country vulnerable to volatility in the global financial markets, according to analysts at Asset and Resource Management Company Limited, ARM.

The Analysts, in their Economic Update for the month of August 2012, also stated that if the trend continues, the Nigerian economy will be exposed to the ever-changing market perceptions, especially about socio-political stability in the country.

The analysts are also of the view that the country’s inclusion in the JP Morgan Government Bond Index would likely alter the bond market dynamics and outlook significantly.

According to the analysts, based on the criteria for inclusion, the 2017 bond could become a strong contender after the implementation of the bond switch programme, especially as Nigeria’s yields significantly exceed the benchmark’s 5.8 per cent average, which suggests that it could attract capital inflows that are likely to be disproportionate to its 0.59 per cent or $1 billion capitalisation weight in the index.

“Moreover, along with more stable currency outlook and a rally in the country’s Eurobond to an all time low yield of 4.84 per cent at the end of August, this development points to a much stronger impetus for overall bond yield declines and could substantially alter market outlook in the medium term,”  the analysts declared.

In their analysis for the month of August, the analysts said, “Sustained high energy prices and an increase in volume of oil exports with its attendant accretive value on foreign reserves, which grew by six per cent from the end of July to $38.6billion over August 2012—has seen the official exchange rate remain flat at N155.5 to a dollar through half year 2012.

“At the interbank, the naira appreciated by two per cent from N160.74 to the dollar at the end of July to close at N158.1 to the dollar as at the end of August, but had been subject to significant bouts of volatility with changing energy price and global investment outlook.

“Official market sales dipped over the three week period supported by increased autonomous supply to the interbank market. Reuters’ reports that this supply is as a result of foreign investor purchase of Nigerian debt which we believe is linked to the country’s inclusion in the J.P Morgan bond index.

“However, we are also of the view that increased autonomous supply reflects a shift away from speculative bets on the naira among local institutions in view of improving crude sales—and dollar revenue outlook.

“We believe market expectations for the naira on this basis should remain positive into the medium term.”