Nigeria, Egypt, and Ghana have been said to have the highest weight at the emerging bond market index.
This was according to a new report titled ‘Investment Funds and Financial Stability: Policy Considerations’ by the International Monetary Fund published on Friday.
“In terms of the relative importance, Egypt, Nigeria and Ghana have the highest weights at 2.6, 1.5, and 1.5 per cent of EMBIG Global Diversified respectively,” the report stated.
According to Investopedia, “the emerging market bond index is a benchmark index for measuring the total return performance of international government and corporate bonds issued by emerging market countries that meet specific liquidity and structural requirements”.
Investopedia added that “despite their increased riskiness relative to developed markets, emerging market bonds offer several potential benefits such as portfolio diversity as their returns are not closely correlated to traditional asset classes.”
The IMF report stated that benchmark investors’ strategies drive more correlation in portfolio flows for emerging market recipients and across emerging market bond yields, adding that such flows are, however, more sensitive to common global risk factors.
“BDI strategies induce greater correlation in portfolio flows within the cross-section of EM recipients and across EM bond yields. Analysis shows flows driven by EM benchmarks to be about three-to-five times more sensitive to common global risk factors than the balance of payments measures of portfolio flows
“Importantly, this sensitivity has been rising over time, reflecting the fact that BDIs tend to treat EMs as an asset class focusing on factors that affect them as a group rather than on country-specific developments,” the report stated.
In addition, it was stated that cross-border spillovers are affecting frontier markets like the Nigerian market.
“Cross-border spillovers are also affecting frontier markets. Frontier debt issuers have benefited from index inclusion and have become an important part of the EM debt asset class. Their share of international debt outstanding increased dramatically over the past decade; they now account for almost 20 per cent of the widely used the EMBIG-Diversified index, making them a large beneficiary of benchmark-driven flows,” the report added.
It was further stated that high foreign participation in the local bond market could lead to substantial volatility in the frontier markets.
“Foreign participation in the local bond markets is also broadly comparable across frontier and emerging markets. High foreign investor participation can induce significant volatility in frontier markets because they often lack financial depth and have a relatively shallow domestic investor base.
“Moreover, potential for contagion is now higher: given their sizable contribution to the overall performance of EM external sovereign debt, episodes of distress in frontier markets could lead to redemptions from BDI funds, resulting in outflows even from countries with strong fundamentals,” the report stated.
Despite having high weight in the emerging bond market index, Nigeria and other frontier markets were said to have shallow investor base and market debt, especially when compared to advanced economies.
“Frontier markets have a significantly shallower investor base and market depth compared to emerging and advanced economies,” it stated.
Nigeria was said to have a financial market depth and financial institution depth of less than 0.2 per cent.
The PUNCH had earlier reported that the Debt Management Office disclosed that Nigeria is back in the International
