Africa to Account for 45% of JPMorgan’s New Frontier Market Bond Index

JPMorgan will launch a new benchmark for frontier-market local-currency government bonds by the end of September, giving African debt markets the largest regional weight. The GBI-EM Edge will track about $328 billion across 425 bonds in 26 countries and 24 currencies. African markets will account for about 44.5% of the index, compared with 31.5% for Asia.

Egypt and Morocco will each receive the maximum 8% country weight. Nigeria will have 7.4%, Kenya 6.91%, Tunisia 5.32% and Uganda 4.84%. Smaller African constituents include Côte d’Ivoire, Angola, Zambia and Ghana. Each eligible bond must have at least $250 million outstanding and more than 2.5 years remaining to maturity, while country weights are capped at 8%.

Nigeria’s inclusion marks its return to a JPMorgan local-currency bond benchmark more than a decade after it was removed from the bank’s flagship emerging-market index in 2015. The new index is separate from that benchmark. Nigeria contributes $17.47 billion across 16 eligible bonds, with an average yield of 17.1% and a B- sovereign rating.

The index offers an average yield of about 10.4%, around 4.4 percentage points above JPMorgan’s main emerging-market local-currency benchmark. Angola has already moved to open its $18.6 billion domestic bond market to more foreign investors, while Zambia increased the size of local bond issues to meet eligibility requirements.

The launch could give asset managers a common benchmark for markets that receive little global portfolio capital. Frontier economies contain about 20% of the world’s population but account for 3.1% of global capital flows. The index gives international investors a way to compare returns from local debt while taking currency, liquidity and sovereign risk into account.

Key Takeaways

The GBI-EM Edge could matter most by making African local-currency bonds easier for global fund managers to measure and allocate to. Index inclusion does not guarantee large foreign inflows, but benchmarks influence where active managers look for opportunities and where index-linked funds place capital. Africa’s 44.5% weight gives the continent a central position from launch, with Nigeria, Egypt, Morocco and Kenya accounting for much of that exposure. Local-currency borrowing also changes the risk for governments. Unlike dollar debt, naira, shilling or pound-denominated bonds do not become more expensive for the government simply because the domestic currency weakens against the dollar. Investors, however, take that currency risk themselves, which helps explain the higher yields available in the index. Nigeria’s 17.1% average yield is one example. The challenge is keeping those markets accessible enough for foreign investors to enter, receive payments and exit without delays. Angola’s reforms and Zambia’s larger bond issues show that index rules can already influence government financing policy. If the benchmark attracts more capital over time, it could deepen domestic debt markets and reduce dependence on Eurobonds, but governments will still need stable currencies, credible fiscal policy and enough liquidity to keep investors involved.

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