J.P. Morgan Warns of Rising Risk in Nigerian Markets as Oil Prices Plunges

In a stark shift from its previous bullish stance, U.S. investment bank J.P. Morgan has issued strong advisory urging investors to unwind long positions in Nigerian Open Market Operation (OMO) bills and Treasury bills, citing escalating global risks that could exacerbate Nigeria’s macroeconomic vulnerabilities.

In a research note dated April 9, 2025, titled “Frontier Local Markets Strategy: Reducing Risk Further”, the bank raised red flags over Nigeria’s economic outlook amid falling oil prices and resurging global trade tensions. With Brent crude hovering near sub-$60 levels—a critical threshold for Nigeria’s budgetary breakeven—J.P. Morgan cautioned that continued declines could severely strain the country’s current account balance, external reserves, and currency stability.

J.P. Morgan, which had previously championed Nigerian assets for their high yields and relative macroeconomic stability, has now reversed its view. The bank attributed this change to an evolving global economic climate, particularly the re-emergence of the former U.S. President Donald Trump as a frontrunner in the upcoming U.S. elections and his pledge to reinstate sweeping global tariffs.

The geopolitical uncertainty, combined with weakening oil prices, has prompted the bank to recommend that clients exit one of its formerly “highest conviction” frontier market trades.

“While Nigeria may well avoid a recession itself,” the report stated, “the substantial decline in oil prices below its break-even of US$60/bbl would push Nigeria’s current account balance into deficit.”

J.P. Morgan underscored that a prolonged oil price slump could trigger sharp depreciation of the naira. The bank had previously warned that the USD/NGN exchange rate could breach 1,700/$1 if dollar inflows falter. The naira currently trades around 1,500/$1 but remains vulnerable due to heavy reliance on oil-linked FX earnings.

Despite recent Central Bank of Nigeria (CBN) efforts to stabilize the currency—including the sale of approximately $550 million into the market in March—foreign portfolio investors are showing signs of unease.

Rising demand for dollar assets and tighter global financial conditions may trigger capital flight, with J.P. Morgan estimating potential outflows of up to $10 billion. However, part of this is likely tied up in private placements or illiquid investments.

The bank commended the CBN’s proactive measures in recent weeks, including a 3.6% depreciation of the naira and increased market intervention, but warned these moves might not be enough if oil revenues continue to shrink.

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In addition to FX concerns, Nigeria’s domestic fixed-income market is showing signs of distress. Yields on OMO bills and Treasury bills have surged by as much as 300 basis points, reflecting investor caution.

Liquidity remains weak, and the central bank has been forced to intervene directly in auctions to maintain market confidence and prevent volatility in short-dated securities.

The weakening sentiment is largely attributed to persistent inflation fears, growing foreign outflows, and doubts over future oil revenues—all of which have combined to sap investor appetite for naira-denominated assets.

Nigeria’s central bank remains optimistic, having earlier in April declared a net external reserve of $23 billion and a balance of payments surplus of $6.83 billion for the end of 2024—figures it said “signal economic resurgence.”

The CBN expressed confidence in rising oil production, improved export conditions, and growing non-oil FX earnings to support the country’s financial outlook.

However, J.P. Morgan’s outlook diverges sharply, stressing that Nigeria’s reliance on oil continues to expose it to external shocks. Without a sustained recovery in oil prices, fiscal and external buffers could be tested further, challenging the country’s economic reform agenda.

Despite short-term concerns, J.P. Morgan maintains a constructive medium-term view on Nigeria. The bank acknowledged recent positive reforms—including the unification of the exchange rate and the removal of fuel subsidies—and believes these policies, if sustained, could help Nigeria transition toward a more market-driven economy.

The commercialization of the Nigerian National Petroleum Company Limited (NNPC) and broader fiscal efforts to mobilize domestic revenue are also seen as steps in the right direction.

However, success hinges on oil price recovery and the government’s ability to maintain macroeconomic discipline in the face of global headwinds.

J.P. Morgan’s latest note paints a sobering picture for investors in Nigerian financial instruments, urging caution amid mounting global and local risks. While the country has made strides in reform, its exposure to oil volatility and external shocks leaves its financial markets precariously balanced.

For now, the bank’s message is clear: reduce risk exposure, monitor oil markets closely, and prepare for potential turbulence ahead.