Foreign Investment Hits 7-Year Low in Nigeria

The latest Capital importation report released by the National Bureau of Statistics (NBS) showed that the total value of capital imported into Nigeria was an estimated $1.55 billion in Q4 2016. In essence, this revealed a 15% quarter-on-quarter (QoQ) decline compared with the $1.8 billion recorded in Q3 2016 and a 0.52% decline relative to the corresponding quarter of 2015.

We note that this reflected the general trend since 2014 when investor confidence in the economy started to wane in the face of falling oil prices and plummeting reserves. Likewise, 2016 was lacklustre as Nigeria recorded a 47% Year on Year (YoY) drop in investment to $5.16bn when compared with the $9.6bn recorded in 2015 and a 75% drop when compared with $20.75bn in 2014. It is the lowest level of investment in Nigeria in seven years (7).

Which segment attracted the most capital in 2016?

There was a shift in the composition of imported capital into Nigeria in 2016. With a contribution of 35%, Foreign Portfolio Investment which had taken the largest share of capital imported in recent years lost ground as Other Investments, which mainly comprise loans, took the lion share of 44%. Foreign Direct Investment (FDI) contributed 20%.

Policy Failure: Withering Sentiment?

In our assessment, capital importation averaged a meagre $876m in the first half of 2016 due to foreign currency illiquidity, scarcity and controls put in place by the CBN to manage foreign currency demand. However, the positive sentiment that greeted the proposed move to a flexible arrangement in June 2016, wherein the Naira was devalued by 40%, resulted in a sharp rise in imported capital in Q3 2016.

The reprieve in imported capital was brief, however. The persistence of factors earlier noted and a lack of commitment to a flexible exchange rate mechanism withered investor optimism in Q4 2016.

High Enough, Is it Attractive?

The trend in Foreign Portfolio Investment is instructive for several reasons. In spite of sky high yields in the range of 16%-20% on financial assets, the decline in FPI in Q4 2016 is an indication of fundamental issues in the economy.

We recall that the Central Bank of Nigeria raised interest rates to 14% in 2016, ignoring leading economic indicators that had worsened and pointed to an economy in a recession. Then, the Apex Bank’s goal was to attract dollar inflows to augment its thinning reserves. And as inflation spiralled out of monetary control, raising rates was a move to encourage foreign capital inflows into financial assets as real yields turned negative. Thus, the green shoots in Q3 2016.

However, foreign investment in Bonds and Money Market instruments which sharply rose in Q3 dipped remarkably by 93% and 76% respectively in Q4 2016 to reflect waning investor sentiment.

In our view, this is a result of the protracted issues around foreign currency administration, among which are currency illiquidity, capital controls and lately, policy inconsistency. These Issues, which started in 2015 as analysts and investors called for a realistic exchange rate led to the eviction of Nigerian financial assets in the JP-Morgan emerging market bond index. We can see the effect in Q1 and Q2 2016 where foreign investment in bonds was almost nil.

2017 Investment Outlook: Any change in direction?

The investing environment in Nigeria still remains encumbered with some fundamental issues, many of which have been earlier mentioned.

Policy inconsistency and lack of follow-through determination on the part of the CBN are worrying signals which would need to be averted for investors’ interest and confidence in Nigeria to improve in 2017. To be sure, a realistic pricing of the exchange rate and a single market rate is needed. Harmonising different exchange rates in the economy, as against the current situation where there are multiple exchange rates in different markets and for different purposes, would serve to reduce speculation and round tripping. More importantly, it would engender business and investor confidence in the economy.

But with the CBN’s rhetoric closely following policy moves that have exacerbated headwinds that started in 2015, we believe recent trends in investing patterns may continue.

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