Foreign Investment in 2017: FPI accelerates to 3-year high; FDI uninspiring at 7-year low

In Q4’17, capital imported into Nigeria increased 247% y/y to $5.38 billion in Q4’17 (Q3’17: $4.1 billion), this is the highest quarterly value in 13 quarters. In full year terms, capital imported more than doubled to USD12.2 billion in FY’17 (FY’16: $5.2 billion), the highest since 2014.

In spectacular fashion, Foreign Portfolio Investment (FPI) more than quadrupled y/y to $7.3 billion in FY’17, accounting for 60.0% of imported capital (FY’16: 35.3%), while Foreign Direct Investment (FDI) remained weak at 8.0% of total imported capital (FY’16: 20.4%), declining 5.9% to $981.7 million in FY’17. Meanwhile, other investments, mainly loans, accounted for 32.0% at $3.9 billion.

Since 2014, investments had been muted, affected by the currency crisis that accompanied a significant decline in oil prices and consequently, weak foreign reserves accretion. In 2017, the strong rebound in investment inflows signals increased investor confidence in Nigeria’s economy due to FX reforms - the introduction of the Investors' and Exporters' FX Window strongly supported stability, liquidity and transparency in the FX market. Specifically, this has also been enabled by the strength of Nigeria’s external reserves buoyed by higher oil production and prices, attractive yields in the fixed income market and cheap valuations of stocks in the equity market (Nigerian Stock Exchange). Despite these improvements, investments still remain weaker than pre-oil crisis levels.

Portfolio Investments: A Case of Undervalued Equities and Abnormal Yield Curves

The equities market rebounded strongly in FY’17, providing a return of 42.3% (FY’16: -6.2%), supported by investment into equities which increased more than four folds to $3.6 billion - exceeding other investments. This was mainly driven by cheap valuation of stocks listed on the Nigerian Stock Exchange (NSE) compared with African and emerging market peers, especially in the banking industry. Despite this progress, foreign investment into equities remains significantly weaker than the $4.66 billion invested in 2015 and the $11.45 billion in 2014.

The story in the fixed income space was dictated by CBN’s restrictive policy stance, which effectively tightened liquidity through aggressive OMO issuances. This sustained the inverted yield curve which started in 2016, a situation where short term debt instruments attract higher interest rates than long term debt instruments due to weakness in the economy. Hence, with short term yields at 16 – 20% and inflation moderating to an average of 16.5% in 2017, real returns became positive. As a result, investments into money market instruments increased remarkably, from $557.9 million to $3.2 billion between 2016 and 2017. Predictably, foreign investment into bonds improved, but remained weak at $482 million in FY’17, below pre-recession levels of $776 million in FY’15 (FY’14: $2.4 billion).

Foreign Direct Investment at 7-year low

FDI declined -5.9% to reach $981 million in FY’17 (FY’16: $1.0 billion), the lowest since 2010 ($728.9 million). We believe this is partly due to weak growth, a challenging business environment, and most importantly, the lack of reforms capable of attracting private interests into critical sectors.

However, boosting FDI is important to achieving growth and development objectives. There’s overwhelming evidence in economic literature that supports increased FDI; this is due to its positive linkages with economic growth and job creation.

 2018 Investment Outlook: Where would further value come from?

We expect increased investment in 2018, influenced by similar macroeconomic fundamentals as with 2017, although at a faster rate in H1'18. With the monetary policy objective to normalize the yield curve, there may be a shift from money market securities to bond securities within H2'18, and maybe into equities for investors with moderate risk tolerance. Also, we expect some level of profit taking on equities as companies release their audited financial statements for 2017, which we expect to be moderately profitable on average. .

Foreign direct investment will continue to lag behind foreign portfolio investments mostly due to weak fiscal and trade policies of the federal government. To a large extent in our analysis, we think that current policies are not clearly defined and unattractive in influencing foreign direct investment. Lastly, there could be a decline in foreign investment beginning in Q4 due to political risks associated with the upcoming 2019 elections.

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