Foreign outflows from Nigerian stocks slow on FX shortage

Foreign investment outflows from equities listed on the Nigerian Exchange Limited (NGX) slowed down between April and July 2022 on the back of foreign exchange shortage in the country.

Foreign investors have been experiencing difficulty repatriating their funds from Nigeria in recent months. The International Monetary Fund estimated recently that the Central Bank of Nigeria (CBN) had a backlog of $1.7 billion in unmet demand to investors.

In the first quarter of 2022, foreign investors withdrew N73.58 billion from their investments in Nigerian equities as against N55.33 billion new investments in stocks, representing a net outflow of N18.25 billion, an analysis of NGX’s Domestic and Foreign Portfolio Investment Report has shown.

But between April and July, foreign inflows amounted to N78.86 billion compared with N65.39 billion outflows, representing a net inflow of N13.47 billion.

Altogether, the NGX attracted N134.19 billion foreign inflows from January to July, compared with outflows of N138.97 billion, resulting in net outflow of N4.78 billion.

In the corresponding period of 2021, foreign inflows amounted to N112.74 billion as against outflows of N124.74 billion, resulting in net foreign outflow of N12.01 billion. That was higher than N4.78 billion net outflows from January to July 2022.

Omobola Adu, an analyst at Afrinvest, said the slowdown in foreign outflows could be due to investors positioning for half-year dividends which were declared by a number of listed firms.
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“A possible explanation for the higher inflows in May and June could be investors positioning for dividend paying stocks. The consideration is that, with lower prices, investors would be able to earn higher dividend yield,” Adu said.

The analysis of data for previous years show that foreign outflows dominated transactions on the NGX in 2020 and 2021 as foreign investors took to safety over the depreciating value of the naira.

Foreign inflows into Nigerian equities stood at N247.27 billion from January to December 2020, as against outflows of N481.93 billion, resulting in a net outflow of N234.66 billion during the period. In 2021, NGX recorded foreign inflows of N204.88 billion compared with an outflow of N229.62, resulting in a net outflow of N24.74 billion, with the depreciating value of naira and foreign exchange policies mostly responsible for flight to safety by foreign investors.

Foreign investors accounted for 15.49 percent of the market transactions on the NGX from January to July this year, and that was lower than 21.13 percent in the corresponding period in 2021.

Analysts at Financial Derivatives Company Limited have attributed the declining value of the naira against other major currencies to Nigeria’s market structure, low oil sales and revenue, rationing of foreign exchange supply, restrictive policies and capital flight.

The official exchange rate of the naira depreciated from a monthly average of 414.46/$ in January 2022 to 426.27/$ in September 2022. At the parallel market, the naira currently trades at about 703/$. This is in spite of the rally in crude oil prices at the international market which was initially caused by post-pandemic economic recovery and buoyed by the Russia-Ukraine conflict.

Although the tide of foreign outflows moderated in the last three months, analysts still believe the development is not sufficient to attract sufficient investments into Nigeria.

“There is a need for structural reforms with a long time horizon to drive foreign direct investment to the country. The measures that the monetary authorities are using currently such as rate hike are not sufficient in this regard,” Moses Ojo, a Lagos-based economic analyst, said.

He added that policy actions that would lead to stability of the exchange rate and bold measures to tackle insecurity would attract foreign direct investment into the country.

“Honestly, I would not say that the reduction in foreign outflows is proof of the efficacy of CBN’s actions. We need to see sustained net inflows,” Tunde Abidoye, head of research at FBNQuest, said.

The interest rate hike by the CBN has produced mixed results on the NGX. Market capitalisation of listed equities lost N219.01 billion between May 4, 2022, when it was N27.03 trillion, and September 13, 2022, when it was N26.77 trillion.

Exchange-traded funds also shed N191.83 million as their market capitalisation fell to N6.95 trillion on Tuesday from N7.14 trillion on May 4, 2022.

Market data show that fixed income instruments gained the most from the recent rate hike. The bond market capitalisation on the NGX appreciated by N1.23 trillion from N21.75 trillion to N22.98 trillion between May 4 and September 13, 2022.

“The good news is that with the slow and steady adjustment of the official I&E rate at N431/$, the naira is likely to stop haemorrhaging very soon and begin to appreciate towards N670/$-N680/$ in October,” Bismarck Rewane, CEO of Financial Derivatives Company, said at the September edition of LBS Breakfast Session.

Between May and July, the CBN raised the monetary policy rate from 11.5 percent to 13 percent and later to 14 percent in response to the surging inflation, which hit 19.64 percent in July.

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