Nigeria’s foreign portfolio investment slides 3-year low on FX crisis
……as return hits -22%
Foreign portfolio investors have continued to reduce exposure in Nigerian equities with transactions reaching the lowest levels in three years in August, according to data from the Nigerian Exchange Group (NGX).
After rising from a low base of N369.56 billion in August 2016 to N906.86 billion in 2018, Nigeria’s foreign portfolio investment (PFI) dropped to a three-year low of N262.85 billion in the comparable month in 2021.
On a year-on-year comparison, the hot money inflow into Nigeria declined by 44.1 percent from N470.20 billion in August 2020 to N262.85 billion in the same month of 2021. It dropped by 71.02 percent when compared to the N906.86 billion reported in the comparable period in 2018.
Africa’s biggest economy is grappling with a backlog of unmet dollar demand, caused by the decline in oil prices due to the COVID-19 pandemic, a development that continues to deter fresh inflows after investors struggle to repatriate their already trapped funds.
“Foreign investors’ priority is the access to their funds once it matures and this, Nigeria has been unable to achieve. This issue of inability to meet investors’ expectations is happening the second time in 5 years and has consequently dampened investors’ confidence in the economy,” a Lagos-based investment analyst told BusinessDay.
The shortage of dollar supply which has restricted investors’ ability to recoup their investment in Africa’s largest economy is not the only challenge faced by foreign portfolio investment, data by Financial Derivatives (FDC) has shown.
Due to Nigeria’s exchange rate volatility, FDC said foreign portfolio investors have seen their investment in Nigeria’s largest listed companies eroded in the last three years.
“FPI investment in bellwethers returned an average of -22 percent in 3 years,” Bismarck Rewane, CEO of FDC said, adding that “net foreign outflow” is “expected to linger as currency woes persist.”
Toye Oyelakin, investment analyst at Cordros Capital also cited the uncertainty around Nigeria’s foreign exchange crisis as a key reason for the decline in foreign inflows.
“Investors will like to know whether or not there’s a potential for the devaluation of the currency or things like that,” he said.
Citing Nigeria’s 2016 recession that was fuelled by the weak oil price, Oyelakin said “FPI around that period was lower but when there was an introduction of I&E window in 2017, it buoyed sentiments for foreign investors again and we noticed that FPI started increasing. So that must be the 2018 increase you saw. Then in 2020 again, we saw another shock for the oil market, so foreign investors left the market.”
The naira at the unofficial market, the channel many Nigerians access the dollar from, has depreciated by 18 percent in 2021 from N465/$ on December 31, 2020, to N568/$ on September 30, 2021.
The Central Bank of Nigeria’s (CBN) FX reserves rose by 1.35 percent to $36.60 billion as of September 29, 2021– the highest level since February 12, 2020 – signifying the sixth consecutive weekly accretion.
The current level of the reserves, according to analysts at Coronation Merchant Bank, partially reflects the International Monetary Fund’s (IMF) Special Drawing Rights (SDR) allocation to Nigeria coupled with the successfully raised S$4.00 billion in Eurobonds last month.
It should be able to “provide the apex bank with enough ammunition to defend the naira in the short term. Nevertheless, FX turnover on the official markers remains relatively low. Thus, there may be continued pressure on the official and parallel exchange rates if the CBN does not increase supply,” the research analysts said.
“Without any major attempt to increase or diversify Nigeria’s FX proceeds through the export of non-oil products, we believe the FX crisis will continue to linger, specifically when crude oil prices drop significantly,” Ayo Ebo, senior economist and head, research & strategy, Greenwich Merchant Bank said.