Investors shun Nigeria’s assets on foreign exchange risks

…As foreign investment falls to 9-year low
…But FDI shows promise

Despite leaving interest rates at a record high of 14 percent, portfolio investors have no confidence in naira assets, as demonstrated in the fourth quarter capital importation report published Wednesday, Feb.1 by the National Bureau of Statistics (NBS).
Portfolio investment shrank 70 percent, to $284 million year-on-year from $952 million in the same period of 2015 and 69 percent from $920 million in the third quarter.
Bogged down mainly by reduced portfolio inflow, total capital importation in 2016 fell to $1.5 billion, the least in nine years, according to NBS data.
“What this means is that foreign portfolio investors are not confident in our foreign exchange policy and are cutting back to avert exchange rate volatility,” said Tajudeen Ibrahim, head of research of investment bank, Chapel Hill Denham.
“If we allow for true price discovery in the market, volatility fears will be doused and portfolio investors who brought in money when the exchange rate was predictable in 2014 will return.
“But if we put hope in high interest rate alone, to attract portfolio investments, nothing substantial may change because exchange rate risks can snuff out gains of carry trade, even with high interest rates,” Ibrahim said by phone.
Godwin Emefiele, the CBN governor, had said the need to maintain a firm grip on inflation and give portfolio investors real positive returns on naira assets had informed the bank’s decision to leave interest rates at 14 percent at the last MPC meeting in January.
Despite low portfolio inflows, other types of investment like Foreign Direct Investment (FDI) and other investment increased.
Foreign direct investment rose 179 percent year-on-year to $344.63 million from $123.15 in the same period of 2015, and saw a 0.01 percent increase from N340.64 in Q3.
Other Investment was the largest component of imported capital in Q4 and accounted for $920.03 million, or 59.40 percent. This followed a quarterly increase of 63.95 percent, and a year on year increase of 91.16 percent.
“Foreign Direct investors take a longer-term view, and therefore Nigeria’s recession and currency problems may carry less weight in investment decisions,” the NBS noted.
FDI fell by 27.83 percent between 2015 and 2016, considerably less than portfolio investment.
By contrast, Other Investment increased between 2015 and 2016, by 3.48 percent. This was entirely due to an increase in loans.
Record low foreign capital importation in 2016 was much to the expectation of analysts polled in a BusinessDay survey.
Bismarck Rewane, CEO of economics consulting firm, Financial Derivatives, attributes the decline to weak investor confidence, policy inconsistency and the recent United States Federal Reserve interest rate hike.
Rewane, however, expects “foreign capital inflows will pick up marginally to $1.7 billion in 2017, pending liberalisation of the foreign exchange market and a sense of government policy direction.”
In terms of capital imported by sector, three sectors accounted for most of the movement. Telecommunication imported the largest foreign capital and was trailed by the oil and gas sector and the banking sector.
The telecommunications sector recorded an increase of $309.45 million, which more than doubled the amount of capital imported in the previous quarter to reach $554.25 million.
The Oil and Gas sector also recorded an increase of $155.67 million or 90.70 percent, to reach $327.30 million and became the second largest.
Banking was the sector to import the largest value of capital in the previous quarter, but following a quarterly fall of $394.22 million, or 70.96 percent, became only the third largest, and imported $161.30 million in the final quarter of 2016.
The state to import the most capital into Nigeria in the final quarter of 2016 was Lagos, as in all previous quarters.
Lagos is the commercial and financial capital of Nigeria, and home to the Nigerian Stock Exchange, where shares are traded.
As such, it accounts for most of the capital imported into the country. In 2016, it accounted for more than 90 percent of capital importation in nearly all months, although in May it accounted for only 88 percent.
Abuja is generally the territory to import the second largest quantity of capital, and this was the case for 2016 as a whole.
The country from which Nigeria imported by far the most capital was the United Kingdom, which accounted for $482.89 million, or 31.18 percent of the total.
This was despite a fall of 56 percent relative to the previous quarter. Since 2010, the UK has accounted for the highest value of capital importation in all but two quarters (both in the second half of 2015).
In addition, it was the country primarily responsible for the rise in portfolio investment throughout 2012-2014, in which this type of investment was by far the largest component.
In 2016 as a whole, the UK also invested the most in Nigeria, with capital worth $2.1 billion imported from this country, more than twice the value of the next largest investor country.
The country to account for the second largest value was the Netherlands, which accounted for $296.52 million, or 19.14 percent of the total.
Although the Netherlands has always been a prominent investor in Nigeria, with numerous large companies active, it has been more consistently among the top investor countries in recent years.
In 2016 it was the third largest investor country, and made investments worth $516.89 million, behind only the UK and the US, the latter of which invested $945.59 million in the same period.
Nevertheless, capital imported from the US was slightly lower than from the Netherlands in the fourth quarter, at $242.46 million.

 

LOLADE AKINMURELE