Naira “float,” higher interest rates attract $1.8bn in Q3 2016

The decision by the Central Bank of Nigeria (CBN) to “float” the naira in June and also raise interest rates has had a positive impact on dollar inflows into the country, the latest report from the National Bureau of Statistics shows.

 

The total value of dollar inflow into Nigeria in the third quarter  (July to September)  of 2016 has risen to a year high of  $1.8 billion, which represents an increase of 74.84 percent, compared to the second quarter of 2016 (April to June), but represents a decline of   33.70 percent compared to the same period of 2015.

“The rise in foreign investment inflows in the third quarter can be attributed to Nigeria’s decision to “float” the naira,” said Ayodeji Ebo, an investment banker at Afrinvest, by phone.
“The naira “float” triggered inflows to some extent and I had expected subsequent months after June to build on that, since it allayed concerns of most investors that the naira was overvalued,” Ebo added.

Ebo however said the outlook might be dim for the fourth quarter, given that the CBN’s market manipulation of the naira float looks set to wipe out gains from June’s false float.
The banking sector attracted the largest capital after it relinquished top spot to oil and gas in the second quarter. The banking sector imported $555.52 million, or 30.49% of the total capital inflows into the country.

Telecommunications was the second most attractive sector, importing $244.80 million, or 13.34% of total capital inflows, an increase of $126.09 million, or 106.21%, relative to the previous quarter. However, compared to the previous year, this is still a decline of 33.75%.

The Oil and Gas sector, the third largest, maintained a high level of capital importation; although it decreased by 14.4% relative to the previous quarter, it is still elevated, relative to previous periods at $171.63 million.

Dolapo Oni, head of energy research at Ecobank says the oil and gas sector could attract significant inflows if the Petroleum Industry Bill (PIB) is passed and security challenges in the oil rich Niger Delta  are resolved.

There were four sectors to record no capital importation in the third quarter of 2016 (Marketing, Hotels, Tanning and Weaving), one less than in the previous quarter.
Despite the significant inflow in the third quarter, capital importation in Nigeria has fallen to a six-year low in 2016 and analysts say a long regime of currency peg which the CBN stuck to for over 15 months is to blame.

In a clear signal that June 20’s big devaluation proved decisive in attracting foreign capital, the capital imported in June rose significantly and made up for record low inflows in April and May to boost total capital importation in the second quarter of 2016 to $1.04 billion.
“However, the quarter-on-quarter uptick in capital importation in the third quarter of 2016 was proof that investors crave market policies for price formation,” Tiffany Odugwe, an analyst at Cardinal Stone Partners Ltd, said by phone.

The level of capital imported in June was $610.77 million, double the amount recorded in the months of April ($305 million) and May ($125 million).
The CBN also raised interest rates to 14 percent in its monetary policy committee meeting in July,  in a bid to attract foreign inflow by offering portfolio investors positive returns after inflation jumped to 16.5 percent in June.

In the third quarter, however, the highest level of capital imported was in August, when $894.00 million was imported, setting a new record as the highest since July 2015, according to NBS data.
In contrast with the previous quarter, where ‘Other Loans’ explained the majority of the increase, a number of investment types contributed to the quarterly increase, according to the NBS.
The NBS report shows that the quarterly increase in the value of capital importation came mainly from debt financing, as 85% of the total capital inflows were accounted for by increases in portfolio investment in Bonds and Money Market Instruments.

“High yield fixed income instruments have served as good alternative to equities, as the appetite for equities wane. The outlook remains positive for yields in the short term, as the CBN will have to maintain a tight monetary policy stance. The equity market requires some catalysts for a rebound, particularly the implementation of government plans for economic recovery and growth,” said Tajudeen Ibrahim, Head of Equity Research at Chapel Hill Denham.

Each type of investment (FDI, Portfolio and Others) recorded quarterly increases, of 84.84%, 172.84% and 7.80% respectively.
The relatively strong growth in Portfolio Investment meant it regained its position as the largest investment type, and it accounted for 50.51% in the third quarter, compared to 18.69% and 30.80% for Other Investment and foreign direct investment respectively.

Year on year growth rates remained negative; FDI, Portfolio and Other Investment declined by 52.54%, 8.80% and 45.05% respectively, compared to the third quarter of 2015.

“Weaker growth in the economy in the first half of 2016 had an impact on the value of capital importation,” added Odugwe.
Nigeria’s economy is in recession after GDP growth contracted by -0.36 percent and -2.06 percent in the first and second quarter of 2016 respectively.