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Capital importation rises to highest in almost 6 years on carry trade

Capital importation rises to highest in 23 quarters

Capital importation

After declining for three straight quarters, capital importation into Nigeria rose to the highest in almost six years and gained the most on a quarterly basis since Q3 2017 as carry trade increased in Q1 2019.

 This followed the peaceful conclusion of the 2019 general elections, an attractive yield environment in Nigeria, while most central banks in developed economies dropped interest rates, analysts say.

Carry trade is a strategy that involves borrowing at a low interest rate and investing the amount in an asset offering higher returns.

Data released Tuesday by the National Bureau of Statistics (NBS) showed that the total value of capital importation into the country stood at $8.49 billion in the first three months of this year, the highest since Q3 2014, when $6.54 billion flowed into the country.

On a quarterly basis, capital importation rose by 216 percent, the highest gain since Q3 2017, when it increased by 131.27 percent. The latest figure also represents a 34.61 percent increase from $6.3 billion in the first quarter of 2018.

According to Nnamdi Olisaeloka, a fixed-income analyst at ZedCrest, the figure is not surprising.

“When investors became convinced of a win for the incumbent president, they had a risk-on appetite for fixed-income securities even though they were wary of equities,” he said.

Olisaeloka pointed out that investors were lured by the high interest rate and yields environment buoyed carry-trade in Q1.

“Foreign Portfolio investors were basically cherry-picking on interest rate opportunities given the expectations of continuous stability of the naira,” Olisaeloka added.

Capital importation rose to $2billion, but rose 129 percent to $4.6 billion by March.

Favourable oil cycle and the dovish monetary policy stance in developed countries are also factors supporting carry trade across emerging markets including Nigeria, Omotola Abimbola macroeconomic and fixed-income analyst at Chapel Hill Denham, says.

 Abimbola however warns that while the interest environment has been juicy, levels of inflow have slowed down since March.

“Data from FMDQ is showing that from April to June, Capital inflow, portfolio inflows, and even FDI have gone back to trend level. March was a one-off jump as underinvested foreign investors increased their level of naira holdings post-elections,” he said.

For the quarter under review, the largest amount of capital importation by type was received through Portfolio investment, which accounted for 84.21 percent ($7.15 billion) of total capital importation.

Other Investment accounted for 12.91 percent ($1.1 billion) of total capital, while Foreign Direct Investment FDI accounted for 2.86percent ($243.36m) of total capital imported in 2019.

By sector, Banking received the most capital in Q1 at 33.6 percent. The sector grew its receipt by 976.57 percent quarter on quarter and 141.45 percent year on year to $2.85 billion.

Shares (equities) were the second largest destination with 28.32 percent or $2.4 billion. The figure represents a 126.25 quarterly rise although inflow was down 37 percent year-on-year.

Financing amassed a total of 25.21 percent of total capital importation in Q1 amounting to $2.139 billion. Growth was up year on year by 236 percent and quarterly by 232 percent.

 Cumulatively the top three sectors accounted for 87.13 percent of total capital importation in Q1.

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