CBN reforms drive investment inflows to four-year high

…Capital triples to $3.4bn in one year

…Anambra, Ogun, Kaduna, others record no investment

Foreign investments into Nigeria rose to the highest in four years in the first quarter of 2024 largely on the Central Bank of Nigeria (CBN) reforms.

The latest capital importation report by the National Bureau of Statistics (NBS) shows that total foreign investments into the country stood at $3.38 billion in the first quarter (Q1) of 2024, an increase of 210.2 percent from $1.09 billion reported in the previous quarter.

On year-on-year count, foreign capital inflows rose by 198.1 percent from $1.13 billion recorded in Q1 of 2023.

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Harmonization of the foreign exchange rate market, clearance of forex backlogs, naira devaluation and high interest rates (following inflation increases) sent positive signals to investors, analysts say.

Portfolio Investment ranked top with $2.08 billion, accounting for 61.5 percent. This is followed by ‘Other Investment’, which returned $1.18 billion capital, accounting for 34.9 percent. Foreign direct investment recorded the least with $119.2 million (3.53 percent) of total capital importation in Q1, the NBS report said.

Further analysis shows that money market instruments (under portfolio investment) increased by 592.7 percent to $1.61 billion in Q1, from $231.8 million in Q4. It also rose by 1,175.2 percent when compared with $125.9 million in Q1 last year.

“On the money market front, which also spiked significantly, open market operations (OMO) are the major contributors. Foreign investors were attracted to the over 25 percent yield for a carry trade in naira while managing the attendant FX risks,” Temitope Omosuyi, investment strategy manager at Afrinvest Limited, said.

He said the CBN was expected to receive an inflow (a loan) of $1 billion from Afrexim from the commodity swap deal, which is a tranche of the agreed $3.3 billion inflow to be received over an extended period.

“This may have come in prior to the announcement, or the promised inflows may have been discounted to get nearly this amount in Q1, over the counter,” Omosuyi added.

BusinessDay reported in April that foreign investors were buying Nigerian stocks again after an extended time off, sparked by dollar shortages and worsened by the apex’s capital controls.

The report shows that foreign inflows into stocks jumped fivefold in the first three months of this year to N93.37 billion from N18.12 billion in the same period last year. That’s also the highest number of inflows in any three-month period since 2019.

“The CBN’s reforms have taken Nigeria from uninvestable only a year or so to investable this year,” a foreign portfolio manager, who invests in Africa but does not want his name in print, said.

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“The settlement of the FX backlog, shift to a more market-determined exchange rate and a more credible monetary policy are proving too hard to resist for investors.”

Earlier in the year, Yemi Cardoso, governor of CBN, had revealed in an exclusive interview with Arise TV that foreign portfolio investments (FPIs) were eager to return to the country.

“A lot of FPIs are still interested in coming back to the country. They have taken a lot of methodical interest in understanding the reforms that have taken place and seeing how it is taking the country in the right direction,” he said.

“They also see rating agencies coming out with their own conclusions, of how they see the economy of the country progressing. It validates what they are thinking,” he added.

The capital importation report also highlighted that the banking sector recorded the highest inflows with $2.07 billion, representing 61.2 percent of total capital imported in Q1, followed by the trading sector, valued at $494.9 million (14.7 percent), and production/manufacturing sector with $191.9 million (5.68 percent).

It further said capital importation during the reference period originated largely from the United Kingdom with $1.81 billion, showing 53.5 percent of the total capital imported.

“This was followed by the Republic of South Africa with $582.3 million (17.3 percent) and the Cayman Islands with $186.2 million (5.52 percent),” the report noted.

In terms of states, only three out of 36 states recorded capital importation during the quarter, with Lagos taking the top destination at $2.78 billion, accounting for 82.4 percent of the total capital imported. Lagos is followed by Abuja (FCT) which had $593.6 million (17.6 percent) capital, and Ekiti with $0.01 million.

Stanbic IBTC Bank Plc received the highest capital importation into Nigeria with $1.26 billion (37.2 percent), followed by Citibank Nigeria Limited with $547.7 million (16.2 percent), and Rand Merchant Bank Plc with $528.7 million (15.7 percent).

Foreign investors are trying to take advantage of the increase in yields, according to Adeola Adenikinju, president of the Nigerian Economic Society.

“But what we should look out for is if the inflows translate into FDI which will lead to employment and reduce poverty. FPI may not necessarily create all of that. So, we have to be careful in celebrating this,” he said.

President Bola Tinubu, who took the helm of Nigeria’s affairs in May 2023, stoked foreign investors’ interest with some of his actions including the removal of petrol subsidy and the partial FX reforms.

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A few weeks after taking office, he hosted several major companies including Airtel, ExxonMobil, Shell Petroleum Development Company and Bank of America as part of efforts to drive investments in the country.

However, his reforms have worsened inflation, currently in double-digits and at the highest level on record. The rising inflationary pressures have weakened the purchasing power of consumers, even as businesses grapple with higher operating costs.

An NBS data shows that the headline inflation rose for the 17th straight time to 33.95 percent in May 2024, up from 33.69 percent in the previous month.

Nigeria’s Gross Domestic Product (GDP) grew by 2.98 percent in real terms in Q1 from 2.3 percent in the same period of 2023. Compared to the previous quarter, growth slowed from 3.46 percent in Q4.

In May, the CBN raised its monetary policy rate for the third straight time by 150 basis points to 26.25 percent in a bid to rein in inflation and defend the ailing naira. That takes the total hikes since February to a combined 750 basis points.

“The year-on-year growth makes sense given that in the first quarter of last year, we were affected by the uncertainty about currency replacement, fuel queues, and elections,” Ayo Teriba, CEO of Economist Associates, said.

“However, the tightening measures by the CBN that started in February are likely to take their toll in Q2 and subsequent quarters,” he added.