Nigeria is expected to record slowing Foreign Direct Investment (FDI) flows this year, to be driven by inconsistent policies, insecurity, and poor infrastructure according to a report by FSDH Merchant Bank Limited.
Total investment inflows as of the third quarter of 2019 stood at US$19.7 billion, higher than the US$16.8 billion achieved in full-year 2018.
However, 73 percent of total inflows were Foreign Portfolio Investments (FPIs), while Foreign Direct Investment’s share at 3.4 percent was very low as investor sentiments tilt towards the capital market vis-à-vis the real sector, the report revealed.
Portfolio investments are skewed towards money market instruments, which accounted for 80 percent of total FPIs.
The significant drop in interest rates especially for short term securities could lead to some traction in the equity space. This factor will also limit FPI inflows relative to 2019.
Meanwhile, Nigeria’s economy is expected to be better in 2020 with a GDP growth at 2.5 percent to be driven by crude oil, Information and Communication Technology (ICT) and transport according to the report.
As output expands, prices are also expected to increase, leading to Inflation rate expected to average 11.9 percent in the year, following continued closure of land borders and implementation of tax increase.
Year-on-year Inflation rate averaged 11.4 percent in 2019 as inflation rose to 12 percent in December last year.
The CBN is expected to continue in its effort to mop up the excess liquidity in the market to curtail inflation and attract FX inflows.
On monetary policy, the higher liquidity levels have forced down interest rates of government securities. The CBN will resort to the use of multiple monetary policy tools to mop-up excess liquidity and attract investment inflows. This will be shape the monetary environment in the year.
“To mop-up this excess liquidity, we believe the CBN and the MPC will adopt several monetary policy tools in 2020. In the first MPC meeting in January, the CBN increased CRR to 27.5%. This is estimated to mop up an estimated N900 billion from the system,” analysts at FSDH research said.
According to the report, fiscal policies of the federal government are expected to stimulate economic growth with the early budget passage which will ensure improved budget performance. Government’s aggressive revenue drive will result in an increase in non-oil revenue in 2020 to fund the budget. Revenues from taxes as well as other charges will improve overall revenue; however, revenue gaps due to slow collection rates will persist.
United Capital said in its report that no significant change is expected in the current dynamics in terms of capital flow. More specifically, the CBN is likely to sustain its OMO sale to FPIs in support of the reserves. This may keep FPIs interest dominant in money market funds at the expense of equity flows. Notably, we expect an upsurge in Loans and Other Claims to continue, given the low interest rate environment in the international debt market. However, Foreign Direct Investment (FDI) flow may remain broadly muted.