Nigeria’s potential to rival current world powers lies in the ability of central authorities to attract massive foreign investments and properly manage domestic resources at the country’s disposal.
Appropriate augments for home-based capital in the drive for a sustained level of growth exists largely within foreign interests, especially in situations where local resources cannot be properly harnessed for whatever reasons. A fair combination of local and imported resources would be a suitable mix since domestic efforts must play well with foreign boosters to drive a sufficient level of investment in select sectors or industries before desired growth can occur.
Among the various forms of external capital inflow, which may benefit a nation, foreign portfolio investments qualify as one of the most popular and, in fact, effective sources of cross-border funding which receiving countries enjoy.
Foreign portfolio investments (FPIs) usually consist of securities and other alternative foreign financial assets held by foreign investors in a host or target economy. The investment involves the purchase of financial assets such as equities, derivatives, mutual funds and guaranteed investment certificates.
While FPIs may benefit the investing individual by promoting international diversification and high foreign returns on portfolio investments, receiving nations of these foreign investments also share substantial benefits. Hosts of these forms of investments are provided with the opportunity of a more liquid market. As the market becomes more fluid, the same becomes broader and deeper, making it easy to finance a broader range of investments. Furthermore, as the market structure continues to take better shape and form due to increased financial flows from abroad, equity prices will begin to reflect value-relevance for investors, and the market will become more efficient.
Market efficiency usually details improved sectoral performance, and other adjoining industries can contact a contagion from the development.
Recent developments in Nigeria regarding the inflow of foreign portfolio investments show that the government needs to re-strategise on policy efforts towards attracting more FPIs. In Q1 2021, for instance, FPI recorded a 77.4 per cent decline to stand at $974.1million, according to the CBN on Nigeria’s foreign investment. Between 2020 and 2021, FPI was observed to have fallen from $4.31billion in Q1 2020 to $974.1million in Q1 2020.
Gauging on a quarter-on-quarter basis, a 1,635 percent increase in FPI was observed from $56.15million in Q4 2020 to $974.1 million in Q1 2021. Money market investment, according to Nairametrics, stood at $808.57 million in Q1 2021, thus, accounting for 83 per cent of total foreign portfolio investment for the observed period.
Next to this volume is an investment in bonds, with a total of $138.7 million, representing 14.2 per cent invested and $26.88million directed towards equity investments. Reports from the Nigerian exchange (NGX) show that N60.11 billion was recorded as a foreign inflow in Q1 2021, representing a 7.9 per cent decline as compared to N65.2billion in Q1 2020.
During the observed period, as reported by Nairametrics for Q1 2021, total foreign outflows stood at N90.12billion while domestic transactions recorded a total of N526.3billion.
To reverse the increasing outflow of foreign portfolio investments into the country, the government needs to fix specific domestic issues that affect the ease of doing business. With the unemployment rate reaching 33.3 per cent, headline inflation recording up to 18.12 per cent (as of April 2021) and food inflation standing at 22.72 per cent (as of April 2021), Nigeria’s hope of attracting more foreign capital may be dashed in a jiffy.
Amid efforts to recover from the pandemic, Nigeria’s exchange market has been on a relatively slow ride since the commencement of the year 2021, with the all-share index (ASI) recording a year-to-date decline of 4.83 per cent as of May 14, 2021. This decline was occasioned by massive sell-offs recorded in the banking and industrial goods sector.
Since the lockdown and the corresponding oil price crash, Nigeria attracted fewer FPIs, going from $4.3billion in Q1 2020 to $385million and $407million in Q2 and Q3 of 2020, respectively. By Q4 2020, total FPI recorded $56.15million and then rose to $974.1million in Q1 2021.
While post-pandemic recovery efforts are still underway, Nigeria’s government must seek policies that will smoothen volatile trends in the foreign exchange (FX) market to stimulate more capital market investments. Also, it is important that the CBN reviews the monetary policy rate (MPR) to accommodate increased market access by foreign investors.
Indeed, high interest rates and shortage of foreign exchange are an unhealthy combination against investment growth and profitability of firms. Nigeria’s situation has witnessed the massive exit of firms from the market due to scarce FX supply and high interest rates. Also, the scarcity of FX prevents productive diversification of investments, discourages investment flows, and makes it uneasy for investors to repatriate unclaimed dividends. However, when interest rates are sufficiently low, investors can borrow long-tenured loans, which could help boost the profitability of investments in the stock market.
Hence, to enjoy more inflow of FPIs that can augment capital for major growth-based investments in the country, Nigeria’s government must seek counter-cyclical policies that stabilise the FX market and consider lowering the monetary policy rate to accommodate more investments into the market.