By Akanni Raji
Nigeria’s foreign investments have continued on successive decline, despite improvements in ease of doing business and attractive valuations of Nigerian securities.
Newsclickng’s Editor-at- Large, Akanni Raji reports that more concerted efforts may be needed to halt the declining flow of foreign investments
Nigeria’s foreign portfolio investment (FPIs) is heading towards third consecutive negative year as risk-averse foreign investors continued to show less enthusiasm for Africa’s largest economy. FPI flows so far this year have shown continuing negative trend, with more outflows than inflows, and in most instances, reduction in momentum of activities by foreign investors, who traditionally play important roles in the liquidity and activities at the Nigerian capital market.
Nigeria’s FPI slipped into negative with a net deficit of N66.2 billion in 2018. Total FPI inflows in 2018 stood at N576.45 billion compared with FPI outflows of N642.65 billion. Foreign inflows had in 2017 outpaced outflows at N772.25 billion and N435.31 billion respectively. Total FPI transactions for the 12-month period ended December 31, 2018 stood at N1.219 trillion as against N1.208 trillion recorded in 2017. The yearly report for the year ended December 31, 2019 showed that total FPI transactions declined by N276.45 billion from N1.22 trillion in 2018 to N942.55 billion in 2019. Both sell side and buy side declined but the sell momentum was stronger. Total inflow dropped by N157.32 billion from N576.45 billion in 2018 to N419.13 billion in 2019 while total outflow declined by N119.23 billion from N642.65 billion in 2018 to N523.42 billion in 2019. Total FPI inflows in 2019 stood at N419.13 billion as against outflows of N523.42 billion, representing a net deficit of N104.3 billion.
The month-on-month reports so far this year indicated greater degree of decline as Nigeria’s tenuous macroeconomic position was compounded by global crude oil decline and fluctuation and the COVID-19 pandemic.
Declining flows
FPIs have dropped by 20 per cent with total foreign portfolio transactions of N470.2 billion by August 31, 2020 compared with N594.46 billion recorded in the corresponding period of 2019. Monthly reports indicated that Nigerian FPIs remained in deficit with more outflows than inflows, implying that more foreign investors were selling than those buying. Total FPIs included both inflows and outflows. While inflows and outflows indicate direction of portfolio transactions, total FPI measures the momentum and level of participation
The FPI report, coordinated by the Nigerian Stock Exchange (NSE), included transactions from nearly all custodians and capital market operators and it is widely regarded as a credible measure of FPI trend. The report uses two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the stock market as a barometer for the economy.
FPI net deficit jumped to –N147.58 billion for the eight-month period ended August 2020 as against –N37.92 billion recorded in comparable period of 2019. Total FPI outflows and inflows stood at N308.89 billion and N161.31 billion respectively by August 2020 as against N316.19 billion and N278.27 billion respectively in corresponding period of 2019.
Month-on-month analysis showed less savoury trend. FPIs dropped to a new low in July 2020, after hitting a 29-month low in May 2020. Total FPIs dropped from its previous low of N35.24 billion in May 2020 to a new low of N34.59 billion or $89 million in July 2020, reversing the dead cat bounce of N56.3 billion or $90.89 million in June 2020.
FPI inflows increased from N13.70 billion in July 2020 to N17.66 billion in August 2020 while outflows also increased from N20.89 billion to N21.32 billion. Earlier, the six-month half-year report had shown that for every naira invested, foreign portfolio investors took out two naira in the first half of this year. Foreign portfolio outflows had risen to N266.68 billion in first half of 2020 as against inflows of N129.95 billion, representing a net FPI deficit of N136.7 billion. The deficits of N136.7 billion in first half 2020 represented 31.1 per cent increase on N104.29 billion recorded for the whole of 2019.
Total FPIs for the six-month period ended June 30, 2020 stood at N396.63 billion. Total FPIs during the first half of 2019 had stood at N472.78 billion with outflows and inflows at N257.81 billion and N214.97 billion respectively.
Total FPIs for the seven-month period ended July 31, 2020 dropped to N431.22 billion with outflows and inflows of N287.57 billion and N143.65 billion respectively, compared with total FPIs of N530.57 billion, including outflows and inflows of N287.22 billion and N243.35 billion, recorded in comparable period of 2019.
The National Bureau of Statistics (NBS) had also reported that total capital importation into Nigeria dropped by 78.6 per cent $1.3 billion in second quarter of 2020, the lowest level since $1.0 billion posted in second quarter of 2016. Foreign Direct Investment (FDI) declined by 33.4 per cent to $148.6 million in second quarter 2020 as against comparable period of 2019, this represents the lowest performance since third quarter 2017. With the FDIs and FPIs hitting lows, it implies foreign investors’ risk aversion to short, medium and long-term investments in Nigeria, although at varying degrees.
Factors behind the slowdown
Most pundits blamed the continuing decline in foreign investments to a mix of global flight to safety, Nigeria’s foreign exchange crisis, tenuous macroeconomic outlook and fiscal and monetary risks.
President, Chartered Institute of Bankers of Nigeria (CIBN), Mr Bayo Olugbemi, said the decline in foreign investments might be a reaction to the Nigerian market situation.
“No doubt foreign portfolio investment (FPI) is on the decline, I recall that in the first quarter of 2020, the World Bank reported that foreign portfolio investment inflow to Nigeria declined by 54 per cent. This is mainly a risk management tactic by foreign investors to minimize their exposure and risk in the Nigeria capital market whose performance has not been consistent lately,” Olugbemi said.
He also noted the relationship between Nigeria’s foreign exchange (forex) situation and investment inflow.
According to him, a stable forex facilitates economic development and Nigeria at the moment is at a disadvantageous position of having primarily one major source of foreign exchange. Oil and gas sector which serves as the primary source of revenue for the government was severely disrupted by the price war between Saudi Arabia and Russia as well as the halt in economic activities occasioned by the coronavirus pandemic. Both events led to a reduction in oil prices which in turn puts pressure on the nation’s forex reserves.
Afrinvest Securities said the introduction of capital controls amid foreign exchange illiquidity had left foreign investors stuck in the market and made Nigeria less attractive as an investment destination.
“The wide premium between exchange rates at the parallel market and the Investors & Exporters ( I & E) window also suggests a mispricing of the currency, which makes investors and businesses reluctant to bring in capital,” Afrinvest stated.
According to Afrinvest, the sharp decline in capital importation in the second quarter of 2020 was due to heightened risks brought by the COVID-19 pandemic which resulted in weak sentiment in emerging markets and foreign capital outflows.
“We believe FDI weakness reflects the volatile macroeconomic environment and weak medium to long-term economic prospects. Going forward, we expect foreign investment to remain weak due to COVID-19 related risks and currency challenges,” Afrinvest stated.
A chartered stockbroker and analyst, Mr. Sola Oni, said foreign portfolio investors are quick to consider risk-return trade off and take cognizance of country risk as they seek markets with optimal returns.
According to him, foreign portfolio investors are quick to embark on flight to safety anytime they perceive threats to their investments, thus their largely speculative orientation. Foreign portfolio investors meanwhile help to enhance the liquidity and efficient price discovery in a market.
“The FPI has been on gradual decline in Nigeria due largely to uncertainties in the operating environment. But at the moment, it is directly traceable to their inabilities to repatriate their money back home with ease due to relative scarcity of foreign exchange,” Oni said.
Analysts at Cordros Securities said currency risk is a major consideration in the flow of foreign investment noting that the market sees headroom for naira to depreciate further despite CBN’s efforts towards exchange rate unification.
Analysts outlined that widening current account position, currency mispricing, which could induce speculative attacks on the naira, and the resumption of forex sales to the BDC segment of the market which should place an additional layer of pressure on the reserves are indicative of further depreciation in naira.
Enhancing investment flows
Olugbemi said the government may need to consider taking more decisive actions to address the forex pressure and boost the economy.
According to him, while it may be difficult due to possible devaluation effect on the national currency, government may need to consider tough decisions to relieve the pressure on forex reserves and also to boost exports, accelerate GDP and reduce the cost of financing government loans.
“In order to stimulate FPI inflows, the CBN should continue to offer high yield to foreign investors through tailored policies. The market should also be opened to allow foreign investment inflows. Policies to ensure ease of doing business should be vigorously pursued and new ones put in place. Investment promotion agency should also promote sectors that are of interest to foreign investors,” Olugbemi said.
Many analysts have called for an end to CBN’s forex control policy for lack of transparency and distortion of the market. They argued that market-determined exchange system will reduce currency risk and enhance inflow of foreign investments.
