Foreign portfolio investment (FPI) has risen to become the main growth driver of capital inflows to Nigeria. Supported by strong expansion in money market instruments and bonds, FPI inflows recorded double-digit growth in both 2017 and the first half of 2018. While this suggests there is positive investor sentiment and confidence in Nigeria’s ongoing macroeconomic recovery, FPI outflows have also risen sharply in the equity market in recent months, pushing the net FPI position into deficit.
Furthermore, investor jitters over the general election set for February 2019, as well as slower-than-anticipated economic recovery, have left the FPI segment facing some uncertainty in 2019, as stakeholders call on the government to boost foreign direct investment (FDI) and reduce its participation in issuances to sustain long-term growth.
Capital Import Growth
Nevertheless, Nigeria has seen a rise in capital imports in recent times, with a February 2018 report published by the National Bureau of Statistics (NBS) putting the figure at $12.2bn in 2017, an increase of 139% on 2016.
The central bank breaks capital importation down into three components: FDI, which includes equity and other capital; FPI, which constitutes equity, bonds and money market instruments; and other investment types, such as loans, trade credits, currency deposits and other claims.
According to the NBS, the rise in capital imports was primarily driven by an increase in FPI, which jumped by $5.5bn, or 304%, in 2017 to hit $7.3bn and account for roughly 60% of the total.
In the fourth quarter of 2017 alone, total capital importation stood at $5.4bn – up 247.5% year-on-year (y-o-y) and 29.9% quarter-on-quarter (q-oq). Meanwhile, FPI stood at $3.5bn, which equated to a y-o-y increase of 1123.5% and a q-o-q rise of 25.7%, making it the fastest-growing segment of capital imports. By comparison, FDI expanded by just 9.8% y-o-y in the final quarter of 2017 to reach. $378.4m. The other investment category, meanwhile, increased by 66% y-o-y to hit $1.53bn.
According to the NBS report, FPI growth in 2017 was mainly supported by strong inflows into money market instruments, which jumped by 475% to $3.2bn in 2017, while equity grew by 323% to $3.6bn and bonds by 22% to $482m.
Trends Continue in 2018
Capital import growth was sustained in the first half of 2018, rising by 337.4% y-o-y to $11.8bn; FPI again drove expansion by contributing $8.7bn, or 73.5%, of the total. As in 2017, money market instruments was the fastest-growing segment of FPI, surging by 1637% y-o-y to $5.39bn in the first two quarters. By comparison the equity segment grew by 40.9% y-o-y to $1.05bn and bonds by 1172% to $736m.
This contrasts quite starkly with the situation in 2016, when the equity segment dominated in terms of its contribution to FPI with a total of $859m, compared with $395.9m from bonds and $557.9m from money market instruments. Stakeholders have noted this change: “As of the second quarter of 2018, FPI flows into bonds and money market instruments constituted over 74% of the total flows into Nigeria,” Suru Daniels, investment banking lead at Coronation Merchant Bank (CMB), told OBG. “Although the narrative has always focused on the impact of FPI on the equities market, the activities in the fixed income instrument segment of the market have been widely under-reported.”
Daniels also pointed to helpful central bank policies as being a factor behind the general upswing in FPI. “The Central Bank of Nigeria has been supportive of the growth in FPI flows. Its multiple exchange rate regime has provided clarity and certainty, which are key comfort factors for investors,” he told OBG. “We think that activities in this segment of the market will be further enhanced if the processes around the issuance of Certificates of Capital Importation – a key document for capital and interest repatriation – are made less cumbersome.”
According to the Nigerian Stock Exchange (NSE), foreign portfolio investors dominated the equities market during the first half of 2018, accounting for over 50% of activity. With FPI transactions totalling N799.7bn ($2.6bn), this represented an 85.1% increase over the same period of 2017. As of September, the most recent statistics available at the time of press, year-to-date FPI transactions on the NSE had risen 26.5% y-o-y to N991.2bn ($3.2bn), with foreign investors’ share of transactions dropping less than a percentage point from the first half of 2018 to 49.4%.
Falling Inflows, Rising Outflows
The NSE further breaks FPI activity down into inflows and outflows, with the former comprising purchase transactions on the exchange and the latter constituting sales and the liquidation of equity portfolio investments through the stock market.
In terms of inflows, these fell from N91.75bn ($296.6m) in January 2018 to N44.89bn ($145.1m) in February. They then rose to N69.71bn ($225.4m) in March and moderated to N64.28bn ($207.8m) in April and N62.06bn ($200.6m) in May. Although investments in May were 38.2% up on the February figure, growth continued to slow mid-year, sinking to N47.96bn ($155.1m) in June and N19.83bn ($64.1m) in July, before picking up to N36.66bn ($118.5m) in August and N40.5bn ($130.9m) in September.
Meanwhile, outflows sank from N74.64bn ($241.3m) in January 2018 to N38.33bn ($123.9m) in February, but rebounded to N62.5bn ($202.1m) in March, N58.25bn ($188.3m) in April and N130.89bn ($423.2m) in May. As with inflows, outflows eased in mid-2018 to N54.45bn ($176m) in June and N16.34bn ($528m) in July, before rising to N34.31bn ($110.9m) in August and N43.78bn ($141.5m) in September.
As a result, total FPI outflows for the first nine months of 2018 stood at N513.49bn ($1.7bn), against N477.68bn ($1.5bn) of inflows, giving a net deficit of N35.81bn ($115.8m). This marked a deterioration from the same period of 2017, when inflows stood at N468.3bn ($1.5bn) and outflows were N315.04bn ($1bn) for a surplus of N153.26bn ($495.5m).
Despite the deficit registered in 2018, the N477.68bn ($1.5bn) worth of inflows recorded through to September 2018 still represented a 2% increase on the same period of the previous year.
Some stakeholders have raised concerns about FPI volatility, particularly in the lead-up to the upcoming general election in February 2019. For example, in March 2018 FSDH Research – an arm of Nigeria’s FSDH Merchant Bank – stated in its monthly economic and financial markets outlook that Nigeria was becoming increasingly exposed to a foreign exchange crisis, with the risk of rapid FPI outflows growing ahead of the coming elections and with weaker-than-anticipated macroeconomic growth. The latter concern was underscored by the October 2018 update to the IMF’s World Economic Outlook database, in which the organisation lowered its GDP forecast for Nigeria for 2018 from 2.1% to 1.9%, and from 2.3% to 1.9% for 2019. High levels of government participation in the debt issuance market, a limited availability of FPI products, and a relatively small pool of issuers could also limit foreign investment growth.
There is also the risk that volatile FPI could cause severe fiscal harm, as was the case in the 1997-98 Asian financial crisis. However, the CMB’s Daniels argued that while Nigeria’s exposure has increased on the back of rising eurobond issuances, the Asian crisis was more attributable to high foreign debt-to-GDP ratios, weak foreign reserves and the financial contagion effect. “We think that the foreign reserve base of Nigeria is healthy, and if this can be maintained, the chances of a contagion effect on the economy are rather remote,” he told OBG.
While FPI is likely to be subdued in early 2019, at least in comparison to its strong performance in the first half of 2018, it has been forecast to remain a leading driver of investment growth. “Post-election, we anticipate a surge in activities; historical data supports this position,” Daniels told OBG. “It is also expected that the government will progressively reduce its dominance of the debt issuance market, leading to a reduction in yields and encouraging private sector participation.”
In the longer-term, greater emphasis on attracting FDI could help to offset any sudden upswings in FPI outflows, such as those that were recorded during the first nine months of 2018. “The government should encourage more FDI in the economy... to accelerate the growth of the real economy and to avoid the negative impact on the foreign exchange market usually associated with the unexpected withdrawals of the FPIs,” Ayodele Akinwunmi, FSDH’s head of research, told local media in March 2018.
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