February 16, 2016/Cordros Research
The National Bureau of Statistics (NBS) recently released report on Capital imported into Nigeria in the third and fourth quarters of 2015. The report covers capital importation by Investment Type (FDI, Portfolio and Other Investments), by Business Type, by State and by Country of Origin. In this report however, we concentrate on Capital Importation by Investment Type, specifically portfolio investments in equity, bonds and money market instruments.
Capital importation into these three asset classes stood at US$1.96 billion in 2015 second half, down from US$4.04 billion in the first half, and US$7.13 billion in the second half of 2014. In total, foreign portfolio investments in 2015 was US$6.1 billion, c.60% below 2014 figure and the lowest since 2011.
Tapering for Longer?
Majority vote is that the current episode of lower crude oil prices is projected to remain over a longer period. Consequently, it is imperative to expect a longer period of lower foreign exchange inflows from oil sources. To avoid any run-down of the national reserves (currently at US$27.8 billion), amidst yet elevated imports, the CBN will have to sustain the Naira at the fixed N197/US$ level, and this will ultimately require painstakingly seeking measures to suppress demand. This, as noted by the MPC at its last meeting, would necessitate continued hard and uncomfortable economic policy choices, including, in our view, forex capital controls.
Under this forex management regime, there is little incentive for larger foreign inflows into the capital market. The perceived overvaluation of the Naira — questioned further by the currently wide and potentially wider spread with the parallel market — amidst elevated risk of an eventual devaluation, suggests that foreign investors will remain averse Naira denominated assets.
Which Market is More Vulnerable?
In 2015, capital importation into equities and bonds markets fell by 59% and 68% respectively. Compared to the first half (-51% and -38% respectively), the rate of decline was intense (at 69% and 98% respectively) in the second half.
On forex risk adjusted basis, we believe the equities market offers more attraction for foreign portfolio investments. On the contrary, bonds and money market yields (currently 11.4% and 5.8% respectively on average) are significantly unattractive from a USD view point.
