July 30, 2021/CSL Research
According to data released by the National Bureau of Statistics (NBS), Capital importation into Nigeria in Q2 2021 declined 54.1% q/q to US$0.88bn, the lowest since Q1 2016. The decline reflects continued foreign investors’ risk aversion towards Naira assets and weak confidence due to FX liquidity crunch.
Portfolio investments remained the largest component of capital imported, averaging c.52%, over the past 5years. Inflows from this segment declined 43.4% q/q. The poor outturn was largely driven by weakened inflows into the Money market (-44.1%), the largest portfolio inflow destination. This indicates that foreign investors will rather await clarity on FX repatriation and capital flows than take advantage of carry trade opportunity. The significant decline in foreign inflows into the bonds market is unsurprising, as this has been the trend following Nigeria’s exclusion from the JP Morgan Government Bond Index- Emerging Markets (GBI-EM) and the Barclays Emerging Markets Local Currency Government index in Q4 2015 and Q1 2016, respectively.
On the other hand, foreign direct investment (-49.6% q/q) remains depressed, reflecting (1) the large infrastructural deficit in the country. For clarity, according to the national integrated infrastructure master plan, Nigeria needs about US$150bn annually for 23 years to address the infrastructural deficit. (2) Policy reversal and inconsistency and (3) lack of major macroeconomic reforms, like the full implementation of fuel and electricity subsidy removal. Beyond this, in the 2020 World Bank Ease of Doing Business report, Nigeria ranked 131 out of 190 countries, well below Ghana (118) and Egypt (114) which are now seen as viable alternatives for long term capital flows.
The narrative will likely remain the same for foreign investors, as measures restricting FX repatriation continue to undermine confidence and prevent the free flow of capital. However, a likely issuance of Eurobond and continued recovery in crude oil prices are expected to support FX liquidity, given the CBN leeway clear outstanding FX backlog.
