une 7, 2022/United Capital Research

The National Bureau of Statistics (NBS) recently released Nigeria’s Capital Importation report for Q1-2022. Accordingly, we observed that total imported total capital declined 28.1% q/q and 17.5% y/y to $1.6bn in Q4-2021, from $2.2bn to $1.9bn in Q4-2021 and Q1-2021. A deeper dive into the data showed the Foreign Portfolio Investment (FPI) inflows, which accounted for 60.9% of total capital imported, declined by 1.7% y/y to print at $957.6mn in Q1-2022. Similarly, the Other investments category follows in tandem, down 40.7% y/y to print at $460.6mn. On the positive side, Foreign Direct Investment (FDI) inflows increased by a marginal 13bps y/y to print at $155.0mn in Q1-2022.

The decline in FPI inflows was mainly due to investors’ lack of interest in Nigeria’s low fixed income instruments following the CBN’s dovish stance on interest rates since 2020 despite persistent rate hikes across other major economies. Notably, the bulk of the FPI inflows remained concentrated in money market instruments (64.3% of inflows), albeit less so than in the preceding quarter (86.9%). Despite the marginal y/y increase in FDI inflows, FDI stayed underwhelming – contributing 9.8% to gross inflows. On a q/q basis, foreign direct investment (FDI) declined 56.7%. Generally, the figures reveal weakened foreign investor sentiment toward investing in the Nigerian Economy.  The country’s hostile business environment, evidenced by FX liquidity concerns, insecurity, policy flip-flop, weaker consumer pockets, and lack of infrastructure, continues to discourage long-term capital commitments.

We do not anticipate a significant improvement in foreign interest and capital importation flows in the short term. Despite the 150bps rate hike by the MPC, which ideally makes the fixed income space more attractive to both local and foreign investors, Nigeria’s extended FX crunch continues to deter foreign investors’ interest in the Nigerian capital market, raising concerns for FPI inflows. Also, risks associated with the political environment in anticipation of the general 2023 elections outweigh the benefits of the rate hike.