According to data released by the National Bureau of Statistics (NBS), capital inflows into the domestic economy expectedly recorded a notable improvement in the three months to September 2017, expanding by 127.5% y/y and 131.3% q/q to USD4.15 billion (highest since Q4-14), from USD1.82 billion and USD1.79 billion respectively.
As was the case in Q2-17, in terms of contribution, Portfolio Investment (259.2% q/q and 200.7% y/y to USD2.77 billion) accounted for the most (67%) inflows into the country in the review period, followed by Other Investments (30%) in the form of loans and other claims (68.6% q/q and 124.5% y/y to USD1.26 billion), and 3% from Foreign Direct Investment (-57.1% q/q and -65.5% y/y to USD117.60 million).
Considering the fact that the size of capital importation reported for the period closely compares with historical levels largely suggests that the behemoth jumps, both y/y and q/q, were flattered by extremely low bases.
In line with our earlier guidance, the surge in capital imported into the country was driven by progressing improvement in the foreign exchange market, which, by
extension, sustained the rally in the equities market, in addition to an attractive interest rate environment – attracting higher inflows into the fixed income space.
Declining Foreign Direct Investment Raises Concerns
Meanwhile, we particularly note the fall in Foreign Direct Investment (FDI) to a record low N117.60 billion, further worsening Nigeria’s already low FDI to GDP ratio relative to most emerging market economies (see chart below), again reflective of the domestic economy growing below its potential over the years. For instance, the recently released Q3-17 GDP figures by the NBS revealed that output growth in the third quarter of the year was everything about oil (the oil sector expanded 25.9% y/y) while the non-oil sector contracted 0.78% y/y, with major subsectors – manufacturing, services, trade, and construction – posting negative growth numbers.
Clearly, the domestic macroeconomic landscape remains highly exposed to external shocks – lending credence to a recent downgrade of Nigeria’s sovereign issuer rating by Moody’s despite maintaining a stable outlook – creating limited confidence for foreign direct investors. In its Global Competitiveness Report for 2017-2018, the World Economic Forum (WEF) ranked Nigeria 125th among 137 countries, implying that the set of institutions, policies, and factors that determine the level of productivity in the domestic economy are still weak.
We reiterate that achieving Nigeria’s long-term growth rate of 7%, requiring c.28% investment/GDP ratio, under current capital import conditions, remains to be seen. For instance, annualizing the reported FDI of N117.60 billion (compared with the historical range of USD1.25 billion – USD1.75 billion quarterly) translates to less than 1% of the country’s yearly investment requirement of USD100 billion, and – as a percentage of GDP – lags the run rates posted by the above-highlighted comparables. While acknowledging the positive impact of the recent World Bank’s Ease of Doing Business Report for 2018 placing Nigeria in the 145th position (169th position in 2017), and ranking the country among the top 10 countries that improved on reforms, we believe more coordinated harmony between monetary and fiscal policies will be crucial to fostering political stability, achieving stable growth and inflation, aligning foreign exchange, and boosting government spending. To this end, we look for improved visibility and more aggressive implementation of the Economic Recovery and Growth Plan (ERGP), further improvement in the ease of doing business, increased dollar liquidity to manufacturers, particularly the SMEs, and a broader pioneer tax incentive.
Increased Equities Flows Further Support Foreign Portfolio Investment
Foreign Portfolio Investment (FPI) consolidated the strong increase recorded in Q2-17, jumping 259.2% q/q and 200.7% y/y closer to historical levels at USD2.77 billion – highest since Q3-14 (USD5.13 billion). The sizable increase in FPI was mostly driven by a monumental 860.7% y/y surge in Equities (214.6% q/q) to USD1.93 billion, accounting for circa 70% of total FPI, and a grand leap (105.6% y/y and 630.2 q/q to USD719 million) in capital investments in the form of Money Market Instruments.
Certainly, the impact (improving foreign exchange liquidity, boosting transparency in FX transactions, and increasing dollar inflows from autonomous sources) of the CBN’s “Investors & Exporter’s” Foreign Exchange Window, established towards the tail end of April, lingered, further attracting offshore inflows amid appealing valuation – supported by positively changing macroeconomic fundamentals.
Corroborating the significant inflows into equities, the Nigerian Stock Exchange’s (NSE) latest report on FPI reveals that foreign inflows surged 205.7% y/y and 64.3% q/q to NGN252.33 billion in the three months to September, from NGN82.54 billion and NGN153.62 billion in Q3-16 and Q2-17 respectively. Still supportive of the potency of the I&E FX window is the sizable increase in the total turnover in the window by 171% q/q to USD10.16 billion in the three months to September, compared to USD3.74 billion in Q2-17, and by extension, the 52.76% q/q increase in total turnover in the domestic bourse to NGN360.73 billion in Q3-17, from N236.14 billion in the previous quarter. Equally reflective of investor confidence in the I&E window is the 15.8% q/q growth (to USD114.65 billion, from USD99.0 billion) in the total OTC market turnover in Q3-17, as reported by the FMDQ.
Q4-2017: FX Stability to Further Chart the Path of Capital Imports
In August, in our economic note titled “Capital Imported into Nigeria Rebounds in Q2- 2017; Higher 97.3% q/q and 71.9% y/y”, we guided that developments in the FX space will further dictate the direction of foreign investments over H2-2017. Clearly, Q3-17 capital importation figures came in sync with our prognosis. Over the last quarter of the year, we reiterate our position that activities in the currency market will again shape the flow of capital into the domestic economy. Specifically, our theme on the naira exchange rate remains stability, anchored on continued healthy accretion to the foreign reserves (currently at a 35-month high of USD34.53 billion) amid relatively stable oil earnings (on the back of less disruptive output and higher prices, up 30.8% to USD62.7/barrel from USD47.9 at end-June) and increased inflow through external borrowing – allowing the apex bank ample legroom to sustain its interventions in the various segments of the FX market in support of the LCY. In addition, continued improvement in the macroeconomic space (higher output growth, at 1.40% y/y in Q3- 17 and positive expectation for Q4-17, and sustained moderation in inflation rate), sustained rally in the equities market, and relatively still-attractive yield environment will be supportive of healthy capital inflow over the rest of the year.
All said, we note downside risk to our positive expectation for capital inflows over Q4- 17, particularly the possible resurgence of militants attack on oil and gas installations, given particularly that the motives behind the unpredictable demands of the agitated groups in the Niger Delta region cannot be ascertained, as shown by recent threats issued by the groups, and with the race for the 2019 general elections gathering momentum. Vis-à-vis militant attacks, a case in sight is the Niger Delta Revolutionary Crusaders’ (NDRC) recent threat to scuttle oil production to zero barrel per day should the federal government fail to implement the various agreements reached with leaders of the region.