In the week under review, the National Bureau of Statistics (NBS) released Nigeria’s capital importation data for Q4 2019 which revealed some trends about foreign investors’ perception of the Nigerian economy.
According to the data, though Nigeria’s overall Capital Importation in 2019 rose by 42.69% to $23.99bn from $16.81bn in the preceding year, a close analysis of the data shows that foreign investors are less willing to take long term investment position.
Specifically, while the size of Capital Importation into Equity and Bond based Portfolio Investments (FPI) and Loan based Other Investments rose by 5.75% y/y and 75.34% y/y respectively to $1.02bn (from $966.82mn) and $6.69bn (from $3.82bn) in 2019, Foreign Direct Investment (FDI), a measure of foreign investors long term investment commitment to the Nigeria economy contracted by 21.79% to $934.34mn from $1.19bn in 2018.
Interestingly, for a country like Nigeria with poor infrastructure, high poverty and unemployment rates, and weak fiscal buffer, rapid growth in FDI is what is most desirous to achieve accelerated growth as against the latter (FPI and Other Investments) which are mostly “Hot money”.
While the strong increase in both FPI and loan based Other Investments components can be attributed to the high-interest rate/yield environment in Nigeria (as against quantitative easing in most advanced economies in 2019) and increased issuance of foreign-denominated debt instruments by both the Nigerian government and local corporates in the reviewed period, we believe the drivers of the weak FDI inflows may not be unconnected with pre-election jitters in H1 2019, lack of stimulus fiscal policy to support rapid growth desired for long term investment commitment, rising cases of insecurity (now spreading to the southern part of the country), and weak external buffers to maintain the exchange rate
In terms of the sector of interest to the foreign investors, we noticed significant increase in capital inflows into Hotels (up 5,815% y/y to $27.80mn from $0.47mn in 2018), Telecoms (up 725% y/y to $944.05mn from $114.43mn in 2018), Brewery (up 528% y/y to $30.16mn from $4.81mn in 2018), Finance (up 322% y/y to $6.28bn from $1.49bn in 2018), Trading (up 306% y/y to $534.52mn from $131.56mn in 2018) and Banking (up 279% y/y to $7.66bn from $1.95bn), while inflows decreased in Drilling (down by 99.23% y/y to $0.07mn), Construction (down by 51% y/y to $26.31mn), Shares (down by 49% y/y to $5.34bn) and Servicing (down by 29% y/y to $915.51mn).
With the near weak state of Nigeria’s foreign buffer (now $36bn) due to decline in crude oil price and concern on the impact of coronavirus on businesses, we expect Nigeria to witness a decline in overall Capital Importation in Q1 2020, with most effect been on Foreign Direct Investment.