The National Bureau of Statistics (NBS) recently released the capital importation data for Q4-2020 which showed that total inflows into the country fell by 59.6% y/y in 2020 to $9.6bn, its lowest total since 2016. On a q/q basis, capital inflow fell 26.8% q/q to $1.1bn in Q4 2020.
The slump in oil prices – Nigeria’s main USD flow source – discouraged FPIs from bringing in new funds. This was further exacerbated by the fact that most FPIs had to resort to unorthodox means to repatriate their funds while many were stuck.
That said, we beam our focus on FPI flows in 2020 considering it constitutes a bulk of Nigeria’s FX inflows. Unsurprisingly, FPI flows across each instrument slumped to record lows as flows into Money market (down 69.1% y/y), Equities (down 60.1% y/y) and Bonds (down 77.4% y/y) all tanked.
The synchronized decline was largely linked to the move by the CBN to limit its intervention in the I&E window in order to forestall the onslaught on foreign exchange reserves in the face of weakened FX inflows.
However, this move reduced the attractiveness of the Nigerian market to FPIs. In addition, despite the CBN maintaining its stance to segment the money market to allow FPIs have access to juicer yields in the OMO window, lower yields in the OMO market amidst galloping inflation ensured FPIs were disinterested in Nigerian bills.
Furthermore, the rally in the equities market was inadequate to lure foreign investors to return to the market.
In 2021, we expect the CBN will exhaust all tools in its arsenal to attract FPI flows before conceding to an exchange rate devaluation. This was obvious in the move by the CBN to raise stop rates at the last OMO auction by 475bps on average.
We think the gradual rise in rates (which would reduce the negative real return) would attract more FPI flows particularly considering major developed economies continue to maintain an accommodative monetary policy stance in keeping with the global recovery narrative.