Capital Imported Into Nigeria; What Comes After An Encouraging 2017?


The National Bureau of Statistics’ (NBS) capital importation report for the fourth quarter of 2017 shows that Nigeria imported total capital of USD5.38 billion (highest since Q3-14) during the period, representing 247.5% y/y and 29.9% q/q increases, from the USD1.55 billion and USD4.15 billion recorded in Q4-16 and Q3-17 respectively. It is good to mention that the reported figure is USD258.72 million higher than the USD5.12 billion total capital imported for 2016FY. For 2017FY, total capital imported was USD12.23 billion, 138.6% higher than the level recorded in the previous year.

Given that the size of capital importation during the review period mirrors pre-oil crash historical average suggests that the sharp behemoth y/y jump is not unconnected to the significantly low base of the corresponding period in 2016.

In terms of contribution, consistent with the previous quarter, Portfolio Investment (25.7% q/q and 1,123.5% y/y to USD3.48 billion) accounted for the most (64.6%; previously 67%) inflows into the country in the review period, followed by Other Investments (28.4%; previously 30%) in the form of loans and other claims (21.2% q/q and 66.0% y/y to USD1.53 billion), and 7.0% (previously 3%) from Foreign Direct Investment (221.8% q/q and 9.8% y/y to USD378.41 million).

In sync with our earlier guidance, as contained in our economic note titled “Capital Imported into Nigeria Strengthens in Q3-2017; To be Sustained over Q4-17”, the surge in capital imported into the country was driven by progressing improvement in the foreign exchange market, which, by extension, bolstered confidence in the overall economy. In effect, demand for domestic risky assets remained healthy, while the still attractive yield on government securities sustained foreign participation in the fixed
income space.

Rebounding foreign direct investment raises a glimmer of hope

The most cheering part of the recent data is the reported expansion in Foreign Direct Investment (FDI) to USD378.41 million – highest since Q3-15 (USD717.71 million), and USD19.66 million ahead of the total FDI inflow recorded in H1-16 (USD358.75 million). While the impact of the improvement on Nigeria’s low FDI to GDP ratio (see chart below) is modest, our view is that the achievement sets the stage for stronger FDI growth – supported by positive economic developments. For instance, the recently released Q4-17 GDP figures by the NBS revealed that unlike in the previous quarter when output growth was everything about oil, rebounding activities in the non-oil sector combined with a healthy oil sector to power economic growth in the three months to December 2017. While we share the view that (1) growth in the domestic economy is still notably below potential (2017FY: 0.83% vs. pre-oil crash average of 5%), (2) the macroeconomic landscape remains highly exposed to external shocks, particularly crude oil price volatility, and (3) political and policy uncertainties remain downside risks, we believe recent efforts to diversify the economy and expand government revenue base – though unfolding too slowly with weak visibility – are laudable.

It is instructive to mention that the total USD981.75 million FDI recorded in 2017 still 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. In effect, we recommend improved visibility and more
aggressive implementation of the Economic Recovery and Growth Plan (ERGP), further improvement in the ease of doing business, higher dollar liquidity to
manufacturers, particularly the SMEs, increased targeted lending (under an accommodative interest rate environment) to the real sector of the economy, and a
broader and inclusive pioneer tax incentive.

Portfolio investment: money market instruments overtake equities flows

Against the run of play, capital inflows into money market instruments accounted for most (62.7%) of the sizable jump in FPI (25.7% q/q and 1,123.5% y/y to USD3.48 billion) during the review period. Specifically, capital imported into money market instruments posted a monumental surge of 202.6% q/q and 2,545.1% y/y to a record high of USD2.18 billion – USD24.26 million higher than total inflows recorded over 2014, 2015, and 2016 combined. We attribute the sharp surge in money market instruments to the relatively attractive yields on treasury bills and increased appetite for commercial papers during the review period. On T-bills, we think the strengthened case for lower yields in the fixed income market (amid declining inflation rate, the FGN’s new debt management strategy with a stronger bias for foreign debts, and monetary easing signals) spurred foreign investors to lock in high-yielding longer-dated naira instruments into their portfolio to mitigate reinvesting risk. Corroborating that, available data from the FMDQ shows 20.9% y/y and 1.9% q/q increases to USD116.80 billion in the total OTC market turnover in Q4-17. For reference, capital inflows into bonds equally improved, jumping by 168.2% q/q and 1,118.7% y/y to USD309.54 million in Q4-17.

Equity, which has historically been the driver of portfolio investments, fell 48.8% q/q but rose 460.6% y/y to USD989.2 million in the review period. Notwithstanding the q/q decline, the y/y improvement suggests offshore investors are more bullish on domestic equities than a year ago, thanks to improved foreign exchange liquidity, positively changing macroeconomic fundamentals, and appealing valuation. Corroborating the significant y/y inflows into equity, the Nigerian Stock Exchange’s (NSE) latest report on FPI reveals that, foreign inflows surged 477% y/y to NGN303.95 billion in the final quarter of 2017, from NGN52.69 billion in the corresponding quarter of 2016.

2018: Improving macroeconomic prospects to support capital inflows Over 2018, we believe capital importation will benefit from the expected improvement in macroeconomic conditions. First, consensus expectation is for higher output growth in 2018 (we estimate 2.63%, base case), supported by continued growth in both the oil and non-oil sectors. Second, our theme on the naira exchange rate remains stability, anchored on continued healthy accretion to the foreign reserves (currently at a high of USD42.35 billion) amid relatively stable oil earnings. We expect the current trend to be sustained over 2018, on the back of less disruptive output (we estimate average of 1.7-1.8mb/d, ex. condensates), higher prices (Cordros’ forecast: USD55-USD60 per barrel), and increased inflow through external borrowings. All that will allow the apex bank ample legroom to sustain its interventions in the various segments of the FX market in support of the LCY. In addition, sustained moderation in inflation rate will bolster consumer purchasing power, hence higher aggregate demand, which will bode well for manufacturers and businesses. We think the feed-through of that on earnings and valuation will be positive for risky assets, while relatively attractive yield environment will be supportive of healthy capital inflow into fixed income instruments.

All said we note downside risks, both internal and external, to our positive expectation for capital inflows over 2018. On the domestic front, we refer particularly to the possible resurgence of militant attacks 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. Lingering security crises in the country, notably intensifying herdsmen-farmers clashes and Boko Haram insurgents are significant risk factors that could incite resurgent militant attacks. To mention, the Niger Delta Revolutionary Crusaders (NDRC) recently threatened 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. While we acknowledge that the threat was promptly managed by the FGN, we are not quick to totally rule out possible attacks as the year progresses. Added to that is uncertainty surrounding the latter part of the year, as the race for the 2019 general elections gathers momentum.

Globally, the possibility of oil prices crashing to sub USD40 per barrel level exists. In our view, that will only require;

(1) the OPEC/Non-OPEC members output cut deal breaking by mid-year,

(2) global oil market tumbling into a surplus, particularly in H1, reflective of rising U.S. oil supply, as guided by the International Energy Agency (IEA),

(3) global growth recovery faltering, and

(4) the Middle East recording no notable geopolitical upheaval. Such development will constrain fiscal spending and elicit broad uncertainty across various segments of the economy.



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