Capital imported into Nigeria rose 30% q/q to $5,383 million in Q4’17, much higher than $1,549 million reported in Q4’16. This made Q4’17 the best quarter since the oil price crash (Q3’14 – $6,543 million). Total capital imports for the full-year period came to $12,229 million, more than double 2016 inflow of $5,149 million, though still some way off the $20,751 million recorded in 2014.
We attribute this mini-recovery in capital imports to a number of factors. Chief among them is the partial liberalization of the Nigerian foreign exchange (FX) market through the enactment of the “Investors & Exporters” (I&E) window in April 2017 which allowed foreign investors to circumvent prior capital controls in the economy. We believe that attractive capital market conditions also encouraged greater capital flows. In particular, the high-interest rates as well as relatively cheap equity market valuation must have enticed foreign portfolio inflows (FPI). Finally, we point to Nigeria’s exit from recession in Q2’17 and improving oil market dynamics – 2017 oil price average of $55/bbl vs. $45/bbl in 2016 and production average of 1.88 mmbd vs. 1.81 mmbd in 2016.
Fixed income appeal entices FPI
For the third straight quarter, FPI represented the largest portion of Nigeria’s capital imports. FPI rose 26% q/q to $3,478 million and the y/y comparison really shows the improvement – 2017: $7,329 million, 2016: $1,813 million. The composition of FPI changed substantially through the year as investors switched focus from the equity to fixed income market. Equity inflows declined from $1,932 million in Q3’17 to $989 million in Q4’17 whilst inflows to bonds rose from $115 million in Q3’17 to $310 million in Q4’17, a far cry from the zero inflow recorded in Q1’17. The most significant inflows were to money market instruments, traditionally the smallest recipient of foreign capital. Inflows here jumped from $720 million in Q3’17 to $2,179 million in Q4’17.
Increased inflows to fixed income instruments were likely on the back of investors looking to lock in moderating interest rates in the final quarter of the year – ahead of possible rate moderation. That said, we would have expected more interest in bonds than money market instruments as longerdated instruments are more appealing given an outlook of declining yields. Looking ahead, we highlight the enormous effect of Nigeria’s possible reinclusion to the JP Morgan Emerging Market Bond Index – it would likely precipitate much higher levels of foreign inflows to the fixed income market.
Looking at other components of capital imports, foreign direct investment (FDI) tripled to $378 million in Q4’17, the highest recording for the year, to bring the full-year figure to $982 million, slightly down from $1,044 million in 2016. In fact, 2017 FDI is the lowest since 2010 ($729 million). Other Investments, the final component of capital imports, rose 21% q/q and 66% y/y with loans still accounting for the bulk of these inflows (Q4’17: 71%, FY’17: 81%).
How important are capital imports to Nigeria’s FX inflows?
Despite the notable uptick in Nigeria’s capital imports, it remains a small part of the country’s foreign currency inflows. At $12,229 million, 2017 capital imports are dwarfed by Nigeria’s oil earnings (2016: $27,788 million, 5-year average: $66,765 million). Meanwhile, Federal Government external borrowing amounted to $4,800 million in 2017, over a third of capital imports. Nevertheless, higher capital imports contribute to Nigeria’s external reserves.
In the long-run, economic and development policy must create an attractive environment to entice patient foreign capital into the economy. Ease of Doing Business initiatives is a plus in this regard but legal & regulatory enforcement in property rights, dispute resolution, and competition in the marketplace, etc. are further steps required to upgrade Nigeria’s market economy. And although recent infrastructure spending should bear fruit in time, external perceptions of the country remain vital, placing an emphasis on the battle against corruption and graft.
Global-domestic divide to define capital imports
Evolving global dynamics make 2018 an interesting year for foreign capital. Whilst a bullish oil market buoys investor interest in Nigeria’s economy, monetary tightening by the U.S. Federal Reserve is likely to exert pressure on Emerging Market capital flows. Nevertheless, domestic conditions may prove more important. Our positive expectation for GDP growth (2018F: 2.4% y/y) and forecast of a stable and liquid exchange rate market should provide a decent base for capital imports. However, imminent 2019 elections are likely to be the swing factor as the level of uncertainty in the latter stages of the year would drive foreign sentiment towards the country.