Capital Flows Riding the Ranges


Wednesday, December 06, 2017 / 9:55 AM /ARM Research

Capital importation to Nigeria sustained its strong growth for the second consecutive quarter in Q3 2017, with combined flows of $4.1 billion over the quarter being two-fold higher QoQ and YoY, according to data from the NBS.


In sync with trend, the strong capital flows emerged from portfolio flows which printed at $2.8 billion, an increase of 260% and 200% QoQ and YoY respectively, even as ‘other investment’ sustained the positive momentum, rising 69% QoQ (125% YoY) to $1.3 billion largely on account of loans.


That said, foreign direct investment (FDI) printed at an 11-quarter low of $117 million. Amidst improved fundamentals of companies and attractive valuation relative to peers combined with FX liberalisation, portfolio flows largely flooded the equities market which contributed nearly half (48%) of the total flows and the highest in the last 11 quarters of $1.9 billion ($1.3 billion excluding one-off transaction in Dangote cement and Mobil).


Furthermore, amidst elevated interest rate environment and falling YoY headline inflation, foreign capital was upbeat to short term debt instrument (+630% QoQ) and bonds (+100% QoQ).


The strong appetite for naira assets, which is mainly pull driven, largely reflected the combined impact of the liberalisation of the currency market in late April, higher crude oil proceeds and external reserve, improved FX liquidity as well as the thirst to lock-in on higher interest rate in the domestic market. 

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Going into the next 2 quarters, while we see positive appetite for naira assets (mainly equities), we are of the view that capital flows will moderate. On the global front, baring accommodative monetary policy in Japan, hawkish environment in other developed economies suggests reduced portfolio flows to the Nigerian market. 

On the domestic front, given our expectation of lower yield environment as well as political risk gearing towards the election, we think flows to short-term debt instrument as well as bonds will likely cool off in coming quarters.

On equities, while valuations remain attractive relative to peers, the high base in Q3 2017, largely due to one-offs and immediate reaction to FX liberalization, implies slower flows to equities in coming quarters.

We estimate a base case scenario of $9.8 billion for FY 17 (9M 17: $6.8 billion) and forecast $5 billion for FY 18. However, higher crude oil proceeds and accretion of the external reserve (+33.4% YTD to $34.8 billion) is expected to moderate inherent risk in naira assets.

On balance, our expectation of a depressed outlook on flows will have a lesser impact on the currency market given accretion in CBN’s war chest to sustain liquidity.

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