Capital Inflows Plummet as The Coronavirus Bug Bites Down Hard on Economic Outlook

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Sunday, August 30, 2020 06:40 AM /by TheAnalyst / Header Image Credit:  Port Tech and EcoGraphics


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With the spread of the coronavirus in Nigeria not showing signs of slowing down soon, concerns over foreign and domestic supply chain disruptions, second wave lockdowns and factory closures have led foreign investors to sit on the fence as they reassess Nigeria as a preferred frontier market (FM) and investment destination. Analysts have noted that the virus bug has bitten down hard on foreign capital inflows in Q2 2020, leaving the domestic money and capital markets in awkward situations.

 

The most recent report released by the National Bureau of Statistics (NBS) shows that capital importation declined by -77.88% (Q-o-Q)  in Q2 2020 and by -78.6% (Y-o-Y). The decline in capital importation inflows was evident as the Nigerian economy shrunk by -6.10% in Q2 2020 (see Chart 1 below).

 

Chart 1: Nigeria Capital Importation Inflows ($'m)

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Source: Proshare Research, NBS


A drop was recorded in foreign direct investment (FDI), foreign portfolio investment (FPI) and other sundry investments by mid-year 2020. Nigeria's foreign direct investment (FDI) declined in Q2 by -30.65% (Q-o-Q) and by -33.41% (Y-o-Y), portfolio investment (FPI) declined by -91.14% (Y-o-Y) to $385.32m while its other investments also recorded a significant decline in Q2 2020 of -48.6% (Y-o-Y) to $761.03m.

 

Furthermore, there was also a decline in capital importation inflows by sector as all sectors recorded a downward slide in capital inflows when compared to the previous quarter, except for the marketing sector which recorded a rise to $1m from $80,000 in Q1 2020. The top five sectors with the highest recorded capital inflows in Q2 2020 were shares of $464.57m, financing $309.48, Banking $140.19m, Production $110.78m, and Telecoms $105.64m (see Chart 2). 

 

Chart 2: Capital Inflows by Sectors in Q2 2020 ($'m)

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Source: Proshare Research, NBS


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Fragile Economy Nudges Investors To Alternative Markets

As COVID-19 took a bite out of economic activities and international oil prices in Q1 and Q2 2020 investors pulled back from intended capital commitments as they decided to sit on the fence. The uncertainty in the global economy has since hurt domestic investment flows.

 

 The Nigerian economy has had difficulties reversing the setbacks of the first two quarters of the year. In Q2 2020, the economy recorded a contraction in GDP of -6.10%, the domestic unemployment rate rose by +27.10%, foreign reserves declined to $35.54bn, while the local purchasing manager's index (PMI) contracted to 48.5 points, as inflation rose to a 27-months high of +12.82%.

 

The downturn in economic outlook has kept both foreign portfolio (FPI) and foreign direct investment (FDI) flows low. The country's foreign exchange rate volatility has equally posed a challenge to investors as uncertainty about monetary policy management has proved to be a challenge. The weak outlook for the exchange rate, has eroded investor confidence. Hence, some investors have opted to investor in alternative frontier economies such as Ghana, Rwanda and Egypt.

 

 With inflation rate representing an unofficial tax on commercial transactions investors have opted for lower inflation environments in other frontier markets. Higher domestic inflation rate may imply a decline in real domestic yields (see Chart 3). 

 

Chart 3: Nigeria Inflation Rate (%)

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Source: Proshare Research, NBS


Credit rating agencies such as Moody, Fitch and S&P have expressed concerns over Nigeria's public debt size e.g. the federal government spent 97.5% of its January to May 2020 revenue on debt servicing. In April, Fitch downgraded the Nigerian economy to B and outlook negative; sighting risks of disruptive macroeconomic adjustment given Nigeria's precarious monetary and exchange rate situation.


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Virus Intensifies Foreign Investors Apathy

The decline in Nigeria's capital importation numbers was also the result of the impact of the coronavirus pandemic on Nigeria's major capital imports. Many of the countries Nigeria depends on for capital inflows contracted in Q2 2020. Nigeria's top five capital import origins in Q2 2020 were; UK $428.83m, South Africa $149.29m, UAE $145.15m, Netherlands $141.3m, and Singapore $137.04. For example, in Q2 2020 the UK economy contracted -20.4%, Singapore -13.2%, Netherlands -8.5% and US -32.9%. If these countries continue to record economic contraction the capital importation figures would fall further in Q3 2020 (see Chart 4).

 

Chart 4: Capital Inflows by Origin Q2 2020 ($'m)

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Source: Proshare Research, NBS


Grim Capital Outlook Reversible

Analysts note that Nigeria's problems though surmountable, may require concerted efforts of policymakers. Nigeria's GDP contraction, high debt profile, high unemployment rate, inflation rate and low PMI has put it into a "policy hole" requiring unconventional policies to navigate. Investors are increasingly shifting to alternative frontier economies with relatively stable growth and lower domestic inflation rates.  


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