Friday 25th August 2017 4:30PM/ Cordros Capital
Earlier this week, the National Bureau of Statistics (NBS) released its Q2-2017 Capital Importation Report, showing that capital inflows into the domestic economy recorded a notable improvement during the review period, expanding by 97.34% q/q and 71.98% y/y to USD1.79 billion, from USD908.27 million and USD1.04 billion respectively.
In terms of contribution, Portfolio Investment (145.69% q/q and 128.43% y/y to USD770.51 million) accounted for the most inflows into the country in the three months to June, followed by Other Investments in the form of loans (95.02% q/q and 43.59% y/y to USD747.47 million), and Foreign Direct Investment (29.80% q/q and 48.88% y/y to USD274.37 million).
Accordingly, total capital imported in the first half of the year increased by 54.04% to USD2.70 billion, from USD1.75 billion in H1-2016. Compared to historical levels, however, the robust y/y growth in inflows was suggestively flattered by the very low base of 2016.
Meanwhile, drilling on Other Investments, we observe that the released data did not capture inflows from the USD1 billion and USD 500 million Eurobonds and USD300 million Diaspora bond raised by the FGN in February, March and June respectively.
In addition, the Statistics Office alluded to likely upward revision (in the next quarter) to the figures as it awaits more information on the other components (trade credits, currency deposits, and other claims) of Other Investments which posted no inflow for the second quarter. Accounting for the aforementioned, we estimate total capital imported into Nigeria in H1-2017 at USD4.50 billion, fairly comparable with the levels recorded in recent years.
Comparatively, however, the level of FDI to GDP in Nigeria remains low relative to most emerging market economies (see chart below), reflective of the domestic economy growing below its potential over the years.
Suffice to say that achieving Nigeria’s long-term growth rate of 7%, requiring c.28% investment/GDP ratio, under current capital import conditions, remains to be seen.
Annualizing the reported FDI of USD274.37 million (from a historical range of USD1.25 billion – USD1.75 billion quarterly), for instance, equates 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.
Acknowledging the fact that the observed trend is consistent with the correlation of FDI to the cyclical anchor (crude oil prices) of Nigeria’s business cycle, both the fiscal and monetary authorities will have to pursue complementary policies that foster political stability, stable growth, inflation, and foreign exchange outlook, and seek to boost government spending.
Granted, recent moves, including plans to improve the ease of doing business, the launch of the Economic Recovery and Growth Plan (ERGP), expansion of the pioneer status incentive base, and improved dollar liquidity to manufacturers particularly the SMEs, are laudable, positioning the economy to attract healthy investment flows. But visibility and implementation remain weak while there are headwinds against sustainability.
Foreign Portfolio Investment Surges Amid Increased Equities Flows
After posting an 8-year low of USD1.81 billion in 2016, capital flows from FPI rebounded in Q2-2017 to mirror historical levels, driven largely by Equities (79.69% of total FPI) at USD614.05 million (highest inflow since end-2015). We note specifically the sharp jump in portfolio flows in May (USD337.25 million) compared to April’s USD118.96 million, indicating the impact of the CBN’s “Investors & Exporter’s” Foreign Exchange Window, established towards the tail end of April.
Indeed, the window, to a meaningful extent, addressed the main concerns of foreign investors about the domestic currency outlook. To be clear, the I&E FX Window has improved foreign exchange liquidity, boosted transparency in FX transactions, and increased dollar inflows from autonomous sources.
In addition to the notable gains from the FX market, investors found respite in the consistent improvement in the economy, as suggested by encouraging leading indicators (Purchasing Managers’ Index stayed above the 50 points that separates expansion from contraction throughout the three months period, while the CBN’s surveys on business and consumer expectations for Q2-2017 showed positive responses), and better-than-expected Q1-2017 corporate earnings (amid positive expectation for stronger performance in H1) of listed companies on the Nigerian Stock Exchange.
Corroborating the significant inflows into equities, the NSE latest report on FPI reveals that foreign inflows surged 146.38% to N153.62 billion in the three months to June, from N62.35 billion in Q1-2017. Equally supportive of the potency of the I&E window is the sizable increase in the average daily turnover of the domestic bourse in May (N4.91 billion) and June (N5.54 billion) – highest levels recorded within the first six months of the year.
H2-2017: FX Stability Remains Fundamental to Capital Imports
Clearly, the relative stability in the currency market was key to the level of capital imported into the country in the second quarter of the year. We think developments in the FX space will further dictate the direction of foreign investments over H2-2017.
Our theme on the NGN exchange rate is stability, hinged on continued healthy accretion to the foreign reserves (currently at a 2-year high of USD31.60 billion) amid relatively stable oil earnings (on the back of less disruptive output and higher prices) – allowing the apex bank ample legroom to sustain its interventions in the various segments of the FX market in support of the LCY.
We expect that to combine with continuously improving macroeconomic indicators (output growth and inflation rates), sustained rally in the equities market – as Nigerian equities remain cheap relative to comparable peers – and an attractive interest rate environment to sustain capital importation for the second half of the year.
While we note the possibility of the CBN’s Monetary Policy Committee changing the gear of its policy stance towards the end of the year by cutting the MPR by 100 bps to 13.00%, we think a more applicable risk to capital inflows, FDI in particular, into the country will be the international community’s outlook of Nigeria’s near term political stability as focus shifts to the domestic polity ahead of the 2019 general elections.
Also worthy of mention is the possible resurgence of militants attack 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, as shown by recent threats issued by the groups.
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