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Nigeria Capital Importation: Christmas Comes Early As Q3’17 Inflows Spike

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Wednesday, November 29, 2017 1:03PM /Vetiva Research 

From $2.7 billion in H1’17, capital inflows in Q3’17 standalone hit $4.1 billion, representing the largest quarterly capital inflow since Q4’14 ($4.5 billion) and 80% of all capital inflows in 2016. This impressive quarter was primarily driven by a $2.0 billion quarter-on-quarter (q/q) increase in foreign portfolio inflows in Q3’17.
 

We attribute stronger capital inflows to the greater confidence in the health of Nigeria’s foreign exchange market (FX); a view supported by the steady increase in FX reserves (from $26 billion in December 2016 to $34 billion in October 2017) despite sustained Central bank of Nigeria (CBN) dollar injections.
 

Also, the “Investors & Exporters” window (“NAFEX” fixing) has been a notable success, leading to a significant improvement in liquidity and transparency in the FX market. We also believe that foreign investors would have cheered a gradually improving economic environment and accelerating GDP growth – Q1’17: -0.9% y/y, Q2’17: 0.7% y/y, Q3’17: 1.4% y/y.
 

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Whilst Q3’17 capital imports are some way off the quarterly peak of $6.6 billion in Q1’13, we note that the naira equivalent is the highest on record, as a result of currency depreciation since then. Generally, this would suggest a greater impact of capital inflows on the Nigerian economy.
 

Foreign investors show appetite for Nigerian stocks
Foreign portfolio inflows were the most significant change in Q3’17 as they recovered from their post-2015 slump. Standalone Q3’17 FPI ($2.8 billion) was more than double the H1’17 value ($1.1 billion) and 1.5x times higher than the entire 2016 figure. Equity inflows ($1.9 billion) were the big movers, recording their highest inflows since Q3’14 ($3.8 billion) as foreign investors flocked to Nigeria’s equity market following the introduction of the NAFEX fixing in mid-April. 

This is consistent with Nigerian Stock Exchange (NSE) data which shows a rise in foreign participation from
144 billion in Q2’17 to 353 billion in Q3’17.  

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Inverted yield curve entices money market inflows
Money market instruments also received a lot of love from foreign investors – FPI to money market instruments was the highest on record ($720 million). Meanwhile, although flows into the bond market doubled q/q to $115 million, they remained weak – less than half of Q3’16 value. 

We attribute this pattern to the inverted shape of Nigeria’s yield curve which has encouraged greater interest in short-term high-yielding government debt in the last 18 months. Moreover, we believe that the market expectation of monetary easing in the near-term may have encouraged investors to lock in attractive high-yielding instruments.
 

Foreign Direct Investment (FDI) was the sore spot in the quarter, declining from $274 million to $118 million on a quarterly basis, the lowest value since Q4’13 ($114 million). Nevertheless, we are cautiously optimistic about FDI in the medium term given the strides taken in upgrading Nigeria’s infrastructure and developing our industrial base – through the enactment of special economic zones and export processing zones.
 

Such projects are attractive to prospective foreign investors as they can benefit from stability in infrastructure and policy that may be absent at the national level.
 

That said, we highlight long-term policy clarity, political stability, and confidence in governance as other critical elements for enticing FDI into the country.

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Other investment, the final category of capital inflows which mainly measures foreign loans secured by Nigerian bodies, recorded a 28% q/q rise to $1.3 billion. We note that Nigeria’s 2017 Sovereign Eurobond figures are not accounted for in this total as a cumulative $4.8 billion has been raised in external debt markets by the Federal Government.
 

We also note that a number of Nigerian banks have secured over $1 billion combined foreign funding during the year. Given the trend towards external debt – at both federal and institutional levels – we anticipate further loan inflows into the country in 2018.
 

FX, macros to spur inflows – global rates on the rise
In 2018, we expect continued FX stability and improvements in the broader economic climate to entice further capital inflows. This view is predicated on stability in oil prices and volumes during the year, and any adverse shock in this area would likely spook foreign investors. 

Other headwinds loiter in the background; namely, underlying political risk from a pre-election year and rising global interest rates channelling capital away from emerging markets.
 

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