Foreign Portfolio Investment (FPI), comprising assets like bonds and stocks held by international investors in an economy, increased by 12.69% to N38.98 billion in August 2020 from N34.59 billion the previous month, the Nigerian Stock Exchange (NSE) said Thursday.
Foreign inflow and outflow rose from N13.70 billion and N20.89 billion to N17.66 billion and N21.32 billion in that order.
On the flip side, aggregate domestic and foreign portfolio investments dived 8.49% to N94.45 billion from N103.21 billion.
Total portfolio transactions contracted 22.58% year-on-year from N121.99 billion to N94.45 billion.
Domestic investors committed more fund to investments than their foreign counterparts in the month under review.
Retail transactions slid 18.22% from N32.54 billion to N26.61 billion while institutional investments tumbled 20.01% from N36.08 billion to N28.86 billion.
Foreign Portfolio Investment (FPI) is sometimes derided as “hot money” because it causes damaging volatility to a nation’s currency and economy when investors sell shares and bonds and seek to “exit” i.e. convert proceeds from selling their assets into foreign currency in order to repatriate funds. Nigeria has restricted sales of foreign currency to portfolio investors seeking to exit. This may seem a good way to conserve Nigeria’s foreign currency reserves, diminished by the fall in oil prices triggered by the novel coronavirus pandemic. It does not provide a real solution to Nigeria’s forex scarcity as it keeps investors from staking new funds in Nigeria as this would mean locking the funds in Nigerian assets for a period unknown even to the Central Bank of Nigeria. Investors avoid such uncertainty. FPI is an important component of a country’s foreign exchange reserves and thus plays an important role in supporting the value and potentially the stability of a nation’s currency. The key requirement, especially for the latter goal, is to maintain policies that conserve a country’s reserves e.g. keeping the exchange rate low to deter imports even while oil prices are high. Nigeria always does the opposite; a high exchange rate encourages imports while oil prices are high and the CBN tries to restrict demand for foreign currency when oil prices fall. The result is a national currency that undergoes bouts of severe volatility, destroys purchasing power and deters investment.
The outflow of foreign capital from the Nigerian capital market has seen hastened by the coronavirus outbreak with the FPI plumbing a year-to-date low in July at N34.59 billion.
“We always like to support an orderly exit, but not an exit where everybody rushes to the door at the same time.
“If there is a fire in this room and everybody rushes to the door at the same time, I am sure the fatalities would be more than if we all go out through the door in an orderly manner; and that is what we are appealing to everybody,” the Central Bank of Nigeria (CBN) chief, Godwin Emefiele said in May, responding to international investors request to exit the Nigerian investment scene.
The NSE report noted that domestic transactions on the bourse plunged by 72.30% in 12 years from N3.556 trillion in 2007 to N985 billion in 2019.
Analysts are hoping that the CBN lowering of its monetary policy rate by 100 basis points to 11.5% on Monday will bolster liquidity and trade on the NSE in near time.