“The CBN would thus continue to be the most important barrier to the inflow of portfolio investment into Nigeria until May 2023”.
Foreign Portfolio Investments in the Nigeria plummeted by 40% in 2021, indicating the lowest level of inflow in 5 years. Foreign Portfolio Investments (FPI) refers to investment in financial assets such as stocks, bonds, mutual funds, exchange-traded funds, and other financial instruments held by foreign investors in Nigeria. The active participation of foreign investors in the Nigerian market declined by 11% from 34% of total market transactions in 2020 to 23% in 2021.
Total transactions by foreigners on the floor of the Nigeria Exchange Limited fell from NGN729 billion recorded in 2020 to NGN 434. 5 billion in 2021, according to data published by the Central Bank of Nigeria on Nigeria’s foreign investments.
The FPI report which is widely regarded as the most credible measure of foreign investors’ participation in the Nigerian capital market is published by the Nigerian Exchange Limited; the report is prepared using all transactions reported by all custodians and capital market operators including portfolio managers, financial institutions, stockbrokers, finance houses etc. The report has shown a continuous decline in the foreign portfolio investment performance in Nigeria since 2019, implying that foreign investors sold off more assets than they bought.
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Why has FPI fallen massively in Nigeria?
The new coronavirus pandemic affected inflows into emerging and frontier markets such as Nigeria from March 2020 till around July 2020. FDI inflows have since recovered and in some cases risen above pre-pandemic levels. However, the continuous decline in foreign portfolio investments in the country can be attributed to several internal and external factors, which are highlighted below:
- According to the CBN’s official rates, the naira has fallen by more than 35% from NGN306.9/USD in 2019 to NGN415.49 in 2022. A continual decline in the value of the naira means foreigners who buy Nigerian stocks or similar assets are very likely to lose money, at least in the short term, as they would get less naira for each dollar when selling their assets and reconverting the local currency to forex. Investors can deal with a one-off even if very deep devaluation but not the uncertainty of a prolonged loss of value of a currency.
- The value of the naira and foreign investors’ confidence in the economy is tied to the level of the country’s external reserves. As the reserves depletes, foreign investors’ confidence in the economy is eroded which leads to foreign portfolio outflows. Due to weakened foreign earnings capacity and rising import bills, Nigeria’s gross external reserves, which are assets held on reserve in foreign currencies, declined to USD40.31 billion in January 2022, the lowest since October 2021, when it stood at USD41.82 billion. The new coronavirus pandemic has impacted Nigeria’s earnings from crude oil exports and diaspora remittances, key sources of forex accrual for external reserves.
- Crude oil production which is a major source of foreign exchange earnings has been below the OPEC quota of 1.6 million barrels per day due to the lingering shutdown of major oil production terminals, underinvestment in the energy sector and sabotage activities like oil theft, pipe vandalisation etc. On average, Nigeria has managed to pump just over 1.2 – 1.4 million per day in the last few months, thereby losing over USD 1 billion of the desperately needed foreign exchange (forex) by the country. This seriously impacts both the level of foreign exchange reserves and the performance of the real economy i.e. the capacity of Nigerian firms to make profits and pay dividends given the implications for purchasing power and investment.
- Everyone (analysts, international media, the World Bank ) think the policies of the Central Bank of Nigeria’s (CBN) is the major reason behind the flight of foreign investors from the Nigerian market. The CBN allocates the country’s diminishing foreign exchange inflows to the uses and beneficiaries it prefers- portfolio investors who have to buy foreign exchange to repatriate their profits or investment (after selling stocks or bonds) come far behind the CBN queue. Investors avoid markets from which they cannot easily exit i.e. sell assets, buy forex and repatriate capital. Also, Nigerian assets are not attractive to foreign investors because the CBN makes them overpriced. This is because the CBN intervenes to prevent the naira from falling to its true market value i.e. the rate that would prevail if it allowed every business or individual to buy at the official or unified foreign exchange market for whatever use. Foreign investors would rather wait till the CBN sees the futility of frittering its reserves on artificially maintaining the value of the naira; Nigerian assets would be cheaper for them when the CBN allows a decisive devaluation.
Also, insecurity and the high cost of doing business dimmish the appetite for Nigerian assets; these factors mean the Nigerian market is shrinking and that companies’ profits is also being reduced by the inclement investment climate.
Multilateral organizations such as the International Monetary Fund (IMF) predict that Nigeria will grow by 2.7% in 2022 as a result of a recovery in global crude oil prices, an expected increase in Nigeria’s crude oil production volume towards the new OPEC cap of 1.83 million/bpd from the previous cap of 1.45 million/bpd. and a recovery in global economic activities. This would translate to an increase in foreign earnings but not up to a level that makes the CBN able to unpack its restrictive foreign exchange policies without allowing a decisive devaluation of the naira.
The CBN in the last six years has proven to be extremely politically attuned, it is hence is extremely unlikely to devalue the naira in a pre-election year. The CBN would thus continue to be the most important barrier to the inflow of portfolio investment into Nigeria until May 2023. This not only means that Nigeria would forgo this important source of foreign exchange, Nigerian firms would also be deprived of the capital for investment and expansion.
