- Dominance of portfolio investors not a good omen for Nigeria – CPPE, Unegwu
Despite a remarkable 198.06 percent increase in Capital Importation into Nigeria in the first quarter of 2024, reaching $3.38 billion, up from $1.13 billion in the same period of 2023, as revealed by the National Bureau of Statistics recently, financial experts argue that there is not much to celebrate about as the nation’s economic woes are still far from being over. FESTUS OKOROMADU reports.
The Capital Importation increase reported by Nigeria’s data warehouse, the NBS not only showed a rise on an annual basis but also indicated a 210.16 percent quarter-on-quarter rise from $1.09 billion in the last quarter of 2023.
Better still, it is the highest capital inflow recorded since the pandemic era, when the country posted $5.85 billion in Q1 2020. Thus, while the government saw this as a positive sign, indicating improved investor sentiment and confidence, despite its incoherent foreign exchange policies and the devaluation of the local currency, financial experts believe that this kind of capital inflow may be inimical to the country’s economy.
Over the last 16 quarters, capital inflows into Nigeria have struggled to return to the pre-pandemic quarterly average of $5 billion, raising concerns and prompting a closer examination of the factors contributing to the downturn in foreign investment.
Experts have identified the key issues responsible for this to include policies on foreign exchange liquidity and other macroeconomic challenges that continue to impede the sustainable inflow of investments.
Therefore, the reported growth came as a welcome relief to some Nigerians, especially the Federal Government. For instance, the Governor of the Central Bank of Nigeria, Olayemi Cardoso, had attributed the inflows to the direct results of its initiatives aimed at ensuring liquidity and stability within the foreign exchange market.
However, experts have argued that the focus on capital importation to sustain the foreign exchange market is detrimental to the economy as such cannot help meet the developmental needs of the economy.
“Most of those banks may not succeed in raising the much-needed funds, because the expected reward from the capital market at this time is low. That apart, the number of banks coming to raise funds, and the amount they are looking for is huge”
Moreover, an analysis of the NBS Capital Importation report shows that Portfolio Investment topped the inflow during the period contributing $2.08 billion, representing 61.48 percent. This implies that investors took advantage of the high-interest rate environment, where money market instruments ($1.61 billion) and bonds ($420.8 million) became more attractive due to higher returns and a positive outlook for the fixed-income market.
The report indicated that there was a 77.8 percent year-on-year decline in investment into equities, contrasting with a 355.7 percent quarter-on-quarter improvement to $49.4 million.
Thus, the concern for many is the implication of higher portfolio investors’ patronage especially when the interest is towards the fixed-income market at the expense of foreign direct investment that focuses on long-term investment. More importantly, at a time when Nigerian banks are heading to the capital market to raise funds to boost their capital bases as required by the CBN.
What experts say
According to the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, the dominance of portfolio investors in the NBS’s report for capital inflow during the first quarter is not a positive move for the economy.
“Portfolio investments are generally very volatile; they are not dependable and they can also trigger a lot of instability in the economy. Whether you are talking about portfolio investors in the money market, fixed income market, or the equity market, they are not good for the economy as they don’t stay long. They are short-term,” he told The Point in a telephone conversation.
He however noted that the presence of portfolio investors in the short run may be necessary to boost the foreign exchange market.
“Though, for short-term liquidity, they may prove to have some benefits, talking about FX liquidity because that is part of the main objectives of increasing interest rates so that we can have some FX liquidity coming but the problem is that they don’t last long enough to sustain the economy.
“So they have short-term benefits but in the long term they are not dependable,” he stated.
Expatiating further, he said, “It is not positive for the economy. What we should be looking for are foreign direct investments that can be here for a long time. They create jobs, they are more patient, and they offer what is called ‘Patient Capital, while portfolio flows are only good for the short term.”
Also commenting, the Chairman of MaxiFunds Limited, Okechukwu Unegbu, said there is nothing to celebrate about the increase in capital inflow for now.
According to him, the fact that all economic indices remain high and continue to increase is a cause for worry.
“Look at all indices measuring rates: inflation, interest rate, Bond rates are very high. Entrepreneurs and other investors cannot borrow from the banks because the Central Bank through the Monetary Policy Committee has increased the MPR (monetary policy rate). Similarly, looking at the foreign exchange rate you see the Naira declining against the Dollar almost daily. So, what is there to celebrate,” he queried.
According to him, celebrating capital importation growth should be its impact on the various indices driving the nation’s economy such as inflation, interest rate, FX, and production.
He noted that the capital inflow in the first quarter has not resulted in any improvement in the economy. He said the absence of any foreign direct investment (FDI) recorded during the period is worrisome.
“The manufacturing sector is almost sliding into comatose,” he stated, insisting that “The monetary policy side where the CBN takes precedence is okay, but the fiscal side is not helping matters. Look at the things enjoyed by the various fiscal side people, the legislature, the judiciary, and the executive is too high. Though we can appreciate the fact that we are progressing, the question is: are we progressing in the right direction?”
Implication on banking recapitalisation
Unegbu expressed worries that the ongoing banking recapitalisation exercise may not achieve the necessary objective.
“Most of those banks may not succeed in raising the much-needed funds, because the expected reward from the capital market at this time is low. That apart, the number of banks coming to raise funds, and the amount they are looking for is huge.
“It is something we need to talk about, do you know how much the banks want to raise? The critical question is: can the economy afford to provide that for now? Imagine the fact that the personal income of Nigerians is depleting every day, companies are exiting, people are losing jobs, and inflation is high, so how do you expect people to invest when they cannot afford to save?
“How many Nigerians have more than enough now to save in the form of investment when people are crying of hunger all around, so for me, I think the time is not right. But perhaps, they know something we don’t know, because simple economics teaches that investment is made out of savings, so when there is not enough to take care of immediate and basic consumption such as food, how do you expect investment to be the priority of the people?
“You and I know that many companies are folding up, foreign companies are exiting which means that people are not earning, so when people don’t earn, how would they get the money to invest in the recapitalisation project?” he queried.
On his part, the Chief Executive Officer of Globalview Capital Limited, Aruna Kebira, agreed with his peers that portfolio investors cannot salvage the economy.
“The foreign (portfolio) investors are not interested in the welfare of our economy, what they are interested in is what they are going to get in return for their investment that is called, ‘what is in it for me’” he noted.
He added that the portfolio investors are just taking advantage of the current situation and government policies, “Remember this guys have software and they have knowledge of the market better than us, whether we like it or not,” he said
Explaining how the market works, he said, “When the rate in the fixed income market begins to increase, if you see foreign investment coming into the market and less going into the capital market is because it’s going into the fixed income market and the money market. An average foreign direct investor knows that the interest rate that is prevalent in the fixed income stage cannot be for long.
“There is no government that can sustain such a rate for long that in a little while whether by hook or by crook, by trial or error or commission, that the government will find a way to lower the interest rates. At the time they are lowering the interest rate, knowing fully well that the foreign investors are not buying these bonds to keep, they are buying them to trade, so the moment the rates begin to come down, imagine if the rates come down from 20 percent to 15 percent, they would have made a humongous profit,” he stated.
Kebira advised that managers of the nation’s economy should rather focus on boosting productive activities across every sector, especially the agriculture industry.
According to him, the economic crisis Nigeria currently faces is due to a collapse in the supply side and, by implication, the absence of real economic productivity.
“There is a collapse on the supply side of the economy; there is a total collapse on the supply side of the economy. That is why every time they release the inflation rate, the food inflation rate is always the highest; it has gotten to about 50 percent now.
“The implication is that if the government does not empower farmers, either by the provision of seedlings or otherwise, and most importantly by solving the insecurity problem, so that farmers can go back to their farms, this problem will continue, they can only try to manage it but it will persist,” he said.
He added that in the past during harvest season, prices of foodstuff would become cheap because there is a glut, stressing that as it is currently, there can never be a glut in this country now, because what is harvested would not satisfy demand.
“It is when supply exceeds demand that we have a glut but what we currently have and will continue to have is scarcity and you know the simple law of demand and supply says when demand overrules supply prices are bound to increase.
“If they don’t do that farmers can now increase productivity as well as tackle the insecurity so farmers can go back to their farms, cultivate, and produce more than enough to bring them to the city because there is no road infrastructure. Unless the government takes care of these issues the problem of food scarcity will persist.
“Do you know that between Okpela and Ekpoma in Edo State, trucks carrying agricultural products spend days on the road such that their goods perish, so they cannot get the goods to Lagos or Abuja and can’t transport their harvest to the market? If these problems are addressed, then food inflation which is the main driver of the current inflation we are seeing will come down. By the time the CBN sees that the inflation rate is lower than the interest rate they will have no option but to bring down the interest rate, as the MPR is coming down, the rate in the money market will also be coming down,” he stated.
On when to expect a boost in the capital market, he said, “When the rate in the money market and the fixed income market are coming down, investors will come to the capital market as they will see that they can get better yield from it than what is available in the money market. Then there will be a migration from the money market back to the capital market.”
For researchers from Cordros Securities Limited, the situation remains dicey as they perceive that even the portfolio investors credited for boosting foreign capital inflow into the country in the first quarter may be trending cautiously in the days ahead.
Reviewing the NBS reports in its weekly market analysis, they wrote, “Looking ahead, we believe that foreign investors will adopt a cautious stance in the near term, closely monitoring the activities of the apex authorities in improving FX liquidity and ensuring sustainability. Notwithstanding, if local FX liquidity improves, market rates increase, and investors can easily repatriate capital, then foreign capital inflows may increase over the short-to-medium term.”
Impact of government policies on capital inflow
“What we should be looking for are foreign direct investments that can be here for a long time. They create jobs, they are more patient, and they offer what is called ‘Patient Capital, while portfolio flows are only good for the short term”
During the first quarter of 2024, the Central Bank of Nigeria’s Monetary Policy Committee announced a measured increase in the benchmark interest rate by 600 basis points to 24.75 percent from 18.75 percent in 2023, in response to the prevailing inflationary environment. This decision was based on expectations for liquidity injections into the economy from policy developments and their potential impact on inflation.
Consequently, the rising rates made fixed-income and money market instruments more attractive to investors. Elsewhere, the equities market reached historic levels, gaining 39.8 percent due to robust corporate earnings, dividend declarations, government-led market reforms, and heightened interest from both domestic and foreign investors.
Furthermore, the “Other Investments” category ranked second among the broad categories with $1.18 billion worth of inflows, accounting for 35 percent of the total inflow. This was due to an impressive 66,806% year-on-year improvement in other claims and a 165.3 percent year on year rise in total loans for the period to $30.1 million. On the contrary, currency deposits for the period nosedived by 100 percent year on year from $1.84 million, though there was a 98.6% increase from the prior quarter. Foreign direct investment during Q1 2024 saw a 150.4 percent year-on-year increase to $119.2 million but declined by 35.2 percent due to the total investment into equity ($119.17 million) and other capital ($10,000).
The top source of capital inflows was the United Kingdom with $1.81 billion, followed by South Africa ($582.3 million), the Cayman Islands ($186.2 million), Mauritius ($179.6 million), and the United Arab Emirates ($101.8 million).
Lagos remained the top destination for investment with $2.78 billion or 82.4 percent of the total inflow into the state, followed by Abuja with $593.6 million and Ekiti state with $100,000, as investors continued to avoid other sub-nationals due to limited investment prospects.
According to the Abuja-based statistics office, the Banking sector recorded the highest inflow with $2.07 billion, representing 61.24 percent of total capital imported in Q1 2024. This was followed by the Trading sector, valued at $494.93 million (14.66 percent), and the Production/Manufacturing sector with $191.92 million (5.68%). Conversely, the oil and gas and drilling sectors saw little to no investment, while the marketing, consultancy, and construction sectors received inflows valued at $60,000, $300,000, and $610,000 respectively.