By Chinwendu Obienyi
Despite a lacklustre interest by foreign investors towards the Nigerian economy, analysts have projected that capital importation is expected to hit $6.2 billion.
According to them, the projection is hinged on the unification of FX rates and pivot to a managed float system that keeps rates close to its fundamental value and less aggressive capital controls in the second half (H2) of 2023.
The projection comes on the heels of recent data from the National Bureau of Statistics (NBS) which revealed that capital importation into Nigeria declined by 28.0 per cent year-on-year (y/y) to $1.13 billion in Q1 2023 compared to $1.57 billion recorded in first quarter (Q1) of 2022 and $1.06 billion recorded in the fourth quarter (Q4) of 2022.
Disaggregating the data, Foreign Portfolio Investment (FPI) experienced a significant decline of 32.2 per cent y/y to $649.3 million. This is the lowest level seen in the past six years, on the back of decrease in inflows from money market investments (-79.6 per cent) and bonds (-2.9 per cent). However, investments in equities witnessed a substantial growth of 559.5 per cent quarter-on-quarter (q/q: 4,472.0 per cent). As a result, the share of FPI in total capital inflows decreased to 57.3 per cent as against 60.9 per cent recorded in Q1 2022.
Also, capital inflows from other investments fell 5.4 per cent y/y to $435.7 million despite a 0.8 per cent increase in loans (99.6 per cent of the sub-component). Nonetheless, the share of other investments in total capital importation rose to 38.5 per cent from 29.3 per cent in Q1 2023. Furthermore, Foreign Direct Investment (FDI) fell 69.3 per cent y/y to $47.6 million while its size in the total capital inflows dropped to 4.2 per cent from 9.9 per cent.
This trend of consistent decline underscores the growing lack of confidence by foreign investors in the Nigerian economy – a development, analysts linked mainly to the misaligned monetary and fiscal policy choices over the past 3 years.
Commenting on the development, analysts at Afrinvest Research in their weekly report, while lauding the initiatives taken by the Federal government and the Central Bank of Nigeria (CBN), said the recent measures can help reverse the ugly trends of low foreign capital and remittance into the country.
They added that poor business climate stemming from weak infrastructure, policy mismatch, insecurity, and increasing poverty were some of the challenges that undermined the attractiveness of capital inflows, especially FDIs and remittances.
“Therefore, the introduction of policies to support business growth, increase crude oil production and diversify FX earnings would allow the CBN to reduce its reliance on capital controls to manage FX reserves and, in turn, the free flow of capital would reduce the apathy of foreign investors to Nigeria.
In light of recent initiatives by the new government, we maintain our base case capital importation projection of $6.2 billion for FY 2023. This is hinged on unification of FX rates and pivot to a managed float system that keep rates close to its fundamental value and less aggressive capital controls in H2 2023”, They said.
For their part, analysts at Cordros Research, said they expect foreign capital inflows to increase over the short-to-medium term and added that investors will adopt a wait-and-see approach, for now, looking for signals on the CBN’s plans to start clearing the FX backlogs and boost FX supply to support the market in the near term.