By Chinwendu Obienyi
Amid mounting economic uncertainty and persistent currency volatility, foreign investors are pulling back from Nigeria’s financial markets, leading to a sharp decline in capital inflows. The latest figures from the Nigerian Exchange Limited (NGX) reveal a worrying trend that accentuates the challenges facing the country’s economy.
In July 2024, foreign inflows dropped to N37.57 billion, a slight but significant decrease of 1.77% from the N38.25 billion recorded in June. This reduction highlights the growing hesitancy among foreign investors, who are increasingly wary of the unstable exchange rate and the broader economic environment in Nigeria.
The NGX’s Domestic and Foreign Portfolio Investment report, which tracks monthly trading activity, shows that domestic investors are now playing a far more dominant role in the market. In July, domestic inflows totaled N210.25 billion, while outflows reached N223.84 billion, dwarfing the contribution of foreign investors.
Domestic transactions accounted for an overwhelming 88% of the total market activity, compared to just 12% by foreign investors. The total value of transactions in the domestic equities market surged by 38.7% from June’s N354.55 billion to N491.61 billion in July. However, this figure represents a 30.07% decrease compared to the same period last year, when transactions totaled N702.98 billion, reflecting the broader economic difficulties.
A closer look at the data reveals a stark contrast between domestic and foreign investment behaviors. Domestic transactions increased by 59.38% from June to July, rising from N272.36 billion to N434.09 billion. In contrast, foreign transactions plummeted by 30.02%, dropping from N82.19 billion (approximately $55.88 million) in June to N57.52 billion (about $35.69 million) in July.
The trend of declining foreign participation is not new; it has been ongoing for several months, driven by the unpredictable foreign exchange market and challenging global economic conditions. Domestic investors have increasingly become the backbone of the market, taking on a larger share of the burden in sustaining activity on the NGX.
As of the last trading week, Nigeria’s foreign exchange reserves had declined for the third consecutive week, with gross reserves falling by $63.50 million to $36.44 billion. Although the naira saw a brief period of appreciation, reaching N1,570.14/$1 in the Nigerian Autonomous Foreign Exchange Market (NAFEM), overall turnover at the official window decreased by 16.2% to $664.29 million, with trades occurring within a wide band of N1,470.00/$1 to N1,603.00/$1.
Market experts are increasingly concerned about the long-term implications of these trends. They predict that the Nigerian bourse will become more reliant on domestic investors in the coming months, with foreign investors remaining on the sidelines due to the ongoing economic instability. Mike Eze, CEO of Crane Securities Ltd, noted that this shift could fundamentally change the dynamics of the NGX, making it more sensitive to domestic economic conditions and the behavior of Nigerian investors.
“The increase in domestic participation could be seen as a positive sign of growing confidence in the local market, but it also highlights the risks associated with a market that is heavily dependent on domestic sentiment,” Eze commented. “The decline in foreign inflows is a clear signal that more needs to be done to stabilize the economy and create an environment that attracts foreign capital. Without this, the market may struggle to maintain its momentum.”
Analysts at Cordros Research echoed these concerns, suggesting that domestic investors will likely continue to dominate the market in the short to medium term. They pointed out that the elevated yields in the fixed-income market and ongoing foreign exchange liquidity challenges are likely to keep foreign investors on the sidelines. Additionally, high interest rates in advanced economies further complicate the situation, making it difficult for Nigeria to draw foreign investment.
As Nigeria navigates the complex economic challenges, the role of domestic investors will be crucial in sustaining market activity. However, the need for economic stabilisation and confidence-building measures remains urgent to restore foreign investor interest and ensure long-term market stability.