Sub-Saharan Africa’s (SSA) three largest investment hubs are witnessing a turn of fortune that has set Nigeria up for increased foreign fund inflows next year, after a sloppy 2016 that saw Africa’s largest economy attract the least flows in nine years.
While Nigeria suffered, South-Africa and Kenya, with the largest and third largest capital markets (stock and bond) in SSA, attracted record inflows from investors that were dumping Nigerian assets in 2016, as its economic slowdown became exacerbated by capital controls from the Central Bank.
Net foreign inflow into South Africa hit a 17-year high in 2016, rising some 817 percent to 22 billion rand ($USD 1.7 billion) from 2.4 billion rand ($184 million) in 2015, according to data obtained from the South African National Treasury.
In Kenya, net foreign portfolio flow climbed to a two-year high of 5.8 billion Kenyan Shillings in 2016 ($55 million), rising 529 percent from 916 million Kenyan Shillings ($8.9 million) in 2015 and 63 percent from 3.5 billion shillings ($34 million) in 2014.
Portfolio inflows into Nigeria declined 70 percent to $1.8 billion in 2016 from $6 billion the year before, the lowest inflows in nine years, according to data compiled by BusinessDay.
However, Nigeria’s challenges have somewhat dissipated this year, following the launch of a market-driven window in April, called the Investors’ and Exporters’ (I&E) window and a return to economic expansion.
In a marked break-away from a staunch resistance to allow the naira trade at a market rate determined by traders, the Central Bank has tolerated some naira weakening against the dollar on the new window and that has boosted foreign exchange liquidity and rekindled investor appetite for Nigeria.
The naira traded at N359 per dollar Tuesday, according to data obtained from the website of trading platform, FMDQ.
“Nigeria has been a good turnaround story from a market perspective, as the launch of the I&E FX window helped attract large portfolio flows into high-yielding T-bills and bonds,” said Samir Gadio, head of Africa strategy and FICC Research at Standard Chartered bank.
“We think there is still decent carry in Nigeria’s short-dated yields and perhaps medium-term potential for moderate duration gains in 2018,” Gadio said in an emailed response to questions.
“At this point, FX risks in Nigeria appear to be subdued, which should anchor investor appetite even if yields decline next year,” Gadio said.
Africa’s largest oil producer has turned the corner on a turbulent 2016 that saw the economy contract for the first time since 1991, following a slump in global oil prices and local production.
Gross Domestic Product (GDP) expanded 1.4 percent in the third quarter of 2017, according to data from the National Bureau of Statistics (NBS), helped by growth in the oil and agricultural sectors.
In the third quarter of 2017, foreign portfolio inflows to Nigeria jumped to the highest since 2014, rising 200 percent to $2.7 billion from $920 million in the third quarter of 2016.
On a quarterly basis, that’s a 259 percent leap from $770.5 million in the second quarter of 2017, according NBS data.
“For equities we are now overweight Nigeria, neutral on SA (but very tempted to go overweight) and underweight on Kenya,” said Charles Robertson, chief economist at Moscow-based Renaissance Capital.
“Politics is not that significant an issue in Kenya – but bank shares are above where they were before the interest rate cap was imposed – and this is a constraint on the market,” Robertson said in an emailed response.
While Nigeria is enjoying a rebound, the recent trends in South-Africa and Kenya flash signals of a quiet 2018 for fund flows as the other major SSA investment hubs are not inspiring the same level of optimism towards Nigeria.
In what captures the waning foreign investor appetite in Kenya this year, net inflow is currently negative at 11,400 shillings in the nine months through September 2017, according to data obtained from the Nairobi Stock Exchange.
South Africa has also fallen out of favour this year. In the third quarter of 2017, net flows slumped to negative 141 million rand from 11.8 billion rand in the comparable period of 2016.
South Africa’s fixed income market has been under pressure after the Medium Term Budget Policy Statement reading on 25 October, as yields backed up significantly.
New-York based credit ratings agency, Standard and Poor’s (S&P)’s downgrade of South Africa’s LCY rating to BB+ on 24 November has resulted in its exclusion from the Barclays Global Aggregate bond index, even though the market will likely be able to absorb the outflows.
Moody’s, another member of the big three ratings agency, did not take action Nov.24, but has put South Africa under review for downgrade within a three-month window.
Analysts say if Moody’s downgrades South Africa further, its bonds will be excluded from the World Government Bond Index, which could trigger larger outflows.
However, funds with emerging market exposure would still go to South-Africa, even if they are likely to underweight the country, according to Wale Okunrinboye, head of fixed income and currency research at Ecobank Transnational Incorporated.
“Whoever is looking at Nigeria must have looked at South-Africa, given that the latter is the most liquid market in Africa,” Okunrinboye said by phone.
In Kenya, a benign market rate regime will likely be supported by accommodative monetary policy and the Kenyan Shilling resilience.
Traders say bond yields are perhaps too low to attract portfolio investors for now.
“But the risk of curve steepening could increase on supply pressure in the remainder of FY18 as the authorities are behind their domestic borrowing target,” one market player said.
“A potential relaxation of the lending rate cap would also likely put upward pressure on fixed income yields if credit extension recovers gradually.”
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