Foreign investors have found something new to cheer about Nigeria, after being led to think Africa’s largest economy had yielded to their concerns and was ready to adopt a flexible exchange rate mechanism in June 2016.
Their latest love affair is with the new Investors’ and Exporters’ window, as deduced from the trend in the country’s capital importation in the second quarter of 2017.
Powered by a 145 percent increase in portfolio inflows, foreign investment into Nigeria crossed the billion dollar mark in the second quarter of 2017 (Q2’17) for the first time since investors cheered a naira devaluation in June 2016 by pouring money into cheap bonds and stocks.
The month of June 2016 was supposed to mark the end of capital controls in Nigeria.
Before investors found that the move would become a false start to true liberalisation, they cheered the policy shift by pouring in some $USD660 million that month, more than double the amount imported in the preceding months of April ($USD305 million) and May ($USD125 million) helping to lift capital imported in that quarter (Q2 2016) to $1.04 billion.
It all came to a screeching halt following the CBN’s open resistance to allowing the naira, already down some 41 percent to N280 per USD from N199/USD, weaken uncontrollably against the dollar.
“It is a confirmation that the exchange rate at the I &E window is more reflective of the naira’s market value and that is inspiring investor confidence,” said Bismarck Rewane, CEO of Lagos-based financial advisory firm, Financial Derivatives Ltd.
The naira closed at N361 per US dollar at the I & E window on Thursday, August 24, according to data by trading platform, FMDQ Securities exchange, recording a total turnover of $146 million for the day. It has tightly hovered around N305 per dollar at the official CBN window.
The country took a step closer this month, to unify its multiple exchange rates, by allowing banks to use the rate at the I &E window for investors when quoting the naira, rather than the official rate.
“Portfolio investors have cheered the policy shift and have brought in more money, but we must be careful, as any sign of policy instability could send those flows back,” Rewane said.
A total of $1.79 billion in foreign investment flowed into Africa’s biggest economy in Q2’17, according to state-funded National Bureau of Statistics (NBS). That’s 95 percent higher than the capital imported the previous quarter and is a 44 percent increase, compared to the same period of last year.
This however remains below average quarterly inflows before the crash in oil prices in 2014.
The main driver of the quarterly growth in the said quarter was portfolio investments, the NBS said in a statement Wednesday.
“We attribute the remarkable growth to the introduction of the investors and Exporters window in April, which was implemented to boost liquidity in the FX and attract foreign investors who previously had concerns regarding timely repatriation of dividends and capital,” Cardinal Stone analysts said in an August 23 note to clients.
“Prior to the introduction of the IE window, capital imported in March stood at $243 million, as compared to an increase of 131 percent to $563 million in April,” the Lagos-based research analysts noted.
“Given further improvement in transparency at the IE window, we expect sustained capital inflows for the rest of the year.”
Foreign capital inflows to Nigeria hit a nine-year low of $5.1 billion dollars in 2016, as the Central Bank kept a tight lid on the naira exchange rate.
While oil producers from Russia to Kazakhstan allowed their currency weaken last year, in line with falling oil prices, Nigeria introduced capital controls which spooked foreign investors, led to an acute dollar shortage and caused a dent on the country’s investment appeal.
As the squeeze worsened, the country opted for a system of multiple exchange rates, before the CBN finally announced it was adopting a currency float starting June, but the CBN soon lost its cool as the naira weakened, resorting once again to an artificial peg.
As dollar shortages weighed on the economy which entered its first recession last year, in 25 years, and with sustained pressure on the apex bank by investors who had their funds trapped in the country because they could not access dollars for repatriation, Emefiele launched the Investors and Exporters window in April and has since redeemed his image in the investor community.
Emefiele told reporters at the last monetary policy meeting, that the window had handled over $4 billion till date.
Nigerian stocks have gone from worst performers globally, to best performers, and their year to date return was 36 percent as at Thursday, August 24, according to data tracked by BusinessDay.
External factors like improved oil prices have also contributed to the rise in foreign investment into Nigeria, according to Tajudeen Ibrahim, head of research at investment firm, Chapel Hill Denham securities Ltd.
“Given our improved capital account, there are signs we would record an overall balance of payment surplus this year,” Ibrahim said by phone.
LOLADE AKINMURELE
