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It is hot money that is bringing dollars into Nigeria, not the more economy-friendly Foreign Direct Investment (FDI), and that should worry fiscal authorities.
Propelled by a 304 percent surge in portfolio inflows to $7.3 billion compared to the previous year ($1.8 billion), total capital imported into Africa’s largest economy more than doubled to a 3-year high of $12.2 billion last year from $5.1 billion in 2016, data agency, the National Bureau of Statistics said Thursday.
Portfolio investors haven’t pumped so much money into Nigeria since 2014, according to data compiled by BusinessDay, when oil prices were relatively higher and the economy was growing at an average of 6 percent.
The high-interest rate environment of 2017 lured portfolio flows, even as higher oil prices and a more stable exchange rate added to the attraction.
At first glance, the trend looks good for Nigeria which until now has struggled to attract enough dollar flows since a lengthy slide in global oil prices and subsequent collapse in foreign investor appetite for Nigerian assets.
Take a second look and there isn’t much to cheer, as Foreign Direct Investment (FDI) into Nigeria slumped to a four-year low of $981 million in 2017. That’s also the first decline in FDI since BusinessDay started compiling data in 2013.
By comparison, Egypt attracted $8.7 billion in the fiscal year ended June 2017, while South Africa attracted $3.2 billion, according to data from the United Nations Conference on Trade and Development (UNCTAD).
Much smaller economies like Kenya attracted $394 million in 2016, according to most recent data by UNCTAD, while Ghana attracted $1.3 billion from January to September, according to provisional figures by the Ghana Investment Promotion Centre (GIPC).
The worry with dominant portfolio inflow or hot money is that it is only a trigger away from storming out at the first sign of danger, as was the case for Nigeria in 2016.
The dominance paints a picture of external sector vulnerability and reinforces why the Central bank has had to keep interest rates at a record high to get portfolio investors to stay, according to Bismarck Rewane, the chief executive officer at Lagos-based advisory services firm, Financial Derivatives Company (FDC).
“Portfolio flows are volatile and less stable compared to FDI, so this is not entirely good news, as it means the stock, bond and currency markets are vulnerable,” Rewane said in an interview with BusinessDay.
“If the $7.3 billion portfolio flows are pulled out of our external reserves, it leaves $34 billion. That may not break the bank, but it is a trend that must be managed,” Rewane added.
Critics say the government has not created enough bankable projects to stimulate FDI flows, as a yawning infrastructural deficit sometimes suppresses the allure of Africa’s most populated country.
“The government must do more to create an enabling environment for FDI,” one investor told BusinessDay.
“It’s easier to get a Wall Street investor to put hot money in stocks and bonds than to attract capital into the real sectors of the economy.”
Unlike FDI which is more difficult to repatriate, hot money come and go like hurricanes, leaving in its wake a battered currency and financial system volatility.
Back to back declines in portfolio inflows in 2015 and 2016 contributed to the country’s first recession in 25 years and put pressure on the naira- which would go on to plunge over 50 percent against the dollar after a devaluation in June 2016.
Inflation also quickened to an 11-year high of 18 percent, double the CBN’s preferred band of 6-9 percent.
To curtail inflation and stem the tide of portfolio outflows, the apex bank has kept interest rates at a record high 14 percent since July 2016.
Since then, inflation has cooled, sliding the 12th straight month to 15.13 percent in January 2018, while the economy exited recession in the second quarter of 2017 and posted a full-year growth of 0.8 percent compared to a 1.6 percent contraction in 2016.
Foreign inflows have responded to rallying oil prices and improved dollar liquidity in Nigeria, as inflows through the CBN turned positive in 2017 for the first time since 2012, according to data compiled by BusinessDay and sourced from a report on the apex bank’s website that put net inflows at $12 billion.
Increased inflows have rubbed off on external reserves (which has crossed the $40 billion mark for the first time since 2015) and helped stabilise the exchange rate which has been partly helped by the creation of a new window (Nafex) in April 2017 where stock and bond investors can access dollars at a market rate as against the capital controls that prevailed in 2016.
The naira gained 0.2 percent to exchange at N360 per US dollar Thursday at the nafex window, according to trading platform, FMDQ.
Foreign portfolio inflows have ballooned since then, helping the stock market to a three-year high.
Portfolio flows accounted for 60 percent capital imports, the single largest share compared to FDI and Other Investments.
Despite the annual slump, however, FDI rose 223 percent to $378 million in the fourth quarter from $117 million in the third quarter.
That’s the largest quarterly capital since the third quarter of 2015, according to data compiled by BusinessDay.
An improved ranking on the 2018 World Bank ease of doing business hasn’t gone unnoticed among foreign direct investors, a foreign investor told BusinessDay.
“The government seems committed to improving the business climate but there is much more work to be done to address policy flip-flops and bureaucratic red tape,” the investor who declined to be named said.
Nigeria jumped 24 places to 145 of 190 countries on the World Bank ease of doing business index, helping it to a top ten list of global reformers.
A phone call to Yewande Sadiku, the executive secretary of the Nigerian Investment Promotion Commission (NIPC) went unanswered.
The NIPC introduced a host of tax, tariff and sector-specific incentives last year to boost FDI.
Sadiku told BusinessDay last month of plans to further boost FDI in 2018, from hosting direct investors summit to reviewing the NIPC Act to reflect changing dynamics that can lure investments.
LOLADE AKINMURELE
