in previous quarter (Q1-24) is a sign of weaker foreign investor confidence in the economy, financial market analysts have said. According to the experts, two critical factors, unfavourable macroeconomic conditions and lingering foreign exchange (FX) liquidity constraints, induced broad-based contraction across foreign direct investments in the country.
Giving insight into Nigeria’s latest capital importation decline, analysts at Lagos based Cordros Capital Ltd stated in an emailed note on Friday that, “looking ahead, we still expect foreign investors to remain cautious in the near term, closely monitoring the activities of the apex authorities in improving FX liquidity and ensuring sustainability. “Notwithstanding, if local FX liquidity and carry trade improve, and investors can easily repatriate capital, then foreign capital inflows may increase over the short-to-medium term.”
The breakdown provided by the financial market experts shows a broad-based contraction across foreign direct investment, which declined by -75.0 per cent to $29.83 million in second quarter while foreign portfolio investment declined by -32.3 per cent to $1.40 billion. Another category of capital importation classified as “other investments” also slowed down -1.0 per cent to $1.17 billion in the second quarter under review.
However, the National Bureau of Statistics (NBS) report showed that capital importation rose substantially by 152.8 per cent on a year-on-year basis, primarily driven by a low statistical base effect from the corresponding period of 2023. But a usually reliable financial market analyst, who did not want his name in print, explained that the year-on-year growth was driven by the initial hype and expectations around President Bola Tinubu’s economic reform, which, he said, failed to lift the economy because the reform, according to him, was not holistic.
“The Bola Tinubu reform is essentially market reform that merely addressed demand side of the market without addressing the supply side. And the market is made up two sides, demand and supply. And both sides must be commensurately addressed to strike an equilibrium other there will be a gap,” he said. According to him, foreign fund managers have expert investment advisors who are quite conversant with financial market situation around the jurisdictions where they operate, and are more sensitive to prevailing risks in any market.
“Therefore, when the foreign investors slow down and get more cautious, there are risk signals, and as such they are trying to be very cautious. They prefer to make single digit profit or less, than to lose their funds,” the expert stated, stressing that Nigeria has high reputational risk and is in the global FATF list. As the capital importation is declining, so also the participation of domestic and foreign investors in Nigeria’s capital market.
According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market declined by 22.8 per cent month-on-month to N379.52 billion in August as against N491.61 billion in July. The breakdown showed that collections from foreign transactions (15.1% of gross transactions) edged lower by 0.1 per cent month-on-month to N57.47 billion in August as against N57.52 billion in July, signaling the third consecutive month of contraction.
In the same vein, domestic transactions (84.9% of gross transactions) also dropped by 25.8 per cent month-on-month to N322.05 billion in August as against N434.09 billion in July due to contraction of 33.5 per cent month-on-month and 12.9 per cent month-on-month across inflows from retail and institutional investors respectively.
“We think the lower participation in the local bourse reflects the dual impact of higher yields in the fixed-income market and lingering FX liquidity constraints,” said Cordros Capital analysts. Concluding on a note of caution, the analysts stated: “Buying activities will likely be constrained by elevated yields in the fixed-income market following the MPC’s tight monetary policy stance. On the other hand, we expect FX liquidity constraints and naira volatility to limit foreign investor participation in the equities market.
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