Capital Importation: Foreign Inflows Expand Despite Underwhelming FDI

The National Bureau of Statistics (NBS) released Q1:2018 capital importation data earlier today and unsurprisingly, capital imported into the country simultaneously expanded Year-on-Year (Y-o-Y) and Quarter-on-Quarter (Q-o-Q) for the fourth consecutive quarter as foreign investors further increased holding of Naira assets. Total capital inflows surged 594.0% Y-o-Y, reflecting low-base effect of Pre-I&E window era, and rose by a modest 17.1% Q-o-Q to US$6.3bn. However, unlike the previous quarter where all components of capital importation expanded Q-o-Q, the improvement in foreign inflows in Q1:2018 was largely driven by growth in Foreign Portfolio Investments (FPI) which fully offset Q-o-Q weaknesses in Foreign Direct Investments (FDI) and Other Investments. 

FPI spiked 14.6x & 31.3% Q-o-Q to $4.6bn, contributing 77.3% to total capital imported, on the back of strengthening investor confidence on Nigeria’s external sector stability and short term growth outlook following rebound in oil production and oil prices. Yet, there was a noticeable shift in FPIs risk exposure as inflows to the equity market fell 29.1% to US$701.6m while Bonds and Money Market rose 8.5% and 61.9% to US$335.9m and US$3.5bn respectively. We believe increased foreign interest in the fixed income market contributed to the bullish sentiment in Q1 while tapered interest in equities was a drag to equity market performance in the period. On the other hand, Foreign Direct Investments (FDI) into Nigeria remains underwhelming as it fell 34.8% Q-o-Q to US$246.6m, accounting for 3.9% of total capital inflows from 23.3% in Q1:2017 and 7.0% in Q4:2017. Similarly, Other Investments comprising of loans, trade credits, currency deposits and other claims declined 2.3% Q-o-Q to US$1.5bn due to weaker flows from undefined “other claims”.

As stated in our April Flashnote, FDI is vital source of capital for emerging and developing countries given the associated benefits to the economy in the form of increased productivity, employment generation and growth; hence, even as we acknowledge the positive knock-on impact of higher foreign inflows on FX market stability, we note that the inability of the economy to capitalize on the ongoing “Virtuous Cycle” of external sector stability to attract long-term patient capital (FDI) is a missed opportunity in truly diversifying the economy, encouraging capital formation and engendering sustainable growth. We believe polity stability as well as the implementation of key structural reforms (encompassing the energy sector, institutions and fiscal structure) will continue to be a key determinant of FDI in the medium term.

In the near term, we anticipate capital inflows into the economy to remain stable despite downside risks of polity stability as the 2019 general elections approaches and recent emerging market risk-off trade. Our outlook is based on 1) improving domestic economic fundamentals which is expected to narrow credit spreads on local debt instruments and sustain demand for fixed income assets, and 2) FGN external deficit financing strategy.

Headline Inflation to Moderate for 15th Consecutive Month in April 2018
The NBS is expected to release Consumer Price Index (CPI) data for April in the coming week ahead of the MPC meeting coming up between May 21 and 22. We expect Headline Inflation (Y-o-Y) to print at 12.6%, marking the 15th consecutive decline in Inflation since it peaked at 18.7% in January 2017. The moderation will be majorly base-effect driven, as we expect the impact of seasonality to lead to a subtle increase in M-o-M price growth.