The total capital imported into Nigeria contracted 78.6% y/y and 77.9% q/q to $1.3bn in Q2:2020, the weakest level since $1.0bn in Q2:2016. The sharp decline in Q2:2020 can mainly be attributed to the heightened risks brought by the COVID-19 pandemic which resulted in weak sentiment in emerging markets and foreign capital outflows.
Similar to the case in 2016, the introduction of capital controls amid FX illiquidity has left foreign investors stuck in the market and made Nigeria less attractive as an investment destination. The wide premium between exchange rates at the parallel market and the I&E window also suggests a mispricing of the currency, which makes investors and businesses reluctant to bring in capital.
The disaggregated data show that Other Investment including loans, trade credits and currency deposits was the largest source of capital import at $761.0m in Q2:2020. Notwithstanding, Other Investment declined 48.6% y/y and 42.8% q/q to reach the weakest level since Q4:2018. Foreign Portfolio Investment (FPI) moderated 91.1% y/y and q/q to $385.3m in Q2:2020, the lowest since Q1:2017. We attribute the weakness in FPI inflows to Nigeria’s currency crisis which has reduced investors’ participation in the OMO market.
FPI flows into money market instruments contracted 90.6% y/y and 90.3% q/q to $332.1m, flows to equities moderated 89.3% y/y and 91.7% q/q to $53.3m while there was no inflow into the bond market from $231.2m in Q1:2020 and $316.3m in Q2:2019. Foreign Direct Investment (FDI) fell 33.4% y/y and 30.7% q/q to $148.6m, the weakest since Q3:2017. We believe FDI weakness reflects the volatile macroeconomic environment and weak medium to long-term economic prospects. Going forward, we expect foreign investment to remain weak due to COVID-19 related risks and currency challenges.