Q3 Performance: 2016 Capital Importation Improves but Lags Medium Term Trend

The National Bureau of Statistics (NBS) earlier this week released Q3:2016 Capital Importation data, estimating total capital imported for the period at US$1.8bn, up 74.8% Q-o-Q from US$1.0bn recorded in Q2:2016, yet 33.7% below US$2.7bn in Q3:2015 and 72.1% weaker than US$6.5bn in Q3:2014. The second consecutive improvement in investment capital inflows (on Q-o-Q basis) is consistent with the optimism that greeted the adoption of a flexible FX framework (or adjustment of exchange rate peg) by the CBN in June 2016 as well as uptick in fixed income yield environment which bolstered foreign investors’ appetite for domestic investment securities.

The Q-o-Q improvement was driven by all components of capital importation as Foreign Direct Investment (FDI), Foreign Portfolio Investment (FDI) and Foreign Loans rose 84.8%, 172.8% and 7.9% Q-o-Q to US$340.6m, US$920.3m and US$561.1m respectively. Despite the Q-o-Q improvement, further breakdown indicates all components of capital importation significantly lagged medium term trend, affirming our earlier position that investor confidence is yet to be fully restored following the supposed shift in FX policy and attractive market valuation of financial securities and real assets. The sub-optimal level of capital inflows is also reflected in subsisting low level of liquidity in the FX market. We also note that foreign portfolio investors’ exposure to Nigeria is now more geared towards less risky and high yielding fixed income securities, with bonds and money market inflows beating portfolio equities inflows (which fell 28.1% Q-o-Q) for the first time in the capital importation data series.

Notwithstanding expected drag in equities portfolio inflow in the short term, we expect capital importation to continue to show improvement on Q-o-Q basis, buoyed by Loans (particular the recently approved US$600.0m AFDB budget support facility and planned Eurobond issuance for Q4:2016) and Fixed Income investments inflow. However, medium term drivers of capital importation include FX market liquidity development, monetary policy outlook and FGN negotiation for multilateral credit facilities.

October Inflation Estimate
Ahead of the scheduled release of October Inflation report on Monday 14th November, we expect a flattish (if not marginally slower) M-o-M CPI growth; in line with recent trend which has seen the index growth decelerate for 4 consecutive months to 0.8% in September 2016.  Nonetheless, Headline Inflation is forecast to breach the 18.0% mark to settle within the range of 18.1% - 18.3% due to low base impact. Inflationary pressure has been subsiding in recent months due to: 1) seasonal effect of farm produce harvest, 2) relatively stable FX rate at the CBN/Interbank market and 3) stable energy and fuel costs. However, inflation expectation is expected to stay high in the short term as further adjustments to fuel prices and FX rate remain inevitable.