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Capital Imports - Capital inflows slow to a trickle

Maintaining the plunging trend in capital inflows in the wake of stringent controls, capital imports declined 8.98% q/q to hit a fresh low of $647 million. This compares unfavorably to $2.66 billion in the second quarter of 2015. Year-on-year, Foreign Portfolio Investment (FPI) – investment in financial assets –declined 88% (vs. 85% decline in Q1) as capital flight continued, largely in response to the unsustainable currency peg that was eventually lifted in June. Meanwhile, a 24% q/q decline in Foreign Direct Investment (FDI) reflected the diminishing economic prospects in the quarter, with GDP growth at -2.06%. Alongside this, higher medium term investment risk led to a reduction in the channels of capital imports (only 4 out of 9 channels recorded any capital importation). Nevertheless, Other Investment, mainly in the form of loans, was largely unchanged during the surveyed period.

With the country in a recession, a potential catch-22 lurks – where capital imports remain low in the response to weak growth and economic recovery stalls as a result of persistent dollar scarcity. To combat this cycle, we believe that MPR will need to be hiked further and more accommodative FX directives implemented by year-end.