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NIGERIA Q2'18 Capital Importation - Easy Come, Easy Go: Hot Money To Cool Before Polls

Easy come, easy go: Hot money to cool before polls                                                                      

Second quarter figures from the National Bureau of Statistics (NBS) show a 13% dip in capital imports into Nigeria during the period, although at $5.5 billion, capital imports for the second quarter were still 3x higher y/y and larger than total capital imports in FY’17 ($5.1 billion). Looking at the half-year period underscores the year-on-year improvement: H1’18 capital imports ($11.8 billion) were 4x larger than H1’17 ($2.7 billion). This improvement has been driven by a surge in foreign portfolio inflows (8x higher y/y) and other investments (2x higher) as foreign direct investments were comparatively flat y/y. As a result, FPI constituted the bulk of capital imports in H1’18 - 73%, while FDI share declined from 18% to 4%. Therefore, although capital imports were weaker q/q in Q2’18, capital inflows to Nigeria have been reasonably strong in 2018, albeit with most of it classified as hot money in the form of portfolio flows.

Most of the improvement in FPI in the last 12 months has been hot money, and these flows would likely slow down (or reverse) as uncertainty deepens ahead of the 2019 elections. In the near-term, there is very little to excite investors in the equity market, although fixed income yields are set to become more attractive amid a hawkish monetary slant and rising inflationary fears. Meanwhile, the global picture is unwelcoming, darkened by a brewing trade war and ongoing monetary tightening in the United States (another rate hike expected in September). Therefore, we expect capital inflows to take a hit in the rest of the year, but given its recent composition, the biggest impact of this development would be felt in foreign exchange liquidity and the capital markets.