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NIGERIA Q3'16 Capital Importation

• Following a dismal first half of the year, total capital imports into Nigeria reached $1,822 million in Q3’16 (Q1’16: $711 million, Q2’16: $1,042 million) on the back of a sharp uptick in foreign investments in financial assets (foreign portfolio inflows). Although this figure still compares unfavorably to Q3’2015 (down 34% y/y), the improvement is consistent with recent trend as Q3 has accounted for the largest quarterly share of capital imports since 2014. Apart from Foreign Portfolio Investment (up from $337 million to $920 million in Q3), the other two categories – Foreign Direct Investment (FDI) and Other Investment – also recorded quarterly rises of 85% and 8% respectively whilst also declining on a yearly basis.
• There are other reasons for why capital imports persist at such low levels. Though nominal returns to investment remain elevated, real return has been eroded by inflation (Q3 average: 17.5%). The downward trend in month on month inflation suggests that we are nearing a peak but further naira depreciation lurks in the horizon – creating another deterrent to foreign investment. In addition, the visibility of Nigerian fixed income instruments remain lower after the eviction from the JP Morgan Emerging-Market Bond Index. Finally, the illiquidity of the FX market is a huge impediment as it discourages investors who worry for the return of their capital. Amidst all this, FMDQ reported a total turnover of $36.7 billion in the FX spot market for the 9-month period up to September 2016, compared to a yearly turnover of $84.9 billion in 2015.
• FX market liquidity and inflationary pressure, amidst broader economic weakness, will continue to be urgent drivers of capital flows. A successful Eurobond offering could boost confidence in Nigeria’s fiscal authorities and set the scene for greater capital flows moving into next year. Sticking to the current tight monetary stance will also keep yields attractive but more necessary is a resolution to the prevailing FX challenge. Longer term, we envisage capital flows will respond to improvement in economic fundamentals, infrastructure and institutional frameworks, all of which will be of particular importance to attract FDI.