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NIGERIA Q3'17 Capital Importation - Christmas comes early as Q3’17 inflows spike

Christmas comes early as Q3’17 inflows spike

From $2.7 billion in H1’17, capital inflows in Q3’17 standalone hit $4.1 billion, representing the largest quarterly capital inflow since Q4’14 ($4.5 billion) and 80% of all capital inflows in 2016. This impressive quarter was primarily driven by a $2.0 billion quarter-on-quarter (q/q) increase in foreign portfolio inflows in Q3’17. We attribute stronger capital inflows to the greater confidence in the health of Nigeria’s foreign exchange market (FX); a view supported by the steady increase in FX reserves (from $26 billion in December 2016 to $34 billion in October 2017) despite sustained Central bank of Nigeria (CBN) dollar injections. Also, the “Investors & Exporters” window (“NAFEX” fixing) has been a notable success, leading to a significant improvement in liquidity and transparency in the FX market. We also believe that foreign investors would have cheered a gradually improving economic environment and accelerating GDP growth – Q1’17: -0.9% y/y, Q2’17: 0.7% y/y, Q3’17: 1.4% y/y.

Foreign portfolio inflows were the most significant change in Q3’17 as they recovered from their post-2015 slump. Standalone Q3’17 FPI ($2.8 billion) was more than double the H1’17 value ($1.1 billion) and 1.5x times higher than the entire 2016 figure. Equity inflows ($1.9 billion) were the big movers, recording their highest inflows since Q3’14 ($3.8 billion) as foreign investors flocked to Nigeria’s equity market following the introduction of the NAFEX fixing in mid-April. This is consistent with Nigerian Stock Exchange (NSE) data which shows a rise in foreign participation from ₦144 billion in Q2’17 to ₦353 billion in Q3’17.

In 2018, we expect continued FX stability and improvements in the broader economic climate to entice further capital inflows. This view is predicated on stability in oil prices and volumes during the year, and any adverse shock in this area would likely spook foreign investors. Other headwinds loiter in the background; namely, underlying political risk from a pre-election year and rising global interest rates channeling capital away from emerging markets.