FREE

NIGERIA Q4'16 Capital Importation - Nigeria records tepid capital inflows in 2016

Total capital imports into Nigeria were 15% lower in the final quarter of 2016 ($1.55 billion), following a minor spike in Q3’16 ($1.82 billion). The Q4’16 figure is roughly flat year-on-year (y/y), primarily as a result of a very low base in Q4’15 ($1.56 billion) when quarterly capital imports dipped below $2 billion for the first time since 2011. The composition of capital imports changed significantly during the review period: foreign portfolio inflows (FPI) sank to $284 million (Q3’16: $930 million) and were overtaken by Other Investment – totaling $920 million from $561 million in the previous quarter – as the largest source of capital imports. The final major category Foreign Direct Investment (FDI) maintained its modest quarterly level of $345 million (Q3: $341 million).

Looking at the picture for the whole year, capital inflows are down markedly, declining from $9.62 billion in 2015 to $5.12 billion in 2016. We point to the sharp uptick in inflation and a slump into recession as relevant causes of weaker foreign investor sentiment in Nigeria. Perhaps more importantly, uncertainty over FX policy and persistent devaluation risk provided strong disincentives for capital inflows during the year. FPI was the main sore point during 2016, falling from $6 billion in 2015 to $1.82 billion in the last year. Equity instruments, traditionally the largest recipient of FPI, dropped from $4.66 billion in 2015 to $0.86 billion in 2016 as the Nigerian Stock Exchange (NSE) All-Share Index generated a 6.17% negative return. The dearth of inflows was significant as foreign transactions on the NSE nearly halved from ₦1,025 billion in 2015 to ₦517 billion in 2016. Similarly, inflows into bonds (down 49%) and money market instruments (down 2%) fell in 2016, despite a high-yield environment for most of the year

The rise in oil prices and expected improvement in domestic oil production leave the Central Bank of Nigeria (CBN) in a stronger position to defend the naira and should induce greater confidence in short-term exchange rate direction. However, the large parallel market spread (c.60% premium in January 2017), persistent dollar scarcity, and use of ad hoc capital controls will continue to make foreign investors wary. The preservation of the FX market status quo may encourage some risky or temporary flows, but clarity and visibility in economic policy and strategy are required to spur a material and sustainable rebound in capital inflows. As such, we expect capital inflows to remain insignificant compared to oil earnings and remittances during the year.