Foreign Investment Drops as Investors Sideline Nigerian Economy

Foreign Investment Drops as Investors Sideline Nigerian Economy

Foreign investment inflows dips again as Nigerian economy remains less attractive to investors on account of capital control brought about foreign exchange scarcity.

Analysts believe that inability to repatriate funds has weaken foreign investors’ sentiment in addition to the mispricing of the local currency, Naira.

Portfolio investment was more affected, having the worst contraction on record following a 91.4% quarter on quarter decline and 98.1% year on year plunged to $35.2 million.

Meanwhile, local equities market performance was lifted gaining more than 50% in 2020 despite foreign portfolio investors’ exit amid low fixed income yield and depreciating exchange rate.

Hitting a three (3) year low, total capital importation contracted by 59.7% year on year to $9.7 billion in 2020 from $23.9 billion in 2019.

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The disaggregated full year data shows that Foreign Portfolio Investment (FPI) was the largest source of capital import at $5.1 billion 2020 Afrinvest said in a report.

Notwithstanding, foreign portfolio investment declined 68.6% year to reach the weakest level since 2017.

Afrinvest attributes the weakness in FPI inflows to the bleak external conditions and Nigeria’s currency crisis which reduced investors’ participation.

Also, capital import from Other Investments declined 47.5% year on year to $3.5 billion from $6.7 billion, weakened by the 49.2% year on year contraction in capital import from Loans.

Analysts however noted that Foreign Direct Investment (FDI) inflows was the only bright spot as it increased 10.1% year on year, though still below 2014 level.

“We believe FDI weakness reflects the volatile macroeconomic environment and weak medium to long-term economic prospects.

“Going forward, we expect foreign investment to remain weak due to the weak prospects of an improvement in the external environment and the currency challenges”, Afrinvest said.

For Q4:2020, total capital imported into Nigeria dropped 71.9% year on year and 26.8% quarter on quarter to $1.0 billion, same level as recorded in Q2:2016.

The quarter on quarter decline was across all the key components of the total imported capital excluding Other Investments which rose 22.5% quarter on quarter to $783.3 million, translating to a 52.9% decline year on year.

FPI recorded the worst contraction on record, down 91.4% quarter on quarter and 98.1% year on year to $35.2 million.

FDI was down 39.4% quarter on quarter and 2.3% year on year, with equity flows accounting for 99.0%.

The decline in capital importation is mainly attributed to the heightened risks brought by the COVID-19 which resulted in weak sentiment in emerging markets and foreign capital outflows.

“Similar to the case in 2016, the introduction of capital controls amid FX illiquidity has left foreign investors stuck in the market and made Nigeria less attractive as an investment destination.

“The wide premium between exchange rates at the parallel market and the I&E window also suggests a mispricing of the currency, which makes investors and businesses reluctant to bring in capital”, Afrinvest noted.

Foreign Investment Drops as Investors Sideline Nigerian Economy