September 24, 2022

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Foreign investments fall by 81%, interest rate rises

Capital importation into Nigeria has fallen by 81.46 per cent ($6.91bn) from $8.49bn in the first quarter of 2019 to $1.57bn in the corresponding quarter of 2022, according to data from the National Bureau of Statistics.

Based on the NBS’s ‘Nigerian Capital Importation’ reports for the first quarters of 2019, 2020, 2021, and 2022, there has been a steady decline in capital inflows into the nation.

Total capital inflow fell by 31.01 per cent from $8.49bn in Q1 2019 to $5.85bn in Q1 2020; it fell by 67.45 per cent to $1.91bn in Q1 2021; and further declined by 17.46 per cent to $1.57bn in Q1 2022.

According to the statistics body of the nation, capital importation data is obtained from the Central Bank of Nigeria and includes imported physical capital, such as equipment, and financial capital importation.

It explained that it is divided into three main investment categories: foreign direct investment, portfolio investment, and other investments.

In Q1, 2019, the largest amount of capital imported into the nation was through portfolio investment. The banking sector dominated inflows that quarter and the United Kingdom was responsible for most of the inflows. In Q1 2020, portfolio investments continued to dominate inflows while banking and the UK also retained their respective leadership positions.

In Q1 2021 and Q1 2022, portfolio investments was responsible for most of the capital inflows into the nation, while banking raked in the highest and the UK provided the most.

During a recent Monetary Policy Committee, the CBN Governor, Godwin Emefiele, disclosed that an unconducive domestic investment climate is impacting capital inflows into the nation.

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He said “The net FDI has been very low while there was a substantial reversal of FPI flows from the country in the fourth quarter of 2021.

“This poor trend is apparently due to the unconducive domestic investment climate which appears to be worsening. In February 2022, such inflows stood at $17.6bn compared with $66.4bn in February 2021, the highest since December 2020.

“The risk factors include increased uncertainty surrounding the inflation outlook in the advanced economies, uncertainty over tapering plans by the US Fed, the regulatory developments in China and its real estate market-related systemic risk, and uncertainty regarding the Russia-Ukraine war and the resulting sanctions imposed on Russia. These factors have weighed down investor sentiment.”

In its recent, ‘Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual’ report, the world bank revealed that rising global interest rates is going to lead to more net portfolio outflows in 2022, leading to a decline in overall capital importation.

It said, “With rising global interest rates, Nigeria will likely experience net portfolio outflows in 2022. FPI inflows grew significantly in 2021, exceeding $6bn (1.4 per cent of GDP).

“This followed a significant decline in 2020 in the wake of the COVID-19 pandemic when net outflows reached $3.6bn (0.8 per cent of GDP). However, with the continued hiking of interest rates in the US and other advanced economies due to rising inflation, net portfolio inflows to Nigeria are expected to drop under 1 per cent of GDP in 2022. The pre-election environment is also likely to add to the hesitance of portfolio investors, keeping net inflows low.”

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The global bank added that FDI is critical to economic growth since it contributes to increased productivity, innovation, and technology transfer. It said FDI supports the diversification of the economy and helps domestic firms export more.

Commenting, associate professor of economics at the Pan Atlantic University, Olalekan Aworinde, said, “If there is an increase in interest rate in developed markets, FDI inflows into developing economies will fall.

“This is because investors will always want to go to environments where they will have high returns on investments. Once US interest rates increase, the inflow of FDI into African and developing countries will decline.”

The Chief Executive Officer, Cowry Assets, Johnson Chukwu, added, “It has already reduced principally because when interest rates go up in advanced economies, investors who were arbitraging (that is, borrowing at a lower cost to invest in emerging markets at a higher yield) won’t be able to do that arbitrary opportunity vanishes.

“For instance, if the interest rate is two per cent in America, you can borrow at that rate and come into an emerging economy and invest at a higher percentage. Even when depreciation of the local currency is factored in, there would still be yield.

“Once rates start going up, the opportunity to arbitrage is almost eliminated because equilibrium would almost be attained. Because the yield that they will get investing at home will almost be the same as the one in emerging economies, they won’t have the motivation to invest abroad.

“A lot of portfolio investors have already left. We won’t see so much in outflows again, but we would witness a reduction in inflows since the window for arbitrage gain has closed.”

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