By Babajide Komolafe
Nigeria has severally enjoyed the sweetness and bitterness of Hot Money.
This is money from foreigners seeking quick returns. It is called Foreign Portfolio Investment. Hence the money is invested in shares, via the stock market; bonds and treasury bills (TBs). These are investment instruments which can be quickly sold or exchanged for cash, mostly within 24 to 48 hours.
The foreign portfolio investor is just interested in the gains on prices of the shares bought or interest rate on treasury bills and bonds.
Hence, they move money into countries that offer high interest rate on TBs and bonds, or stock market with undervalued shares of well performing companies. However this is subject to stability of the country’s exchange rate, and availability of foreign exchange as well as policy that allows them to easily move their money out of the country at the shortest possible time.
Hot Money is helpful as it provides ready inflow of dollars, especially when a country is experiencing decline in dollar revenue from export and in external reserves. Hot money, dollar inflow from foreign portfolio investors, helps to boost the external reserves and maintain stability of the exchange rate and even appreciation in some cases. Hot money invested in TBs and Bonds also provides opportunities for government to borrow from foreign investors. Hot money invested in shares helps to revive the stock market, leads to increase in share prices which help domestic investors either to preserve or increase money invested in the stock market.
Nigeria is presently enjoying all the above goodies of Hot Money.
Data from National Bureau of Statistics (NBS) reveals that inflow of Hot Money into Nigeria rose by 791 percent, to $2.8 billion in the third quarter (July-September) of last year, from four year low of $314 million in the first quarter (January-March) of 2017.
Most of the Hot Money, $1.9 billion (68%) were used to buy shares on the stock market.
As a result the total values of shares (market capitalisation) on the Nigeria Stock Exchange (NSE) rose astronomically to N13.6 trillion at the end December 2017 from N9.24 trillion at the end of December 2016
Also, Nigeria’s external reserves rose to $38.765 billion at the end of December 2017 from $25.84 billion at the end of December 2016.
However, the country has severally tasted the bitter pills of Hot Money.
For example, Hot Money into Nigeria declined from historic high of $5.13 billion in third quarter of 2014, to $1 billion in fourth quarter of 2016. During this period, the total values of shares on the NSE fell to N9.24 trillion at end of 2016 from N11.48 trillion at the end 2014.
As the foreign portfolio investors demanded dollars to move out their money out of the country, the external reserves fell from $34.47 billion at the end of 2014 to $25.84 billion at the end of 2016.
This, in addition to other factors, led to the sharp depreciation of the naira during this period. From N169 per dollar in third quarter of 2014, the naira depreciated in the parallel market to N450 per dollar at the end of 2016.
This resulted into inflation, sharp increase in prices of goods and services and eventually economic recession.
Nigeria’s latest romance with Hot Money has persisted into the 2018.
Within three weeks, the NSE capitalisation rose to N16.15 trillion, the highest in 35 years.
Also, foreign investors have pumped in $5.4 billion dollars into the economy since the beginning of the year, through the Investors and Exporters (I&E) window of the foreign exchange market.
While the romance is needed and very helpful in sustaining the nation’s recovery from economic recession, we should bear in mind, it would not last. At a time convenient for them, foreign portfolio investors will move their dollars out of the country, not giving a damn to the damage it may cause the economy. The best every Nigerian especially policy makers, can do is to prepare for that time, so as to limit the impact of the outflow of Hot Money from Nigeria.