…Growth rate falls 78 percentage point
…Dominance of TBs increases to 61%
By Babajide Komolafe
A CLOUD of uncertainty hangs over foreign investment inflow into Nigeria in 2020 following the 78 percentage point decline, year-on-year, YoY, in growth rates recorded in the nine months ending September 2019.
This is compounded by the increased dominance of investment in treasury bills (TBs), which accounted for 61 percent of foreign investment during the period from 51 percent in the corresponding period of 2018.
This uncertainty is reflected in the divergence in analysts’ outlook on foreign investment growth in 2020, with some analysts projecting that growth in foreign investment could be positive or negative in 2020, while others assert that the sharp slowdown in growth will continue in 2020, citing the Central Bank of Nigeria (CBN) exclusion of local investors from the Open Market Operations (OMO) TBs, and Moody’s downgrade of Nigeria’s outlook to ‘negative’ from ‘stable’.
Others are the recent warning by the World Bank on the possibility of Nigeria sliding back into recession, as well as the unfavourable global macroeconomic conditions, as factors that will aggravate the decline in foreign investment inflow in 2020.
Foreign investment in 2019
Financial Vanguard analysis of the quarterly Foreign Capital Importation (foreign investment) reports by the Nigeria Bureau of Statistics (NBS) show that foreign investment inflow into the country from January to September 2019 rose by 34 percent, YoY, to $19.6 billion, from $14.67 billion in the corresponding period of 2018.
However, the 34 percent growth in 2019 represents a 78 percentage point underperformance when compared to the 114 percent growth achieved in 2018 against the corresponding period of 2017.
This is even as the report shows that Foreign Direct Investment (FDI) component fell by 36 percent, YoY to $666.4 million in the first nine months of 2019, from $1.04 billion in the same period of 2018.
But, Foreign Portfolio Investment (FPI) and Other Investment (OI) rose by 38 percent and 43 percent, YoY, respectively to $14.4 billion and $4.6 billion in 2019 from $10.4 billion and $3.23 billion in 2018.
Dominance of TBs
The NBS data also showed increased dominance of Money Market instruments (treasury bills, TBs) in the foreign investments. In the first nine months of 2019, foreign investors bought $11.95 billion worth of the nation’s TBs, representing 59 percent, YoY, increase when compared to $7.5 billion worth of TBs bought in the same period of 2019.
As a result, the share of foreign investment in TBs in the total foreign investment inflow rose to 61 percent in 2019 from 51 percent in 2018 and 14 percent in 2017.
Financial Vanguard analysis shows that the huge growth in foreign investment through TBs was driven by high yield on TBs especially in the first quarter of 2019 (Q1’19), when yields on one year TB averaged 13.9 percent.
Consequently foreign investors bought $5.9 billion worth of TBs in Q1’19, representing over 500 percent, quarter-on-quarter, increase when compared with the $983 million worth of TBs purchased in the preceding quarter, Q4’18.
As a result, total foreign investment into the country jumped by 252 percent, quarter-on-quarter, QoQ, to $8.48 billion in Q1’19, from $2.14 billion in Q4’18. This trend was however reversed in Q2’19, following 190 basis points decline in one year TBs to 12 percent, prompting amount of TBs purchased by foreign investors to fall by 40 percent, QoQ to $3.5 billion in Q2’19.
Consequently, total foreign investment into the country fell by 32 percent, QoQ to $5.8 billion in Q2’19. The decline persisted in Q3’19 with another 6.8 percent, QoQ, decline to $5.4 billion.
Analysts’ projections for 2020
Analysts believe that the above trend, namely decline in foreign investment growth in first nine months in 2019 and the QoQ decline in Q2’19 and Q3’19 will persist in 2020.
According to Lukmon Oloyede, analyst with Zedcrest Capital Limited, “The slowdown in growth should repeat again in 2020, mostly for two reasons: first 2017 was more of recovery year for Nigeria in terms of capital flows as investors had just resumed confidence in the Nigerian markets following the opening of the Investor’s and Exporter’s (I&E) FX window allowing the USD/Naira to be appropriately priced thus improving liquidity.
“Secondly, we believe the current policies put in place by the CBN restricting some participation in OMO bills trading would be seen by some foreign portfolio investors as a negative as it reduces the liquidity for those products. This should lead to some investors with lower risk appetites and more concerns for liquidity to repatriate and stay away from the Nigerian markets in the interim.”
Yinka Ademuwagun, Research Analyst, United Capital Plc, made a similar projection citing apprehension over illiquidity in the OMO market by foreign investors and the recent downgrade by Moody’s.
He said: “Going into 2020, a few factors point to the continued slowing of capital imported into the Nigerian economy. In terms of Foreign Portfolio Investment (FPI), the CBN successfully barred local participants from the OMO market, offering juicy yields solely to retain FPIs. However, there are a few issues with this approach. Liquidity risk has heightened, a major concern for FPIs, as only themselves and banks (for proprietary reasons) can trade in OMO bills, limiting market size and price discovery. With this kind of market terms, including the declining trend in external reserves amid the CBN’s continued intervention, complications could arise, should these class of investors decide to exit.
“Additionally, the recent downgrade on the outlook for Nigeria’s economy from stable to negative, by Moody’s, could increase risk-off sentiments going forward. Apart from money market instruments, inflows into equity have been lacklustre, given the poor performance of the local bourse, which has also spurred a flight to safety in government bills.
“On the other side of the spectrum, Foreign Direct Investment (FDI) will continue to remain on the side-lines, given the lack of critical infrastructures, such as electricity and good road networks, to ease cost pressures and boost profitability. Bearing all the points above in mind, we expect the declining trend to persist at least to H1-20, as the two-tier system being operated by the CBN becomes unsustainable.”
However, Lukman Otunuga, Senior Research Analyst at FXTM and Oritsejimi Ogbobine, Senior Manager at Agusto & Co, opined that foreign investment growth could be negative or positive in 2020, depending on global macroeconomic development and economic reforms by the federal government.
According to Ogbobine, “Growth in foreign capital importation in 2020 will be largely hinged on macro-reforms in the economy in 2020. The most germane of these reforms will be in the oil and gas sector. The key question will be: How much reform is Nigeria willing to undertake to attract FDIs in 2020?”
Otunuga on his part said: “Given how the lion share of inflows is from portfolio investments, there is a risk of FCI declining further amid unfavourable global macroeconomic conditions. Renewed signs of economic weakness in Nigeria due to volatile oil prices and persistent trade disputes could dampen investor appetite towards the nation’s assets. Alternatively, rising commodity prices, a breakthrough in US-China trade talks and signs of economic stability in the nation will be positively reflected in capital importations.”
But, Kunle Ezun, a senior research analyst with Ecobank Nigeria expressed a different projection, stressing that foreign investment growth will be strong and positive, ranging from 100 percent to 150 percent in 2020.
He stated: “I have a strong opinion that the economy will record robust growth in foreign capital importation in 2020. I foresee a growth within a range of 100 percent to 150 percent in 2020. The improvement in macro-economic environment as underscored by the Q3’19 GDP growth of 2.28 percent, vis-à-vis the implementation of the ERGP is expected to help strengthen the performance of the economy.”
Speaking further, he listed other factors that will enhance foreign investment into the country to include: Early passage of 2020 budget: CBN’s monetary stimulus to support growth related sector; and fiscal stimulus to support economic growth.
However, all the analysts projected that increased dominance of TBs in total foreign investment will persist mostly due to the high yield offered on OMO TBs by the CBN.
According to Oloyede of Zedcrest Capital, “Because the yield on OMO bills remain the highest available in the market, we expect the foreign portfolio investors who do remain invested in Nigerian assets to focus on OMO bills thus supporting an increase in the dominance of money market instruments in FCI.”
Similarly, Ademuwagun of United Capital Plc, said, “In 2020, the CBN is likely the sustain its OMO sale to foreign portfolio investors (FPIs) at attractive rates, a decision that may continue to keep FPI interest dominant in money market funds.
“However, we do not expect the level of interest to be as high as what was recorded in Q1’19, especially as FPIs price in the recent World Bank and Moody’s concerns.”
Agreeing, Ezun of Ecobank explained: “While the country desires huge growth in FDI to enhance GDP growth performance, the quantum of FPIs in the composition of the foreign capital importation would remain relatively high, partly due to high yielding government (OMO Bills) available to the FPI.”