(Response to: “More foreign investors leave as FPI flows crash by 228%”)
Writing in the Vanguard Newspaper on 31 August 2020, Peter Egwuatu presented a narrative of recent outflows of Foreign Portfolio Investment (FPI) from Nigeria. There are two main reasons why this article is both misleading and incomplete.
First, one of the most enduring effects of the COVID-19 pandemic is the massive exodus of Portfolio Investors from Emerging Market Economies (EMEs) back to their safe havens in the U.S. and U.K.
Rather than explain that, as expected, Nigeria is not immune to these effects, the article suggests that capital outflows from Nigeria are a reflection of domestic policy missteps. Second, although the rate of capital outflows has been more than normal, Nigeria has done far better than many peers, a fact that the article clearly omits. Let us consider these points in greater detail.
If there was ever a time when the word “unprecedented” had a real meaning, it would be the times we are currently facing in the aftermath of the COVID-19 pandemic. As aptly exemplified by the headline of the IMF’s June 2020 World Economic Outlook Update, “A Crisis Like No Other, An Uncertain Recovery,” the crisis has crippled the entire global economy, leaving no country unaffected in significant ways.
The OECD, in its COVID-19 and Global Capital Flows report, similarly notes that the pandemic “has escalated into an unprecedented global crisis, accompanied by plummeting oil prices,” during which “exchange rates of key emerging market economies (EMEs) dropped substantially.”
The aforementioned OECD report goes on to state that what is “exceptional about capital flow dynamics during the COVID-19 crisis are the scale and speed of the outflows.” Likewise, in April 2020, the Institute of International Finance (IIF) labelled this as a “record-breaking outflow episode” for Emerging Market Economies (EMEs). This is a global trend of international investors swiftly repatriating their capital from EMEs back to safer havens, such as the U.S.. Nigeria itself only represents a minor part of this trend.
Indeed, for a group of EMEs comprising Argentina, Brazil, Chile, Egypt, India, Indonesia, Malaysia, Mexico, Nigeria, Pakistan, Peru, Thailand, Turkey, and South Africa, leading global economic indicators powerhouse, CEICData.com, reports that total net outflows amounted to about -US$73.560 billion in Q1 2020, compared to total net inflows of US$72.007 billion in Q1 2019, which represents a flow reversal of -202 percent.
Given that transparency is required for credibility, it is also instructive to note that the author failed to evidently reveal the source of his data, while repeatedly referring to the Nigerian Stock Exchange in the report.
Perhaps, this omission was to hide the fact that these numbers only measure equities and do not cover developments in the debt market. In contrast, the more comprehensive information contained within the Central Bank of Nigeria’s Balance of Payments statistics reveals that the total Net Foreign Portfolio Investment Liabilities recorded a net outflow of -US$8.335 billion in Q1 2020, which is the latest available data. This represents a -158 percent decline from the US$14.444 billion of net inflows in Q1 2019.
Although this outcome leaves much to be desired, Nigeria performed much better when compared to other EMEs on the same metric. Nigeria’s -158 percent decline not only fares better than the EMEs weighted average of -202 percent decline, it is also better than major EMEs such as Brazil (-307 percent), India (-229 percent), Argentina (-209 percent), Thailand (-464 percent), South Africa (-412 percent), and Egypt (-218 percent).
It is not a coincidence that half-year 2020 GDP figures tell a similar story: Nigeria’s -6.1 percent decline in the second quarter of 2020 is more moderate compared to the steep contractions recorded in many other countries including U.S. (-32.9 percent), U.K. (-20.4 percent), France (-13.8 percent), Germany (-10.1 percent), Israel (-28.7 percent), Japan (-7.8 percent), India’s (-23.9 percent), and South Africa (projected to be over -40 percent).
Therefore, in contrast, to what is suggested by yesterday’s article, capital flight is not specific to Nigeria nor is Nigeria the worst performer in this regard. Rather the unprecedented economic contraction and withdrawal of portfolio investment from emerging markets is reflective of the severe global financial conditions caused by the COVID-19 pandemic.