The microscopic predator (COVID-19) hunting the world has caused severe slowdown in global growth in 2020. On the back of aggressive isolation measures and nationwide lockdowns in major economies and states of the country, the first quarter of the year was characterized by weak consumer demand, steep declines in global oil prices (WTI hitting the negative territory, Bonny-Light around $10), and bearish stock markets (NSE – All Share Index closed the quarter at 21,300.47 points, down by 32.11% from Q1 2019). Although Nigeria didn’t record her index case till February 27th, the first quarter (Q1) 2020 report of capital importation was gloomy.
In a recent publication by the NBS, total value of capital imported into the country stood at $5,854.38m in Q1 2020. This represents an increase of 53.97% compared to Q4 2019 and -31.19% decrease compared to the first quarter of 2019. Foreign Portfolio Investment (FPI) accounted for 73.61% ($4,309.47m) of total capital imported, followed by Other Investment, which accounted for 22.73% ($1,330.65m) of total capital.
Investopedia defines FPI to be “the entry of funds into a country where foreigners deposit money in a country’s bank or make purchases in the country’s stock and bond markets, sometimes for speculation”. Although, Foreign Portfolio Investment declined by 39.36% Q1 2020 on Q1 2019, it increased significantly from the last quarter of 2019 by 128.79% ($1,883.58m to $4,309.47m). This surge can be attributed to several factors, chief of which is Portfolio Investment in Money Market Instruments. Money market is an organized exchange where participants lend and borrow large sums of money for one year or less. Portfolio investment in Money Market Instruments (OMO bills, T-Bills) accounted for 58.73% of total capital imported ($3,438.54m). This represents 131.93% increase from the last quarter of 2019 although lesser than the same period in 2019 (41.55%). This was as a result of CBN freezing out of local investors from the OMO auctioning giving room to foreign investors only which saw the rate for OMO-bills rise around 12% – 18% in the first quarter of 2020.
Following Money Market Investment closely is Foreign Portfolio Investment in Equity. FPI in Equity accounted for 10.93% of total capital imported ($231.22m) representing 388.23% growth from the last quarter of 2019. FPI in Bonds accounted for the least contribution in portfolio Investment for Q1 2020 ($231.22m). Investments in Bonds surged by 388.23% from the last quarter of 2019 ($47.36m to $231.22m), the highest since Q2 2019 ($316.28m), this can be ascribed to foreign inflows in FGN Bonds as well as Eurobonds, although still 59.23% lower than Q1 2019.
Trade Credits, Loans, Currency Deposits and other Claims accounted for 22.73% ($1,330.65m) of total capital imported. Trade credit stood at $0.05m, the lowest form of foreign inflow, the first inflow since Q2 2019. Other claims and Loans equal $769.99m and $559.79m accounting for 13% and 10% respectively. This on the back of high interest rate in the country, even when other Central Banks were cutting the rate, (MPR stood at 13.5% until the recent downwards review).
Other Claims by foreign investors have been on the increase since 2018. It alone experienced positive growth Q1 2019 on Q1 2020 (92.97%). Currency Deposits ($0.82m) has been on a free fall, it experienced -72.13% decline in Q1 2020 when compared to Q4 2019. This on the back of depreciation of Naira against the USD before the recent devaluation by the CBN.
By sector, Capital importation by Banking dominated Q1 2020 reaching $2,990.21m (51.08%) of the total capital imported, followed closely by Financing (22.77%) and Shares (13.96%). These three sectors have taken a large chunk of inflows (over 70% since 2018) with sectors like Agriculture (0.93%) and Construction (0.20%) craving for serious attention. Lagos, the city that never sleeps, remains the top destination of capital investment in Nigeria accounting for 87.72% of the total capital inflow in Q1 2020. The state has been experiencing significant growth in capital importation raising by 58.9% from the last quarter of 2019 ($3,231.83m) to Q1 2020 ($5,135.49m). Government policies, ease of doing business, available market, and high consumer spending (over 20 million inhabitants) have contributed largely to this growth.
Foreign Direct Investment FDI, accounted for 3.66% ($214.25m) of total capital imported in Q1 2020. FDI is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. FDI fell by 16.71% Q4 2019 on Q1 2020 largely caused by fall in Equity financing. Equity financing and Other form of foreign capital constitute this segment. Equity and Other Capital fell by 14.31% and 94.67% respectively, owing to capital flight by foreign investors from emerging markets due to unforeseen economic shock caused by the pandemic. Investors needed to move their funds to safe havens or at least advance markets to protect their capital from eroding in value.
Moving forward, with the huge gap in infrastructural deficit, high level of unemployment, increasing poverty rate, the need to attract FDI has never been like before. Nigeria has embarked on serious deficit financing over the past few years either to compliment short fall in revenue or financing government expenditure. Its total public debt stands at N27.4Trillion (Dec 31st, 2019) and expected to double the end of 2020 coupled with a B negative rating by S&P, B2 negative by Moody and B rating by Fitch credit rating agencies, which is expected to increase Nigeria’s cost of debt.
The need to attract investment is however needed like never before. This it can achieve by creating investors friendly environment such as improving the ease of doing business, ensuring stable macro – economic environment, tackling insecurity menace across the country and introducing decisive measures to discourage corruption at all tiers of government. Being the largest economy in Africa with over 200million people, domestic market is readily available with enabling investment environment. Government’s expenditure needs FDI to compliment it to achieve the desired level of economic growth and improved standard of living.
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