During the week, the National Bureau of Statistics (NBS) published its quarterly capital importation report for Q2:2017. Expectedly, the data published reflected improved investor confidence in the Nigerian economy since the turn of the second quarter against the backdrop of improving macroeconomic condition and FX policy reforms implemented by the Central Bank of Nigeria (CBN) in April 2017. This culminated in a rebound in capital inflows in the period to a level last seen in Q3:2016 when the CBN first announced a move to a flexible FX market structure. In Q2:2017, total capital inflows surged 97.3% Q-o-Q to US$1.8bn from US$0.9bn in the prior quarter and improved 72.0% Y-o-Y from US$1.0bn in Q2:2016. Foreign Portfolio Investment (FPI) accounted for the largest proportion (43.0%, US$0.8bn) in Q2:2017, followed by Other Investments (41.7%, US$0.7bn) and Foreign Direct Investment (15.3%, US$0.3bn). By Sectoral contribution, inflows classified as Shares (52.0%, US$0.9bn), Oil & Gas (10.6%, US$0.2bn) and Telecommunication (9.7%, US$0.1bn) attracted the bulk of capital inflows.
In our view, the jump in foreign inflows is unsurprising given the recent development in the FX market, particularly the launch of the Investors’ & Exporters’ (I &E) FX window in April. The largest volume of foreign inflows was recorded in May, underlining the positive impact of FX market transparency and flexibility on investor confidence. The knock-on effects of strong portfolio flows is already evident in performance of the domestic Equities market which have historically been driven by FPIs – as investors took advantage of the erstwhile attractive valuation of the market, thereby driving the benchmark index YTD return to 36.4% (25/08/2017) from a negative position of -6.2% in the first week of April. Furthermore, the impact of the increased foreign inflows was also evident in real sector performance, as Manufacturing Purchasing Managers’ Index (PMI) readings for all the months in Q2:2017 showed expansion in the sector.
Nonetheless, the broad-based nature of rekindled confidence in the economy, we note that recovery is still fragile and sustaining the current trend in the short term is hinged on 2 key factors:
- Flexibility of the I&E FX window: Since the launch in April, turnover of transactions in the window has exceeded US$7.6bn but the key attraction of the segment remains the fact that rates are market determined. Hence, any moves to distort the current operations of the window could lead to a repatriation of funds. In addition, the improved FX liquidity in the economy is broadly driven by spate of FX intervention by the CBN - which has been bolstered by relatively stable oil prices and improved production volumes. Thus, we expect investors to continue to watch the two variables in taking investment decisions.
- Global Funds Flow: The increasing odds of tighter monetary policy by systemic central banks in the medium term remains a threat to funds flow in emerging and frontier markets including Nigeria. The impact could further be amplified if the CBN proceeds with easing monetary policy as currently advocated by trade groups and politicians.
Therefore, we believe there is a need to complement the recent improvements with efforts to boost competitiveness and minimize external sector vulnerabilities in order to reduce the effect of oil earnings shocks on economic performance.