Posted Wed, Jun 3, 2020 6:45 AM

NESG Q1’2020 Capital Importation Alert

Overall investment inflows into Nigeria dipped by 31.2% year-on-year in Q1’2020

According to the National Bureau of Statistics (NBS), foreign investment inflows for Q1’2020 fell sharply by 31.2% to $5.9 billion from $8.5 billion in the corresponding quarter of 2019 (Q1’2019). The year-on-year decline in investment inflows is the first since the last recession in 2016. This could be attributed to weaker domestic economic fundamentals - slower economic growth (stood at 1.9% in Q1’2020), rising inflation (averaged 12.2% in Q1’2020), declining global oil prices (down 66.9% to close the quarter at $22.8/barrel), as well as, dwindling external reserves in Q1’2020 (stood at $33.5 billion) - relative to the respective performances in Q1’2019. The slowdown in total foreign investment inflows was also escalated by the rapid spread of COVID-19 across the world.

On a disaggregated basis, the year-on-year decline in total investment inflows was largely driven by a drop in foreign portfolio investments (FPI). The share of FPI in the overall foreign investment inflows weakened to 74% in Q1’2020 from 84% in Q1’2019. However, both Foreign Direct Investment (FDI) and other investments witnessed a rise in their respective contributions to overall investment inflows to 4% and 23% in Q1’2020, relative to their respective shares in the corresponding quarter of 2019. It is worthy of note that there was a decline in the year-on-growth of FDI and FPI inflows in Q1’2020. This is an indication that private investment inflows were more vulnerable to the sudden spread of COVID-19 into Nigeria since February 2020.

FDI fell to $214 million in Q1’2020 – Weakest Q1 inflows since 2017

Foreign Direct Investment (FDI) – which is a relatively stable source of investment flows – was down by 13.4% to $214 million in Q1’2020 when compared with its level in the corresponding quarter of 2019 ($247 million). This is in spite of the increase in the share of FDI in the overall investment inflows to 4% in Q1’2020. The FDI receipts in the quarter are also the weakest Q1 level of investment inflows since 2017. Aside from short-term risks such as the current global health crisis, FDI inflows into Nigeria have continuously been hindered by policy inconsistency – deepening capital controls as proceeds from crude oil exports remain on the downside. Lack of strong political will to address the country’s huge infrastructural deficit is another key factor. Despite the improvement in the operating environment of business in Nigeria (The country rose by 15 places to 131st out of 180 countries on the World Bank’s Doing Business Ranking in 2020), FDI inflows into Nigeria were largely constrained by the aforementioned key structural factors.

FPI inflows nosedived on lower foreign participation in Nigeria’s Money Market

Foreign portfolio investment (FPI) – which is highly vulnerable to capital flow reversals – stood at $4.3 billion in Q1’2020. This is 39.4% below its level in the corresponding quarter of 2019 ($7.1 billion). The fall in FPI inflows could be attributed to the rapid deterioration of investors’ confidence in the Nigerian economy. The country’s declining external reserves position have made foreign portfolio investors more concerned about the repatriation of their funds than the yields on investment.

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