Foreign capital inflows dip 32% to $3.8b over naira woes - THE NATION

March 16 2020

By Collins Nweze

The uncertainties surrounding the naira at local and international markets have reduced foreign capital inflows into the economy to $3.8 billion. This represents 32.4 per cent drop.

Although the naira witnessed major pricing shake-up at the end of last week that pushed it to N375 to the dollar in the parallel market, it remained unfazed at the official market, where it traded at N306.95 to a dollar. The naira also closed at N366.75 to a dollar on the Investors and Exporters' (I&E) Forex window.

A combination of dollar injections by the Central Bank of Nigeria (CBN) estimated  at $500 million and support from the bureaux de change operators helped reduce naira losses after it touched N414 to the dollar at the parallel market last Thursday. The pressure on the naira is expected to persist this week.

A report by the National Bureau of Statistics (NBS) for the fourth quarter of 2019 showed there was  a continuous deceleration in foreign capital inflows since the second quarter of last year, driven by post-election uncertainties, falling yields, currency pressures and weakened investors' confidence.

"In the fourth quarter of 2019, there was sustained decline across the board as foreign capital flows fell by 32.4 per cent yer-on-year to $3.8 billion, the lowest recorded during the year," analysts at Afrinvest West Africa Limited, disclosed in emailed report to investors.

They explained that prior to the incidence of the Coronavirus (COVID-19) pandemic which is wreaking havoc across the world, Nigeria's external sector was already in a fragile state. "In our earlier reports, we had indicated a successive deterioration in external conditions in 2019. The National Bureau of Statistics has also confirmed our suspicions on the state of the economy," they said.

They said there would be sustained downward trend in capital flows following global risk-off sentiments due to the COVID-19 pandemic. "The global decline in oil prices amid oversupply and falling demand for oil raises Nigeria's risk, hence we expect foreign investors to be reluctant to hold naira assets. For trade, we anticipate weaker export growth due to plummeting oil prices ($32.9/barrel). With the major oil-producing countries engaged in a price war, we are not optimistic that the removal of curbs on Nigeria's oil output would support more sales," they said in emailed report to investors. We also expect a slowdown in imports given the disruptions to global supply chains and softening economic activities among trading partners such as U.S., Europe, China and India. The combination of trade deficit, negative current account balance and weak capital flows mean there would be a sustained moderation in external reserves, thus increasing the need for currency devaluation".

The drop in crude oil prices to $32.9 per barrel, the Coronavirus epidemic ravaging global economies,  local and foreign investors dumping fixed-income assets and decline in the foreign exchange reserves are some remote reasons that brought the local currency under pressure.

Traders said more investors are worried about the value of the naira after oil prices plunged, pushing them to sell down their position on the debt and equity markets.

NBS report showed there was a 42.7 per cent year-on-year rise in foreign capital inflows to $24 billion in 2019, given the traction recorded in first half 2019. Foreign Portfolio Investment rose to $16.4 billion in 2019, representing a 38.7 per cent year-on-year uptick.

"This was driven by the 58.7 per cent year-on-year rise in money market inflows as investors remained shy of equities where foreign investments dipped 19.9 per cent year-on-year to $1.9 billion. We attribute the inflows into money market instruments to the relative calm recorded post-elections, which eased political risk".

The report said a 75.3 per cent year-on-year surge in inflows from other investments to $6.7 billion, buoyed foreign capital flows in 2019. Foreign direct investments (FDI), on the other hand, remained uninspiring, down 21.8 per cent year-on-year to $0.9 billion, reflecting the weak macroeconomic environment and lack of reforms to encourage investors.

Nigeria's trade balance fell to a deficit of N579.1 billion in fourth quarter  of 2019 as imports expanded faster than exports.

"Imports accelerated by 37.2 per cent to N5.3 billion in fourth quarter of last year, bringing 2019 total imports to N17 trillion, a 28.8 per cent year-on-year rise. This was mainly driven by an expansion in the importation of capital goods and industrial supplies as well as fuel and lubricants import," it said.

Exports contracted by 9.8 per cent to N4.8 billion in the fourth quarter of last year, driven by the slowdown in the export of manufactured goods and crude oil. Likewise, in 2019, data showed that exports rose at a slower rate of 3.6 per cent to N19.2 trillion, following a 3.1 per cent year-on-year moderation in crude oil exports to N14.7 trillion.

"We attribute this to a 10.0 per cent year-on-year reduction in crude oil price to $64 per barrel despite a 4.7 per cent year-on-year uptick in oil production at 2.0mb/d in 2019," the report said.

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Read Comments

Steven Rich
Sep 17, 2018:
Well done

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