Foreign Portfolio Investments Declines By 40% To Five-year Low

Foreign portfolio investments in Nigerian stock market dropped by 40.4 per cent in 2021 to its lowest level in five years as the active participation of foreign investors in Nigerian market declined by 11 percentage points from about 34 per cent of total market transactions in 2020 to about 23 per cent in 2021.

The full-year foreign portfolio investments (FPI) report at the weekend showed a significant deceleration in FPI transactions and it was the main reason for the 12.4 per cent decline in turnover of activities at the stock market in 2021.

Total foreign transactions in Nigerian equities declined to N434.50 billion in 2021 as against N729.20 billion recorded in 2020. Consequently, the percentage participation of FPIs in total market transactions dropped from 33.63 per cent in 2020 to 22.88 per cent in 2021.

The report, however, showed admirable improvement in the overall FPI deficit as the gap between inflows and outflows narrowed considerably in 2021 compared with 2020, although the country remains with negative FPIs flow.

The FPI report, coordinated by the Nigerian Exchange (NGX), included transactions from nearly all custodians and capital market operators and it is widely regarded as a credible measure of FPI trend. The report uses two key indicators-inflow and outflow, to gauge foreign investors’ mood and participation in the stock market and the economy. While inflows and outflows indicate direction of portfolio transactions, total FPI measures the momentum and level of participation.

FPI inflows and outflows stood N204.88 billion and N229.62 billion respectively in 2021, indicating a deficit of N24.74 billion. These compared with inflows and outflows of N247.27 billion and N481.93 billion respectively in 2020, and a deficit of N234.66 billion.

FPIs had declined by 22.64 per cent to a four-year low to close 2020 at N729.20 billion as against N942.55 billion recorded in 2019. The decline in FPIs in 2020 counteracted the general increase in momentum of activities at the Nigerian stock market, which saw 12.45 per cent increase in total turnover value.

FPI reports had shown wider gap between foreign portfolio inflows and outflows, implying that foreign investors had divested more than two kobo for every kobo invested in 2020, the worst deficit in recent years.

Total FPIs had increased from N1.208 trillion in 2017 to N1.219 trillion in 2018, before dropping by 22.72 per cent to N942.55 billion in 2019.

FPI reports have shown continuing negative trend in the mix of inflows and outflows, with more outflows than inflows, implying that foreign investors were selling more of their investments than buying more investments. This is known as FPI deficit.

Nigeria recorded FPI deficit of N234.66 billion in 2020, about 125 per cent increase on N104.3 billion recorded in 2019. This implied that foreign investors divested more than two kobo for every kobo invested in 2020. FPI deficit had stood at N66.3 billion in 2018.

The reports also showed that the quantum of transactions by foreign investors relative to total transactions at the Nigerian market decreased from about 49 per cent of total activities in 2019 to about 34 per cent in 2020. Foreign portfolio inflows stood at N247.27 billion as against outflows of N481.93 billion in 2020. Inflows and outflows had stood at N419.13 billion and N523.42 billion respectively in 2019.

Nigeria’s FPI had slipped into negative with a net deficit of N66.2 billion in 2018 after a world-leading stock market rally left the country with a surplus of N336.94 billion in 2017. Total foreign inflows in 2018 stood at N576.45 billion compared with outflows of N642.65 billion. Foreign inflows had in 2017 outpaced outflows at N772.25 billion and N435.31 billion.

Most analysts have blamed Central Bank of Nigeria’s (CBN) management of the country’s foreign exchange (forex) for the decline in foreign investors’ appetite for Nigerian stock market. They said the opaque forex system amid uncertainties and threats of devaluation did not provide the the needed stability for foreign participation.

The Nation had reported that there was growing concerns that oil revenue fluctuation and global monetary tightening would lead to further devaluation of the Nigerian currency in the year.

Analysts at Cordros Capital said that although the CBN might have enough supply to support the foreign exchange market over the short term, global and domestic challenges may force the apex bank to adjust the Naira exchange rate further

According to analysts, foreign inflows, which have been disrupted by lack of global investors’ confidence in Naira rate management are paramount for sustained forex liquidity over the medium term as accretion to the national reserves will be weak given that crude oil production levels remain quite low. Thus, FPIs, which have historically supported supply levels in the official Investors and Exporters (I & E) Window will be needed to sustain forex liquidity levels. About 53.8 per cent of forex inflows to the I & E Window in 2019 were from FPIs.

“Hence, we think further adjustments in the Naira/Dollar peg closer to its fair value and flexibility in the exchange rate would be significant in attracting foreign inflows back to the market;” Cordros Capital stated.

The International Monetary Fund (IMF) recently advised that Nigeria and other emerging economies should allow their currencies to depreciate to avoid a disorderly condition that may arise in their forex markets as a result of an imminent policy tightening by the Federal Reserve Bank of the United States.

The IMF advised Nigeria to raise its benchmark interest rate and scale back fiscal support to address inflation and rising debt respectively.

The IMF also noted that emerging countries with high levels of foreign-currency denominated debt must do all within their bit to reduce it – Nigeria has within the space of five years astronomically increased its foreign-currency denominated debt.

“In what appears to be a difficult time for the emerging economies, especially Nigeria as it navigates through pre-election year, the above action plans as proposed by IMF posed a difficult choice for the oil-rich African country as it trades off supporting a relatively weak domestic economy with safeguarding price and foreign exchange stability;” Cowry Asset stated.

Analysts said insecurity, high costs of doing business and multiple foreign exchange windows have done disservice to foreign investment into the country, thus its relatively low capital inflow from foreign investors.

Analysts however called on the government to also take responsibility to restore investors’ confidence given the nature of the challenges facing the country which may be aggravated by any rate hike by the apex bank.