Foreign investments

Foreign investment drops 81%, interest rates rise

Capital imports into Nigeria fell by 81.46% ($6.91 billion), from $8.49 billion in the first quarter of 2019 to $1.57 billion in the corresponding quarter of 2022, according to Bureau data National Statistics.

Based on the BNS reports on the import of Nigerian capital for the first quarters of 2019, 2020, 2021 and 2022, there has been a steady decline in capital inflows into the country.

Total capital inflows fell by 31.01% from $8.49 billion in the first quarter of 2019 to $5.85 billion in the first quarter of 2020; it fell 67.45% to $1.91 billion in the first quarter of 2021; and fell a further 17.46% to $1.57 billion in the first quarter of 2022.

According to the country’s statistical agency, data on capital imports are obtained from the Central Bank of Nigeria and include imported physical capital, such as equipment, and import of financial capital.

He explained that it was divided into three main investment categories: foreign direct investment, portfolio investment and other investment.

In the first quarter of 2019, the largest amount of capital imported into the country came from portfolio investments. The banking sector led inflows this quarter and the UK was the source of most inflows. In the first quarter of 2020, portfolio investment continued to dominate inflows, while banking and the UK also maintained their respective leading positions.

In the first quarter of 2021 and the first quarter of 2022, portfolio investment drove most capital inflows into the country, while banks reaped the most and the UK provided the most.

At a recent monetary policy committee, CBN Governor Godwin Emefiele revealed that an unconducive domestic investment climate is impacting capital inflows into the country.

He said: “Net FDI was very weak as there was a substantial reversal in FDI flows from the country in the fourth quarter of 2021.

“This bad trend is apparently due to the unconducive domestic investment climate which seems to be deteriorating. In February 2022, these inflows amounted to $17.6 billion compared to $66.4 billion in February 2021, the highest since December 2020.

“Risk factors include heightened uncertainty surrounding the inflation outlook in advanced economies, uncertainty over the US Fed’s cutback plans, regulatory developments in China and its systemic risk related to the housing market, and the Uncertainty regarding the Russian-Ukrainian war and the resulting sanctions imposed on Russia These factors weighed on investor sentiment.

In its recent report “Nigeria Development Update (June 2022): The Continuing Urgency of Business Unusual”, the World Bank revealed that rising global interest rates will lead to more net portfolio outflows in 2022, leading to lower capital overall. import.

He said, “With rising global interest rates, Nigeria is likely to experience net portfolio outflows in 2022. PEI inflows increased significantly in 2021, exceeding $6 billion (1.4% of GDP ).

“This follows a significant decline in 2020 following the COVID-19 pandemic, when net outflows reached $3.6 billion (0.8% of GDP). However, with interest rates continuing to rise in the United States and other advanced economies due to rising inflation, net portfolio inflows in Nigeria are expected to fall to less than 1% of GDP in 2022. The pre-election environment should also add to portfolio investor hesitancy, keeping net inflows low.

The World Bank added that FDI is essential for economic growth as it helps increase productivity, innovation and technology transfer. He said that FDI supports the diversification of the economy and helps domestic companies to export more.

Commenting, Olalekan Aworinde, Associate Professor of Economics at Pan-Atlantic University, said: “If there is an increase in interest rates in developed markets, FDI inflows into developing economies will fall.

“This is because investors will always want to go to environments where they will have high returns on investment. Once US interest rates rise, the inflow of FDI into African and developing countries will decline.

Cowry Assets Managing Director Johnson Chukwu added: “It has already fallen mainly because when interest rates rise in advanced economies, investors who arbitrated (i.e. borrowed cheaply to invest in emerging markets at a higher price). yield) will not be able to make the arbitrary opportunity disappear.

“For example, if the interest rate is 2% in America, you can borrow at that rate and go into an emerging economy and invest at a higher percentage. Even taking into account the depreciation of the local currency, it there would always be returns.

“Once rates start to rise, the possibility of arbitrage is almost eliminated because equilibrium would almost be reached. Because the return they will get from investing at home will be almost the same as that of emerging economies, they will not have the motivation to invest abroad.

“A lot of portfolio investors have already left. We won’t see as many outflows anymore, but we would see a reduction in inflows since the arbitrage win window has closed.