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Can CBN’s new FX policy woo FPIs back to Nigerian equities?

Analysts at at FSDH examine the pathern of capital importation into the country in the second quarter of 2021 in sycn with the country’s foreign exchange policy and conclude that despite improvement in liquidity in the domestic forex market, Foreign Portfolio Investors (FPIs) may not be attracted back to the county.

Last week, the National Bureau of Statistics (NBS) released the Q2-2021 capital importation data, showing total capital imported into Nigeria fell 54.1 percent q/q and 32.4 percent y/y to $875.6 million.

However, our focus is on total capital flows into equity instruments in Q2-2021 which rose 216.8 percent q/q and 59.9 percent y/y to $85.2 million.

Nevertheless, it remains below pre-2020 average of $2.7 billion (five-year average) or the more recent pre-Covid five-quarter average of $506.6 million.

Similarly, data from the Nigerian Exchange Group (NGX) showed that foreign participation in the local bourse declined by 44 percent y/y to N222 billion between Jan-2021 and Jun-2021.

In addition, foreign investor participation in total transactions on the NGX is at historic lows of 21.5 percent since the data began to be collated. Thus, it is clear that foreign investor apathy towards Nigerian equities is at a record high.

Despite the recent recovery from recession, the Nigerian economy has remained unattractive for investors due to persistent structural challenges and macroeconomic imbalances.

In addition, recent insecurity troubles have contributed to the negative rhetoric regarding the Nigerian economy and business environment.

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Lastly, currency adjustment and inhibitive forex controls has further dampened investors’ sentiments. Therefore, it is not surprising to see continuous decline in foreign capital flows towards Nigerian equities despite attractive valuation points.
That said, the recent CBN forex policy which aims to end sale of dollar to BDCs and improve forex liquidity via official channels begs the question if FPIs can be wooed by this policy to begin to reconsider Nigerian equities.

One of the biggest challenges for foreign investors in the Nigerian market is the forex scarcity that periodically bedevils the economy.

However, it appears some improvement may be recorded on that front over the next three to six months, as forexX market fundamentals (oil price & production, and flows from possible Eurobond issuance) continue to improve.

To provide further context, average daily turnover at the I&E window has continued to improve, printing at $140 million, $143.3 million, and $140.7 million in May-2021, Jun-2021 and Jul-2021, compared to Q1-2021 average of $63.6 million. This indicates improved liquidity as CBN ramps up intervention via official channels.
Nevertheless, we do not expect the current signs of improved forex liquidity to be enough to woo foreign investors back into Nigerian equities.

First, while Nigeria’s economy experiences fragile recovery, there remains several structural problems that would continue to leave the economy exposed as well as keep recovery fragile.

In addition, Nigeria is five months from a pre-election year, a period where foreign investors typically exit the Nigerian market as is the case with most emerging markets during political cycles.

Thus, we do not expect additional capital inflows. Overall, we retain the perspective that foreign interest in Nigerian equities will remain tepid despite emerging signs of improved forex liquidity.

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