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Wednesday, January 19, 2022

Exchange rate risks, uncertainties around election could impact capital importation in 2022

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Analysts at local investment banking group, United Capital Plc in this write-up are projecting that exchange rate risks and uncertainties around the upcoming election year are downside risks that could further deter capital importation in 2022 

The National Bureau of Statistics (NBS) recently published Nigeria’s Capital Importation report for Q3-2021. Accordingly, we observed that on a q/q basis, the total capital imported grew 97.7 percent to $1.7 billion in Q3-2021, beating $875.6 million in Q2-2021, albeit lagging $1.9 billion inflows recorded in Q1-2021.

Furthermore, on a y/y basis, capital importation during the period exceeded Q3-2020 by 18.5 percent.

A deeper dive into the numbers showed FPI inflows, which accounted for over 70.3 percent of total capital imported, increased by 120.8 percent q/q and 198.9 percent y/y to $1.2 billion.

FDI inflows improved 38.3 percent q/q to $107.8 million but declined 74.0 percent on a y/y basis. Meanwhile, the other investments category rose by 65.0 percent q/q and declined 36.5 percent y/y to $406.4 million.

Notably, the bulk of the FPI inflows remained concentrated in money market instruments (65.4 percent of inflows), albeit less so than in the preceding quarter (81.9 percent of inflows).

In comparison, the much-needed FDI stayed underwhelming – contributing a paltry 6.2 percent to gross inflows.

READ ALSO: IMF seeks further monetary tightening, currencies devaluation in Nigeria, other emerging economies

We note that foreign exchange liquidity concerns, insecurity and a chronic lack of enabling infrastructures, such as electricity and a good road network, continues to discourage long-term commitments into the country through FDI.

However, we attribute the increase in FDI and FPI inflows to increased FX liquidity in Q3-2021 amid higher oil prices, the FG Eurobond issuance and SDR inflows from IMF.

Looking ahead, with bold reforms necessary to create an enabling environment still lacking, we expect to FDIs to remain on the sidelines.

For FPIs, despite renewed optimism from higher oil prices and improved FX liquidity, the direction of capital funds will primarily depend on the monetary policy direction of the CBN as major central banks in 2022 are expected to adopt hawkish policies.

The return of monetary policy normalisation in advanced economies will reduce the interest spread on domestic fixed-income securities, making fixed income securities less attractive in the absence of a rate hike.

Exchange rate risks and uncertainties around the upcoming election year are downside risks that could further deter capital importation in 2022.

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