2019 FOREIGN INVESTMENT - Sustained decline threatens H1’18 gains

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AS Nigeria’s economy struggles into 2019 there are indications that the impressive first half 2018, H1’18 foreign investment inflow may be wiped out by increasing headwinds both on the local and international fronts. Already the third quarter 2018 statistics are pointing to reversals which analysts forecast to be sustained into 2019 given some emerging adversities in the external sector.

Foreign investments in the Nigerian economy rose by 114 percent, year-on-year, to $14.6 billion in nine months as at September 2018, driven by foreign exchange stability, improved crude oil price and attractive yields on fixed income instruments. Analysts, however, expressed mixed opinion in their forecast for foreign investment inflow in 2019, noting that Nigeria’s ability to sustain or exceed this growth trend next year is threatened by the conduct of the general elections, likely policy mishaps, weakened crude oil prices and global interest rate regime.

Financial Vanguard analysis of the quarterly capital importation (foreign investment) report of the Nigeria Bureau of Statistics, NBS, shows that foreign investment in the country from January to September 2018 grew by 114 percent, year-on-year (y/y), to $14. 67 billion, from $6.85 billion recorded in the first nine months of 2017. Leading the growth was Foreign Portfolio Investment (FPI) which rose by 170 percent to $10.4 billion in nine months to September 2018 from $3.85 billion in the same period of 2017.

Foreign Direct Investment (FDI) rose by 72 percent, y/y, to $1.04 billion in the nine months to September 2018 from $603 million in the same period of 2017. Other Investment recorded 35 percent growth to $3.23 billion in the nine months to September 2018 from $2.39 billion in the same period of 2017.

Further analysis, however, showed that growth in foreign investments turned negative in the second half of 2018. In Q1’18, foreign investment grew by 594 percent, y/y, to $6.303 billion from $908 million Q1’17. In Q2’18, it grew by 208 percent, y/y, to $5.514 billion from $1.792 billion. But in Q3’18, foreign investment fell sharply by 311 percent to $2.855 billion from $4.145 billion in Q3’17.

Economic fundamentals
Analysts who spoke to Financial Vanguard noted that while the general growth trend was in line with expectations based on improvement in Nigeria’s economic fundamentals, global geopolitical and monetary developments however undermined foreign investment inflows in the second half of the year.
“The growth trend in capital importation in 2018 was consistent with our expectations”, said Nnamdi Olisaeloka, Fixed Income Analyst at Lagos based Zedcrest Capital.

He added: “An overall growth trend was expected following the recovery of the Nigerian economy from recession, coming on the back of recovery in oil prices, and stability in the foreign exchange market from the introduction of the Investors and Exporters window by the Central Bank of Nigeria (CBN) which bolstered foreign investors’ confidence in the market.

“We however noted a slowdown in capital importation in Q2 and Q3 2018 successively, which was also anticipated on the back of tighter monetary policy stance in global markets namely rate hikes especially in the US, and political risk off sentiments by offshore investors as we approach the forthcoming elections in 2019.”

According to Gaimin Nonyane, Head, Economic Research, Ecobank Group, “We estimated a higher level of foreign currency inflows into Nigeria in 2018, specifically in H1’18, amid improving economic fundamentals supported by a favourable oil price backdrop, increased corporate earnings aided by improved foreign exchange liquidity and exchange rate stability and a supportive external environment.

“However, this was short-lived as steeper pricing, geopolitical concerns and strong confidence in the US economy weakened appetite for risk assets in H2’18.”
However, Bunmi Asaolu, Head Equities, FBNQuest Capital, noted that in addition to global development, weak fundamentals in the Nigerian economy also undermined foreign investment inflow.

These, he said, include weak Gross Domestic Growth (GDP) growth, weak consumer spending and the length of time it is taking to recover properly from the recession.


The growth in foreign investment inflows in 2018, according to Guy Czatoryski, Head of Research, Coronation Merchant Bank, was also helped by the robust external reserves, CBN’s commitment to exchange rate stability and the steady decline in inflation rate.

“Nigeria had a cushion of foreign exchange reserves above $40 billion and guidance from the CBN that maintaining the exchange rate was a primary policy reaction. It worked in combination with inflation adjusted yields which currently stand above 6 percent”, he said.

Outlook for 2019

Most of the analysts expressed mixed opinions in their outlook for foreign investment inflows in 2019. While they expected growth to remain positive for the year, they were, however, doubtful of the possibility of sustaining or exceeding the 114 percent growth recorded in the nine months to September 2018.


“A successful election should result in the continued growth of capital importation in 2019,” said Ayo Akinwunmi, Head of Research at FSDH Merchant Bank, adding that a rise in global yield would also play a major role.

Also projecting, Asaolu of FBNQuest Capital said: “With the US still likely to see further interest rate rises, the slow GDP growth environment in Nigeria, while capital importation may still grow in 2019, that growth is more likely to be subdued.”
Gaimin Nonyane of Ecobank Group, on his part, noted that the geopolitical factors that undermined growth in H2’18 would constrain foreign investment inflows in 2019.

He stated: “In 2019, we are unlikely to see a bullish market as was the case in 2017 despite CBN’s hawkish policy stance.

“We expect foreign currency inflows to post modest growth. Our expectation of fewer US rate hikes should boost appetite for emerging market/financial market risk assets although some of the gains will be offset by rising political risk premium and expectation of continued geopolitical tensions.”

He also noted that headwinds from the volatile US-China trade relations and global market uncertainty, specifically in the global oil market and or a return to an aggressive US policy hike cycle may undermine growth in 2019.

While noting that uncertainties surrounding the general election may constrain growth in the first half of 2019, Czatoryski of Coronation Merchant Bank was, however, upbeat about other factors which he believes would enhance growth during the year.


He explained, “The responses of our models on the base assumption of crude oil prices above $58 per barrel and a wane in investor confidence leading to full unwinding of positions by foreign investors is unlikely to spark a massive devaluation as we saw in 2015/2016. That’s a positive for capital importation.

“Also, the CBN is already lifting short-term interest rates close to 18 percent providing a spread which in our view is attractive to asset managers with emerging market portfolios.

“Furthermore, the possibility of disinflation after the general elections makes a case for emerging market money managers to hold positions in risk free naira denominated assets over H1 2019. Falling yields would imply good returns.

“We must highlight the possibility that OPEC led efforts to stabilize crude prices above $60 per barrel may be unsuccessful to some degree. Brent is currently trading at sub-budgetary levels. This puts extra pressure on the revenue mobilization ability of the federal government in 2019 and brings deficit financing to the fore.
“While the CBN might see some reason to moderate rates, funding the budget may require high yields to keep lenders happy. This suggests some level of support for capital importation irrespective of the outcome of the general elections.”

Projecting a similar positive outlook for growth in foreign investment inflow in 2019, Olisaeloka of Zedcrest Capital highlighted domestic and external factors that will aid or impede growth in the New Year. He said: “Given our expectations for a peaceful conduct of the 2019 elections, we anticipate a positive improvement to capital import statistics in Q2 to Q4 2019. We however remain wary of domestic policy mishaps, monetary/fiscal, and the Federal govt’s perceived aggression towards foreign businesses, MTN’s case in point.

“Other factors that pose downside risks to our outlook include higher interest rates in global markets and any significant downturn in global oil prices, which would fuel bearish sentiments in domestic financial assets.

“Global monetary conditions are gradually easing, with the US FED dot plot forecast pointing to a slower rate of hikes in 2019.

We believe this could result in some FPI flows back into emerging and frontier markets like Nigeria from investors looking to invest in undervalued emerging market assets which were sold off this year in the wake of the aggressive rate hikes.”