How forex reforms could boost capital inflow

Economic and financial experts say the Central Bank of Nigeria’s ongoing foreign exchange reforms could lead to the return of foreign portfolio and foreign direct investors into the country, EDIDIONG IKPOTO writes

Nigeria’s stock market has in the past few years witnessed a consistent decline in Foreign Portfolio Investment, a development analysts have attributed majorly to the volatility of the country’s erstwhile multiple exchange rate regime.

However, recent reports posited that the CBN’s decision to float the naira could restore foreign investors’ confidence in Nigeria’s stock market.

Over the past year, there has been a mass exodus of foreign investors from Nigeria’s stock market as investments continue to plunge in exponential proportions. In 2022 alone. FPI inflow to Nigeria’s stock market declined by $672m (312.8bn).

Various reports of the National of Bureau of Statistics show how FDI have declined over time.

According to the quarterly Capital Importation reports published by the National Bureau of Statistics, portfolio investments, which represent foreign investments in Nigeria’s stock market fell by $957.5m in the first quarter of 2022 to $285.2m in the fourth quarter of the year.

Further checks also showed that year-on-year, capital importation via portfolio investments declined in 2022 to $2.4bn compared to the $3bn recorded in 2021.

FDI, FPI vital

According to Nigeria’s official trading bourse, Nigerian Exchange Limited, foreign portfolio investment outflow includes sales transactions or liquidation of portfolio investments through the stock market, while the FPI inflow includes purchase transactions on the NGX (equities only).

An NGX report published last month also indicated that foreign portfolio investors scaled down their investments in Nigeria’s stock market to N53.71bn in the first quarter of 2023.

The data represents a 58.3 per cent decline on a year-on-year basis when compared to the N128.91bn they invested in the corresponding period in 2022.

Also, the report by the NGX on Domestic and Foreign Portfolio Participation in equities showed a consistent decline in the value of FPI participation in the market from January to March this year.

A breakdown showed that total foreign portfolio investment had fallen Month-on-Month by 26.9 per cent to N19.62bn in February, 2023 from N24.90bn in January, before falling again to N9.19bn at the end of March, indicating a 53.2 percent month-on-month decrease.

For many developing and emerging market economies such as Nigeria, the ability to attract international investors always plays a key role in the calibration of the performance of such an economy.

However, this race for foreign investors is not always characterised by an attendant desire to shore up confidence in the nation’s capital market. More often than not, the focal point of attracting foreign investors has always revolved around Foreign Direct Investments.

Traditionally, FDI is seen as a key element in international economic integration because it creates stable and long-lasting links between economies.

Nonetheless, a consistently declining FPI typically speaks to confidence, or lack thereof, not in the market per se, but a confidence in Nigerian companies and future prospects of the economy.

In explaining the rationale behind the declining confidence by foreign investors in Nigeria’s stock market, analysts and experts have often cited the volatile nature of Nigeria’s exchange rate regime, which typically did not give foreign investors much confidence vis-a-vis their exit point.

According to the Corporate Finance Institute, FPIs increase the liquidity of domestic capital markets. As markets become more liquid, they become deeper and broader, and a wider range of investments can be financed. Savers can invest with the assurance that they will be able to manage their portfolio or sell their financial securities quickly if they need access to their savings.

FPIs also promote the development of equity markets because increased competition for financing will lead to the market rewarding superior performance, prospects, and corporate governance. As the market’s liquidity and functionality develop, equity prices will become value-relevant for investors, ultimately driving market efficiency.

Analysts laud CBN

While speaking with The PUNCH, a Nigeria Consultant, ECOWAS Common Investment Market, Jonathan Aremu, said that while FPI’s speak to how healthy an economic climate is, FDIs offer better opportunities to the economy in the long run.

He said, “As an economist and an expert in foreign investment, what ECOWAS did and what we have done in the African Continental Free Trade Agreement is to promote Foreign Direct Investment, not targeting portfolio investment because portfolio investors are those investors that buy shares in the Nigerian economy and keep the shares in their bag, when there is a small shake, they open the portfolio and sell off.”

But, despite adumbrating the fact that FDIs would be more beneficial to the economy in the long run, Aremu emphasised that a declining FPI never portends well for any economy as it implies a lack of confidence in the economy, which in Nigeria’s case was mostly down due to the volatility of the naira occasioned by the multiple exchange rate regime.

He further expressed confidence that with the decision of the CBN led by the Acting Governor, Folashodun Shonubi, to float the national currency and allow it find its true value, investors, both at home and abroad, would have a renewed sense of confidence in the Nigerian stock market.

He said, “I think that the reason the new president decided to float the naira is that the thing has been taken for granted for so long, and it has led to serious corruption. How can there be over N300 between the official and parallel market? This has given a lot of people free money.

Aremu, however, warned that floating the currency will not do much good for the economy if production activities were not given a boost in order to promote exports and improve the value of the naira.

“I expected what happened in the capital market to be initially positive. I’m not equally surprised that two days later, it went down. It is going to be adjusting until it finally settles at a very comfortable level,” he added.