Hot Monies: Foreign Investors Take Advantage of Nigeria’s High Interest Rate

Amidst elevated yield on naira assets, Nigerian economy is seeing strong inflows of hot money into the country, latest data the statistics office capital importation report confirmed.

Imported capital increased year on year but then slowed down over the recent past quarters due to exchange rate fluctuations, data from the National Bureau of Statistics revealed.

Total foreign direct investment remained unimpressive due to infrastructural provision and lacuna around ease of doing business including fluctuating exchange rate.

Foreign investors are taking advantage of high interest rate environment to boost their return, analysts said, noting that US Fed rate cut would pushed more offshore funds into Africa markets in the coming quarters.

For hot monies, Nigeria has become top investment destination as yield on fixed interest securities investment remained elevated, supported by interest rate hikes in 2024.

With foreign portfolio inflow maintained uptrend due to elevated yield in the fixed income market, direct investment has continued to suffered setback.

The latest data on capital importation from NBS shows that Nigeria attracted total capital inflow worth $5.98 billion in the first half of 2024 from $2.16 billion posted in the first half of 2023.

With a space of 12 month, capital importation has increased by 177% as foreign portfolio investors flood the debt capital market short term options investment bets.

According to the statistics office report, the increase was driven by a 360% year on year growth in Portfolio investments into Nigeria, which settled at $3.48 billion from $756 million last year.

There was also 85% year on year surge in ‘other investments’ which settled at $2.35 billion while foreign direct investments managed a 12% year on year  increase to $149 million under six months of 2024.

The recorded growth could be said to have been triggered by the elevated interest rates in Nigeria, Cowry Asset Limited said in a review.

The investment firm explained that this happened despite incoherent foreign exchange policies and the devaluation of the local currency.

In the first half of the year, Nigeria saw significant foreign portfolio participation in money market instruments, with around 77% or $2.68 billion of foreign portfolio investments (FPIs) allocated to treasury bills, OMO bills, and commercial papers.

The Central Bank of Nigeria (CBN) offered yields as high as 22.5% on treasury bills primary market auctions, Cowry Asset Limited said.

Analysts said OMO bills yielded 22%, making these instruments among the most attractive in the market. It was noted that private companies also tapped into the favourable conditions, issuing commercial papers at even higher discount rates of 25%, 28%, and up to 30%.

Analysts said high return on debt instruments drew substantial foreign interest in the period. Bonds attracted $599 million in foreign portfolio investment during the period, with $420.8 million invested in Q1 alone.

Compared to the previous year, foreign portfolios investors into bonds grew by 55%, rising from $386 million in the first half of 2023.

Cowry Asset Limited analysts said this strong performance in money market and debt instruments indicates the critical role elevated interest rates played in attracting foreign capital to Nigeria.

Out of $5.98 billion of total inflows, Banking topped investment drive in the period amidst capital raising exercise, up by 53.4%, inflows into trading and production sector climbed by 17.8% and 13.7% respectively.

Analysts said this is particularly hinged on their continued contribution to national growth and expansion with the adoption of innovation.

In Q2, Nigeria experienced a significant rise in capital importation, amounting to $2.60 billion, a 152.81% increase from $1.03 billion in Q2 2023, representing a 22.85% decline from $3.38 billion in Q1 2024.

Cowry Asset Limited said over the past four years, capital inflows have struggled to regain the pre-pandemic quarterly average of $5 billion, highlighting ongoing concerns about the factors affecting foreign investment, particularly around foreign exchange liquidity and broader macroeconomic challenges.

In its review note, the investment firm stated that portfolio Investments dominated the inflows, accounting for $1.40 billion (53.93%), followed by Other Investments at $1.17 billion (44.92%).

Data from the statistic office revealed that Foreign Direct Investment (FDI) contributed only $29.83 million or 1.15% to the total capital importation in the quarter.

Easy way out banking sector led with the highest inflows at $1.12 billion, accounting for 43.15% of total capital in the period.

This was followed by production/Manufacturing sector which generated $624.71 million or 23.99% of the total inflows while trading sector accounted for $569.22 million or 21.86% of the sum. 

Geographically, the bulk of capital importation came from the United Kingdom with $1.12 billion (43.01%), followed by the Netherlands at $577.82 million (22.19%) and the Republic of South Africa at $255.98 million (9.83%).

Lagos State was the top destination for capital importation, receiving $1.37 billion (52.52% of total), followed by Abuja (FCT) with $1.24 billion (47.48%).

In terms of institutional inflows, Citibank Nigeria Limited attracted the highest capital with $818.46 million (31.43%), followed by Standard Chartered Bank Nigeria Limited with $654.79 million (25.14%) and Rand Merchant Bank Plc with $488.59 million (18.76%).

Analysts at Cowry Asset said the trend underscores the crucial role that banking and financial services play in attracting foreign capital to Nigeria amidst prevailing economic challenges.

Cowry Research said the decline in total capital inflow into the Nigerian economy presents a worrying concern, as key sectors and regions, traditionally seen as drivers of economic growth, are experiencing an exodus of investors.

“While there has been a positive year-on-year increase in total capital imported during the first half of the year—primarily driven by the high-interest-rate environment—this momentum is at risk of reversal”.

Experts noted that persistent foreign exchange challenges remain a significant barrier, obstructing the flow of investments into Nigeria.  #Hot Monies: Foreign Investors Take Advantage of Nigeria’s High Interest Rate

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