Frontier markets set to attract higher capital inflows on global rate cuts
Bamidele Famoofo
Frontier markets which include Nigeria, world’s most populous black nation, will reap the fruit of rate cuts in a bid to curb inflation by big economies.
Central banks have made substantial progress in the fight against inflation in recent times. In July 2022, the median inflation rate worldwide was 9.4 percent, the highest since 2008.
Inflation is projected to continue on its downward path, falling from 4.9 percent on average in 2023 to 3.5 percent in 2024, before reaching levels broadly consistent with average country inflation targets in 2025-26.
Surveys of inflation expectations similarly imply gradual global disinflation over the next two years.
Core inflation is expected to soften as demand for services moderates, easing services inflation just as goods disinflation reaches a trough. Weaker demand for services is also expected to help moderate wage growth, particularly in advanced economies. Supply disruptions are expected to continue to fade. Finally, elevated real policy rates in major economies are set to restrain interest-sensitive demand components.
Ugodre Obi-Chukwu, founder and ceo of Nairametric, revealed that the persistent rate cuts will be to the advantage of frontier market of which Nigeria is one to attract more capital inflow from foreign investors due to high inflation and high interest rates.
Speaking on global economic outlook for 2025 in a presentation titled: “Nigeria in Transition: Reforms, Global Shifts, and Strategic Opportunities” in Lagos, recently, the financial analyst noted that lending rate will remain high in Nigeria, giving the fact that government will borrow more from debt markets to fund its budget deficit in 2025.
Obi-Chukwu hinted that investors will focus more on the equities market, treasury bills, bonds in 2025 because interest rate will rise as government borrows more.
Capital Importation report from the National Bureau of Statistics (NBS) reveals that capital inflows into Nigeria declined by -52 per cent quarter-on-quarter (QoQ) to approximately US$1.3bn in Q3 2024. However, on a year-on-year (YoY) basis, the value was 91 per cent Y-o-Y higher. The sequential reduction in capital inflow was driven by double-digit decreases in inflows from Foreign Portfolio Investments (FPI) and other investments of the total capital inflow; portfolio investments comprised approximately 72 per cent, while other investments and Foreign Direct Investments (FDI) accounted for about 20 per cent and 8 per cent, respectively.
Despite its significant contribution to capital inflows, FPI inflow fell by -36 per cent QoQ to US$899m, driven by reductions across all segments, with inflows into equity, bonds, and money market investments declining by between -43 per cent and -61 per cent.
Other investments, the next largest segment, declined by -79 per cent QoQ to US$250m. The share of loans, which typically accounts for over 90 per cent of the category’s inflow, plummeted to US$235m from almost US$1.2bn in Q2 2024
Conversely, foreign direct investment inflow increased to US$104m from US$30m in Q2 2024. Despite the increase, FDI remains significantly low, highlighting ongoing challenges in attracting substantial foreign investment. In terms of sector recipients, the banking sector, which typically dominates capital inflows, once again received the highest capital inflow of US$579.5m or 46 per cent of all capital inflow.
Financing and production/manufacturing were the next largest beneficiaries at $295m (24%) and $189m (15%), respectively. The United Kingdom was the leading source of capital inflow, with $503m, or 40% of the total. South Africa and the USA followed with $185m and $163m, respectively. Regarding destination, only Lagos and Abuja (FCT) received meaningful capital inflows, with the former receiving $650m while the latter getting US$600m (48%).
Looking ahead, we anticipate substantial Q-o-Q growth in capital inflow in Q4 2024, driven by the FGN’s recent Eurobond issuance of US$2.2bn. Additionally, analysts expect ongoing investments in the oil and gas sector to contribute to FDI inflows in the coming quarters.
World leaders and heads of multilateral organisations have confirmed the direction that inflation must go in 2025.
President Donald Trump tells Davos he will demand lower interest rates, oil prices.
Global policymakers have made remarkable progress in tackling inflation without inducing a recession, but some work remains to be done, International Monetary Fund Managing Director Kristalina Georgieva said in Davos.
“The head of the genie is in the bottle, most of the body of the genie is in the bottle, kind of getting stuck there, but the legs are kind-of hanging still out,” Georgieva told the World Economic Forum when asked if the ‘genie’ of inflation had been defeated. “We need to push it all the way down.”