KPMG lays bare dangerous trend in Nigeria’s declining FDI, portfolio flows

• Outlines risks facing Africa’s largest economy

• Urgency addressing fall in capital import

• Economic instability, regulatory uncertainty 

Onome Amuge

KPMG, the global audit, tax, and advisory services firm, popularly referenced as one of the world’s BIG FOUR, has warned that the downward trend in Nigeria’s portfolio investment has serious implications for the availability of foreign exchange, currency devaluation, inflation, purchasing power, and economic growth in Africa’s largest economy.

KPMG’s “flashnotes” on the National Bureau of Statistics’ (NBS) capital importation report for the third quarter of 2023 titled, “Light Not Yet at the End of the Tunnel for Foreign Capital?”, disclosed a sharp decline in portfolio investment. This form of investment, which includes financial assets like stocks, bonds, and securities, decreased from $649.28 million in the first quarter of 2023 to $87.11 million in the third quarter of 2023.

The firm noted: “Portfolio investment which includes investments in financial assets such as stocks, bonds, and other securities has also been on the decline since Q1 2023 from $649.28 million to $87.11 million in Q3 2023 exposing the economy to risks of foreign exchange illiquidity and currency depreciation, pressure on consumer price inflation, reduced purchasing power, slower economic growth (3.75% target for 2024), lower job creation (especially from persistent reduction in (FDI), and overall macroeconomic instability.”

In addition to concerns about consumer price inflation and purchasing power, KPMG’s report also highlights the impact of the decline in portfolio investment on economic growth and job creation. The firm notes that this is particularly concerning given the current global poly-crisis, which includes geopolitical tensions, a global energy crisis, high inflation, and looming recession.

According to KPMG, several factors have contributed to the decline in portfolio investment, including macroeconomic instability, negative interest rates, a widening foreign exchange gap, and dwindling foreign exchange reserves. In addition, global reclassifications by investment bodies like FTSE Russell and MSCI have further hurt Nigeria’s market reputation.

In addition to the negative impact of reclassifications by investment bodies, KPMG noted that the exit of multinational companies like GlaxoSmithKline and Procter & Gamble has further undermined investor confidence. These companies have decided to move to distributor-led models, which has reduced their need for direct investment in Nigeria. The loss of these companies, as well as other major companies, has exacerbated the negative sentiment surrounding Nigeria’s economic outlook.

The KPMG’s report emphasises the urgency of addressing the decline in capital importation, despite a temporary rise in the second quarter of 2023. The firm points to the need for macroeconomic stability, clear monetary and fiscal policies, and investment-friendly regulatory frameworks as essential elements in reversing the decline. The report also highlights the importance of attracting foreign direct investment (FDI), which can help create jobs and stimulate economic growth.

However, the audit firm notes that in the current environment, attracting FDI will be difficult without addressing the underlying issues of economic instability and regulatory uncertainty.

In addition to the decline in portfolio investment, KPMG noted the worrying dominance of short-term capital inflows, such as trade credit and loans. These types of capital are less stable and reliable than long-term capital, such as FDI. The heavy reliance on short-term capital puts Nigeria at a disadvantage when it comes to competing in the global economy and attracting sustainable investment. This, in turn, could lead to higher business costs and a decline in investment attractiveness. KPMG stressed the need for a strategic shift towards promoting long-term capital flows, rather than relying on short-term inflows.

In the event of a continued decline in foreign capital inflows, KPMG warns that the cost of doing business in Nigeria could rise, potentially discouraging investment opportunities. However, the firm also suggests that this could lead to some positive outcomes, such as greater self-sufficiency, the development of domestic financing sources like savings and capital markets, and a focus on supporting local entrepreneurship.

While acknowledging the challenges facing Nigeria’s economy, KPMG also notes some signs of hope, such as the reported success of President Bola Tinubu in securing commitments for over $15 billion in FDI during recent international trips. The firm argues that fulfilling these commitments could significantly change the trajectory of the country’s economic growth.

KPMG recommends that initiatives to attract foreign capital should be broadened across diverse sectors, rather than focusing only on a few specific areas. This, they argue, will help to make the economy more resilient in the face of global challenges.

In sum, KPMG argues that Nigeria needs to take immediate and decisive action to change its economic narrative and reverse the decline in foreign capital inflows. To achieve this, the country will need to fulfil its foreign investment commitments and develop a strategy to attract long-term capital flows. This, it said, is essential for a more resilient economy and a more prosperous future for the country, the firm concludes.

As stated in the National Bureau of Statistics report, the total capital imported into Nigeria in the third quarter of 2023 was $654.65 million, representing a 36.45 percent decrease from the $1.03 billion recorded in the second quarter of 2023 and a 43.55 percent year-on-year decline from $1.16 billion recorded in the third quarter of 2022.

The report by the NBS further broke down the capital inflows by type, revealing that other investments, which included trade credits, loans, and currency deposits, accounted for the largest share of capital inflows at 77.56 percent in Q3, 2023.

While portfolio investments had been the largest contributor to capital importation for the past six years, accounting for an average of 62.18 percent of capital inflows annually, the share of capital inflows from this source dropped to 13.31 percent in Q3, 2023 and 29.93 percent for the year to date.

While FDI remained a small part of the overall capital inflows into Nigeria in Q3, 2023, it was still a vital source of investment for the country. However, this investment was significantly lower than the previous quarter, having dropped by 30.52 percent from $86.03 million in Q2, 2023 to $59.77 million in Q3, 2023.