Portfolio investments in Nigeria increased more than tenfold in Q1 2018 as FDI remained subdued

Portfolio investment (PI) inflows in Nigeria saw a 12-fold increase year-on-year (y-o-y) to $5.1 billion in Q1 2018, the highest quarterly inflow since 2013, according to the balance of payments figures released by the Central Bank of Nigeria.

The growth in PI inflows however contrasts those of foreign direct investments, which remained subdued at $800 million in the quarter under review.

The increase in PIs, according to analysts at Renaissance Capital (Rencap), in an economic update published July 4, reflects the equity market rally in early 2018, which was driven by offshore investors who got attracted by valuations that looked cheap vs. peers and continued confidence in the Investors & Exporters FX window as well as the oil price rally.

The analysts however predict slowdown in net portfolio inflows in the second half of the year.

“Higher US Treasury yields and a strengthening dollar, plus uncertainty that typically precedes polls imply the slowdown in net portfolio inflows that started in May is likely to continue in 2H18,” they said.

The CBN data indicated that the nation’s current account (CA) surplus increased to 4.6 percent of GDP (annualised) in Q1 2018 as against 3.3 percent in Q1 2017, fuelled by strong export growth of 44 percent year-on-year in the review quarter as against 31 percent in the corresponding period of 2017.

Imports in the quarter also recovered, growing by the fastest rate since 2014. After nine-consecutive quarters of negative growth, imports started growing again in Q3 2017, but were flat in 4Q17, and grew by their fastest rate in over three years in Q1 2018.

“We believe the sustained increase in FX liquidity, the upcoming 2019 elections, and likely minimum wage hike in September imply aggregate demand is likely to pick up in 2H18, which implies sustained import growth,” the Rencap analysts said.

According to the CBN, imports increased by 12 percent y-o-y to $8.6 billion (8.8% of GDP, annualised) in Q1 2018 largely due to improved FX liquidity. However, the sharp increase in export revenue explains the increase in the trade surplus to $5.8 billion (5.9% of GDP, annualised) in the reporting quarter, from $2 billion (2.3% of GDP, annualised).

Nigeria’s exports, of which 93 percent were due to oil and gas, increased by 44 percent y-o-y to $14.4 billion (14.7% of GDP, annualised) in Q1 2018, the highest since 2014. This increase comes on the back of an 11 percent y-o-y increase in oil

production to 1.95mn b/d and a 36 percent y-o-y increase in the oil price to $68/bl, on average, in Q1 2018.

As export earnings improve, on the back of higher prices and output, there was a corresponding increase in payments to foreign service providers as the country’s net services payments increased more than threefold y-o-y to $4.4 billion in the review period.

Net income payments increased by 44 percent y-o-y to $3.3 billion, implying that dividend and interest payments to foreign investors rose compared with a year earlier. These outflows, according to analysts, were mitigated by a one-third increase in current transfers to $6.4 billion in the period.

“A one-third increase in current transfers (remittances) helped mitigate a strong increase in income outflows and payments to foreign service providers. We revise our 2018 CA/GDP forecast up slightly to 3.4 percent, from 3.3 percent previously. This supports naira stability; our YE18 forecast is NGN356/$1,” the Rencap analysts noted.