Naira Skids as Hot Money Inflows Sink By 86%
The Nigerian naira skidded to N778.80 per United States (US) dollar in the official window for Investors and exporters due to surging demand. The exchange rate remained subdued as a result of a shortage of FX inflows in Nigeria despite rising demand.
In the second quarter of 2023, there was about 86% decline in foreign portfolio investment which represents an inflow of massive capital with short-term investment horizon or hot money into Nigeria, according to a capital importation report published by the Nigerian Bureau of Statistics.
The breakdown showed that foreign direct investment also nosedived in the period amidst uncertainties in the local economy. At the parallel market, the exchange rate steadied as traders reacted to the apex bank’s announced removal of restriction on 43 items.
In the foreign exchange market, the Naira routed in the negative territory by 1.82% at the Investors and Exporters window, closing at N778.80 to the US dollar from N764.86 per dollar the previous day.
In the parallel market, the Naira traded flat on Monday at N1,050 per dollar as tension in the Middle East dragged the market price of crude oil lower. Crude oil prices opened the week in negative territory on Monday following fears from the ongoing faceoff in the Middle East and the U.S. plans to clamp down on Iranian Oil.
Thus, the WTI traded slightly above $85 per barrel while the Brent Crude price hung around the $90 market on brewing positive sentiments. Analysts said capital importation remained underwhelming as the new administration’s reform momentum in June was insufficient to turn the tides in capital inflows over Q2-2023.
According to the National Bureau of Statistics (NBS), capital importation into Nigeria declined by 32.9% year on year to USD1.03 billion in Q2-2023 from USD1.13 billion in Q1-2023. Analysts said this is the lowest level since Q2-2021 when the total capital inflow of USD875.62 million was recorded. In the comparable period in Q2-2022, Nigeria reported a capital inflow of USD1.54 billion.
The report showed that foreign portfolio investments crashed by 85.9% year on year to USD106.85 million recording the most significant decline given lingering FX liquidity constraints and uncompetitive domestic interest rates. In the period, foreign direct investments declined by 41.5% year on year to USD86.03 million. Meanwhile, other investments increased by 32.7% year on year to USD 837.34 million.
“We link this increase to parent companies of local subsidiaries stepping in to provide the needed US dollar liquidity required to meet obligations. We expect foreign investors to continue to adopt a wait-and-see approach over the short term, more so that reform momentum has slowed and global interest rates remain high.”, Cordros Capital said in its commentary note.
If local FX liquidity improves significantly, market rates increase, and investors can easily repatriate capital, analysts said they expect foreign capital inflows to increase over the medium term.
NBS reported that the production sector recorded the highest inflow with US$605.04 million, representing 58.73% of total capital imported in Q2 2023, followed by the banking sector, valued at US$194.58 million or 18.89%, and Shares with US$68.63 million or 6.66%.