FDIs drop as ‘hot money’ dominates Nigeria’s $5.85bn imported capital in Q1

Nigeria’s ability to attract sustainable foreign direct investments (FDIs) remained weak, as the bulk of imported capital continues to be dominated by portfolio investments, otherwise known as ‘hot money’.

With oil prices remaining unstable, there are concerns about the quality of investment attracted into the economy, especially when investors are becoming jittery about the stability of the Naira, and the country’s capacity to service its debts.

Of the $5.85billion received in the first quarter (Q1) of 2020, portfolio investment accounted for 73.61% ($4.31billion) of the total capital importation recorded by the National Bureau of Statistics (NBS).

Indeed, Nigeria received $5.85billion capital importation in Q1 2020 against $8.51billion in Q1 2019.

According to the NBS, the $5.85billion worth of capital importation in Q1 2020 represents an increase of 53.97% when compared to how much was received in Q4 2019.

However, when compared to the corresponding first quarter period of 2019, the figure indicates a 31.19% decline.

Hot money, as it is called, is frequently transferred among financial institutions in an attempt to maximise interest or capital gain and could easily be pulled out by the investor depending on his/her perception of the business environment.

Specifically, hot money investments are targeted at bonds and money market instruments. They are major part of foreign investments inflow, which also exerts pressure on the Naira and national reserves every time the investor’s perception of the economy is negative. The move leads to capital flight.

Under the portfolio category, investment in money market instruments remains the largest recipient of capital inflows with a total of $3.44billion, followed by $639.72million in equity, while investment in bonds stood at $231.22million.

Foreign Direct Investment (FDI) constituted only 3.66% ($214.25million) to the total capital inflows. A decline of 16.72% compared to $257.25million received in Q4 2019, and 13.39% reduction compared to the corresponding quarter of 2019.

Other investments, which were broken down into four categories contributed 22.73% ($1.33billion) to the total capital importation in the first quarter of 2020. The inflows through other investments reduced by 19.92% when compared to $1.66billion received in Q4 2019.

Investment through trade credits in Q1 2020 was $50,000, Loans ($559.79million), Currency deposits ($820,000), while other claims scooped the highest share of $769.99million.

A further look into the report shows that the banking sector received the largest portion of capital importation, as it constituted 51.08% ($2.99billion) to the total capital inflows, followed by Financing, which received $1.33billion (22.77%) in Q1 2020.

Shares followed with $817.38billion (13.96%), Production $273.97billion (4.68%) while Telecoms received $157.48billion (2.69%).

The United Kingdom remains the biggest source of capital investment in Nigeria. In Q1 2020, investment from the U.K. amounted to $2.91billion, up from $1.19billion received in Q4 2019 and decline compared to $4.48billion in Q1 2019.

The top five countries that accounted for the biggest capital inflows in Nigeria within the quarter included the U.K. ($2.91billion), South Africa ($692.63million), UAE ($532.89million), Netherlands (441.79million), and U.S ($389.1million).