The recent spike in foreign portfolio flows into Nigeria’s capital markets is giving the Central Bank of Nigeria (CBN) some concerns, on the back of a potential negative fallout from a sudden reversal of the flows.
Foreign capital inflows into Nigeria, Africa’s top oil producer, rose 77 percent from the previous three months to $6.07 billion in the third quarter of 2012, according to a CBN report on some major developments in the Nigerian economy for quarter three (Q3) 2012 in comparison with the preceding quarter (Q2) and the corresponding quarter of 2011.
Portfolio flows or “hot money” accounted for 76 percent of total inflows during the period, with foreign direct investment accounting for the remainder.
The apex bank’s anxiety is being fuelled by the consequences of the exit of hot money from Asian economies in the late nineties, which culminated in the Asian financial crises of 1997 – 1998. The impact was huge currency devaluations and a collapse in aggregate output, leading to massive poverty and unemployment in the region.
“The observed increase in the inflow of foreign direct investment and portfolio investment in Q3, 2012 was quite impressive and should be sustained through a sustained investment friendly environment,” said the report.
However, the report said the slow global recovery continues to dampen world demand for commodities and possibly lower prices could cause adverse trade shocks.
“The increase in the inflow of foreign direct and portfolio investment over the last two quarters suggests the need to put in place measures that would guard against capital reversal,” said the report.
Analysts however say that it is to Nigeria’s credit that the country’s free markets attracts and makes it easy for offshore portfolio investors to exit rapidly.
“We are perplexed by suggestions in the report that the portfolio surge highlights the need for measures against capital reversal,” said FBN capital research analysts, in a note released last Friday.
“We hope that we have not stumbled upon a call for controls out of fear of ‘hot money’,” they said.
The CBN had cautiously embraced ‘hot money’ flows into the country, as it only recently (in 2011), lifted the one-year minimum hold period on Nigerian bonds by foreign investors ,leading to an increase in such inflows into Nigeria.
The bank pushed up short term interest rates through the hike in its Monetary Policy Rate (MPR) to 12 percent, a move designed to improve the incentive for local and international investors to hold NGN-denominated assets.
The CBN puts the total hot money in the system at about $5 billion, with a further $1.5 billion expected to flow into naira denominated assets from the addition of Nigerian bonds to JP Morgan’s emerging markets bond index.
Nigeria’s total external reserves was $40.64 billion as at end- September 2012 which represented increases of 14.8 and 28.0 per cent when compared with the levels recorded in the preceding quarter and the corresponding quarter of 2011, respectively.
The Nigerian naira was up 3.9 percent in 2012, the strongest performer on the continent according to Bloomberg data.