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Foreign portfolio investors in massive return to Nigeria

…Analysts attribute devt to CBN’s hawkish monetary policy

The Central Bank of Nigeria, CBN, monetary policies may have wet the appetite of Foreign Portfolio Investors, FPIs, as fresh inflows amounting to N120.8 billion came into the market in April 2024, recording a fourth consecutive month-on-month rise this year.

FPI had hit a record low as of April last year on concerns over the foreign exchange market regulations and related monetary policy constraints.

Specifically, the Nigerian Exchange Limited (NGX)’s Domestic and Foreign Portfolio Participation in Equity for April 2024 showed that foreign portfolio investors’ stake in the market soared to N120.83 billion in April 2024 from N94.26 billion in March.

The significant investment by foreign investors’ during the period lifted their participation level to 34.90 percent in April, the highest in the last 28 months (since November 2021).

This, consequently, spurred a 0.32 percent Month-on-Month, MoM increase in the nation’s external reserve to $33.827 billion in April from $33.718 billion in the previous month. The reserve has been on decline before this time.

The FPIs’ participation had dropped to as low as four percent in April 2023 before resuming an uptrend following some policy pronouncements, including unification of the exchange rate and fuel subsidy removal, which analysts believed, had injected confidence in the foreign investors and propelled their comeback to the stock market.

Vanguard’s findings show that the foreign investors’ return to the stock market became more intense January this year as the CBN launched aggressive interest rate regime ramping up Monetary Policy Rate by an unprecedented 600 basis point to 24.75 percent within two months of February and March this year.

This policy development made Nigeria’s money market one of the most attractive to FPIs globally.

The apex bank had also launched a slew of policy actions in the FX market, including clamping down on cryptocurrency platform – Binance, harmonisation of reporting requirements on foreign currency exposures of banks, and complete clearance of all valid foreign exchange backlog, in a bid to clean up the forex market.

Commenting on this development, analysts at Afrinvest Securities Limited, a Lagos-based investment house, said the CBN’s tough stance on inflation with constant hike in monetary rate resonated well with foreign investors.

They stated: “We opine that the improved outlook of foreign investors was inspired by both CBN’s stance on inflation and stabilizing the Naira. Although higher interest rates tend to be negative for stocks, in theory, we believe the MPC’s vote to raise the interest rate by 600basis points to 24.75% between February and March 2024 was indicative of CBN’s tough stance on inflation and the need for currency stability, by extension’’.

They, however, maintained a cautious outlook for FPI inflows through the bourse going forward.

Also, analysts at Coronation Asset Management, noting the Federal Government’s declaration that they had received about $2 billion in FPI since last year, stated: “Given that the 1-year Nigerian Treasury Bill yield is comfortably over 20 per cent, it would be surprising if foreign investors did not take a look at Nigerian securities again, to create FPI.

“The issue, in our view, is that $2.0 billion, while welcome, is not large in the scheme of things, given Nigeria’s track record in attractive FPI over the years.

And, assuming this $2.0 billion (or more, because we are not counting possible additions in March and April) is already booked, then more FPI may be needed in Q2 2024 to support FX turnover.”

Commenting on the impact of the increased FPI on the exchange rate, David Adonri, Vice Chairman, Highcap Securities, said: “When FPIs flow into the stock market, it impacts the foreign exchange market positively as the rate in the FX market is determined by demand and supply dynamic. This in turn also boosts foreign reserves.

“Increase in FPI is also indicative of rising foreign investors confidence in the market and economy at large.”

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