Investment and financial analysts at Cordros Securities Research has projected marginal uptick in capital importation (CI) in 2021 after a decline of 56.7 per cent in 2020.
The CI for 2020, according to data released by the National Bureau of Statistics (NBS), stood at $9.68 billion, down from $23.99 billion.
Cordros Securities said they had envisaged the low CI, saying it would improve until foreign investors saw policy action that increases their confidence in the stability and liquidity of the naira and more attractive fixed-income yields versus peers.
However, looking ahead, Cordros Securities said they expect a marginal pickup in CI given the recent uptick in yields as well as their expectation of further devaluation of the currency which they said they believe would support improvement in foreign portfolio inflows(FPI).
According to the analysts, the major downside risk stems from the conflicting policy actions that continue to deter confidence in the Nigerian economy, stressing that over the medium to long term, attracting foreign direct investment (FDI) should remain the key focus for the government. They explained that this will be a major factor in bringing stability to the FX reserves (which is currently dominated by export earnings and volatile “hot money”).
“In our view, this will make the FX reserves less susceptible to external shocks, providing more flexibility to the Central Bank of Nigeria (CBN) flexibility in achieving its mandate of a stable currency. In 2021, we expect a marginal pickup in capital importation on account of (1) a low base effect, (2) higher yields in the OMO market, and (3) devaluation of the currency,” they said.
They added that given the recent rally in the price of crude oil, “we expect the FX liquidity conditions to improve albeit slowly when compared to 2020. Thus, we see scope for improvement in portfolio inflows as the CBN tries to attract them through the measures identified above. On FDI, we do not expect any major divergence from historical trends, due to the continued presence of structural rigidities and in recent times, socio-economic problems which will continue to deter long-term investments in our view. With local yields lower than dollar-denominated yields, we expect local companies to continue to favour local denominated debt.”
On liquidity, they noted that the CBN has started the process of clearing the backlog of FX demand with the daily sale of $50 million to Foreign Portfolio Investors. Although this is positive for exiting investors, the CBN would have to issue instruments at yields higher than the prevailing secondary market rates to make the market interesting for new foreign inflows. Peers with similar ratings and less currency risk have yields on one-year government securities at between 4.9 per cent and 13.7 per cent, compared to Nigeria at 3.6 per cent. Given the level of liquidity in the system, coupled with the funding needs of the government (N588.90 billion planned domestic borrowing over the next four months), we do not see yields rising significantly over the rest of the year.”
– Thisday