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Market Digest Nigeria

Finance

Nigeria’s Foreign Portfolio investment to crash by $11.4 billion in 2020- IMF

Investment is expected to decline by at least $11.4 billion, as the coronavirus disease eats deep into the fabric of the most populous black nation’s economy.

This was disclosed in the International Monetary Fund report.  In the report, the global lender stated that the nation’s portfolio investment would drop from the $9 billion recorded in 2019 to a deficit of $2.4 billion by the end of 2020.

Portfolio investments are in the form of a group of assets, including transactions in equity, securities, such as common stock, and debt securities, such as banknotes, bonds, and debentures. They are passive investments, as they do not entail active management or control of the issuing company. Unlike, Foreign Direct Investment (FDI), foreign investors here have a relatively short-term interest in the ownership of these passive investments.

On Tuesday, IMF had approved a sum of $3.4 billion via a Rapid Financial Instrument to Nigeria. The loans come at a period when countries across the world are battling with the Covid-19 pandemic and the crash in crude oil prices.

Shedding more light on what the future holds for the Nigerian economy, IMF explained that the liquidity based indicators of the nation remain a concern, as they make Nigeria’s low debt-to-GDP ratio highly vulnerable to shocks. Some of the liquidity based indicators that remain a concern for IMF are the Cash Reserve Ratio (CRR), which several Nigerian banks had frowned at, Loan Deposit Ratio (LDR), and money supply (M2). It stated:

“Public debt is projected to remain sustainable under a variety of shocks, albeit liquidity based indicators remain a concern and make Nigeria’s low debt-to-GDP ratio highly vulnerable to shocks. Under staff’s baseline, public debt will increase to 34.8% of GDP in 2020 (including the RFI purchases), would reach 37.4% in 2022 and come down to 36.3% in 2025, significantly below most emerging market peers’ debt levels.

“These risks are partially mitigated after accounting for extra-budgetary revenue (as the authorities currently plan to stop some of the earmarked funds for certain activities, such as the Road Fund or Tobacco Fund) and state and local government revenue; access to these resources in the case of an emergency would allow the ratio to remain high but manageable at between 20 to 30%.”

Also, the global lender added that the nation’s oil and gas exports are expected to decline by at least $26.5 billion, as it warned that Nigeria remained exposed to rising risks, particularly in oil markets. “Rising unsold cargoes could also impact oil production, which could decline further through OPEC agreed cuts or if prices persist below production costs,” the IMF said.

In its request letter to the IMF, Nigeria included its plans to implement a “more unified and flexible exchange rate regime.” This, according to the country, would increase its revenue to 15% of GDP and move to cost-reflective electricity tariffs by 2021.

The letter, which was signed by the Minister of Finance and the Central Bank of Nigeria’s Governor, also stated that a new fuel price regime, outlined in March, would permanently eliminate costly fuel subsidies. The subsidies cost an estimated 10 trillion naira ($27.78 billion) from 2006 to 2018.

With uncertainties in economic indices and parameters, a Council Member, Nigerian Stock Exchange, (NSE), Adebayo Ajayi, agree with IMF that the nation would witness dearth of FPI in 2020.

In an interview, he explained that the state of the nation’s foreign reserve and the value of crude oil are major attractions of foreign investors to the country. He said,

“With the depleting reserve and ridiculous crude oil price, there is no way Nigeria would not lose foreign investors in 2020, except the government, introduced capital controls, which no one prays for, as investors prefer free entry and free exit. Without any micro change, no FPI for us. The equity market felt the impact a few weeks back when several foreign investors sold their stakes and left the bourse the bourse.

“The way out for the nation is to come up with an international commodity that would be in high demand across the globe immediately after COVID-19, as that would attract FPIs to the country. Anything out of that, 2020 will be a year of no FPIs.”

In all, Nigerians and observers can’t wait to see the defence of the Federal Government or the CBN, and their assurances that the nation would be out of the woods sooner than expected.

NAIRAMETRICS
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