The Central Bank of Nigeria (CBN)’s recent monetary policies have significantly bolstered the appetite of Foreign Portfolio Investors (FPIs), resulting in fresh inflows amounting to N120.8 billion into the market in April 2024.
This marks the fourth consecutive month of month-on-month growth in FPI this year.
Data from the Nigerian Exchange Limited (NGX) revealed that foreign portfolio investors’ participation soared to N120.83 billion in April 2024, up from N94.26 billion in March.
This increase has elevated foreign investors’ market share to 34.90 percent, the highest level recorded since November 2021.
The substantial influx of foreign investment has positively impacted Nigeria’s external reserves, which saw a 0.32 percent month-on-month increase to $33.827 billion in April from $33.718 billion in March. Before this, the reserves had been on a steady decline.
Policy Reforms Drive Investor Confidence
Foreign portfolio investment had plummeted to a mere four percent in April 2023, largely due to stringent foreign exchange market regulations and other monetary policy constraints.
However, the uptrend in FPI began following pivotal policy announcements, including the unification of the exchange rate and the removal of fuel subsidies.
These measures are believed to have restored confidence among foreign investors, prompting their return to the Nigerian stock market.
Vanguard’s research indicates that the foreign investors’ resurgence became more pronounced in January 2024 when the CBN implemented an aggressive interest rate policy, raising the Monetary Policy Rate by 600 basis points to 24.75 percent between February and March.
This development has made Nigeria’s money market highly attractive to FPIs on a global scale.
Additionally, the CBN has introduced several policy actions in the foreign exchange market, such as clamping down on cryptocurrency platform Binance, harmonizing reporting requirements for banks’ foreign currency exposures, and clearing all valid foreign exchange backlogs. These actions aim to stabilize and clean up the forex market.
Analyst Perspectives
Analysts at Afrinvest Securities Limited, a Lagos-based investment firm, highlighted that the CBN’s firm stance on inflation and its consistent hike in the monetary rate have resonated well with foreign investors.
They noted, “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 600 basis points to 24.75% between February and March 2024 was indicative of CBN’s tough stance on inflation and the need for currency stability.”
However, Afrinvest maintained a cautious outlook for future FPI inflows through the stock market.
Coronation Asset Management analysts also pointed out the federal government’s report of receiving approximately $2 billion in FPI since the previous year.
They stated, “Given that the 1-year Nigerian Treasury Bill yield is comfortably over 20 percent, 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 attracting FPI over the years.”
Impact on Exchange Rate and Economy
David Adonri, Vice Chairman of Highcap Securities, commented on the positive impact of increased FPI on the exchange rate.
“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 dynamics.
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,” Adonri explained.
As Nigeria continues to navigate its economic challenges, the CBN’s monetary policies and the resulting increase in foreign portfolio investments signal a cautious yet optimistic outlook for the nation’s financial markets.
