The global audit, tax, and advisory services firm, KPMG, has highlighted that the decreasing trend in portfolio investment poses a significant risk to Nigeria’s economy, raising concerns about forex illiquidity and currency depreciation.
The firm points out that this decline is not only impacting consumer price inflation and purchasing power but also hindering the country’s economic growth and reducing job creation, particularly due to a persistent reduction in Foreign Direct Investment (FDI).
In its “flashnotes” on the recent National Bureau of Statistics (NBS) capital importation report, KPMG noted a sharp decline in portfolio investment, encompassing financial assets like stocks, bonds, and securities, dropping from $649.28 million in Q1 2023 to $87.11 million in Q3 2023, a decrease of 86.58%.
The firm attributes this fall to negative market sentiments and ongoing concerns about the country, despite initial positive reactions to reforms in Q2 2023.
It said:
- “Portfolio investment which includes investments in financial assets such as stocks, bonds, and other securities has also been on the decline since Q1 2023 from $649.28 million to $87.11 million in Q3 2023 exposing the economy to risks of foreign exchange illiquidity and currency depreciation, pressure on consumer price inflation, reduced purchasing power, slower economic growth (3.75% target for 2024), lower job creation (especially from persistent reduction in (FDI), and overall macroeconomic instability.
- “It also makes the economy more vulnerable to global economic shocks which is especially concerning given the current global poly-crisis.”
Major company exits hurt investors’ confidence
With nearly 10 major firms exiting the Nigerian market in 2023, KPMG noted that the departure of longstanding companies is eroding investors’ confidence.
It added that factors contributing to this include the need for macroeconomic stability, a negative interest rate environment, a widening FX gap with declining reserves, and global reclassifications by FTSE Russell and MSCI, which have negatively influenced external sentiments.
It said:
- “We attribute the drop in capital importation to Nigeria in Q3 2023, after an initial rise in Q2 2023, to continuing negative market sentiments on the country despite initial reforms being viewed positively.
- “The need for macroeconomic stability, the negative interest rate environment, wide FX gap with low and declining forex reserves, the need for greater clarity with respect to monetary and fiscal direction in addition to various negative news including the exit of multinational companies like GlaxoSmithKline and Procter & Gambles (P&G) who have discontinued on-ground operations and adopted import and distributor-led business models as well as recent reclassifications of Nigeria from frontier markets to standalone and lower markets by two external investment bodies – FTSE Russell and MSCI, respectively, have all dampened external sentiments.”
Foreign capital inflow concerns
The overall foreign capital inflow into Nigeria witnessed a substantial drop to $654.65 million in Q3 2023. Of this, FDI represented only 0.091%, while approximately 78% comprised foreign loans.
KPMG expresses concern over the dominance of short-term capital inflows like trade credit and loans, emphasizing the potential negative impact on the country’s ability to compete globally and attract foreign investment.
The audit firm warns that without foreign investment, the cost of doing business could rise, affecting the attractiveness of investment opportunities.
However, on a positive note, KPMG suggests that the decline in foreign inflow might promote self-sufficiency, encourage the exploration of alternative financing sources like domestic savings and capital markets, and foster local entrepreneurship.
More Insights
- Despite the obstacles evident in the recent capital importation report, there is a sense of hope centred around the anticipated favourable outcomes of foreign investment commitments secured by President Tinubu during his international trips.
- These commitments reportedly exceed $15 billion in Foreign Direct Investment (FDI) spread across diverse sectors. The trajectory of Nigeria’s economic trajectory hinges on the fulfilment of these pledges and determined initiatives aimed at bolstering foreign capital inflows.
- As Nigeria grapples with these economic challenges, KPMG’s analysis underscores the urgency for strategic interventions to stabilize the financial landscape and promote sustainable growth.