CBN frowns as ‘hot money’ exceeds FDI by $7bn in 2018

THOUGH the Central Bank of Nigeria (CBN) is not too comfortable with huge Foreign Portfolio Investment (FPI) into the economy, records show that the inflow has exceeded Foreign Direct Investment (FDI) by $7 billion.

In the March edition of the Lagos Business School (LBS) Executive Breakfast Session, Bismarck Rewane and the Financial Derivatives Company (FDC) Think Tank observed that Nigerian Foreign Exchange (FX) receipts since January 2018 to date recorded $8 billion FPI known as ‘hot money’ and  $1 billion FDI described by some finance experts as ‘cold money’ ($7 billion net).

This trend has continued over time as official numbers show. For instance, the National Bureau of Statistics (NBS) in its “Nigeria Capital Importation for Fourth Quarter and Full Year 2017 Report” posted on its website stated that portfolio investment, which recorded $3.477 billion in the fourth quarter of 2017, remained the largest component of Nigeria’s capital inflow and contributed 64.6 per cent of the total amount of capita inflow, standing at $5.382 billion.

During the quarter, the report stated that FDI hit $378.4 million for the first time since the fourth quarter of 2015 when it reported $123.2 million.

Unlike FDIs which are more difficult to repatriate, hot money comes and go like a hurricane, leaving in its wake a battered currency and worse economy. FDI is a lot more difficult to withdraw when times are hard. Such investments (like factories) may have to be sold at a loss if they can be sold at all.

This is why the Central Bank of Nigeria (CBN) frowns at too much FPI in the economy. In a TV programme monitored in Lagos, CBN’s acting director, Financial Policy and Regulation, Hassan Mahmud said, “We are not just only interested in foreign capital inflows. We are not interested in hot money. We want capital inflow, but not for trading in the market. We want foreign capital inflow that will come as Foreign Direct Investment, which will stay in the economy and propel additional production in the economy.”

Owners of hot money are foreigners seeking quick returns. Hence, the money is invested in shares via the stock market, bonds and treasury bills (TBs). These are investment instruments which can be quickly sold or exchanged for cash, mostly within 24 to 48 hours. Some stockbrokers call investors in these classes of assets “fly by night” investors. The foreign portfolio investor is just interested in the gains on prices of the shares bought or interest rate on treasury bills and bonds.

Already, there are speculations that US Fed’s (equivalent of CBN) rate hikes could mean even greater pressure and instability in the exchange rate from capital outflows than initially projected. Analysts fear that a strengthening dollar could weaken commodity prices and this would be negative for oil revenues, external reserves and CBN’s ability to support the exchange rate.

Nigeria is presently enjoying all the goodies of Hot Money. Data from National Bureau of Statistics (NBS) reveals that inflow of Hot Money into Nigeria rose by 791 per cent, to $2.8 billion in the third quarter (July-September) of last year, from four year low of $314 million in the first quarter (January-March) of 2017. Most of the Hot Money, $1.9 billion (68 per cent) were used to buy shares on the stock market. As a result, the total values of shares (market capitalisation) on the Nigeria Stock Exchange (NSE) rose astronomically to N13.6 trillion at the end December 2017 from N9.24 trillion at the end of December 2016.

Also, Nigeria’s external reserves rose to $38.765 billion at the end of December 2017 from $25.84 billion at the end of December 2016. However, the country has severally tasted the bitter pills of Hot Money. For example, Hot Money into Nigeria declined from historic high of $5.13 billion in the third quarter of 2014, to $1 billion in fourth quarter of 2016. During this period, the total values of shares on the NSE fell to N9.24 trillion at end of 2016 from N11.48 trillion at the end 2014.

As the foreign portfolio investors demanded dollars to move their money out of the country, the external reserves which as at March 6 2018, stood at $43billion, fell from $34.47 billion at the end of 2014 to $25.84 billion at the end of 2016. This, in addition to other factors, led to the sharp depreciation of the naira during this period.

From N169 per dollar in third quarter of 2014, the naira depreciated in the parallel market to N450 per dollar at the end of 2016. This resulted into inflation, sharp increase in prices of goods and services and eventually economic recession.

Nigeria’s latest romance with Hot Money has persisted into the 2018. Within three weeks, the NSE capitalisation rose to N16.15 trillion, the highest in 35 years. Also, foreign investors pumped in $5.4 billion into the economy in the first three weeks in January, through the Investors and Exporters (I&E) window of the foreign exchange market. Currently, market capitalisation increased by N104.8 billion to settle at N15.5trillion on Friday last week.

Hot money, dollar inflow from foreign portfolio investors, helps to boost the external reserves currently at $43 billion and maintain stability of the exchange rate and even appreciation in some cases. Hot money invested in TBs and Bonds also provides opportunities for government to borrow from foreign investors. Hot money invested in shares helps to revive the stock market, leads to increase in share prices which help domestic investors either to preserve or increase money invested in the stock market.