The subdued confidence of a few market analysts that the recent foreign portfolio investment (FPIs) outflow outpacing inflows was not indicative of a loss of trust in the country’s economy is understandable. But coming from a backdrop of investors’ bitter experiences over the 2008 market crash, there might be serious need for caution again.
Moreover, the phenomenon is a timely warning to managers of the economy and the country’s political elite to re-strategise in the face of intervening variables: dwindling price of oil – the underlying strength of the economy – in the international market, projections into the year before general elections and the suspected ‘softness’ of the stock market this year. These are identified major decision cases for the outflow that should not be discountenanced and the managers should apply some foresight in preventing another scary meltdown for local investors.
In a developing economy like Nigeria, a capital flight of $3 billion through the stock exchange within a short period is not complimentary. The problem is that officials over-celebrate an achievement and tend to play down serious challenges when they come.
FPIs have always had a good hold on local transactions which always trigger cracks after any outflow. For instance, the Nigerian Stock Exchange (NSE) indicated a domination of the market activities by 75 per cent in the first four months of the year between January and April. Comparatively, during the period, domestic transactions decreased by 32.61 per cent. Also, total transactions up till April rose by 1.35 per cent which in value terms shows an increase from N181.7 billion in January to N184.43 billion in April. Investment flows through the FPIs grew to N138.78 billion (about $0.89 billion) in April 2014, up 54.8 per cent from January 2014, while domestic investors decreased significantly from 50.72 per cent to 24.75 per cent. Total foreign inflow reportedly stood at N65.06 billion while total foreign outflow was N73.73 billion.
The current fear was, however, triggered by reports the other day that against the staked N389.06 billion on equities on NSE, FPIs withdrew N482.91 billion in the first eight months of 2014 which are outflows from sales transactions or liquidation of portfolio investments. The posting represents a 35.4 per cent increase on the N356.64 billion. Comparatively, there was a 0.4 per cent drop in year-on-year drop in inflow. Available data as of August also show that FPI outflow was 55.4 per cent of the total foreign transactions against a total inflow of 44.6 per cent. It is, however, reassuring that the development is not limited to the Nigerian economy.
What is at play makes it obvious then that investors are getting more conservative with their funds and that emerging market investors are beginning to see better options elsewhere to maximize profit. Another expert opinion suggests better investment options in countries that are sources of the inflows, which are likely to make investors being less adventurous. These are legitimate. A closer look at the Nigerian economy as is will reveal that there is no investment in the real sector but rather in services. A change in perspective is, therefore, ideal. Regulators of the economy should interrogate themselves on whether Nigeria is truly a destination for Foreign Direct Investment as an FDI investment frame should be able to target 25 years on the average.
However, the authorities have to live with the realization that there is no proper growth where capital flight rules. Therefore, a certain level of restraint is advised on the part of policy makers and regulators against desperate invitation to briefcase foreign investors whose only interest is borrowing at cheap rates elsewhere to hold another economy by the jugular to promote self-aggrandizement.
From the foregoing, the lesson is simple: investment inflows are most likely to be on the upward swing if portfolio investors feel comfortable; a downward slope is imminent if the reverse is the case. That in essence is a clarion call on political and economic managers to lead in the right path and create that enabling environment for growth and development strong enough to raise the confidence level of foreign investors. To make a headway, the disconnect between factors sustaining an economy and the collapse, including provision of a solid enabling environment, must be addressed. If the economy would be rock-solid to attract investors at any point, effort should also be invested in keeping their trust for longer periods with attractive incentives.
It is pertinent to state that foreign investors play a major role in capital markets and very recent global financial crisis has taught most economies around the world a few lessons not the least being that: complacency kills. Also, an index of a failing economy is a collapse of banks, so the regulatory authorities must continue to guard against this and Nigeria must continuously strive to retain the confidence of the international investing community.
