Nigeria's foreign exchange reserves experienced a $7.7 billion increase, culminating in a November 2024 balance of $40.3 billion. This growth is attributable to portfolio investment inflows driven by the nation's attractive high-interest-rate environment.
The sustained reserve growth reflects the Central Bank of Nigeria's (CBN) proactive monetary policy, successfully attracting substantial foreign portfolio investment following interest rate adjustments. A Tuesday report from Lagos-based FBNQuest Capital Research analysts confirms a predominantly upward trend in gross official reserves since April 2024.
This positive trend is primarily attributable to the renewed influx of foreign portfolio investment, driven by the Central Bank's restrictive monetary policy and the current high interest rate environment, according to analysts.
Governor Olayemi Cardoso of the Central Bank of Nigeria (CBN) cited curbing inflation, stabilizing the naira, and attracting portfolio investment as key drivers behind the benchmark interest rate increase to 27.5 percent. The central bank's actions, representing an 875-basis-point increase from last year's 18.75 percent, aim to maintain price stability.
However, despite these substantial rate hikes, inflation persists at a high level, and the naira remains under pressure. Elevated interest rates create an attractive environment for portfolio investors, bolstering foreign currency inflows and strengthening national reserves.
FMDQ data indicates a 40% month-over-month increase in foreign portfolio investment inflows, exceeding $1.6 billion in November. Conversely, foreign direct investment (FDI) inflows remain low at $241 million, unchanged from the previous month, primarily due to the challenging macroeconomic environment.
ARKK Economics and Data Limited CEO and Chief Economist Samson Simon highlighted that, while rising interest rates may draw in portfolio investors, a cautious approach is warranted, as these investors may quickly withdraw capital if risks are perceived. He noted that, although foreign portfolio investment (FPI) is a significant factor potentially mitigating Nigeria's foreign exchange liquidity challenges, its inherent volatility necessitates against over-reliance. A decline in FPI, he stated, is an unfavorable indicator.
Conversely, FBNQuest analysts forecast growth in the nation's foreign exchange reserves, projecting sustained capital inflows to bolster the Nigerian market. They project a steady rise in Nigeria's gross official reserves in the near term, driven by increased capital inflows as foreign portfolio investors exploit carry trade opportunities presented by high interest rates.
Foreign Portfolio Investment Overview
Foreign portfolio investment in Nigerian equities totaled \$284 million during the first nine months of 2024, exceeding all levels since the COVID-19 pandemic. This represents a 19% increase over the \$239.2 million recorded during the same period in 2023, according to the National Bureau of Statistics' (NBS) Q3 2024 Capital Importation report.
This investment level is the highest since the first nine months of 2020, when it peaked at approximately \$737 million, compared to \$168.5 million in 9M 2021, \$51.7 million in 9M 2022, and \$239.2 million in 9M 2023. Furthermore, the \$84.7 million in Q3 2024 represents the highest quarterly foreign investment in Nigerian equities since at least 2020.
In 2024, Nigeria's economy is exhibiting characteristics consistent with a "hot money" destination, with foreign portfolio investment comprising approximately 61% of total capital inflow during the first three quarters. Of the $4.38 billion in foreign portfolio investment, $3.43 billion is allocated to short-term money market instruments.
The Nigerian Exchange (NGX) has yielded a 31.34% year-to-date return in 2024, a figure below both the national inflation rate and 2023's returns. Despite record-high inflation (since 1996) and a benchmark interest rate of 27.5%, the increased foreign interest in Nigerian equities is attributable to improvements in the nation's foreign exchange regulatory environment.
Unlike previous years, the current foreign exchange system offers enhanced liquidity, facilitating seamless participation by investors in the Nigerian stock market and enabling straightforward repatriation of dollar-denominated returns without the need for advocacy.