Fakoyejo OlalekanForeign investors significantly reduced their participation in the Nigerian stock market during Muhammadu Buhari’s tenure as President of Nigeria.
According to stock market data analysed by Prime Business Africa, foreign investors dropped their equity trading from a whopping 54 per cent in December 2015 to 16.67 per cent during the same period in 2022.
Noticeably, prior to Buhari’s emergence as President, Foreign Portfolio Investment (FPI) dominated the equity market, as they accounted for 54 per cent against domestic investors’ 46 per cent in 2015.
Fast forward to last year, foreign investments into the Nigerian bourse accounted for 17 per cent, significantly below the 83 per cent domestic investors held.
Flipping the percentage into capital, foreign investors reduced their investment value to N364 billion between January to November 2022, far from the N974 billion inflow recorded in the same period in 2015.
Impact of foreign investment falling against domestic investment
While the increase in domestic participation is an exciting sight, indicating more Nigerians are trusting the equity market as a source to grow their earnings, the reduction in foreign participation also affects.
The rise of domestic participation also reduces the risk posed by the dominance of foreign investors, who are known not to hold long positions in equity trading. As a result of FDI dominance, the growth of the equity market could be hampered, affecting investors’ investment value.
“They (foreign investors) don’t really keep their money for long. Yes, we need them, but we prefer them to also come in and invest their money for a certain period of time,” a Portfolio Management Analyst, Regina Nwangele, told Prime Business Africa.
Although Nwangele said the exiting foreign investors can’t be blamed, cause investors don’t invest based on emotions, but on the possibility of returns.
However, it also reduces the forex inflow into the foreign exchange market, thereby extending the forex scarcity which drove the Naira and Dollar exchange rate in the official market up by 54 per cent (N235) and 73.1 per cent (N554.5) in the black market.
Reasons for the reduction in foreign investors’ participation
Prime Business Africa understands that there are several factors driving foreign investors out of the stock market in the last seven years.
Taxing capital gains
- Foreign investors had taken interest in Nigeria’s equity market for years due to its impressive returns and exemption of Capital Gains Tax (CGT) on investment liquidation.
- But this changed due to Buhari’s administration taxing its way to higher revenue generation by imposing 10 per cent CGT on the disposal of shares via the Finance Act 2021 introduced in January 2022.
Inability to rein in Inflation/high MPR
- The inability of the government and the Central Bank of Nigeria (CBN) to curb inflation has wane the gains from equity trading.
- Prior to Buhari’s emergence, Nigeria was in a single-digit inflation era of 9 per cent as of May 2015, however, the rate closed in 2022 at 21.34 per cent.
- To rein in inflation, the apex bank raised the Monetary Policy Rate (MPR) or interest rate from 12 per cent in 2015 to 17.5 per cent within seven years.
- The rise in interest rate often results in an exit in the equity market, as investors look to fixed-income assets to take advantage of the hike in MPR.
Naira devaluation
- Due to the significant rise in inflation, Naira has devalued over the years, with inflation defying CBN’s monetary policies.
- In response, the exchange rate has appreciated from N200 in the official and black market in early 2015 to N435/$1 and N745/$1 respectively as of the end of 2022.
- The devaluation of the Naira means foreign investors will need to part with more Nigerian banknotes from their equity earnings to buy dollars when liquidating their investment – a move that will wipe their gains or further reduce their principal.
Repatriation challenges
- Capital repatriation has taken centre stage in Nigeria on several occasions due to foreign companies’ inability to repatriate their earnings in Nigeria.
- Insufficient foreign exchange is behind the repatriation challenge, and this is a cause of concern for foreign investors, as they would have to struggle to have their hands on forex despite having to lose part of their gains to inflation and naira devaluation.
- A similar event occurred in the aviation sector where foreign operators threatened to shut down their flight operations to Nigeria due to their inability to repatriate their ticket revenue in forex.
Non-definite policy direction/political uncertainty
- The political climate in Nigeria is also a factor in the reduction of Foreign Portfolio Investments in the Nigerian stock market.
- Policy uncertainty contributed to the exits, as investors are unsure of the policy direction of the administration.
- One such is the unexpected change in currency outlook announced in October 2022, with just three months as the deadline to phase out old Naira notes. This further impacted the value of the banknotes, as the policy forced Naira hoarders to dump the local currency for dollars.
Rise in insecurity
- Buhari’s administration was unable to end the Boko Haram insurgency, despite this being a major reason behind his victory at the Presidential poll in 2015.
- Also, the clash between herders and farmers has persisted, with bandits also attacking farmers, kidnapping and killing bus passengers, as well as destroying communities and killing the residents.
- High level of insecurity causes investor apathy or kills investors’ appetite, cause investing in an unsecured business environment is a financial disadvantage that results in investment loss.
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