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As Portfolio Investment Rises… CBN May Impose Capital Controls

27 Jan 2013

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Sanusi Lamido Sanusi


Festus Akanbi
As the National Assembly waits on President Goodluck Jonathan to sign the 2013 Budget, there are fears that the rising appetite of portfolio investors for Nigeria’s economy could compel the Central Bank of Nigeria (CBN) to roll out measures aimed at foreclosing the flight of foreign investment from the country.

According to the estimation of the international financial advisory firm, Renaissance Capital, portfolio inflows increased significantly in September 2012 and exceeded foreign direct investment (FDI) for the first time in recent years.

Financial analysts, who interpreted the scenario, last week said the development implied that capital and financial account became more susceptible to reversals of portfolio inflows.

But analysts who are familiar with the unstable nature of portfolio investment fear that the apex bank might be contemplating a cocktail of policy to make capital reversal difficult for now.

Rencap, in its latest report, said: “While Nigeria’s foreign reserves have improved significantly to 10 months of import cover, from six months a year earlier, by our estimates, the fickle nature of portfolio inflows imply foreign reserves are at a higher risk from capital reversals. Foreign reserves are insurance against illiquidity, which depends on the volatility of flows.
“The increase in the significance of portfolio inflows in the capital account in 9M12, explained the CBN’s inclination to put up measures that protect foreign reserves from rapid capital reversals.

“The last time Nigeria imposed capital controls was during the global crisis when it shut down the interbank FX market,” the report stated.
In order to guard against the potential threat, which sudden withdrawal of portfolio investment could cause, analysts said the apex bank might impose new tax on foreign exchange transactions.

“We think this time round Nigeria may opt for something like a tax on FX transactions to dissuade sudden withdrawals of FX,” Rencap said.
However, when contacted, spokesperson of the CBN, Mr. Ugo Okoroafor, told THISDAY that the apex bank was watching the development in the economy, saying it would respond appropriately to any situation.

“We are aware of the fact that hot money is coming into the economy. We know how much is coming and the instruments being used by portfolio investors but we have excellent foreign reserves to meet any shock.

“The question people should ask is what are the factors that set the stage for the flow of portfolio investment into Nigeria. These people are looking at our stable exchange rate regime and good GDP, which is put at between 6.7 and 6.8 whereas growth is slow in other parts of the world,” he said.

He explained that foreign investment is flowing into Nigeria because of the ongoing economic reforms in the power sector and growth in the telecoms sector, explaining that the tempo could be sustained when there is stable price regime in oil market.
He also called for diversification of the economy and less appetite for imported goods. However, analysts said the significant interest in Nigeria’ capital market may reduce the risk of capital reversals.

“Notably, portfolio inflows increased in 9M12 to become the biggest source of financial inflows into the capital and financial account. While that is positive for boosting FX reserves, it also implies that the reserves are more susceptible to capital reversals. However, we believe attractive high yields and a stronger banking sector will support continued interest in Nigeria’s capital market in 2013, which is positive for the naira,” Rencap said.

Another frontline financial expert, who is the Chief Executive of Investment One Financial Services Limited, Mr. Nicholas Nyamali, said Nigeria could retain the attention of portfolio investment by sustaining the current impressive tempo of economy development.

Nyamali, in a recent interview, told THISDAY that the “fundamentals in the country are impressive and so people are coming in. If the government continues on that path that encourages those fundamentals to remain attractive, what is defined as hot money can become cold money by becoming money that will stay in the economy for a very long time but if those fundamentals should change for the worse, then individuals who have those investments would pull them out quickly?

He said: “I think the availability of funds in the short terms has value for the economy so we have more money in our reserves and we have more than we had in the past. That is great. The challenge is for the government and for those in the economic circles to continue to provide the environment that allows the money to stay for a long term.

“There are several reports coming out. I can mention a few, the Economist magazine, McKenzie report, and Rencap report. Each of these reports say Africa is the next destination and Nigeria is the point of call. As we go, we talk to our customers outside the country and I can tell you that it is clear that people are interested in investing in Nigeria and so government needs to step back as well as those of us in the private sector and ask the question, what are these investors looking for and what are they worried about.

Tags: Business, Nigeria, Featured, Portfolio Investment

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