Despite concerns of declining external reserves, analysts at FSDH Merchant Bank Limited have predicted that foreign portfolio investments (FPIs) in 2019, will be higher than the US$12.2 billion recorded in 2018, as investors seek to take advantage of the relatively higher yields in the Nigerian market.
The investment and financial advisory firm stated this in its 2019/2020 Investment Outlook obtained yesterday.
The external reserves stood at $40.5 billion as of last Thursday, lower than the $41.852 billion it was as at the end of the third quarter 2019.
But, the Lagos-based firm in the report, predicted that FPI would continue to drive investment inflows into Nigeria, but may still be a challenge in the near term. “Money market instruments will continue to account for the largest share. However, declining external reserve could limit foreign investment inflows into the country as investors would be wary about stability of rates and ease of exit.
“Given the recent restriction of non-bank financial institutions in OMO operations, we expect yields to moderate as we anticipate more inflows into the secondary market,” it stated.
It noted that, “underlying policy uncertainty in the system is sending mixed messages to the market– latest government policy measures like forced private sector lending and trade restrictions – with a backdrop of worsening macroeconomic fundamentals does not augur well for investment.”
In September, the loan-to-deposit ratio (LDR) target was reviewed upwards from 60 per cent to 65 per cent and all banks are required to attain the minimum by December 31, 2019.
Priority areas include MSMEs, retail, mortgage and consumer lending.
The upward review of the LDR led to the 5.3 per cent increase in credit to the private sector from N15.6 trillion in May to N16.4 trillion in September.
According to the CBN, failure to meet the above minimum LDR by the specified date shall result in a levy of additional cash reserve requirement equal to 50 per cent of the lending shortfall implied by the target LDR.
“While this move is expected to further stimulate lending to key sectors of the economy, it could also result in a lower lending to businesses. In addition, forcing banks to lend to businesses, especially given the slow economic recovery has the potential to add pressures on banks, and therefore, raise non-performing loans.
“Low consumer demand in the short to medium term triggered by expectations of higher prices and will have implication on future investment decisions in the real sector,” it added.
According to the report, the closure of land border was expected to have mixed impact on investments and trade. They held the view that introduction of such policy without embarking on measures to improve local capacities would only result in higher prices and firms’ redundancy.
“In addition, closure of land border without commensurate and prior investment in ports infrastructure and implementation of port reforms would lead to increased pressure on the existing ports, and result in reduced trade volumes.
“On the positive side, real investors will take advantage of the border closure and make investments in the production of strategic products such as rice, palm oil and poultry products,” it added.
However, in spite of the declining reserves occasioned by increasing forex demand, poor inflows as well as imminent inflationary pressure, they ruled out the likelihood of Monetary Policy Rate cut in 2019, at the last monetary policy committee meeting for the year holding this month.