Nigeria’s exchange rate crisis had crashed foreign investor participation in the stock market to just 16.8% when compared to their domestic counterparts.
This is largely due to capital controls put in place by the central bank limiting currency repatriation as well as the disparity between the official and parallel market rates.
NewsBeatng reports that on Tuesday, the exchange rate between the naira and the dollar fluctuated between N444 and N446 to the dollar at the official market. However, the rate on the parallel market was N745 to the dollar.
The parallel market, where the dollar is freely exchanged but at a premium of 80% to the official spot rate, is where many firms and investors buy dollars.
In the meantime, the exchange rate conundrum is now negatively affecting Nigeria’s stock market.
Although the naira’s official depreciation against the dollar this year is 4%, many international portfolio managers looking to repatriate funds from the country are unable to access that rate due to a scarcity of hard cash.
Foreign involvement in Africa’s largest economy has not yet returned to normal since the pandemic-induced capital flight. This is partly because of overvalued naira at the official market and the country’s unstable macroeconomic environment.
Foreign portfolio investors’ participation in the Nigerian domestic stock market has decreased solely because of the country’s volatile foreign exchange market, which is mostly the result of subpar exchange rate management and declining foreign reserves.
However, Nigeria’s Foreign Portfolio Investments, or FPIs, increased by 11.8% to N321.04 billion in the third quarter of 2022, or Q3’22, from N287.2 billion in the same period of 2021, or Q3’21.
FPI is a measure of the value of foreign investments in Nigerian stocks. Despite being referred to as “hot money” because of the quick entry and leave, analysts believe the higher balance in the FPI position is due to the investors’ inability to withdraw their funds due to the lack of foreign exchange.
In the meantime, domestic investors’ strong appetite has continued to outperform international investors in the Nigerian stock market.
Total domestic transactions made up 77% of all transactions made in 2021, while overseas transactions made up 23% of all transactions made during that time.
According to the YTD transaction data for 2022, there were N1.729 trillion in total domestic transactions and N349.59 billion in total foreign transactions.
But since the start of the second half of the year, there has been a slowdown in overall market activity because of risk aversion ahead of the general election in 2023 and a lacklustre macroeconomic backdrop.
Foreign transactions as a percentage of domestic transactions on the stock exchange is a paltry 16.8% year to date compared to 21.3% same period last year.
In terms of total transactions, foreign investments are about N349 billion compared to N792 billion and N1 trillion in 2019 and 2018 respectively, when Nigeria was not facing a forex crisis.
Note that the elevated level of insecurity in Nigeria has partly also contributed to a 59% decline in foreign direct investment during the past 11 years.
