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Foreign Exchange Policy, Interest Rate Increase Foreign Portfolio Investment by 170%
The Central Bank of Nigeria (CBN) high interest rate regime and foreign exchange policy have whetted the appetite of Foreign Portfolio Investors, FPIs, as inflows amounting to N696.88 billion came into the stock market in nine months of 2024.
This represents a huge 170.1 percent growth from N258 billion in the same period of 2023, 9M’23.
Findings show that the foreign investors’ return to the Nigeria’s stock market became more intense in the first quarter of this year as the CBN launched aggressive interest rate regime ramping up Monetary Policy Rate, MPR, by 450 basis points to 27.25% between February and September this year.
The MPR is the minimum benchmark rate for investment portfolios in both capital and money markets.
Meanwhile domestic investors committed N3.271 trillion to the stock market in the 9M’24, showing a 33.3% increase from N2.454 trillion in 9M’23.
Commenting on the FPI, analysts at Afrinvest Securities Limited, a Lagos-based investment firm, stated the CBN’s tough stance on inflation with constant hike in monetary rate resonated well with foreign investors.
They said: “We opine that the improved outlook of foreign investors was inspired by both CBN’s stance on inflation and stabilizing the Naira. Although higher interest rates tend to be negative for stocks, in theory, we believe the MPC’s vote to raise the interest rate by 600basis points to 24.75% between February and March 2024 was indicative of CBN’s tough stance on inflation and the need for currency stability, by extension”.
Commenting on the impact of the increased FPI on the exchange rate, David Adonri, Analyst and Vice Chairman at Highcap Securities Limited, said: “When FPIs flow into the stock market, it impacts the foreign exchange market positively as the rate in the FX market is determined by demand and supply dynamics. This in turn also boosts foreign reserves.
“Increase in FPI is also indicative of rising foreign investors’ confidence in the market and the economy at large.
“The jump in the overall foreign investment inflows reflects improved investor confidence driven by the government’s fiscal and monetary reforms.
“However, the capital importation profile has remained skewed to Foreign Portfolio Investment (FPI), suggesting that the investment climate is anchored on investors’ appetite for short-term instruments”.
Also commenting, Tajudeen Olayinka, Investment Banker & Stockbroker said : “ The essence of running a high interest rate regime by CBN is to stimulate foreign portfolio investors’ interest in Naira denominated financial assets, in a way to improve dollar liquidity in the foreign exchange market, as well as forcibly causing a cooling effect on local inflation. So, high interest rate and high yield environment in the fixed income space is responsible for the surge in foreign portfolio inflows into the economy in 2024.
“High interest rate regime is usually meant to address short term fundamental issues in the macroeconomic environment, its sustainability is therefore dependent on how responsive those key macroeconomic variables become in the immediate to near term. It is expected to be a short term measure.
The Central Bank of Nigeria (CBN) high interest rate regime and foreign exchange policy have whetted the appetite of Foreign Portfolio Investors, FPIs, as inflows amounting to N696.88 billion came into the stock market in nine months of 2024.
This represents a huge 170.1 percent growth from N258 billion in the same period of 2023, 9M’23.
Findings show that the foreign investors’ return to the Nigeria’s stock market became more intense in the first quarter of this year as the CBN launched aggressive interest rate regime ramping up Monetary Policy Rate, MPR, by 450 basis points to 27.25% between February and September this year.
The MPR is the minimum benchmark rate for investment portfolios in both capital and money markets.
Meanwhile domestic investors committed N3.271 trillion to the stock market in the 9M’24, showing a 33.3% increase from N2.454 trillion in 9M’23.
Commenting on the FPI, analysts at Afrinvest Securities Limited, a Lagos-based investment firm, stated the CBN’s tough stance on inflation with constant hike in monetary rate resonated well with foreign investors.
They said: “We opine that the improved outlook of foreign investors was inspired by both CBN’s stance on inflation and stabilizing the Naira. Although higher interest rates tend to be negative for stocks, in theory, we believe the MPC’s vote to raise the interest rate by 600basis points to 24.75% between February and March 2024 was indicative of CBN’s tough stance on inflation and the need for currency stability, by extension”.
Commenting on the impact of the increased FPI on the exchange rate, David Adonri, Analyst and Vice Chairman at Highcap Securities Limited, said: “When FPIs flow into the stock market, it impacts the foreign exchange market positively as the rate in the FX market is determined by demand and supply dynamics. This in turn also boosts foreign reserves.
“Increase in FPI is also indicative of rising foreign investors’ confidence in the market and the economy at large.
“The jump in the overall foreign investment inflows reflects improved investor confidence driven by the government’s fiscal and monetary reforms.
“However, the capital importation profile has remained skewed to Foreign Portfolio Investment (FPI), suggesting that the investment climate is anchored on investors’ appetite for short-term instruments”.
Also commenting, Tajudeen Olayinka, Investment Banker & Stockbroker said : “ The essence of running a high interest rate regime by CBN is to stimulate foreign portfolio investors’ interest in Naira denominated financial assets, in a way to improve dollar liquidity in the foreign exchange market, as well as forcibly causing a cooling effect on local inflation. So, high interest rate and high yield environment in the fixed income space is responsible for the surge in foreign portfolio inflows into the economy in 2024.
“High interest rate regime is usually meant to address short term fundamental issues in the macroeconomic environment, its sustainability is therefore dependent on how responsive those key macroeconomic variables become in the immediate to near term. It is expected to be a short term measure.
