High Yield in short-term Income instruments leads to Capital Importation
The National Bureau of Statistics (NBS) has published its most recent report on capital importation for the first quarter of 2025. The total estimated value of capital imported during Q1 2025 reached US$5.64 billion, marking the highest level in five years. This figure indicates a year-on-year increase of 67.12% and a quarter-on-quarter rise of 10.86%, primarily driven by a surge in Foreign Portfolio Investments (FPIs) due to high yields in short-term fixed income instruments. It is important to note that the capital importation figures are gross and have not been adjusted for capital exports.
The Foreign Portfolio Investments (FPIs), which constituted 92.25% of the total capital inflow during the reviewed period, surged by 150.75% year-on-year to $5.20 billion, and increased by 30.14% quarter-on-quarter. This significant rise in FPIs was predominantly focused on money market instruments such as Open Market Operations (OMO) and Treasury bills. In the first quarter of 2025, money market instruments represented 80.89% ($4.21 billion) of total portfolio investments, reflecting a substantial year-on-year increase of 162.23% from US$1.61 billion in Q1 2024, and a quarterly increase of 19.45%. The share of bonds in portfolio investments was relatively modest, accounting for 16.86% (US$877.41 million). This represents a year-on-year increase of 108.50% and a quarter-on-quarter increase of 165.48% from US$330.51 million, indicating a growing interest in fixed income securities amid attractive yield levels.
Conversely, Foreign Portfolio Investment in the local equities market experienced a decline of 18.69% quarter-on-quarter, highlighting ongoing caution among foreign investors in that sector. Data from the Nigerian Exchange (NGX) indicates that the NGX All Share Index (ASI) recorded a growth of 2.66% during the quarter. This asset class constituted only 2.25% (US$117.33 million) of total portfolio investments. Foreign Direct Investment (FDI) remained subdued at US$126.29 million, declining by 70.06% quarter-on-quarter while experiencing a slight year-on-year increase of 5.97%. It was noted that the contribution of FDI to capital importation decreased to 2.24% from 8.29% in Q4 2024. The lackluster performance of FDI reflects ongoing structural challenges, including policy uncertainty and infrastructure bottlenecks.
From a sectoral viewpoint, it is observed that the banking sector experienced the highest inflow of US$3.13 billion, representing a notable increase of 151.29% compared to US$2.07 billion in the same quarter of 2024, which constitutes 55.44% of the total capital inflow in Q1 ’25. The second largest contributor to capital importation was the Financing sector, estimated at US$2.09 billion, accounting for 37.18% of the total inflow.
The production/manufacturing sector was estimated at US$129.92 million (2.30% of the total capital importation), reflecting a decline of 69.14% quarter-on-quarter and 32.30% year-on-year. This decline can be attributed to diminished investment activity in the sector due to the prevailing high interest rate environment and macroeconomic instability, which is hindering growth in this area. Other significant contributors to capital inflows include shares valued at US$115.26 million (2.04%) and the Telecoms sector, estimated at US$80.78 million (1.43%).
Regarding capital importation by country of origin, the United Kingdom emerged as the leading source of capital imported into Nigeria in Q1 ’25, contributing a total of US$3.68 billion, which accounts for 65.26% of the total capital inflow during this period. Additionally, other notable sources of capital inflow included South Africa at US$501.29 million (8.88%), Mauritius at US$394.51 million (6.99%), the United States at US$368.92 million (6.54%), and the United Arab Emirates at US$301.72 million (5.35%).
The Monetary Policy Committee (MPC) decided to maintain the Monetary Policy Rate (MPR) at 27.50% during its most recent meeting, in light of ongoing month-on-month inflation increases, which is expected to sustain carry trade investments following the cumulative 850 basis points hike in 2024. This decision is anticipated to continue supporting inflows from Foreign Portfolio Investors (FPIs) in the short term. Given the current monetary easing stance of select central banks in key economies, yield-seeking capital is likely to persist in favoring emerging markets, including Nigeria, in the near future.
Unless there are external shocks, capital importation in Q2 is projected to remain high, primarily driven by FPI-related inflows due to the sustained high yields on short-term fixed income securities, particularly. SOURCE: Coronation Merchant Bank
