Exchange rate crisis crashed foreign investor participation in stock market

In contrast to domestic investors, the exchange rate crisis in Nigeria reduced international investors’ stock market participation to just 16.8%.

This is mostly caused by the central bank’s capital controls, which restrict the flow of currency back home, as well as the discrepancy between official and black market interest rates.

On Tuesday, the official market experienced fluctuations in the naira to the dollar exchange rate between N444 and N446. On the other hand, the pricing on the black market was N745.

Numerous businesses and investors purchase dollars on the parallel market, where they can do so freely and at a premium of 80% above the official spot rate.

Meanwhile, the problem with the exchange rate is now hurting the Nigerian stock market. Despite the official naira’s 4% decline against the dollar this year, many foreign portfolio managers trying to withdraw money from the nation are unable to reach that rate due to a lack of hard currency.

Foreign investment in Africa’s biggest economy has not yet fully recovered from the pandemic-induced capital flight. This is partially due to the overvalued naira on the official market and the unsteady macroeconomic climate of the nation.

The turbulent foreign currency market in Nigeria, which is mostly the result of poor exchange rate management and falling foreign reserves, has reduced the participation of international portfolio investors in the country’s domestic stock market.

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Foreign Portfolio Investments, or FPIs, in Nigeria, however, climbed by 11.8% to N321.04 billion in the third quarter of 2022, or Q3’22, from N287.2 billion in the same quarter of 2021, or Q3’21. The value of foreign investments in Nigerian stocks is quantified by the FPI.

Analysts say that the higher balance in the FPI position is attributable to the investors’ inability to withdraw their cash owing to a lack of foreign exchange, despite the fact that it is known as “hot money” due to the speedy entry and exit.

In the meanwhile, the Nigerian stock market has continued to perform better for domestic investors than for foreign ones because of their great hunger. In 2021, total domestic transactions accounted for 77% of all transactions, while foreign transactions accounted for 23% of all transactions.

The total domestic transaction volume for 2022 was N1.729 trillion, and the total international transaction volume was N349.59 billion.

Due to risk aversion in the run-up to the general election in 2023 and a dismal macroeconomic background, the overall market activity has slowed down since the beginning of the second half of the year.

For instance, the stock exchange’s ratio of international transactions to local transactions, which was 21.3% during the same period last year, is now a pitiful 16.8%. When Nigeria wasn’t experiencing a currency crisis, overall foreign investments were roughly N349 billion, down from N792 billion and N1 trillion in 2019 and 2018, respectively.

Be aware that Nigeria’s high degree of insecurity played a role in the country’s 59% loss in foreign direct investment over the previous 11 years.

The largest economy in Africa is struggling as a result of a substantial reduction in direct and portfolio foreign investment, which has decreased FX liquidity.

The reduction in export receipts, which is mostly due to the decline in crude export earnings notwithstanding an increase in remittances from the diaspora and non-oil export receipts, has made this situation worse.

The local currency’s depreciation may indicate domestic investors which explains why, in relative terms, the market has been under constant pressure. If the official and illicit markets for the naira don’t coincide, this trend can continue for some time. ill need more money to maintain their existing quality of life locally. They might have to sell some of their stock in order to accomplish that.