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The policies of the Central Bank of Nigeria (CBN) are attracting “hot money” back into the country. This is according to new research by Bank of America (BoFA)’s global research unit.

Investopedia defines “hot money” as capital that investors regularly move between economies and financial markets to profit from highest short-term interest rates.

According to the report by BoFA, "Nigeria Watch: Hot Money on the Rebound," the total inward investment flows to Nigeria in Q1 2024 tripled the amount a year earlier but lower than 2019 highs, largely flowing into Treasury and Open Market Operation (OMO) bills.

Data cited in the report shows Nigeria attracted $3.38 billion in Q1 2024, up from $1 billion in Q4 2023. Of this, $2.01 billion was in portfolio investment, while loans accounted for $1.15 billion. Within portfolio investment, the flows largely went to money market instruments ($1.6 billion) such as Treasury bills and OMO bills.

“Recent central bank monetary and exchange rate policy adjustments are driving this trend,” BoFA said in a statement sent, today, to Financial Nigeria.

The analysis says more inflows should support the local currency’s stability for the next 12 months, with the naira projected to exchange at N1,400 to the US dollar by year-end.
 
In Q1 2019, Nigeria attracted over $8 billion in inward investment.

According to BoFA, the specific policies and actions of the CBN that drove the increase in financial flows in the first quarter of this year were currency devaluations, clearing of FX backlogs, paid maturing FX forwards, and reduced interventions in the FX market.

Also, the CBN started to hike the Monetary Policy Rate (MPR) – its indicative interest rate – in February with an increase of 400 basis points (bp). It continued its rate-raising policy with a 200bp hike in March and 150bp in May. These added up to a 7.5% increase, taking the MPR to 26.25% in May.

The report projects headline inflation to peak, in the near-term, at around 35%, and then to drop to 25% by year-end. “That would leave ex ante real rates in a positive range,” says BoFA.

BoFA observes that the CBN interest rate hikes were less and less with each meeting of the Monetary Policy Meeting (MPC), the rate-setting organ of the central bank. Accordingly, BoFA projects that the CBN may extend the current cycle of rate increases with one more hike by 100bp, although it is leaning towards a pause. The next MPC meeting is scheduled for July 22-23.

 “Attracting portfolio investors to the local market helps naira stability, in our view,” says BoFA. “We think that inflows from the World Bank ($2.25 billion already received), potential Eurobond issuance, and portfolio flows should keep the naira on a stable path in a N1,400-1,450 range. As of today, the spot is around N1,500 per USD.”