Nigeria’s Reliance on ‘Hot Money’ Rises But Exit Risk Looms Large

Nigeria’s foreign portfolio investment, which climbed to its highest level in at least 12 years in 2025, is increasingly exposed to global shocks, according to a new report by Afrinvest West Africa Limited.

The warning follows the latest capital importation data released by the National Bureau of Statistics (NBS), which showed that FPI surged by 135.7 percent year-on-year to $19.7 billion, accounting for 85.0 percent of total capital inflows—up from 68.0 percent in 2024. This drove total capital importation to $23.2 billion in 2025.

On a quarterly basis, capital importation rose to $6.44 billion, up from $5.08 billion in the previous quarter. Portfolio investment remained dominant at $5.48 billion, accounting for 85.1 percent of total inflows. This was followed by other investments at $599.7 million (9.3 percent) and FDI at $357.8 million (5.6 percent).

Hot money dominance raises vulnerability

According to the report, the surge in FPI was driven by broad-based growth across all portfolio components, led by a near doubling of money market investments to $13.8 billion and a 389.8 percent jump in bond inflows to $4.9 billion.

While foreign direct investment rose by 36.8 percent to $923 million—its highest level since 2020—other investments declined by 21.9 percent to $2.6 billion.

“While the rebound in capital inflows is encouraging, its composition reveals heightened vulnerability to global shocks. Hot money now accounts for 85.0 percent of total inflows—the highest level since at least 2014,” Afrinvest said.

The investment firm noted that this structure leaves Nigeria highly sensitive to shifts in global financial sentiment and geopolitical risks.

Geopolitical tensions involving the United States, Israel, and Iran have intensified since late February, pushing crude oil prices above $100 per barrel and disrupting tanker traffic through the Strait of Hormuz—a critical route for roughly one-fifth of global oil supply.

While higher oil prices could boost fiscal revenues for Africa’s most populous nation, the broader impact of the crisis risks fuelling inflation, increasing import costs, and weakening currencies across emerging markets.

Authors of the report noted that Nigeria’s strong foreign exchange reserves—estimated at $49.5 billion as of March 26, 2026—and potential oil windfalls could support near-term stability.

However, “an escalation of conflicts and drag on the global economy could trigger a sharp reassessment of risk exposure among portfolio investors,” the firm warned.

Reforms, high yields attract inflows

The rebound in capital inflows also reflects recent macroeconomic reforms.

Afrinvest highlighted efforts by the Central Bank of Nigeria to restore orthodox monetary policy and stabilise the foreign exchange market, alongside ongoing banking sector recapitalisation, as key drivers of improved investor confidence.

In a bid to attract dollar liquidity, the central bank issued over N30 trillion in open market operation (OMO) bills at yields of up to 26 percent. These measures helped lift FX reserves to $45.5 billion and supported a 7.4 percent appreciation of the naira in 2025.

Stronger global investor appetite for emerging markets has also played a role. Data from the Institute of International Finance shows that capital flows to emerging markets excluding China rose by 79 percent.

Call for more stable capital

Despite the strong inflows, Afrinvest emphasised that FDI remains a more stable and cost-effective driver of long-term economic growth.

“Consequently, we reiterate the need to deepen structural reforms that improve the business environment, including addressing persistent challenges such as unreliable power supply, weak infrastructure, corruption, and insecurity,” it said.

The firm projects that capital importation could rise to $7.8 billion in the first quarter of 2026, representing a 20.4 percent quarter-on-quarter and 37.5 percent year-on-year increase.

While portfolio inflows and a supportive domestic macro environment are expected to sustain momentum, rising global uncertainties continue to pose downside risks.