Foreign portfolio investment (FPI) involves investment in non-physical assets in foreign economies. This includes investing in financial assets like bonds, stocks, and treasury bills.
Investments through FPI do not necessarily give the investor direct control or MANAGEMENT. And It is primarily driven by returns, market signals, and policy direction.
There are investors around the world whose interest is to monitor economic trends, policy changes, and signals. When it is the best time to take positions, they move their capital quickly.
This capital is highly mobile. It enters when conditions are favourable and exits when returns begin to normalize or risks increase. Therefore, an economy looking to achieve sustainable growth needs to look beyond relying on large FPI.
While the total capital inflow for the first three quarters of 2024 reached approximately $7.23 billion, the FPI component accounted for roughly $4.38 billion. This signals a market heavily driven by short-term financial appetite. Nigeria’s FPI is largely driven by high yields, not strong fundamentals.
ADVANTAGES OF FPI FOR INVESTORS
- Diversification: Investments are spread across different economies, reducing the impact of shocks from a single economy.
- Policy arbitrage: Investors can take advantage of favourable interest rate regimes and structural reforms.
- High liquidity: These securities are easier to convert to cash in a functional market.
- Accessibility: With technology, investors around the world can invest in financial assets in countries of their choice.
WHAT DRIVES (SPIKES) FPI
FPI flows are highly sensitive to economic signals. Major drivers include:
▪️ Differences in interest rate movements and returns
▪️ Expectations of changes in exchange rates
▪️ Government policies and reforms
▪️ Macroeconomic and political stability
▪️ Ease of moving capital in and out of the country
▪️ Investor confidence in the economy
▪️ Perceived opportunities in key sectors
In Nigeria, high yields in fixed-income instruments such as treasury bills and bonds have historically been a major attraction for foreign portfolio investors.
LET’S TALK ABOUT THE RISKS INVOLVED IN FPI
➡️ Liquidity risk: It may be difficult to exit quickly during market stress.
➡️ Exchange rate risk: Currency depreciation can reduce the real value of returns.
➡️ Political risk: Instability or sudden policy changes can lead to capital flight.
FINAL THOUGHT:
FPI can support the economy, especially in the short term.
However, for long-term stability, it is not the type of capital to rely on. It can leave as quickly as it comes.
For long-term growth, an economy must focus on building strong fundamentals that attract and retain more stable investments.
Akinsulere’s Economic Notes
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