Portfolio Investment as Delusional Nexus of Economic Growth and Development: Preventing the 2008 Economic Bubble Burst

By AVM (Rtd.) Akugbe Iyamu, MNSA, FSI

Nigeria economy seem to be experiencing a massive surge in foreign portfolio investments (FPI) with total capital importation that recently hit $10.37 billion in a single quarter. It may sound like portfolio investments is driving about 95% of these inflows into Nigerian government bonds and the capital market and it is durable to compress the understanding that while foreign capital importation has rebounded dramatically, the market remains volatile.

Additionally, it is also critical to be cautious that while foreign inflows frequently account for over 50% of total FPI transactions, the reality is that investors continually remain cautious regarding currency fluctuation and macro-risks with a likely possibility to disentangle themselves from any economic crisis or surge at the drop of the hat. This is because FP Investors are constantly monitoring the economy for any sign of stress and surge to withdraw their investment as the case in 2008 and that is why

economists caution that while massive portfolio inflows boost external reserves and support exchange rate stability, only a fraction (roughly 1.3%) directly impacts the real, productive economy (such as infrastructure, job creation, or manufacturing).

On the other hand, while Foreign portfolio investment (FPI) can significantly boost a country’s short-term financial liquidity and economic growth as seen currently in the country by increasing capital inflows, this is because it involves buying liquid assets like stocks and bonds rather than long-term physical infrastructure. As seen in mist economies globally, it remains highly volatile and therefore cannot fundamentally change a country’s fortune without broader economic foundations.

Let us agree that

FPI has injected massive liquidity into local capital markets in recent years in Nigeria thereby allowing domestic companies to raise capital more easily and at a lower cost. We must also be aware that in this case, substantial foreign inflows may be seen as helping to stabilize or strengthen the local currency of an economy that is experiencing liquidity problem. It does seem to be

making it cheaper for the country to import essential goods when one considers the ephemeral conditions, it looks as though high levels of FPI act as a vote of confidence thereby signaling to the global community that a country’s economic policies and financial markets are transparent and well-governed.

That is what we are currently experiencing; a feel good situation that is short in exposing deeper issues of poverty, hunger, inequality, lack of transparency and accountability with deep rooted issues of corruption.

A portfolio investment may provide the passive ownership of financial assets to create the facade of a healthy business such as high yield stocks, bonds, or mutual funds purchased for financial return rather to control a company’s management. The unreliability and uncertainty of Portfolio Investment caused it to be referred to as “hot money” as FPI can enter quickly but leave even faster.

For example If global market conditions shift or domestic political uncertainty arises like we are experiencing in Nigeria, investors may instantly pull out their funds. This was experienced in 2008 when the sudden exit of portfolio investment triggered the stock market crash with severe currency depreciation, and deep economic crises.

While FPI sometimes could be an excellent catalyst for growth for such countries like Nigeria, the biggest challenge is that it is a double edged sword. For this reason, for Nigeria to truly transform into economic fortune, portfolio investments must be paired with Foreign Direct Investment (FDI) which builds lasting infrastructure, creates physical jobs, and transfers technology as well as strong, predictable domestic economic policies.

The building process must have tracking the Nigerian Exchange Group (NGX) or reading macroeconomic reports from the Central Bank of Nigeria necessary to provide deeper tranquilizing context on how these volatile short-term capital flows to create a wider domestic economy. Before the actualisation of these fundamental principles, there is need for adequate

understanding of the difference between FDI and FPI, and that is critical especially in international economics as the mix of assets in a portfolio depends entirely on the investor’s goals, time horizon, and risk tolerance for passive and strictly financial focus.

Accordingly, the investor has no long-term operational interest and can quickly liquidate their holdings like the case of an investor (or corporation) buying a significant stake (typically 10% or more of voting power) to actively influence, manage, or operate a foreign entity. Let us understand thatt the entire focuses is on managing risk and maximizing growth through asset diversification as investors do not actively participate in the daily management or decision-making of the companies they invest in.

The sad reality is that the ecosystem create assets that are highly tradable, meaning they can be easily bought or sold on public markets. We need not be carried away by the illusion that Portfolios typically spread funds across different asset classes to buffer against volatility and market losses. What is more important is that the country need to have safeguards to completely protect vulnerable aspects of the economy to prevent the 2008 economic monster with loss of substantial wealth and investment.

Therefore, I consider the antidote to the risks of Foreign Portfolio Investment (FPI) in Nigeria to include shifting national dependence from hot money (short-term stocks and bonds) toward Foreign Direct Investment (FDI), domestic savings, and local infrastructure. This is because FPIs are highly volatile, frequently triggering massive currency and capital outflows when withdrawn.

Consequently, Nigeria need a holistic approach to combat this macroeconomic vulnerability and reliance on volatile capital through several strategic and policy antidotes.

Nigeria must push to anchor its economic growth in sectors that build actual infrastructure, create jobs, and transfer technology rather than simply buying liquid stocks and bonds. State-backed initiatives focus on real assets in agriculture, energy, and FinTech.

The nation must as a matter of urgency Monetize and securitize intangible assets in the creative, tech, and intellectual property (IP) sectors (often backed by the Nigeria Startup Act) serves as an antidote to raw capital flight by creating localized, long-term wealth.

The country must trough robust policies that create wealth and institutions strengthen regulatory standards and prevent unregulated speculation; “hot tips” . The Securities and Exchange Commission (SEC Nigeria) need to continually enforce the Investments and Securities Act, actively halting unauthorized public share offerings to protect the financial system.

Finally, through creative process of engagements, the Central Bank of Nigeria (CBN) and local asset managers need to incentivize citizens to build a deeply entrenched savings and local investment culture as this is the ultimate antidote to the obsession with immediate wealth and over-reliance on foreign capital.

AVM (Rtd.) Akugbe Iyamu, MNSA, FSI

President, Association of Environmental Protection and Climate Change Practitioners and Analyst on Climate Change and Environmental Policies and Commentator on National Issues.