-
2020 investment inflows down 35%
-
COVID-19 crisis to blame
-
Developed countries largely hit
A recent report by the United Nations Conference on Trade and Development (UNCTAD) has stated that the global foreign direct investment flows are expected to recover lost grounds with a 10 to 15 per cent increase in 2021 and a further increase in 2022, though, still below the 2019 levels by 25 per cent.
According to the report, UNCTAD projected that the prospects for the relatively modest recovery are highly uncertain and will depend on, among other factors, such as the pace of economic recovery and the possibility of pandemic relapses, the potential impact of recovery spending packages on FDI, and policy pressures. It also stated that the recovery for global FDI projections for 2021 reflects the lingering uncertainty about access to vaccines, the emergence of virus mutations and the reopening of economic sectors.
“Looking ahead, global FDI flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10 per cent to 15 per cent. This would still leave FDI some 25 per cent below the 2019 level. Current forecasts show a further increase in 2022 which, at the upper bound of projections, bring FDI back to the 2019 level,” said James Zhan, UNCTAD’s director of investment and enterprise,
He noted that, “Increased expenditures on both fixed assets and intangibles will not translate directly into a rapid FDI rebound, as confirmed by the sharp contrast between rosy forecasts for CAPEX and still-depressed greenfield project announcements”.
The report further pointed out that the recovery in global foreign direct investment will be uneven as the developed economies are anticipated to drive the global growth resulting from strong cross-border mergers and acquisitions (M&A) activity and large-scale public investment support. Also, it stated that a substantial recovery of FDI to Africa and to Latin America and the Caribbean is unlikely in the near term, while inflows to Asia will remain resilient as the region has stood out as an attractive destination for international investment throughout the pandemic.
In 2020, there was a plunge in FDI flows by 35 percent around the globe to $1 trillion from $1.5 trillion in 2019 on the back of lockdown restrictions precipitated by the coronavirus pandemic across the globe, the UNCTAD report stated. The pandemic-induced effect slowed down existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to reassess new projects.
However, UNCTAD disclosed that the fall was heavily skewed towards developed economies, where FDI fell by 58 percent, in part due to corporate restructuring and intra-firm financial flows. Furthermore, FDI inflows in developing economies were relatively resilient, declining by 8 percent, mainly because of robust flows in Asia. As a result, developing economies accounted for two-thirds of global FDI, up from just under half in 2019.
According to Isabelle Durant, acting secretary-general, UNCTAD, FDI patterns contrasted sharply with those in new project activity, where developing countries are bearing the brunt of the investment downturn. In developing countries, the number of newly announced greenfield projects fell by 42 percent and international project finance deals, which are important for infrastructure, dipped by 14 percent.
“These investment types are crucial for the productive capacity and infrastructure development and thus for sustainable recovery prospects,” Durant further said.
Durant also pointed out that some sectors vital for development were hard hit as the COVID-19 has also caused a collapse in investment flows to sectors relevant for the Sustainable Development Goals (SDGs) in developing countries. In her statement, all but one SDG investment sector registered a double-digit decline from pre-COVID-19 levels. The shock exacerbated declines in sectors that were already weak before the pandemic – such as power, food and agriculture, and health.
“The drop in foreign investment in SDG-related sectors may reverse the progress achieved in SDG investment in recent years, posing a risk to delivering the 2030 Agenda for Sustainable Development and to sustained post-pandemic recovery,” Durant said.
In other areas, the report also shows that the regional trends of FDI in 2020 varied significantly by region. In developing regions and transition economies they were relatively more affected by the impact of the pandemic on investment in global value chain-intensive and resource-based activities. Asymmetries in fiscal space for the roll-out of economic support measures also drove regional differences.
An analysis of the report shows that FDI flows to Europe declined by 80 percent while those to North America fell less sharply by 40 percent. The fall in FDI flows across developing regions was uneven, with 45 percent in Latin America and the Caribbean, and 16 percent in Africa. On the other hand, flows to Asia increased by four percent with East Asia being the largest host region, accounting for half of global FDI in 2020. FDI to transition economies declined by 58 percent.
As the pandemic further deteriorated FDI in structurally weak and vulnerable economies, inflows in the least developed countries (LDCs) remained stable, greenfield announcements fell by half and international project finance deals by one third. FDI flows to small island developing states (SIDS) fell by 40 percent and those to landlocked developing countries (LLDCs) by 31 percent. Despite the 2020 fall in earnings, the top 100 multinational enterprises who are the key actors in the global FDI are still weathering the storm as they have significantly increased cash holdings, attesting to the resilience of the largest companies. As a result, the number of state-owned MNEs, which stand at about 1,600 worldwide, increased by seven percent in 2020, with some new entrants resulting from equity participation as part of rescue programmes.
