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Global FDI could fall by up to 50% in next two years

June 16, 2020

The economic fallouts of the coronavirus, especially dwindling profits, are forcing companies to tighten the purse strings, a UN report says. Developing economies are expected to be among the worst hit.

This photo taken on August 14, 2019 shows an employee working on a medical glove production line at a factory in Huaibei in China's eastern Anhui province
Image: Getty Images/AFP

Global foreign direct investment (FDI) flows could fall by as much as 40% this year, as companies reeling from the economic downturn caused by the coronavirus pandemic postpone their investment plans.

The dramatic drop would push global FDI below $1 trillion (€880 billion) for the first time since 2005, UNCTAD's World Investment Report 2020 said. The report which assumes that the outbreak would continue well into 2021 expects FDI flows to decrease by a further 5-10% next year.

"The impact, although severe everywhere, varies by region. Developing economies are expected to see the biggest fall in FDI because they rely more on investment in GVC [Global Value Chains]-intensive and extractive industries, which have been severely hit, and because they are not able to put in place the same economic support measures as developed economies," said James Zhan, UNCTAD's director of investment and enterprise and lead author of the World Investment Report.

Early warning signs are already evident. The top 5,000 multinational companies worldwide, which account for most of global FDI, have seen expected earnings for 2020 revised down by 40% on average, with some industries plunging into losses, a survey done by Zhan and his team showed.

Lower profits will cripple companies' ability to reinvest cash for growth purposes. Reinvested earnings on average account for more than half of global FDI flows.

New greenfield investment project announcements and cross-border mergers and acquisitions (M&As) dropped by more than 50% in the first months of 2020 compared with last year, the report said.

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Triple shock

The pandemic was dealing a triple — demand, supply and policy — shock to FDI, Zhan told DW.

While a sharp fall in global GDP are taking a toll on new investments, global lockdowns and disruptions in global supply chains are slowing down existing investment projects. FDI flows are also taking a beating because of restrictive policies being adopted by countries, underscoring a trend of rising protectionism that has gathered steam in recent years.

Dozens of countries, including the US and Germany, have tightened foreign investment screening mechanisms to protect strategic domestic industries from foreign takeovers.

UNCTAD expects global FDI flows to slowly recover starting 2022 as the economy bounces back and as companies look to make their supply chains more resilient. But Zhan cautions that the outlook is "highly uncertain" and a lot would depend on how long the pandemic lasts and the effectiveness of fiscal and monetary measures being rolled out.

Developing countries worst-hit

The report projects FDI flows to Asia, the biggest destination for foreign investments, to fall by 30-45% in 2020. Asian economies, such as Vietnam, Indonesia and Thailand, which have been attracting record FDI in recent years amid trade friction between the United States and China, are expected to suffer because of their oversized role in global supply chains which have seen major disruptions.

FDI in Latin America and the Caribbean is expected to halve in 2020 as political turbulence compounded by the coronavirus and structural weaknesses in several economies, weigh down on investment sentiments.

FDI flows to developed economies is expected to fall by between 25% and 40%, mainly hurt by falling corporate profits and increased scrutiny of inward investments.

Africa, which bucked the trend of global decline in FDI in 2018, saw foreign investments drop by 10% last year and is expected fare even worse in 2020, hurt by the dual shock of the coronavirus pandemic and low prices of commodities, especially oil. FDI flows to the continent are forecast to contract between 25% and 40% to $25-$35 billion this year.

"Although all industries are set to be affected, several services industries including aviation, hospitality, tourism and leisure are hit hard, a trend likely to persist for some time in the future," Zhan said.

But the continent could be one of the quickest to bounce back thanks to higher value being assigned to ties to the continent by major global economies and growing regional integration following the commencement of trade under the African Continental Free Trade Area, he added.

Ashutosh Pandey
Ashutosh Pandey Business editor with a focus on international trade, financial markets and the energy sector.@ashutoshpande85