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Info Service on WTO and Trade Issues (Jan21/10) Geneva, 25 Jan (Kanaga Raja) – Global foreign direct investment (FDI) fell by 42% to an estimated $859 billion in 2020, from $1.5 trillion in 2019, the UN Conference on Trade and Development (UNCTAD) has said. In its latest Investment Trends Monitor (No. 38), UNCTAD said that FDI finished 2020 more than 30% below the trough after the global financial crisis in 2009 and is back at a level last seen in the 1990s. The decline was concentrated in developed countries, where FDI flows fell by 69% to an estimated $229 billion, said UNCTAD. Flows to Europe dried up completely to -$4 billion (including large negative flows in several countries), while a sharp decrease was also recorded in the United States (-49%) to $134 billion, it added. On the other hand, the decline in developing economies was relatively measured at -12% to an estimated $616 billion. The share of developing economies in global FDI reached 72% – the highest share on record, with China topping the ranking of the largest FDI recipients, said UNCTAD. At a virtual media briefing, James Zhan, Director of the UNCTAD Division on Investment and Enterprise, said that global foreign direct investment (FDI) collapsed in 2020, falling by 42% to an estimated $859 billion, from $1.5 trillion in 2019. The decline was concentrated in developed economies, where FDI flows fell drastically by 69% to only $229 billion. It was the lowest level over the past 25 years, he said. The developing economies weathered the storm much better, with a decline by 12% to an estimated $616 billion. FDI inflows to developing economies now account for 72% of the global FDI. “This is really the highest share on record,” said Zhan. Looking ahead, Zhan said that global FDI flows will remain weak in 2021. “I feel that the decline of global FDI will bottom out in 2021 at best, and the real recovery will only start in 2022.” According to Zhan, risks related to the latest wave of the COVID-19 pandemic, the pace of the roll-out of vaccination programmes and economic support packages, fragile macroeconomic situations in major emerging markets, and uncertainty about the global policy environment for investment will all continue to affect FDI in 2021. Investors are likely to remain cautious in committing capital to new overseas productive assets, and data on an announcement basis, an indicator of prospects, provides a mixed picture and points at continued downward pressure, he added. Overall, the global FDI is likely to follow a U-shape recovery starting in 2022, unlike the global trade and GDP which have been predicted to be a V-shape recovery starting already in 2021, he said. International investment projects tend to have a long gestation period and react to crises with a delay, both on the downward slope and in the recovery, he added. TRENDS IN FDI FLOWS According to UNCTAD, global FDI inflows, excluding Caribbean offshore financial centers, fell by 42% in 2020, reaching an estimated $859 billion. The COVID-19 pandemic affected all types of investment: greenfield investment project announcements (-35%), cross-border mergers & acquisitions (M&As) (-10%) and new international project finance deals (-2%). By region, falling flows to Europe (by more than 100%) and North America (-46%) contributed most to the global decline, while FDI flows fell by only 4% in developing Asia. As a result of these regional differences, the share of developing economies increased to 72% of the world total, said UNCTAD. China became the largest recipient, attracting an estimated $163 billion in inflows, followed by the United States with $134 billion. In relative terms, flows declined most strongly in the United Kingdom, Italy, the Russian Federation, Germany, Brazil and the United States, while India and China bucked the trend, said UNCTAD. According to UNCTAD, FDI flows to developed countries fell drastically by 69% to values last seen almost 25 years ago. Of the global decline of $630 billion, almost 80% was accounted for by developed economies. At an estimated $229 billion, inflows in developed economies were only one third of the low point after the global financial crisis in 2009 (at $714 billion), said UNCTAD. Multinational enterprises (MNEs) significantly reduced new equity investments. In combination with lower M&A activity, this resulted in a marked decline in the equity component of FDI (to near-zero). Intra-company loans turned negative (-$134 billion) as parent firms withdrew or were paid back loans from their affiliates, strengthening their balance sheets at home. Contrary to earlier expectations and despite significantly lower profit levels, re-invested earnings in foreign affiliates remained relatively stable, declining by only 6%. Inflows to Europe dropped into negative territory (-$4 billion) mainly due to sharply negative FDI in countries with significant conduit flows, such as the Netherlands and Switzerland, said UNCTAD. FDI flows to the Netherlands fell to an estimated -$150 billion in 2020 due to large equity divestments and negative intra-company loans (-$125 billion and -$102 billion, respectively). The value of cross-border M&As in the country reached almost $100 billion due to a corporate re-configuration registered as a merger of Unilever (United Kingdom) with Unilever (Netherlands) for $81 billion. FDI to Switzerland remained negative at -$88 billion, due in part to large equity divestments (to an estimated -$155 billion). FDI to the EU-27 fell by 71% to an estimated $110 billion, from $373 billion in 2019. Among EU members, 17 saw their FDI decline. Germany posted a large decrease (from a revised $58 billion in 2019 to $23 billion) despite a jump in cross- border M&As, while FDI flows fell strongly to Italy and Austria due to large divestments. France also saw its FDI decline by 39% to $21 billion due in part to lower M&A sales which fell from $18 billion to $5.1 billion, said UNCTAD. FDI flows to the United Kingdom were -$1.3 billion (from $45 billion in 2019) mainly due to large negative intra-company loans and some equity divestments. Re-invested earnings turned positive to an estimated $27 billion from -$5 billion in 2019. According to UNCTAD, there were a few European countries that saw their FDI increase despite the crisis. FDI to Sweden doubled from $12 billion to $29 billion, as United States MNEs injected loans in their affiliates in the country, while FDI to Spain rose 52% due to several acquisitions. FDI flows to North America fell by 46% to $166 billion with cross-border M&As dropping by 43%. Announced greenfield investment projects also fell by 29% and project finance deals by 2%. FDI to the United States halved (-49%) to an estimated $134 billion. Investments in the United States by MNEs from the United Kingdom, Germany and Japan declined significantly, said UNCTAD. The decline took place in wholesale trade, financial services and manufacturing. Cross-border M&A sales of United States assets to foreign investors fell by 41% mostly in the primary sector. FDI in Canada decreased by 34% to $32 billion, as MNEs from the United States halved new investment in the country. Among other developed economies, flows to Australia fell (-46% to $22 billion), while those to Israel increased (from $18 billion to $26 billion), as did those to Japan (from $15 billion to $17 billion). In Israel, M&As sales in computer-related industries rose by 31% to $7.3 billion. FDI flows to developing economies decreased by 12% (to an estimated $616 billion), said UNCTAD. The decline was reflected across all types of investment: the value of announced greenfield projects (-46%), the number of cross-border project finance deals (-7%) and the value of cross-border M&A sales (-4%). FDI in developing Asia fell by 4% to an estimated $476 billion in 2020, the mildest FDI contraction among all regions, said UNCTAD. FDI in East Asia actually grew 12% to $283 billion, due in part to a rebound of financial flows to Hong Kong, China (+40%) after unrest resulted in exceptionally low values in 2019. FDI flows to China rose by 4% to $163 billion, making the country the largest FDI recipient in 2020. A return to positive GDP growth (+2.3%) and the Government’s targeted investment facilitation programme helped stabilize investment after the early lockdown, said UNCTAD. FDI in high-tech industries was up by 11% in 2020, while cross-border M&As rose by 54% mostly in ICT and pharmaceutical industries. In the Republic of Korea, FDI fell by 42% to $6 billion, with a significant decline in cross-border M&As. FDI in South-East Asia contracted by 31% to $107 billion due to a decline in investment to the largest recipients in the sub-region: inflows in Singapore fell by 37% to $58 billion, Indonesia by 24% to $18 billion, Viet Nam by 10% to $14 billion and Malaysia by 68% to $2.5 billion. In Singapore, through which investments in the sub-region are often funnelled, cross-border M&As contracted by 86%, reflecting a significant slowdown of foreign acquisitions in the sub-region, said UNCTAD. In Thailand, FDI contracted 50% to $1.5 billion, mainly due to a large divestment (Tesco (United Kingdom) sold its stores to a Thai investor group for $9.9 billion). The strength of South-East Asia as an FDI engine remained evident; announced greenfield investment contracted more moderately (-14%) than in other developing regions. UNCTAD said that South-East Asia registered more than $70 billion in new greenfield investment projects, the largest volume among developing regions. FDI in South Asia rose by 10% to $65 billion. India saw FDI rising by 13% to $57 billion as investment in the digital economy continued, particularly through acquisitions. Cross-border M&A sales grew 83% to $27 billion. FDI flows to West Asia dropped by 24% to $21 billion. In most oil exporters, the impact of the pandemic was exacerbated by low energy prices. Inflows to Turkey decreased by 19% to $6.8 billion. FDI to Saudi Arabia remained stable, with inflows increasing by 4% to an estimated $4.7 billion, said UNCTAD. It said FDI in Latin America and the Caribbean decreased by 37% to an estimated $101 billion, amidst one of the deepest recessions across the developing world. According to UNCTAD, investments in oil-related industries and market-seeking flows recorded steep declines. Among the larger economies, only Mexico experienced a decline of less than 10%, thanks to resilient re-invested earnings. In South America, flows fell by 46% to an estimated $60 billion as all the major recipients registered steep contractions, said UNCTAD. In Brazil, FDI decreased to $33 billion as the privatization programme and infrastructure concessions paused during the pandemic crisis. UNCTAD said that the worst affected industries were transportation and financial services, with falls in inflows of more than 85% and 70%, respectively, and the oil and gas extraction and automotive industries, which both registered a (preliminary) 65% decline in inflows. Meanwhile, flows to Peru, Colombia and Argentina slumped by 76%, 49%, and 47%, respectively. In Peru, all sectors registered severe declines of flows with virtually no new investments in the services, manufacturing and utilities industries. The mining sector registered a milder decline, sustained by re-invested earnings. In Argentina, the health crisis compounded an already dire economic situation with a sovereign debt default in May. In Chile, flows fell by 21% to $8.9 billion; an increase in new investments in the first quarter in the transport, manufacturing and trade industries was undone in the second part of the year, said UNCTAD. Flows to Central America contracted by 14% to an estimated $38 billion. FDI to Mexico decreased by 8% to $31 billion. The automotive industry was particularly hard hit by the pandemic registering a drop in flows (by -44%). UNCTAD said in the Caribbean, flows fell by 18% to $3.2 billion, significantly hit by reduced investment in the tourism industry. In the Dominican Republic, although overall inflows fell by 9%, manufacturing investments increased, supported by new projects in medical devices. FDI flows to Africa declined by 18% to an estimated $38 billion, from $46 billion in 2019, said UNCTAD. Greenfield project announcements, an indication of future FDI trends, fell 63% to $28 billion, from $77 billion in 2019. “The pandemic’s negative impact on FDI was amplified by low prices of and low demand for commodities,” it added. Egypt remained the top recipient of FDI in Africa, despite a significant decline in inflows (-39%) to an estimated $5.5 billion. Overall, in North Africa, FDI inflows fell by 32% to $9.4 billion from $14 billion in 2019, said UNCTAD. Only flows to Morocco were robust and stayed almost unchanged at $1.6 billion as the country’s FDI profile is relatively diversified with the established presence of several major MNEs in manufacturing industries including automotive, aerospace and textiles. FDI inflows to Sub-Saharan Africa decreased by 11% to an estimated $28 billion, said UNCTAD. Inflows to Nigeria declined to $2.6 billion from $3.3 billion in 2019. Lower crude oil prices, coupled with the closure of oil development sites at the start of pandemic due to movement restrictions, weighed heavily on FDI to Nigeria, it added. Senegal was among the few economies with higher inflows in 2020, registering a 39% increase to $1.5 billion supported by rising investments in energy. FDI to South Africa almost halved to $2.5 billion from $4.6 billion in 2019. However, several large projects were announced including an investment by Google (United States) of approximately $140 million in a fibre optics submarine cable and an additional investment of $360 million by Pepsico (United States) to expand the capacity of Pioneer Foods. FDI flows to the transition economies fell sharply – by 77%, to an estimated $13 billion. This was the lowest level of inflows recorded in the region since 2002, said UNCTAD. Inflows plummeted in the Russian Federation, the largest economy of the region – from $32 billion in 2019 to $1.1 billion due to the COVID-19 crisis. “In addition, weak international demand for crude oil, and a price conflict with other large producers in April 2020 drove prices to historical low levels, putting downward pressure on investment in the oil sector,” it said. FDI also decreased in less natural resource dependent South-East Europe (-28%). Manufacturing activities that are connected to global supply chains suffered in several economies, explaining most of the decline in FDI. ALL FORMS OF FDI AFFECTED UNCTAD said that new greenfield investment project announcements were 35% lower in 2020, cross-border M&As fell by 10% and newly announced cross-border project finance deals, an important source of investment in infrastructure, declined by 2%. Cross-border M&A sales reached $456 billion in 2020 – a decrease of 10% compared to 2019. In developed countries, they fell sharply in North America (-43%) while in Europe, the increase of 26% was due in part to the above mentioned Unilever corporate re-configuration adding $81 billion. In developing economies, M&A sales in Asia rose by 31%, while those in Latin America and the Caribbean (-67%) and Africa (-45%) fell. The value of cross-border M&A sales dropped by 52% in the primary sector (mainly in mining, quarrying and petroleum) and by 8% and 6% in manufacturing and services. Sales of assets in food and digital industries more than tripled in 2020. Information and communications remained the sector with the largest number of cross-border sales. After a jump in 2019, the value of M&A sales in pharmaceuticals declined by 43% but the number of M&As kept rising, reaching 206 – the highest number ever recorded, said UNCTAD. Announced greenfield projects reached an estimated $547 billion in 2020 – a decline of 35% compared to 2019. The largest decline took place in the developing economies (46%), mainly in Africa and Latin America and the Caribbean, said UNCTAD. International project finance deals were as weak as greenfield investment up to the third quarter of 2020. A flurry of new project announcements in the final months of 2020 dampened the overall decline to -2% only. However, the vast majority of these projects were in developed economies – many in renewable energy projects, said UNCTAD. PROSPECTS FOR FDI IN 2021 According to UNCTAD, global FDI flows will remain weak in 2021. “Although the global economy is expected to initiate a hesitant and uneven recovery in 2021 and GDP growth, gross fixed capital formation and trade are projected to resume growth, investors are likely to remain cautious in committing capital to new overseas productive assets,” it said. International investment projects tend to have a long gestation period and react to crises with a delay, both on the downward slope and in the recovery, it added. The uncharacteristic immediacy of the FDI reaction to the crisis caused by the COVID-19 pandemic was due to physical lockdowns and other mitigation measures making the implementation of ongoing projects more difficult, but the effects of the recession will linger and an FDI recovery is not expected to start before 2022. UNCTAD said investor uncertainty related to further waves of the pandemic and to developments in the global policy environment for investment will also continue to affect FDI. Data on an announcement basis – on M&As, greenfield investments and project finance – provide a mixed picture on forward trends, confirming the weak outlook. Greenfield project announcements in 2020, 35% lower than in 2019, do not bode well for new investment in industrial sectors in 2021, it said. The decline in announced international project finance deals, important for investment in infrastructure, was more contained (-2%), but the up-tick in the last part of the year that dampened the decline was largely concentrated in developed countries. UNCTAD said that the far more limited capacity of developing countries to roll-out economic support packages to stimulate investment in infrastructure will result in an asymmetric recovery of project-finance-driven FDI. “Any increase in global FDI flows is more likely to come from cross-border M&As, rather than from new investment in productive assets,” it added. Announced cross-border M&A deals rebounded in the second half of 2020, mostly driven by technology and healthcare deals. These two industries are not affected by the pandemic in the same way as other industrial sectors. Although their investment activity slowed down initially in 2020, they are now set to take advantage of low interest rates and increasing market values to acquire assets in overseas markets for expansion, as well as rivals and smaller innovative companies affected by the crisis, said UNCTAD.
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