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Service on Finance and Development (Oct20/05) Geneva, 28 Oct (Kanaga Raja) – Global foreign direct investment (FDI) flows fell by 49% in the first half of 2020 compared to 2019, the United Nations Conference on Trade and Development (UNCTAD) has said. In its latest Investment Trends Monitor (No. 36), UNCTAD attributed the drastic decline in FDI flows to lock-downs around the world due to the COVID-19 pandemic which slowed existing investment projects, as well as to prospects of a deep recession that led multinational enterprises (MNEs) to re-assess new projects. According to UNCTAD, the decline cut across all major forms of FDI. New greenfield investment project announcements dropped by 37%, cross-border mergers and acquisitions (M&As) fell by 15% and newly announced cross-border project finance deals – an important source of investment in infrastructure – declined by 25%, it said. Developed economies saw the biggest fall, with FDI reaching an estimated $98 billion in 2020 H1 (first half) – a decline of 75% compared to 2019, while FDI flows to developing economies decreased by 16%, which was less than expected. At a media briefing, James Zhan, Director of the UNCTAD Division on Investment and Enterprise, said that global FDI flows for the first half of 2020 went down by nearly half compared to the same period last year, and the decline was “more drastic than we expected for the whole year.” He said that the outlook for FDI remains highly uncertain depending on the duration of the health crisis and the effectiveness of the policy response to mitigate the economic effects of the COVID-19 pandemic. Geopolitical risks also continue to add to the uncertainty, he added. However, Zhan emphasized that the international production system will continue to play an important role in economic growth and development despite the drastic decline in global FDI flows during the crisis. Asked about the possibility of supply chains being relocated from China to other countries in light of the current health crisis, Zhan said that he expects this to happen over a longer period of time. He said that in the short-term, at this stage, companies are focusing on crisis management rather than longer term restructuring of their global value chains, adding that as a result, re-shoring or restructuring is not happening massively at the moment. “At this stage, we see East and South-East Asia leading the recovery of the global economy because the situation there stabilized first and at an early stage,” he said. “So, the world still depends on the global value chains that are mainly located in East and South-East Asia at this stage.” As the rest of the world is still heavily (engulfed) in the pandemic, it is not realistic now for companies to re-locate to other parts of the world, he added. Zhan also said East and South-East Asia is still an attractive location, not only as a manufacturing bench for the world but also the market itself which is largely dynamic and that creates a lot of opportunities for manufacturing for the markets there. According to UNCTAD’s Investment Trends Monitor, global FDI flows (excluding Caribbean offshore financial centers) in the first half of 2020 were under severe pressure due to the COVID-19 pandemic. They reached an estimated $399 billion, 49% less than in 2019, as lockdowns around the world forced companies to delay existing investment projects and to postpone non-essential investment to preserve cash buffers. The decline was more pronounced in developed economies, where flows fell to $98 billion – a value last seen in 1994, said UNCTAD, adding that FDI flows into Europe were negative, and they fell sharply in North America. It noted that among major FDI recipients in 2019, flows declined most strongly in Italy, the United States, Brazil and Australia. FDI FLOWS TO DEVELOPED ECONOMIES FDI flows to developed economies were $98 billion in 2020 H1 (first half), only a quarter of the level in 2019 ($397 billion), said UNCTAD. “The low level was mainly due to sharply negative FDI in countries with significant conduit flows, such as Switzerland and the Netherlands, and the decrease of FDI in the United States.” For the first time ever, flows to Europe in 2020 H1 turned negative to -$7 billion (from $202 billion). Among major forms of FDI, announced greenfield investment project values and cross-border project finance deals dropped by 17% while cross-border M&As fell by 5%. FDI flows to the EU-27 (without the United Kingdom) fell by 29% to $133 billion from $186 billion. Most countries saw their FDI decline, but the negative trend was worsened by a few economies that experienced strong volatility, said UNCTAD. Flows to the Netherlands fell to -$86 billion in 2020 H1 due to large divestments in equity (-$70 billion) and negative intra-company loans (-$57 billion). According to UNCTAD, despite the crisis caused by the pandemic, a few countries recorded rising FDI flows. FDI flows to Ireland reached $75 billion with a jump of $65 billion in equity in the second quarter of 2020, with the increase being driven by sizeable transactions, financial flows and corporate restructurings, while FDI to Germany rose by 15% to $21 billion. In the rest of Europe, FDI flows to the United Kingdom were -$30 billion, mainly due to large negative intra- company loans. In addition, there were several divestments; for example, Swiss Re (Switzerland) divested its ReAssure Group to Phoenix Group Holding for $4.2 billion. In Switzerland, FDI turned sharply negative to -$98 billion (from -$11 billion). FDI flows to North America fell by 56% to $68 billion with project finance deals declining by 34%, cross-border M&As by 32% and greenfield investment projects by 25%. FDI to the United States more than halved (-61%) to $51 billion. Investments in the United States by EU MNEs declined by 53% and MNEs from developing economies reduced their investment from $31 billion to -$2 billion. Cross-border M&A sales of United States assets to foreign investors fell by 30%. Inflows to several other developed economies declined as well, including in Australia (-40% to $11 billion) and New Zealand (-55% to $1.2 billion), said UNCTAD. The decline in FDI in Australia was due to a 64% drop in cross-border M&As. On the other hand, flows to Japan increased by 6% and those to Israel by 74% to $16 billion. FDI FLOWS TO DEVELOPING ECONOMIES UNCTAD said that developing economies saw their FDI flows decrease by 16%. While the value of announced greenfield projects suffered a 49% decline and the number of cross-border project finance deals fell by 25%, cross-border M&As rose by 12%. The overall decline was spread across all regions – Africa (-28%), Latin America and the Caribbean (-25%) and developing Asia (-12%). The contraction in FDI in developing countries has so far been less severe than in developed economies; FDI in developing economies contains more greenfield investments and project finance, which tend to be more stable, said UNCTAD. FDI in developing Asia fell by 12% in the first half of 2020 to $217 billion. Despite suffering the brunt of the initial impact of the pandemic and the effects of the early supply chain shocks on global value chain investment, Asia shows the lowest decline in investment among developing regions, said UNCTAD. The relatively successful containment of the pandemic in East Asia is reflected in continued investment activity in the region, it added. FDI in East Asia remained stable at $125 billion, in large part due to the effect of a 22% rise in flows (including conduit flows) to Hong Kong, China from the anomalously low level of FDI in the previous year. FDI flows to China also proved relatively resilient. In the first half of 2020, flows to China reached $76 billion, a 4% decline. The decline – lower than expected – was cushioned by an 84% rise in the value of M&A transactions, mostly in information services and e-commerce industries, said UNCTAD. “Government investment facilitation measures, which focused on restoration and continuation of previously announced greenfield investment projects, also helped to stabilize investment activities,” it added. FDI in the Republic of Korea fell by 34% to $3 billion with a strong decline in cross-border M&A sales and a 37% fall in announced greenfield investment projects. FDI in South-East Asia contracted by 20% in the first half of 2020 to $62 billion due to a significant fall in flows to Singapore (-28% to $33 billion), Indonesia (-24% to $9.1 billion) and Viet Nam (-16% to $6.8 billion) – the three largest recipients in the region. There were a few exceptions, said UNCTAD, adding that FDI in the Philippines rose by 20% to $3 billion and flows to Thailand more than doubled to $4.8 billion from a low level in 2019. M&A deals in agriculture and energy in these two countries played a role in sustaining inflows. However, overall cross-border M&As in South-East Asia decreased by 44% because of a significant fall in activity in Singapore. Announced greenfield investment dropped by 36%, with services and manufacturing suffering the most. FDI in South Asia fell 31% to $20 billion in the first half of 2020. India, the largest FDI recipient in the region, saw FDI contracting by 33% to $17 billion as the country struggles with COVID-19 containment, UNCTAD said. However, investment growth in India’s digital economy continued, especially through cross-border M&A sales, which doubled in value. In other South Asian economies, where investments are largely tied to export-oriented apparel manufacturing, greenfield investments have taken a severe hit due to activity stoppages and contracting global demand. Announced greenfield projects in Bangladesh fell by 78% and in Sri Lanka by 97%. FDI flows to West Asia declined by a third in the first half of 2020 to an estimated $9.3 billion, amid worsening GDP growth projections and the shock to oil prices, said UNCTAD. “Steady investment flows in a few countries and some noteworthy projects mitigated against an even steeper downturn.” For example, inflows to Saudi Arabia and Jordan defied the broader trend with investment increasing by 12% to $2.6 billion and by 17% to $0.4 billion, respectively. Conversely, inflows to Turkey declined by 32% to $2.9 billion. FDI in Latin America and the Caribbean fell by 25% in the first half of 2019 to an estimated $62 billion. While the first quarter was relatively unaffected by the COVID-induced economic crisis, flows plummeted in the second quarter leading to declines in most of the major economies with the exception of Mexico and Chile, said UNCTAD. In South America, flows to Brazil almost halved, to $18 billion, as the privatization programme launched last year stalled. “Flows are expected to recover moderately in the second half of the year as asset sales are resumed and a new infrastructure plan is rolled out.” Flows to Argentina, Colombia and Peru fell by 40, 34, and 72%, respectively. In Argentina, the health crisis compounded an already difficult economic situation with a sovereign debt default in May. In Peru, the suspension of mining projects led to a sharp decrease in FDI flows to $1.3 billion. In Chile, flows increased by 67% to $9.5 billion driven by investments in the first quarter in transport, manufacturing and trade industries. Flows to Central America were flat at $23 billion. FDI to Mexico increased by 5% to $18 billion, with more than half in the form of reinvested earnings, said UNCTAD. Flows to the manufacturing sector remained stable: losses in the automotive industry (mostly auto parts) were offset by increases in the electronics and machinery industries. In Costa Rica, FDI flows decreased by 41% with falling inflows to the tourism industry (-70%) and into special economic zones (-45%). In the Caribbean, flows fell by 27% to $1.4 billion, significantly hit by reduced investment in the tourism industry. In the Dominican Republic, they fell by 20% as investments in the mining, telecom and power industries contracted sharply. FDI inflows to Africa declined by 28% to $16 billion in the first half of 2020. Greenfield project announcements fell by 66% and cross-border M&As by 44%. Natural resource-based economies in Africa are being hit the hardest, said UNCTAD. In North Africa, for example, inflows to Egypt declined by 57% to an estimated $1.9 billion in 2020 H1. Total FDI inflows to North Africa decreased by 44% to $3.8 billion in the first half of the year. “Against the tide, FDI flows to Morocco increased by 6% to $0.8 billion, due to a relatively diverse investment profile.” FDI inflows to Sub-Saharan Africa decreased by 21% to an estimated $12 billion, said UNCTAD. Inflows to Nigeria fell by 29% to $1.2 billion as the implementation of ongoing projects slowed down due to closures of sites in the oil and gas industry. Inflows to Ethiopia were relatively stable, declining by only 12% to $1.1 billion, with China continuing to be the biggest source of FDI to Ethiopia, accounting for a quarter of newly approved projects in 2020. FDI to Mozambique decreased by 27% to $0.8 billion as the implementation of offshore gas projects slowed down due to the pandemic. Bucking the trend, FDI flows to South Africa increased by 24% to $2.9 billion. However, this increase was driven largely by intra-company transfers of foreign companies to their subsidiaries in the country rather than greenfield investment projects, said UNCTAD. In the first half of 2020, FDI flows to the transition economies fell sharply – by 81%, to an estimated $5.4 billion. They plummeted in the Russian Federation, the largest economy in the region: from $16 billion in 2019 to -$1.2 billion. The decrease in FDI was more limited in Serbia (-24%). In contrast, Kazakhstan saw a 19% increase with growth of FDI in construction and trade compensating for a decline in flows in oil and gas. Greenfield investment announcements in the region fell by 58%. In larger recipients of greenfield investment such as Kazakhstan (-86%), the Russian Federation (-68%) and Serbia (-72%), the decline was even stronger, indicating a major slowdown in future investment intentions. Cross-border M&As targeting the region increased by 84%, but from a very small base. The increase was mostly due to corporate restructurings in the Russian Federation, said UNCTAD. CROSS-BORDER M&As AND GREENFIELD INVESTMENTS According to UNCTAD, cross-border M&A sales reached $319 billion in the first three quarters of 2020 – a decrease of 15% compared to 2019. In developed countries, where they are a significant part of total FDI, they fell by 21%, mostly in North America, while in developing economies, cross-border M&As rose by 12%. The decrease of sales in Latin America and the Caribbean (-73%) and Africa (-44%) was more than offset by the 60% increase in Asia. Cross-border M&A sales dropped by 76% in the primary sector (mainly in mining, quarrying and petroleum) and by 27% in manufacturing. Sales of assets in digital-related industries rose significantly (mainly in manufacturing of computer, electronic, optical products and electrical equipment and information and technology). In Europe, the value of acquisitions in the digital sector grew strongly – with large acquisitions in the United Kingdom. At the global level, M&A deal values in the pharmaceutical industry fell by 46%, but pharma remained the second largest M&A industry due to deals in North America, said UNCTAD. An estimated $17 billion worth of acquisitions was made by Europe’s largest pharmaceutical companies, such as Novartis (Switzerland), Sanofi (France), UCB (Belgium), and Roche (Switzerland) in the United States. Announced greenfield projects reached $358 billion in the first eight months of 2020 – a decline of 37% compared to 2019, with the largest decline taking place in developing economies (49%), mainly in Africa and Latin America and the Caribbean. The largest fall was registered in manufacturing (-49%), especially in coke and petroleum products (-89%), reflecting the oil price slump, said UNCTAD. “Announced greenfield projects fell by 33% in the primary sector and 25% in services. Chemicals (+5%) and utilities (+1%) were more resilient.” According to UNCTAD, the number of announced cross-border project finance deals fell by 25% from the 2019 monthly average. The strongest decline was registered in developing and transition economies, with project finance deals in Africa falling by 49%. According to UNCTAD, prospects for FDI for the full year remain in line with earlier projections of a 30-40% decrease. The rate of decline in developed economies is likely to flatten as some investment activity appears to be picking up in the third quarter. Flows to developing economies are expected to stabilize, with East Asia showing signs of an impending recovery. However, UNCTAD said that projections for 2020 remain laden with uncertainty. “With a second wave of the pandemic in some developed economies undermining efforts to return to normal, the near 50% decline in 2020 H1 could persist longer,” it added. Despite the drastic decline, FDI remains the largest source of external financing for developing economies as a group, although official development assistance (ODA) and remittances play a relatively greater role in the least developed countries (LDCs). “The overall picture of external financial flows is especially important for developing countries facing external payments problems, which may be aggravated by a prolonged downturn in FDI inflows,” said UNCTAD.
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