TWN Info Service on WTO and Trade Issues (Oct16/13)
14 October 2016
Third World Network

United Nations: Global FDI forecast to fall by 10-15% this year
Published in SUNS #8329 dated 10 October 2016

Geneva, 7 Oct (Kanaga Raja) -- Global foreign direct investment (FDI) flows are projected to fall by 10-15 per cent in 2016, with the decline in FDI flows likely to occur in both developed and developing economies, the UN Conference on Trade and Development (UNCTAD) said on Thursday (6 October).

In its latest Global Investment Trends Monitor (No. 24 of 6 October 2016), UNCTAD said that over the medium term, global FDI flows are projected to resume growth in 2017 and to surpass $1.8 trillion in 2018, but they will remain below the pre-crisis peak.

Overall, said UNCTAD, expectations for short-term FDI prospects are best described as "cautiously pessimistic".

FDI will decline in both developing and developed countries, it added.

"The recent ‘Brexit' vote in the United Kingdom is likely to further amplify uncertainty on FDI flows," it pointed out.

UNCTAD has attributed the projected decline in FDI flows in 2016 to the fragility of the global economy and the persistent weakness of aggregate demand, sluggish growth in some commodity exporting countries, effective policy measures to curb tax inversion deals and a slump in multinational enterprises' (MNE) profits in 2015.

FDI flows have been volatile in recent years, with analysts warning that this uncertainty will have its own negative impact on trade and global value chains. In the meantime, the road to the recovery of global FDI looks rocky, said UNCTAD Secretary-General Dr Mukhisa Kituyi, in an UNCTAD press release.

"This drop in FDI is troubling, because our global economy urgently needs investment to get it going again," he added.

"We forecast FDI to pick up in 2017, then to reach $1.8 trillion in 2018, but it will remain lower than the pre-crisis peak," Dr Kituyi further said.

The UNCTAD report said that the world economy continues to face major headwinds, which are unlikely to ease in the near term. Global GDP is expected to expand by only 2.4 per cent, the same relatively low rate as in 2015, it noted.

"A tumultuous start to 2016 in global commodity and financial markets, added to the continuing drop in oil prices, have increased economic risks in many parts of the world."

The momentum of growth slowed significantly in some large developed economies towards the end of 2015.

In developing economies, sluggish aggregate demand, low commodity prices, mounting fiscal and current account imbalances and policy tightening have further dampened the growth prospects of many commodity- exporting economies.

"Elevated geopolitical risks, regional tensions and weather-related shocks could further amplify the expected downturn," the UNCTAD report warned.

It also noted that the global economic outlook and lower commodity prices have had a direct effect on the profits and profitability of MNEs, especially in extractive industries.

After two years of increase, profits of the largest 5,000 MNEs slumped in 2015 to the lowest level since the global economic and financial crisis of 2008-2009.

The value of announced cross-border deals may be less affected than in recent years by purely tax-driven deals, as the United States Treasury Department imposed new measures to rein in corporate inversions in April 2016.

"The new rules, the Government's third wave of administrative action against inversions, make it harder for companies to move their tax domiciles out of the United States and then shift profits to low-tax countries."

UNCTAD pointed out that as a result, the $160 billion merger of pharmaceutical company Pfizer (United States) with Ireland-based Allergan Plc was cancelled.

Reflecting the projected increase in global growth, UNCTAD has forecast that over the medium term, FDI flows will resume growth in 2017 and surpass $1.8 trillion in 2018.

According to the report, this year's MNE survey results reveal muted overall expectations for FDI prospects over the next three years, with less than half of all MNEs anticipating FDI increases to 2018, and only 40 per cent of executives at top MNEs expect an increase.

Macroeconomic factors, such as exchange rate volatility, lower commodity prices and debt concerns in emerging markets are among the factors cited as influencing future global FDI activity.

FDI FLOWS IN MEGA-GROUPINGS

According to the UNCTAD report, mega-groupings such as the G20, the Transatlantic Trade and Investment Partnership (TTIP), Asia-Pacific Economic Cooperation (APEC), the Trans-Pacific Partnership (TPP), the Regional Comprehensive Economic Partnership (RCEP) and the BRICS (Brazil, Russia, India, China and South Africa) account for a significant share of global FDI.

"The economic collaboration in mega-groupings is raising expectations of higher future FDI flows into these groups from intra-regional and extra-regional sources," it said.

The prospect of a large regional market, liberalization, removal of tariff barriers and complementarity of locational advantages are expected to encourage companies from inside and outside each grouping to establish a stronger presence.

"Mega-groupings are expected to increase opportunities for market-seeking, resource-seeking and efficiency- seeking FDI and to lead to an evolving investment environment that will influence greater intra-economic group value chain activity."

UNCTAD, however, pointed out that as inflows to mega-groupings are currently highly concentrated, their short- term FDI prospects will continue to be influenced by few large economies.

On the G20, the report found that the G20 members generated over three quarters of global GDP and attracted half of global world FDI flows in 2015.

Some 58 per cent of global FDI stock is invested in the G20 ($14.4 trillion) and they are home to more than 95 per cent of the Fortune Global 500 companies.

Overall, FDI flows to the group increased by 42 per cent in 2015, with foreign investment increasing in most members.

"However, the recovery of FDI inflows to G20 members is unlikely to be sustained in 2016."

UNCTAD has forecast that FDI inflows could decline by 5 to 10 per cent in 2016, falling to $830-880 billion.

"The decline of FDI flows reflects the fragility of G20 advanced economies, volatility of global financial markets, weak aggregate demand and a deceleration in some large G20 emerging market economies," it said.

Data on announced greenfield investment projects also support the expected decline. For instance, the number and value of announced greenfield investment projects in the G20 in the first quarter of 2016 were almost 20 per cent lower than the same period in 2015.

"Uncertainty over the United Kingdom's exit from the EU is expected to weigh heavily on FDI inflows to European G20 members and beyond. G20 economies in which natural resources play a predominant role are likely to see further negative impact on FDI flows," said UNCTAD.

As regards APEC, the UNCTAD report said that in 2015, this mega-grouping was the largest recipient of global FDI flows among mega-groupings, attracting 54 per cent of the total, which was roughly in line with its share of world GDP.

In 2015, these economies held about $12.8 trillion in FDI stock, and FDI flows to APEC jumped by 42 per cent to $953 billion.

UNCTAD has projected FDI inflows to decline by 15 to 20 per cent to $760-810 billion in 2016. "While the current global and regional economic slowdown will hinder FDI growth in APEC members, the decline owes also to a reversion to normal patterns after some unusually high expansions in two major host APEC members, the United States and Hong Kong (China)," it said.

The rise of flows in both economies in 2015 was due in part to corporate re-configurations which involved large values in the financial account of the balance of payments but little movement in actual resources.

Furthermore, the low level of commodity prices, especially crude oil and metals and minerals is expected to impact future FDI flows to a number of APEC natural-resource-based economies.

"Flows will continue to be impacted not only by reductions in MNE's planned capital expenditures in response to declining prices, but also by a sharp reduction in reinvested earnings as profit margins shrank."

Nevertheless, FDI flows to some other APEC members are expected to increase moderately in 2016.

According to the UNCTAD report, the five BRICS countries are home to 41 per cent of the world population and account for 23 per cent of world GDP between them but received 15 per cent of global FDI flows in 2015.

They held $2.4 trillion in FDI stock in 2015, representing 9 per cent of the world total. FDI flows to BRICS countries declined by 6 per cent in 2015, to $256 billion, as increasing investment to China and India could not fully compensate for the decline in FDI flows in the other countries in the group.

In 2016, FDI inflows to BRICS countries could return to a growth path, increasing by an average of 10 per cent to $270-290 billion.

This bounce-back is already becoming visible in the first months of 2016, said UNCTAD, citing for example that during the first five months of 2016, FDI inflows to China amounted to $54.2 billion, 4 per cent higher than that in the same period of 2015, with the increase being mainly driven by rising inflows to high-tech services.

India continues to take steps to open up its economy to foreign investors, and this is expected to foster FDI. The momentum created by the huge increase in announced greenfield investments, including in manufacturing, is likely to carry through into realized FDI in 2016 and beyond.

"Moreover, greenfield investment announcements for the first quarter of 2016 also imply that prospects for inward FDI are good, with sustained interest in India from foreign investors."

After the slump of FDI flows in the Russian Federation in 2014 and 2015, flows are also likely to increase as the country has announced large privatization plans, which if realized, will open new avenues for foreign investment.

In contrast, FDI flows in the two remaining BRICS economies are expected to slip further, as challenging macro-economic conditions persist.

REGIONAL FDI FLOWS

FDI inflows to Africa could return to a growth path in 2016, increasing by an average of 6 per cent to $55-60 billion, said the UNCTAD report, adding that this bounce-back is already becoming visible in announced greenfield projects in Africa.

In the first quarter of 2016, their value was $29 billion, 25 per cent higher than in the same period in 2015.

"The biggest rise in prospective investments are in North African economies such as Egypt and Morocco, but a more optimistic scenario also prevails more widely, for example, in Mozambique, Ethiopia, Rwanda and the United Republic of Tanzania."

Depressed conditions in oil and gas and in mining continue to weigh significantly on GDP growth and investment across Africa.

The rise in FDI inflows, judging by announcements in 2015, will mostly occur in services (electricity, gas and water, construction, and transport primarily), followed by manufacturing industries, such as food and beverages and motor vehicles.

UNCTAD noted that MNEs are indeed showing great interest in the African auto industry, with announced greenfield capital expenditure into the industry amounting to $3.1 billion in 2015.

"Investment into Africa's auto industry is driven by industrial policies in countries such as Morocco, growing urban consumer markets, improved infrastructure, and favourable trade agreements."

Major automotive firms are expected to continue to expand into Africa: PSA Peugeot-Citroen and Renault (France) and Ford (United States) have all announced investments in Morocco; Volkswagen and BMW (Germany) in South Africa; Honda (Japan) in Nigeria; Toyota (Japan) in Kenya; and Nissan (Japan) in Egypt.

To reduce the vulnerability of Africa to commodity price developments, countries are reviewing policies to support FDI into the manufacturing sector.

East Africa has already become more attractive in this sector as a source and investment location, especially in light manufacturing. MNEs are therefore investing across Africa for market-seeking and efficiency-seeking reasons.

"Hindered by the current global and regional economic slowdown, FDI inflows to Asia are expected to decline in 2016 by about 15 per cent, reverting to their 2014 level."

Data on cross-border M&A sales and announced greenfield investment projects support the expected decline. For instance, cross-border M&As in the region announced in the first quarter of 2016 were $5 billion, only 40 per cent of the same period in 2015.

In addition, the number of greenfield projects announced in 2015 was 5 per cent lower than in 2014.

There are indications that intra-regional investments are rising: 53 per cent of announced greenfield projects in developing Asia by value in 2015 were intra-regional, especially from China, India, the Republic of Korea and Singapore.

UNCTAD has projected a moderate increase in FDI inflows to some Asian economies such as China, India, Myanmar and Viet Nam in 2016.

During the first four months of 2016, FDI inflows in non-financial sectors in China amounted to $45 billion, 5 per cent up from the same period in 2015. In India, the large increase of announced greenfield investments in manufacturing industries may provide further impetus to FDI into the country.

Viet Nam is expected to continue strengthening its position in regional production networks in industries such as electronics, while Myanmar is likely to receive increasing levels of FDI inflows in infrastructure, labour- intensive manufacturing and extractive industries.

Announced greenfield projects in Myanmar totalled $11 billion in 2015 and $2 billion in the first quarter of 2016, pointing to sustained FDI inflows in the near future.

In addition, on the basis of greenfield announcements in 2015, a number of other economies may perform better, including Bhutan, the Islamic Republic of Iran and Pakistan.

UNCTAD has forecast that FDI inflows in Latin America and the Caribbean could decline by 10 per cent in 2016, falling to $140-160 billion.

"Macroeconomic conditions will remain challenging, with the region projected to slip further into recession in 2016. Weak domestic demand led by softening private consumption, coupled with the potential for further currency depreciation, will weigh on investment in domestic manufacturing as well as in the services sector."

A further decline in the prices of the region's principal export commodities will likely serve to delay investment projects in the extractive industry as well as crimp reinvested earnings, it cautioned.

The value of announced greenfield projects dropped 17 per cent from 2014, to $73 billion, led by an 86 per cent decline in the extractive sector in 2015. This largely accords with the capital expenditure plans of the region's major State-owned oil companies - Petrobras (Brazil), Ecopetrol (Colombia) and Pemex (Mexico) - which also foresee a sharp reduction in their investment outlays in the medium term.

Preliminary data for the first quarter of 2016 suggest that greenfield investments will continue to be weak, with the number of projects falling 19 per cent and their value sliding 18 per cent, compared with the same period in the previous year. M&A activity in the first part of 2016 was also well below the quarterly average in previous years.

After the slump in 2015, FDI flows to transition economies are expected to increase in the range of $37-47 billion in 2016, barring any further escalation of geopolitical conflicts in the region.

In South-East Europe, the EU integration process and increasing regional cooperation will likely support FDI inflows, while in the Commonwealth of Independent States (CIS), FDI is expected to increase, as some companies with hefty debt burdens and reduced access to the international capital market are forced to sell equity stakes.

"Furthermore, several countries, including Kazakhstan, the Russian Federation and Uzbekistan, have announced large privatization plans in response to ballooning current account deficits and depleted foreign exchange reserves, resulting from the depreciation of their currencies and low energy prices."

As regards the developed countries, the recovery of FDI in these countries is unlikely to be sustained in 2016, with UNCTAD forecasts indicating that FDI flows to developed countries will be in the range of $830-880 billion, with the median falling by 11 per cent.

"The third wave of administrative action against tax inversions by the United States Treasury Department in 2016 should make it harder for companies to move their tax domiciles out of the United States and shift profits to low-tax countries. For instance, the $160 billion merger of drug maker Pfizer (United States) with Ireland-based Allergan was dropped in April 2016."

UNCTAD said that although announced greenfield investment projects in developed countries in 2015 were up across many industries and from a range of source countries, especially Europe, cross-border M&A data on deals announced over the period January-April 2016 probably provide a better indication of prospects for 2016 as a whole.

In this period, $292 billion worth of M&A deals targeting assets in developed countries were announced.

Compared with the year before, cross-border M&A deals made a much slower start. In the same period in 2015, the value of announced deals amounted to $423 billion.

The decline would have been much more pronounced had it not been for a flurry of deals announced by Chinese MNEs which were worth $93 billion, representing 32 per cent of the total. The largest announced deal was the proposed takeover of the agribusiness MNE Syngenta (Switzerland) by ChemChina (China) for $44 billion.

Agribusiness might see further consolidation with the German pharmaceutical MNE Bayer launching a $62 billion bid for Monsanto (United States) in May 2016, said the report. +