TWN Info Service on WTO and Trade Issues (Jun21/13)
22 June 2021
Third World Network

United Nations: Global FDI to recover some lost ground in 2021, says UNCTAD
Published in SUNS #9371 dated 22 June 2021

Geneva, 21 Jun (Kanaga Raja) – Global foreign direct investment (FDI) flows are expected to bottom out and recover some lost ground in 2021, with an increase of about 10 to 15 per cent, the United Nations Conference on Trade and Development (UNCTAD) has said.

In its World Investment Report 2021, released on 21 June, UNCTAD however said prospects are highly uncertain and will depend on, among other factors, the pace of economic recovery and the possibility of COVID-19 pandemic relapses, the potential impact on FDI of recovery spending packages, and policy pressures.

UNCTAD has forecast a further increase in FDI in 2022 which, at the upper bound of the projections, could bring FDI back to the 2019 level of $1.5 trillion.

According to the UNCTAD report, the COVID-19 crisis caused a dramatic fall in FDI in 2020. Global FDI flows dropped by 35 per cent to $1 trillion, from $1.5 trillion in 2019. This is almost 20 per cent below the 2009 trough after the global financial crisis, it said.

“The decline was heavily skewed towards developed economies, where FDI fell by 58 per cent, in part due to oscillations caused by corporate transactions and intra-firm financial flows.”

On the other hand, FDI in developing economies decreased by a more moderate 8 per cent, mainly because of resilient flows in Asia.

As a result, developing economies accounted for two-thirds of global FDI, up from just under half in 2019, said UNCTAD.

At a virtual media briefing on 17 June, Ms Isabelle Durant, the Acting Secretary-General of UNCTAD, said that: “While COVID-19 is still the defining force, we are in a better situation than a few months ago. We have come a long way with vaccinations, and the global economy is recovering faster than initially expected. Yet, the recovery is uneven and fragile.”

The crisis caused a dramatic fall in foreign direct investment (FDI). Global FDI flows fell by one-third, from $1.5 trillion in 2019 to $1 trillion in 2020.

To put this into perspective, this is almost 20 per cent below the low point after the global financial crisis more than a decade ago, she said.

“This has important implications for our development aspirations. The fall has undone much of the progress made since 2015 in promoting investment flows to sectors relevant for the SDGs.”

New investment projects in developing countries in infrastructure, water and sanitation, food and agriculture, health and education were all one- to two-thirds lower than in 2019. This is of course very worrisome, she said.

“We expect FDI flows this year to recover some lost ground, with an increase of 10-15 per cent. But it could take some time for FDI to gather speed,” Ms Durant added.

Early indicators on greenfield investment and international project finance suggest that firms and financiers are still cautious with new overseas investments in productive assets and infrastructure, she said.

“What we are certain is that the recovery depends on countries’ capacity to respond and the investment stimulus packages that are being adopted: these packages will affect global investment patterns in the coming years owing to their sheer size,” Ms Durant added.

GLOBAL FDI TRENDS

According to the UNCTAD report, global foreign direct investment (FDI) flows fell by 35 per cent in 2020, reaching $1 trillion, from $1.5 trillion in 2019.

“This is the lowest level since 2005 and almost 20 per cent lower than the 2009 trough after the global financial crisis,” it said.

The UNCTAD report said the lockdowns around the world in response to the COVID-19 pandemic slowed down existing investment projects, and the prospects of a recession led multinational enterprises (MNEs) to re-assess new projects.

The fall in FDI was significantly sharper than the fall in gross domestic product (GDP) and trade. FDI plummeted in developed and transition economies, falling by 58 per cent in both.

It decreased by a more moderate 8 per cent in developing economies, mainly because of resilient flows in Asia (up 4 per cent). As a result, developing economies accounted for two-thirds of global FDI, up from just under half in 2019.

UNCTAD said that both the steep decline in developed economies and the relatively strong showing in Asia were influenced to a significant degree by large fluctuations in a small number of conduit economies.

Of the global decline of some $500 billion, almost one-third was accounted for by the Netherlands and caused by the liquidation of several large holding companies, corporate re-configurations and intra-firm financial flows.

The up-tick in Asia was mostly driven by an increase in FDI flows to Hong Kong, China (up $46 billion from low levels in 2019), largely reflecting financial transactions by Chinese MNEs.

Excluding the effects of conduit flows, one-off transactions and intra-firm financial flows, the global decline was slightly more moderate (about 25 per cent) and uniform (with flows to developing Asia down 6 per cent).

The patterns in new greenfield investment announcements and international project finance deals contrasted sharply with FDI patterns, with much steeper declines in developing economies than in developed ones, said UNCTAD.

Greenfield announcements in developing countries fell by 44 per cent in value and international project finance deals by 53 per cent, compared with 16 per cent and 28 per cent in developed countries.

“These investment types are crucial for the development of productive capacity and infrastructure and for the prospects for a sustainable recovery,” said UNCTAD.

The sudden and simultaneous interaction of supply- and demand-side shocks triggered a cascade of effects, it added.

The slowdown in project activity (across greenfield, project finance and cross-border mergers and acquisitions (M&As)) resulted in a large drop in new equity flows.

Intra-company loans were negative in many countries because of changes in financial positions within MNEs in response to the crisis.

Lower earnings also affected re-investment – the profits of the largest MNEs plunged by 36 per cent on average.

Although re-invested earnings declined by only 7 per cent overall, in many large host countries they declined significantly, said UNCTAD.

For example, it added, re-invested earnings of foreign affiliates in the United States fell by 44 per cent.

In other countries with significant investment in commodity-related industries, re-invested earnings suffered from the combined effects of the pandemic and the plummeting oil prices early in the year.

The impact of the pandemic on global investment trends was immediate and concentrated in the first half of 2020, said the report.

In the second half, cross-border M&As and international project finance deals partly recovered (although the recovery was concentrated in developed economies).

In contrast, greenfield investment continued its negative trend throughout 2020 and into the first quarter of 2021, it added.

FDI INFLOWS AND OUTFLOWS

According to the report, FDI flows to developed economies fell by 58 per cent to $312 billion, with the decline being inflated by strong fluctuations in conduit and intra-firm financial flows, and by corporate re-configurations.

The value of net cross-border M&A sales in developed economies, normally the most important FDI type in those economies, decreased by 11 per cent to $379 billion.

The values of announced greenfield investments and cross-border project finance deals declined by 16 per cent and 28 per cent, respectively.

Aggregate inflows in Europe plummeted by 80 per cent, reaching only $73 billion. FDI fell in European countries that have significant conduit flows (in addition to the Netherlands, Switzerland remained in negative territory), but it also dropped in large economies such as the United Kingdom (-57 per cent), France (-47 per cent) and Germany (-34 per cent).

FDI to the European Union fell by 73 per cent to $103 billion, while flows to the United States decreased by 40 per cent, to $156 billion, mainly because of a reduction in re-invested earnings.

Nevertheless, the country remained the largest recipient of FDI, followed closely by China, said UNCTAD, adding that FDI flows to developing economies decreased less steeply, by 8 per cent to $663 billion.

FDI flows to China rose by 6 per cent to $149 billion, mainly because of resilient economic growth, investment facilitation efforts and continuing investment liberalization.

Developing Asia, already the largest FDI recipient region – accounting for more than half of global FDI – registered a rise of 4 per cent to $535 billion.

However, excluding sizeable conduit flows to Hong Kong, China, flows to the region were down 6 per cent.

FDI in South-East Asia – normally an engine of growth for global FDI – contracted by 25 per cent to $136 billion, with declines in investment in all the largest recipients, including Singapore (-21 per cent), Indonesia (-22 per cent) and Viet Nam (-2 per cent).

In India, FDI rose, pushed up by acquisitions in the information and communication technology (ICT) industry, making it the fifth largest recipient in the world, said UNCTAD.

FDI flows to Latin America and the Caribbean, Africa and transition economies tumbled as the collapse in export demand caused by the pandemic and a significant drop in commodity prices early in 2020 weighed heavily on their investment prospects, UNCTAD added.

FDI in Latin America and the Caribbean dropped 45 per cent to $88 billion, the steepest decline among developing regions. Inflows to Brazil, Colombia, Chile and Peru plummeted while those to Mexico fell less sharply (by 15 per cent to $29 billion).

FDI flows to Africa declined by 16 per cent in 2020 to $40 billion – a level last seen 15 years ago. Egypt remained the largest recipient in the region.

In 2020, flows to the transition economies shrank by 58 per cent to $24 billion. Inflows plummeted in the Russian Federation, the largest economy of the transition economies – from $32 billion in 2019 to $10 billion, reflecting its significant dependence on investment in the extractive industry.

According to the report, in 2020, MNEs from developed economies reduced their investment abroad by 56 per cent, to $347 billion. As a result, their share in global outward FDI dropped to a record low of 47 per cent.

As with inflows, the decline in investment by major investor economies was exacerbated by strong volatility in conduit flows, said UNCTAD.

UNCTAD said that aggregate outward investment by European MNEs (including large negative flows) fell by 80 per cent to $74 billion – the lowest amount since 1987, with the fall being driven by sharp declines in outflows from the Netherlands, Germany, Ireland and the United Kingdom.

Outflows from the United States remained flat at $93 billion, while an increase in flows to Europe was offset by reduced investment in Asia, mainly in Singapore.

Investment by Japanese MNEs – the largest outward investors in the last two years – dropped by half to $116 billion, as large M&A purchases were not repeated in 2020, said UNCTAD.

The value of investment activity abroad by MNEs from developing economies declined by 7 per cent, reaching $387 billion. However, excluding flows from Hong Kong, China, that value declined by 22 per cent.

Outward FDI from China, despite a 3 per cent decline, remained high at $133 billion, making China the largest investor in the world, said the UNCTAD report.

“The value of cross-border M&A purchases by Chinese MNEs doubled, mostly due to financial transactions in Hong Kong, China. Continued expansion of the Belt and Road Initiative led to resilient FDI outflows amid the pandemic.”

Outflows from South-East Asia decreased by 16 per cent to $61 billion. Flows from Singapore dropped by 36 per cent, to $32 billion, with most investment going to other countries of the Association of Southeast Asian Nations (ASEAN).

Outward investment by Latin American MNEs collapsed in 2020, recording an overall disinvestment of -$3.5 billion, for the first time ever, said UNCTAD.

The decline in value (of about $50 billion) was caused mostly by continued negative outflows from Brazil (-$26 billion), resulting from MNEs raising funds through their overseas subsidiaries and from a 41 per cent decrease of outward FDI from Mexico.

In contrast, said UNCTAD, outflows from Chile rose by 25 per cent to $12 billion, as Chilean MNEs increased loans to their foreign affiliates abroad.

In 2020, it said, FDI outflows from transition economies fell by 76 per cent to $6 billion, mostly driven by reduced investment overseas by Russian MNEs in extractive industries because of lower reinvested earnings (-83 per cent).

FDI BY TYPE AND SECTOR

According to the report, the pandemic had a sizeable impact across all types of FDI in 2020, affecting investment in all regions and industries.

Greenfield project announcements decreased in volume and number, by 33 per cent and 29 per cent, respectively.

International project finance volumes were also affected – declining by 42 per cent – although the number of project finance deals (more indicative of the trend) slowed by only 5 per cent.

Meanwhile, the value of net cross-border M&As decreased by 6 per cent and the number of deals by 13 per cent, as the sharp decline in the first half of the year was mostly offset by a surge in the last quarter of 2020.

The value of announced greenfield investment projects fell to $564 billion in 2020, the lowest level ever recorded.

The geographical focus of foreign investors shifted to developed economies. Consequently, developing countries faced an unprecedented downturn in greenfield FDI projects, said UNCTAD.

Greenfield announcements in energy generation and distribution decreased by 13 per cent to $99 billion, as foreign investors continued to invest more in renewable energy power projects than in projects based on fossil fuels.

Projects in renewable energy, which hit a record high in terms of both value and number in 2019, were not immune from the global economic shock but showed resilience, said UNCTAD.

Greenfield investment in renewables declined by only 5 per cent in value, to $88 billion, across 507 projects.

The pandemic boosted demand for digital infrastructure and services globally, leading to higher values of greenfield FDI project announcements targeting the ICT industry, rising by more than 22 per cent to $81 billion.

Although the number of announced projects decreased by 13 per cent, the ICT industry attracted the largest share of projects, said the report.

Greenfield project announcements in manufacturing industries registered a 41 per cent decline to $237 billion. In developing economies, where such investments are most important for industrial development, the decline mirrored the global trend, with a 42 per cent fall to $129 billion, said UNCTAD.

“International project finance activity was less affected by the crisis than greenfield investment, with a decline of only 5 per cent in the number of new projects.”

However, the relative resilience of project finance was due only to continued growth in renewable energy projects, which constitute more than half of project finance deals, it added.

The pandemic affected international deals more than projects led by domestic sponsors, as overall project finance activity remained stable, said UNCTAD.

Greater aversion to risk among international sponsors, often involved in the largest projects, led to a decline in total project values of 42 per cent, to $367 billion – the lowest level since 2003.

UNCTAD said that cross-border M&A sales reached $475 billion in 2020 – a decrease of 6 per cent compared with 2019.

“Among the top target industries were information and communication, and pharmaceuticals, as the pandemic gave the digital and health sectors a big push.”

Sales of assets in digital-related industries rose significantly (mainly in manufacturing of computers, electronics, optical products and electrical equipment, and in information and technology).

After a jump in 2019, the value of M&A sales in pharmaceuticals stabilized at $56 billion, but the number of deals rose significantly, reaching 211 – the highest number ever recorded, said UNCTAD.

“This appears to reflect a pivot in expansion strategies in the industry, from large M&As to smaller acquisitions, particularly in therapeutics, and research and development collaborations such as that between Pfizer (United States) and BioNTech (Germany) for the COVID-19 vaccine,” it added.

In developed countries, where cross-border M&As are a significant part of total FDI, the value of deals decreased by 11 per cent, mostly in North America (-40 per cent) while in Europe the increase of 25 per cent was inflated by the corporate re-configuration in the Netherlands, said UNCTAD.

GLOBAL PROSPECTS FOR FDI

“Global FDI flows are expected to bottom out in 2021 and recover some lost ground with an increase of 10-15 per cent,” said the UNCTAD report.

This would still leave FDI some 25 per cent below the 2019 level and more than 40 per cent below the recent peak in 2016, it added.

Current forecasts show a further increase in 2022 which, at the upper bound of the projections, could bring FDI back to the 2019 level of $1.5 trillion.

“The relatively modest recovery in global FDI projected for 2021 reflects lingering uncertainty about access to vaccines, the emergence of virus mutations and delays in the reopening of economic sectors,” said UNCTAD.

As FDI tends to trail other macroeconomic indicators after a shock, a full and broad-based recovery in flows to pre-pandemic levels is expected to take longer, it added.

“This is despite expectations of a boom in capital expenditures by MNEs as a result of a peak in cash holdings and pent-up spending plans.”

According to the UNCTAD report, increased expenditures on both fixed assets (e.g. machinery and equipment) and intangibles will not translate directly into a rapid FDI rebound, as confirmed by the sharp contrast between rosy forecasts for capital expenditures and still depressed greenfield project announcements.

Moreover, the FDI recovery will be uneven. Developed economies are expected to drive global growth in FDI, both because of strong cross-border M&A activity and large-scale public investment support, said UNCTAD.

“FDI inflows to Asia will remain resilient – the region has stood out as an attractive destination for international investment throughout the pandemic.”

A substantial recovery of FDI to Africa and to Latin America and the Caribbean is unlikely in the near term.

These regions have more structural weaknesses and less fiscal space, and they are more dependent on greenfield investment, which is expected to remain weak in 2021, said UNCTAD.

Early indicators – FDI projects in the first months of 2021 – confirm diverging trajectories between cross-border M&As, largely driven by financial market dynamics, and greenfield projects.

After fully recovering in the second half of 2020, cross-border M&A activity remained broadly stable in the first quarter of 2021.

Notably, both the number and the value of newly announced M&A deals are on the increase in 2021, suggesting a potential surge in M&A activity later in the year.

Announced greenfield investment is not showing signs of recovery yet; after a significant contraction in 2020, it remained weak in early 2021, said UNCTAD.

The modest growth forecast for 2021 – to about $1.1-1.2 trillion – would still put global FDI flows slightly above the range projected this time last year. (At the time, the forecast for 2020 was fully in line with the actual trend, at -35 per cent.)

UNCTAD said the upward revision is supported by several factors. Despite delays and setbacks, the deployment of vaccines will allow more and more countries to ease restrictions during the course of 2021, it added.

“Excess savings by households and pent-up consumer demand are expected to drive growth, especially in wealthier economies.”

UNCTAD said that this will have positive spillovers for trade in goods and for commodity prices, which are both increasing.

“The anticipated growth spurt will likely raise corporate profitability, with a positive effect on the re-invested earnings component of FDI.”

Moreover, it said, governments in developed countries and higher-income emerging markets have responded to the COVID-19 crisis with large fiscal stimulus programmes, mostly in the form of transfers to distressed households and firms.

As current measures wind down, both the European Union and the United States have pushed forward public investment strategies.

Such measures will have a positive effect on FDI, particularly in the infrastructure, “green” and digital economy sectors, said UNCTAD, adding that low borrowing costs and buoyant financial markets worldwide are pushing up cross-border M&A activity.

“The withdrawal of immediate fiscal support measures may also lead to a spike in M&As, as distressed firms seek buyouts.”

Supporting the upward revision of the forecast, UNCTAD said global output and trade were more resilient than expected over 2020, so the outlook for 2021 has improved in recent months. Current projections suggest that FDI will increase a further 15-20 per cent in 2022, up to $1.4 trillion, it added.

According to UNCTAD, this would imply that FDI will largely recover by the end of 2022 in the baseline forecast, which assumes continued improvement in the health and economic situations over the next two years.

The most optimistic upper-bound scenario implies the absence of subsequent regional or global crisis relapses, as well as rapid economic growth and high investor confidence.

Under these conditions, said UNCTAD, FDI could fully recover to its pre-pandemic level of about $1.5 trillion by 2022. The lower-bound scenario reflects the possibility of a prolonged downturn in global FDI. Although FDI is not expected to contract further, it could remain at a low level – about $1.2 trillion, over 2021 and 2022.

“A full recovery of FDI to historical levels is not assured. In the medium term, the pandemic could accelerate the push towards improving supply-chain resilience and lead to policy pressures for greater national or regional self- sufficiency,” said UNCTAD.

“Tighter restrictions on international trade and investment have already emerged because of the pandemic.”

A re-balancing of global supply chains towards more local (domestic or regional) operations, possibly boosted by policy incentives, could exert lasting downward pressure on global FDI, said UNCTAD.