FDI flows to developing economies decrease by 16pc

Foreign Direct Investment (FDI) flows to developing economies decreased by 16 per cent, less than expected, Unctad said on Tuesday.

The FDI flows were 28% lower in Africa, 25 per cent in Latin America and the Caribbean and 12 per cent in Asia, mainly due to resilient investment in China, according to United Nations Conference on Trade and Development (Unctad).

In the first half of 2020, developing Asia accounted for more than half of global FDI.

FDI flows to transition economies were down 81 per cent due to a strong decline in the Russian Federation.

Despite the 2020 drop, FDI remains the most important source of external finance for developing countries.

Other sources, including remittances and official development assistance – relatively more important for LDCs – are also falling.

The overall decline can add to external payments problems in developing countries.

Global foreign direct investment (FDI) flows in the first half of 2020 were down 49 per cent compared to 2019 as lockdowns around the world slowed existing investment projects and the prospects of a deep recession led multinational enterprises (MNEs) to re-assess new projects.

The decline cut across all major forms of FDI. New greenfield investment project announcements dropped by 37 per cent, cross-border mergers and acquisitions (M&As) fell by 15 per cent and newly announced cross-border project finance deals, an important source of investment in infrastructure, declined by 25 per cent.

Developed economies saw the biggest fall, with FDI reaching an estimated $98 billion in 2020 H1 – a decline of 75 per cent compared to 2019.

The trend was exacerbated by sharply negative inflows in European economies with significant conduit flows.

FDI flows to North America fell by 56 per cent to $68 billion.

Cross-border M&A values reached $319 billion in the first three quarters of 2020.

The 21 per cent decline in developed countries, which account for about 80% of global transactions, was checked by the continuation of M&A activity in digital industries.

The value of greenfield investment project announcements – an indicator of future FDI trends – was $358 billion in the first eight months of 2020.

Developing economies saw a much bigger fall (-49%) than developed economies (-17%), reflecting their more limited capacity to roll out economic support packages.

The number of announced cross-border project finance deals declined by 25 per cent, with the biggest drops in Q3, suggesting that the slide is still accelerating.

Prospects for the full year remain in line with earlier projections of a 30-40 per cent decrease.

The rate of decline in developed economies is likely to flatten as some investment activity appears to be picking up in Q3. Flows to developing economies are expected to stabilize, with East Asia showing signs of an impending recovery.

The outlook remains highly uncertain, depending on the duration of the health crisis and on the effectiveness of policy interventions to mitigate the economic effects of the pandemic.

Geopolitical risks also continue to add to the uncertainty.

(Source: UNB)