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FDI outlook ‘highly uncertain’, 2020 level to shrink by 40% – U.N. agency

Global flows of foreign direct investment (FDI) will be under severe pressure this year as a result of the COVID-19 pandemic, said the United Nations Conference on Trade and Development (UNCTAD) in its annual world investment report.

Global FDI will plunge by 40% from $1.54 trillion in 2019 and drop well below the “trough reached during the global financial crisis”, UNCTAD said in the report released mid-week.

Early indicators of FDI projects in the first months of 2020 are already showing sharp declines, according to UNCTAD. “The numbers of announced greenfield projects in March and cross-border M&A deals in April decreased by over 50% compared with the 2019 monthly average,” said the agency.

Early indicators confirm the link between earnings impact and FDI. UNCTAD pointed out that the earnings forecasts for 2020 of the top 5,000 multinational companies show average downward revisions since the virus outbreak, of -36%, with the services industries among the most severely hit, particularly accommodation and food service activities.

“All regions and economic groupings will see negative FDI growth rates in 2020,” said UNCTAD.

“Developed economies as a group are projected to see a decline of between -25 and -40%. FDI in Europe will fall most (-30 to -45% relative to 2019), as the vehemence of the virus adds to economic fragility in several large economies,” it added.

UNCTAD expects developing economies to see a larger decrease in the range of 30% to 45%.

The bleak outlook doesn’t stop there.

“FDI is projected to decrease by a further 5 to 10% in 2021 and to initiate a recovery in 2022,” said the agency in its report that comes in just under 300 pages.

However, UNCTAD wrote that its projection “is subject to significant uncertainty”.

“The exogeneous shock of the pandemic adds to the usual volatility of FDI. The range forecast for FDI through 2020 is between -30 and -40% and for 2021 between -30 and -50%.

“The main factor that will determine the severity of the drop is the development of the health emergency.

“Another key element of uncertainty will be the extent of the economic damage and the effectiveness of extraordinary measures that governments around the world are implementing to support businesses and households.”

A rebound in 2022, with FDI reverting to pre-pandemic underlying trend is possible, said UNCTAD, but only at the “upper bound of expectations”.

But the pandemic is not the only gamechanger, UNCTAD said, adding that three other factors will also have “far-reaching consequences” for the configuration of international production in the decade to 2030: the new industrial revolution, the policy shift towards more economic nationalism, and sustainability trends.

The report said that sustainability-themed funds in global capital markets are growing rapidly but they are not yet finding their way to investments on the ground in developing countries.

“We have now entered the last decade for the implementation of the SDGs. We need action to translate increased interest in SDG finance into increased SDG investment in the least developed countries,” wrote UNCTAD Secretary-General Mukhisa Kituyi in the report.

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