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Friday, May 24, 2024

Foreign direct investment: fall of almost 50% in the first half of the year

Confinements linked to COVID-19 have put the brakes on the global economy. The United Nations has announced that cross-border investments fell by 49% in the first half of 2020 compared with the same period a year ago. The annual decline could be as much as 40%, due to the prospect of a deep recession.

According to the United Nations Conference on Trade and Development's (UNCTAD) World Investment Report 2020, all major forms of foreign investment, from infrastructure financing to mergers and acquisitions, have been globally affected. Excluding the Caribbean's offshore financial centers, global flows of foreign direct investment (FDI) have come under severe pressure as a result of the pandemic.

The Director of UNCTAD's Investment and Enterprise Division, James Zhan, said in Geneva that "global FDI flows fell by almost half in the first half of this year ... This is more drastic than was envisaged for the whole year". He added that "developing economies weathered the storm relatively better in the first half of the year".

75% collapse in industrialized countries

Developed economies, which normally account for around 80% of global transactions, were the hardest hit. Their flows fell to $98 billion, a level last seen in 1994. FDI flows to North America fell by 56% over the same period, to $68 billion. In the United States, the loss was 61%. Some countries recorded an increase in flows. Germany recorded +15%, with $21 billion, and Ireland $75 billion, with a jump of $65 billion in equity capital in the second quarter of 2020.

Africa

FDI flows to developing economies, on the other hand, fell by less than expected (-16%), according to Unctad. On the African continent, cross-border investments reached $16 billion in the first half of this year. They fell by 28%. Total inflows into North Africa fell by 44% to $3.8 billion over the same period. In contrast, Morocco saw an increase of 6%, due to a relatively diversified investment profile. Sub-Saharan Africa saw a decrease of 21% to an estimated $12 billion. Contrary to the trend, FDI flows to South Africa rose by 24% to $2.9 billion. However, this increase was largely due to intra-company transfers from foreign companies to their subsidiaries in the country, rather than greenfield investment projects.

Stability in China

China is bucking the trend, said James Zhan. "Their FDI flows remain relatively stable. For the first half of the year, the decline was really modest (-4%) and, in fact, according to the latest data, for the first nine months of this year, FDI in China increased by 2.5%," he added. Most FDI investment in China was in e-commerce services, specialized technology services and research and development.

Uncertain outlook

According to UNCTAD, the outlook remains poor, as greenfield investment projects fell by 37% in the first eight months of the year. These job-creating investments, which are also a source of technology and know-how transfer, fell by 49% in developing countries, and by 17% in developed economies. In 2021, the decline in foreign direct investment is expected to be between 5% and 10%, according to James Zhan.