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COVID-19 ….. GLOBAL FOREIGN DIRECT INVESTMENT TO FALL DRASTICALLY – UNCTAD predicts; as UN says Global economy worse than 2008 crisis

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  • FDI flows to Africa to contract between 25% and 40%
  • FDI projected to decrease by a further 5% to 10% in 2021 and to initiate a recovery in 2022, the report says.
  • The pandemic is a supply, demand and policy shock for FDI
  • Investment flows are expected to slowly recover starting 2022, led by global value chains
  • FDI was already on the decline before the crisis The COVID-19 crisis has arrived at a time when FDI was already in decline, with the continent having experienced a 10% drop in inflows in 2019 to $45 billion.
  • Global economy worse than 2008 crisis – United Nations
  • Trade in many developing countries projected to ‘nosedive’, warns UNCTAD.
  • A United Nations report says ‘’trade in many developing countries is expected to “nosedive” in the second quarter of 2020, owing to the unprecedented effects of the coronavirus pandemic, UN economists have disclosed. In a new report from UNCTAD, the UN highlighted data showing that the value of international trade in goods has declined by about five percent between January and March. Worrying as that is, commerce is expected to plummet further – by a staggering 27 percent – from April to the end of June.
  • Worse than the 2008 crisis: To put it into perspective, this is even worse than the near 25 per cent contraction in world trade in the aftermath of the 2008-9 financial crisis, from which the global economy has yet to recover fully. COVID-19 has caused a steep drop in investment flows, hitting developing countries hardest. Recovery is not expected before 2022, says new UNCTAD report.

A WORLD INVESTMENT REPORT authored by the United Nations Conference on Trade & Development, UNCTAD predicts that Global foreign direct investment (FDI) flows are forecast to decrease by up to 40% in 2020, from their 2019 value of $1.54 trillion, according to UNCTAD This would bring FDI below $1 trillion for the first time since 2005. In addition, FDI is projected to decrease by a further 5% to 10% in 2021 and to initiate a recovery in 2022, the report says.

“The outlook is highly uncertain. Prospects depend on the duration of the health crisis and on the effectiveness of policies mitigating the pandemic’s economic effects,” said UNCTAD Secretary-General Mukhisa Kituyi.

AFRICA:  The trend of declining foreign direct investment (FDI) to Africa is set to exacerbate significantly in 2020 amid the dual shock of the coronavirus pandemic and low prices of commodities, especially oil. FDI flows to the continent are forecast to contract between 25% and 40% based on gross domestic product (GDP) growth projections as well as a range of investment specific factors, The trend of declining foreign direct investment (FDI) to Africa is set to exacerbate significantly in 2020 amid the dual shock of the coronavirus pandemic and low prices of commodities, especially oil.

FDI flows to the continent are forecast to contract between 25% and 40% based on gross domestic product (GDP) growth projections as well as a range of investment specific factors, according to UNCTAD. “Although all industries are set to be affected, several services industries including aviation, hospitality, tourism and leisure are hit hard, a trend likely to persist for some time in the future,” said UNCTAD’s director of investment and enterprise, James Zhan.

Manufacturing industries intensive in global value chains are also strongly affected, a sign of concern for efforts to promote economic diversification and industrialization in Africa. Overall, there is a strong downward trend in the first quarter of 2020 for announced greenfield investment projects, although the value of projects (-58%) has dropped more severely than their number (-23%). Similarly, as of April 2020, the number of cross-border merger and acquisition (M&A) projects targeting Africa had declined 72% from the monthly average of 2019.

LOCKDOWN MEASURES The pandemic is a supply, demand and policy shock for FDI. The lockdown measures are slowing down existing investment projects. The prospect of a deep recession will lead multinational enterprises (MNEs) to reassess new projects. Policy measures taken by governments during the crisis include new investment restrictions. Investment flows are expected to slowly recover starting 2022, led by global value chains (GVCs) restructuring for resilience, replenishment of capital stock and recovery of the global economy.

MNE profit alerts are an early warning sign. The top 5,000 MNEs worldwide, which account for most of global FDI, have seen expected earnings for the year revised down by 40% on average, with some industries plunging into losses. Lower profits will hurt reinvested earnings, which on average account for more than 50% of FDI. Early indicators confirm the immediacy of the impact. Both new greenfield investment project announcements and cross-border mergers and acquisitions (M&As) dropped by more than 50% in the first months of 2020 compared with last year.

In global project finance, an important source of investment in infrastructure projects, new deals fell by more than 40%. “The impact, although severe everywhere, varies by region.  Developing economies are expected to see the biggest fall in FDI because they rely more on investment in GVC-intensive and extractive industries, which have been severely hit, and because they are not able to put in place the same economic support measures as developed economies,” said James Zhan, UNCTAD’s director of investment and enterprise.

“Despite the drastic decline in global FDI flows during the crisis, the international production system will continue to play an important role in economic recovery and development. Global FDI flows will continue to add to the existing FDI stock, which stood at $37 trillion at the end of 2019,” Mr. Zhan added.

Global FDI flows rose modestly in 2019, following the sizable declines registered in 2017 and 2018. At $1.54 trillion, inflows were 3% up. The rise in FDI was mainly the result of higher flows to developed economies, as the impact of the 2017 tax reforms in the United States waned. Flows to transition economies also increased, while those to developing economies declined marginally. FDI flows to structurally weak, vulnerable and small economies remained stable overall, declining by only 1%.

The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a permanent intergovernmental bod and is part of the UN secretariat dealing with trade, investment, and development issues.

Hope for recovery: However, two distinct factors offer hope for the recovery of investment flows to the continent in the medium to long run. The first is the higher value being assigned to ties to the continent by major global economies, promoting investment in infrastructure, resources, but also industrial development. Investments from these countries, which have varying degrees of political backing, despite being affected by the joint impact of COVID-19 and low commodity prices to some degree, could be relatively more resilient.

The second is deepening regional integration due to the commencement of trade under the African Continental Free Trade Area (AfCFTA) after years of deliberation and the expected finalization of its investment protocol. In the short term, curtailing the extent of the investment downturn and limiting the economic and human costs of the pandemic is of paramount importance.

Longer-term, diversifying investment flows to Africa and harnessing them for structural transformation remains a key objective. Both of these objectives will require a prudent, coordinated and timely response from countries on the continent.

FDI was already on the decline before the crisis The COVID-19 crisis has arrived at a time when FDI was already in decline, with the continent having experienced a 10% drop in inflows in 2019 to $45 billion.

The negative effects of tepid global and regional GDP growth and dampened demand for commodities inhibited flows to countries with both diversified and natural resource-oriented investment profiles alike, although a few countries received higher inflows from large new projects.

North Africa

FDI inflows to North Africa decreased by 11% to $14 billion, with reduced inflows in all countries except Egypt, which remained the largest FDI recipient in Africa in 2019, with inflows increasing by 11% to $9 billion.

Sub-Saharan and Southern Africa

After a significant increase in 2018, FDI flows to Sub-Saharan Africa decreased by 10% in 2019 to $32 billion.

Southern Africa was the only sub-region to have received higher inflows in 2019 (22% increase to $4.4 billion) but only due to the slowdown in net divestment from Angola.

FDI inflows to South Africa decreased by 15% to $4.6 billion in 2019, despite key investments in mining, manufacturing (automobiles, consumer goods) and services (finance and banking).

West Africa

FDI to West Africa decreased by 21% to $11 billion in 2019. This was largely driven by the steep decline in investment in Nigeria due to new investment regulations for multinational enterprises in the oil and gas industry.

East Africa

FDI flows to East Africa also decreased, by 9% to $7.8 billion. Inflows to Ethiopia contracted by a fourth to $2.5 billion caused to some degree by political tensions in parts of the country.

Similarly, inflows to Kenya dropped by 18% to $1.3 billion despite several new projects in IT and healthcare.

Central Africa

Central Africa received $8.7 billion in FDI, marking a decline of 7%. The key highlight in the sub-region was the decrease in flows to the Democratic Republic of the Congo (9% to $1.5 billion).

The Netherlands overtook France as the largest investor by stock

On the basis of FDI stock data through 2018, the Netherlands overtook France as the largest foreign investor in Africa.

The investment stock held by the United States and France in Africa declined by 15% and 5% respectively, owing to profit repatriation and divestment. Meanwhile, the investment stock of the United Kingdom and China increased by 10% each.

FDI outflows also fell in 2019, by approximately a third

FDI outflows from Africa decreased by 35% to $5.3 billion. South Africa continued to be the largest outward investor despite the reduction in outflows from $4.1 billion to $3.1 billion.

Outflows from Togo increased significantly, from a mere $70 million to $700 million, a tenfold increase. In North Africa, Morocco also increased outward FDI, to approximately $1 billion from $800 million in 2019.