Global FDI recovers in 2021, prospects look grim this year

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Geneva, 10 Jun (Kanaga Raja) — Global foreign direct investment (FDI) flows recovered to pre-pandemic levels in 2021, reaching $1.58 trillion, up 64 per cent from the exceptionally low level in 2020, the UN Conference on Trade and Development (UNCTAD) has said.

In its World Investment Report 2022, UNCTAD, however, said that the 2021 growth momentum is unlikely to be sustained, with global FDI flows in 2022 likely to move on a downward trajectory, or at best remain flat.

“The war in Ukraine – on top of the lingering effects of the COVID-19 pandemic – is causing a triple food, fuel and finance crisis in many countries around the world,” it said.

UNCTAD said investor uncertainty could put significant downward pressure on global FDI in 2022. New project activity is already showing signs of increased risk aversion among investors: preliminary data for Q1 2022 show greenfield project numbers down 21 per cent and international project finance deals down 4 per cent.

Speaking virtually from New York, UNCTAD Secretary-General Ms Rebeca Grynspan told a media briefing that the UNCTAD report comes out at an extraordinary time for the world economy.

“We are suffering from the compounding effect of multiple global crises: climate change, the COVID-19 pandemic and on top of these two global crises, the war in Ukraine,” she said.

Today, billions of households around the world are looking at their shrinking family incomes, alarmed by the rapidly rising cost of living, she added.

The FAO Food Price Index is near record highs, oil is over 120 dollars a barrel, transport costs are triple the pre- COVID average, interest rates are rising, and real incomes are falling, said Ms Grynspan.

Global foreign direct investment flows in 2021 increased almost 70% from the exceptionally low levels of 2020. However, the global environment for international business and cross-border investment has changed dramatically in the last three months, she added.

“The war in Ukraine – added to the pandemic and climate change crisis – is rapidly increasing investor uncertainty.”

“This is a year of uncertainties,” said Ms Grynspan, emphasizing that global value chains are greatly disrupted, consumers are worried, and interest rates are rising.

Fears of recession are also high, and rising investor uncertainty will put significant downward pressure on global FDI in 2022, she said.

GLOBAL INVESTMENT TRENDS

Global foreign direct investment (FDI) flows in 2021 were $1.58 trillion, up 64 per cent from the level during the first year of the COVID-19 pandemic of less than $1 trillion, said the UNCTAD report.

“FDI flows appeared to have significant momentum mainly because of booming merger and acquisition (M&A) markets and rapid growth in international project finance as a result of loose financing conditions and major infrastructure stimulus packages.”

However, the global environment for international business and cross-border investment changed dramatically in 2022 with the onset of the war in Ukraine, which occurred while the world was still reeling from the impact of the pandemic, said the report.

“The war is having effects well beyond its immediate vicinity, causing a triple food, fuel and finance crisis, with rising prices for energy and basic commodities driving inflation and worsening debt spirals. Investor uncertainty and risk aversity could put significant downward pressure on global FDI in 2022.”

The war, with its direct implications for investment in and from the Russian Federation and Ukraine, and its ripple effects through sanctions, supply shortages in energy and basic commodities, and broader macroeconomic impact, is not the only factor cooling FDI prospects for 2022, said the report.

“The flare-up of COVID-19 in China, which is resulting in renewed lockdowns in some areas that play a major role in global value chains (GVCs), could further depress new greenfield investment in GVC-intensive industries.”

Furthermore, the expected interest rate rises in the United States, Europe and other major economies that are seeing significant rises in inflation could slow down M&A markets later in the year and dampen the growth of international project finance. Negative financial market sentiment and signs of a looming recession could accelerate an FDI downturn, the report cautioned.

UNCTAD said there are also factors that point towards making FDI relatively resilient to drastic decline at times of global economic downturn.

The part of FDI that is most closely correlated with financial markets has not yet lost its strength. The cross-border M&As and international project finance in infrastructure sectors may provide a floor to global FDI in 2022, the report added.

“Greenfield investment in industry, which saw only a partial recovery in 2021 and remains weak in many sectors, is likely to suffer more,” said UNCTAD.

“Early indicators reveal a worrisome FDI outlook: FDI project activity in the first months of 2022 shows investors’ uncertainty and risk aversity. According to preliminary data, the number of greenfield project announcements in the first quarter of 2022 was 21 per cent below the quarterly average in 2021.

Cross-border M&A activity was 13 per cent below the 2021 average and international project finance deals were down 4 per cent.”

Overall, UNCTAD foresees that the growth momentum of 2021 cannot be sustained and that global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat.

Looking at the global FDI trend over the course of the pandemic to date, UNCTAD said a clear contrast emerges with other economic variables. In 2020, FDI was much more severely affected than global trade and GDP, which had already started their recovery in the second half of the year.

In 2021, FDI accelerated faster than other variables, it said, noting that the large swings in FDI observed between the first and second year of the pandemic, especially in developed countries, were mainly caused by the substantial financial flow component of FDI and by transactions that are closely linked to performance of financial markets.

“The booming M&A market and retained earnings of MNEs explain much of the rapid rebound of growth in 2021. The corollary is visible in much weaker growth of greenfield investments in industry and in the low share of new equity in FDI flows.”

UNCTAD said the reinvested earnings component of FDI – profits retained in foreign affiliates by multinational enterprises (MNEs) – accounted for the bulk of FDI growth in 2021.

In the United States, reinvested earnings reached $200 billion – the highest level ever recorded. Other developed countries, including Switzerland, the Netherlands, Canada, Australia and Belgium, in that order, also saw large jumps in their reinvested earnings.

Global equity investment grew more moderately, reflecting the more limited growth of new project investments and the shift towards international project finance, which often includes a much smaller equity component and greater reliance on debt financing. Intra-company loans remained negative in many countries.

The report said that the importance of retained earnings in 2021 FDI flows reflects the record rise in profit levels of MNEs, especially in developed economies, with the release of pent-up demand, low financing costs and significant government support. The profitability of the largest MNEs doubled to 8.2 per cent.

As a result of these growth factors, developed economies saw the biggest rise by far, with FDI reaching $746 billion in 2021 – more than double the exceptionally low level in 2020.

According to the report, in Europe, FDI rose in most countries, although half of the increase was caused by large fluctuations in major conduit economies. Inflows in the United States more than doubled, with much of the increase accounted for by a surge in cross-border M&As.

“Although much of the growth in FDI in developed countries was driven by financial flows and M&As, there were indications of investment strength in actual new projects. Investor confidence was high in infrastructure sectors, supported by favourable long-term financing conditions and recovery stimulus packages.”

International project finance deals in developed economies were up 70 per cent in number and 149 per cent in value, it said.

FDI flows to developing economies increased by 30 per cent, to $837 billion, with 19 per cent growth in developing Asia (to a record $619 billion), a partial recovery in Latin America and the Caribbean (to $134 billion) and an up-tick in Africa (to $83 billion).

“International project finance deals rose by 64 per cent in number (142 per cent in value). Investor confidence in industry remained weak, although the low points seen in GVC-intensive industries in 2020 were not repeated and several industries registered a partial recovery.”

The report said greenfield project announcements in developing countries were flat in value terms, although activity (project numbers) increased by 16 per cent.

FDI INFLOWS

FDI flows recovered strongly in 2021 in all regions. The increase in FDI flows to developed economies (+134 per cent) – from the exceptionally low values in 2020 – accounted for most of the global growth, said the report.

The jump in developed economies showed the effect of stimulus packages, resulting in record earnings for MNEs, and reflects the more volatile nature of FDI flows in developed markets because of the larger financial component.

However, FDI flows to developing regions also increased significantly. FDI inflows to developing Asia increased by 19 per cent to reach a new high of $619 billion, driven mostly by East and South-East Asia. Flows to Latin America and the Caribbean increased by 56 per cent, recovering part of the ground lost in 2020.

Flows to Africa more than doubled, but most of the increase was due to a single corporate transaction, without which they would have increased moderately.

The share of global flows accounted for by developed countries returned to pre-pandemic levels, at about half of the total, from just one third in 2020.

Structurally weak economies continued to attract only a small share of global FDI, at 2.5 per cent of the total, said the report.

In 2021, most developed countries – 34 out of 48 – saw an increase in FDI. The overall rise was characterized by strong fluctuations in conduit FDI, financial flows resulting from corporate restructurings, and M&As. Among sub-regions, flows rose in North America, other Europe and other developed countries while they fell in the EU.

UNCTAD said in North America, flows to the United States more than doubled to $367 billion, the third highest level ever recorded, after those of 2015 and 2016.

The United States remained the largest recipient of FDI.

The increase in corporate profits had a direct impact on reinvested earnings, which rose to a record $200 billion. In addition, equity investments were up by 54 per cent, reflecting a steep increase in cross-border M&As, while new greenfield project announcements also increased, by 28 per cent to $86 billion.

The report said cross-border M&A sales of United States assets to foreign investors in the services sector reached $200 billion. They were spread across many services industries, including information and communication ($43 billion), trade ($40 billion), transport and storage ($37 billion), finance and insurance ($30 billion) and professional services ($21 billion).

Among the 18 cross-border M&As sales of more than $10 billion in 2021, nine took place in the United States.

FDI flows to the European Union (EU) reached $138 billion – the lowest level since 1997 – mostly due to continued large swings in conduit flows, including negative values in the Netherlands (-$81 billion in 2021 from -$105 billion in 2020) and an enormous drop of flows to Luxembourg (from $102 billion in 2020 to -$9 billion in 2021).

Equity flows in EU countries fell sharply from $220 billion to -$4.2 billion, while cross-border M&A sales dropped also by 26 per cent to $139 billion.

While intra-EU sales doubled, mainly because of acquisitions by French and German MNEs, sales to MNEs from outside the EU declined.

The fall was due in part to several sizeable divestments of foreign affiliates to domestic firms, which led to negative values in net cross-border M&As, said UNCTAD.

For 2022, FDI trends in developed economies are highly uncertain, as the war in Ukraine could have far-reaching consequences for investment – especially in Europe where, apart from the direct impact on investment in the Russian Federation and Ukraine, the main channel through which the war and the sanctions will affect investment is the rise in energy prices and energy insecurity, it added.

Supply chain disruptions will also hurt some industries – including automotive – as the war and sanctions hinder production of key inputs, said UNCTAD.

Nonetheless, cross-border M&As – the most important type of FDI in developed economies – rose by 39 per cent, to $285 billion, in the first four months of 2022, compared with the $205 billion four-month average in 2021. One third of M&A sales ($87 billion) took place in the extractive industries, reflecting the higher commodity prices.

The report said FDI flows to developing economies in 2021 increased by 30 per cent to $837 billion, the highest level ever recorded. The increase was mainly the result of strong growth performance in Asia, a partial recovery in Latin America and the Caribbean, and an upswing in Africa.

“The share of developing countries in global flows remained just above 50 per cent. FDI flows continue to be an important source of external finance for developing economies, together with other cross-border capital flows, which also saw a rise in 2021.”

UNCTAD said that in 2022, FDI flows to developing economies are expected to be strongly affected by the war in Ukraine and its wider ramifications, and by macroeconomic factors including rising interest rates.

The main drivers of a possible contraction of FDI are the impact of higher energy prices on domestic demand; high food prices, which can lead to political instability; and tighter financial conditions.

It said fiscal space in many countries will be significantly reduced, especially in oil- and food-importing developing economies. Rising investor uncertainty and downgrades of country risk ratings will be important factors for FDI.

Higher commodity prices may provide some offsetting investment increases for resource-based economies in Africa and in Latin America. As in developed economies, cross-border M&A sales in developing economies also rose – by 13 per cent, to $42 billion in the first months of 2022, 40 per cent of which targeted extractive industries.

FDI flows to Africa reached $83 billion – a record level – from $39 billion in 2020, accounting for 5.2 per cent of global FDI. Most recipients saw a moderate rise in FDI after the fall in 2020 caused by the pandemic. The total for the continent was inflated by a single intra-firm financial transaction in South Africa in the second half of 2021.

Excluding that transaction, the increase in Africa is moderate, more in line with other developing regions. Southern Africa, East Africa and West Africa saw their flows rise; Central Africa remained flat and North Africa declined, said UNCTAD.

Despite successive waves of COVID-19, FDI in developing Asia rose for the third consecutive year to an all-time high of $619 billion, underscoring the resilience of the region. It is the largest recipient region of FDI in the world, accounting for 40 per cent of global inflows, it added.

The 2021 upward trend was widely shared in the region, with South Asia the only exception. However, inflows remain highly concentrated, with six economies (China, Hong Kong-China, Singapore, India, the United Arab Emirates and Indonesia, in that order) accounting for more than 80 per cent of FDI to the region.

In 2021, FDI in Latin America and the Caribbean rose by 56 per cent to $134 billion, sustained by strong inflows in traditional target industries such as automotive manufacturing, financial and insurance services, and electricity provision, and pushed up by record high investments in information and communication services across the region.

UNCTAD said most economies saw inflows rebound, with only a few experiencing further declines caused by the pandemic-induced economic crisis, in some cases combined with political instability.

FDI flows to 82 structurally weak, vulnerable and small economies rose by 15 per cent to $39 billion. Inflows to the least developed countries (LDCs), landlocked developing countries (LLDCs) and small island developing States (SIDS) combined accounted for only 2.5 per cent of the world total in 2021, down from 3.5 per cent in 2020.

“The impact of the pandemic continued to intensify the fragility of the structurally weak economies. Investment in various sectors relevant for achieving the SDGs, especially in food, agriculture, health and education, continued to fall in 2021,” said the report.

FDI OUTFLOWS

In 2021, MNEs from developed economies more than doubled their investment abroad to $1.3 trillion, from $408 billion. Their share in global outward FDI rose to three quarters of global outflows, said the report.

The strong volatility of conduit countries continued in 2021. Aggregate outward investment by European MNEs rebounded from the anomalously low level in 2020 of -$21 billion to $552 billion, it added.

The report said that outflows from North America reached a record $493 billion.

MNEs from the United States increased their investment abroad by 72 per cent, to $403 billion.

Flows to the EU and the United Kingdom doubled to $154 billion and $79 billion, respectively. Outflows from the United States to Mexico almost tripled (to $11 billion), and to Singapore they increased significantly ($25 billion). By industry, the biggest rises were in wholesale trade (to $38 billion from -$1 billion) and finance (to $39 billion from -$30 billion).

The value of investment activity abroad by MNEs from developing economies rose by 18 per cent, to $438 billion.

Developing Asia remained a major source of investment even during the pandemic. Outward FDI from the region rose 4 per cent to $394 billion, contributing to almost a quarter of global outflows in 2021, said the report.

The rise included robust outflows from Saudi Arabia (with a five-fold increase to $24 billion), Singapore (up 49 per cent to $47 billion) and the United Arab Emirates (up 19 per cent to $23 billion).

Investment from China and Hong Kong (China), the region’s two largest investors, fell by 6 per cent to $145 billion and 13 per cent to $87 billion, respectively.

Outward FDI from South Asia, mainly from India, rose by 43 per cent to $16 billion. In South-East Asia, only outflows from Singapore and Malaysia increased.

Outward FDI from Latin America and the Caribbean jumped back to 2019 levels at $42 billion. The increase is mostly explained by the investment behaviour of Brazilian MNEs, as $13 billion of negative outflows turned to a positive $23 billion. Chilean MNEs also increased their foreign investments to $12 billion, said UNCTAD.

In terms of FDI flows by type and sector, UNCTAD said that in 2021, cross-border M&As, greenfield project announcements and international project finance deals all increased, both in value and in number.

It said strong financial markets and loose financing conditions led to robust growth in international project finance numbers, up by 68 per cent, and a boom in M&A activity, with a corresponding increase in cross-border M&As of 43 per cent.

The recovery of greenfield project announcements after the steep drop in 2020 was more moderate, with project numbers up 11 per cent, UNCTAD added. 

- Third World Network