FDI Flow For 2022 Grim

FDI

The flow of Foreign Direct Investment (FDI) recovered to pre-pandemic levels in 2021, hitting $1.58 trillion – a 64% increase compared with 2020 but the prospects for 2022 are grimmer, according to UNCTAD’s World Investment Report 2022.

The report, entitled “International tax reforms and sustainable investment”, said that developing countries must get significant help from the international community to cope with an environment of uncertainty and risk aversion. UNCTAD Secretary-General Rebeca Grynspan said that the need for investment in productive capacity, Sustainable Development Goals (SDGs) and climate change mitigation and adaptation was enormous. However, she noted that the present investment trends in these areas were not unanimous. “It is important that we act now. Even though countries face very alarming immediate problems stemming from the cost-of-living crisis, it is important we are able to invest in the long term,” she said.

GROWTH IN DEVELOPED ECONOMIES

In the report, UNCTAD said that coming off a low base in 2020, global FDI rose last year with momentum from booming merger and acquisition (M&A) activity and rapid growth in international project finance due to loose financing and major infrastructure stimulus packages. Despite recovery benefiting all regions, the UNCTAD report stated that almost three quarters of the growth was concentrated in developed economies, where FDI flows soared 134%. Flows to developing economies rose 30% to $837 billion – the highest level ever recorded – largely due to strong growth 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%. The reinvested earnings component of FDI – profits retained in foreign affiliates by multinational companies -accounted for the bulk of the global growth, reflecting the record rise in corporate profits, especially in developed economies. The top 10 economies for FDI inflows in 2021 were the United States, China, Hong Kong (China), Singapore, Canada, Brazil, India, South Africa, Russia and Mexico.

PROSPECTS FOR 2022

The UNCTAD report mentioned that war in Ukraine resulted in a triple crisis of high food and fuel prices and tighter financing. Other factors clouding the FDI horizon include renewed pandemic impacts, the likelihood of more interest rate rises in major economies, negative sentiment in financial markets and a potential recession, it added Despite high profits, investment by multinational companies in new projects overseas were still one fifth below pre-pandemic levels last year. For developing countries, the value of greenfield announcements stayed flat. Signs of weakness are already emerging this year. Preliminary data for the first quarter shows greenfield project announcements down 21% globally, cross-border M&A activity down 13% and international project finance deals down 4%.

“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,” the report underlines. “However, even if flows should remain relatively stable in value terms, new project activity is likely to suffer more from investor uncertainty.”

AFRICA, ASIA AND LATIN AMERICA

FDI in Africa hit a record $83 billion last year but this was significantly affected by a single intrafirm financial transaction in South Africa in the second half of 2021. Flows rose in Southern Africa, East Africa and West Africa while Central Africa stayed flat and North Africa fell.

Developing Asia, which receives 40% of global FDI, saw flows rise in 2021 for the third straight year to an all-time high of $619 billion. FDI in China grew 21% and in Southeast Asia by 44%, but South Asia went the other way, falling 26% as flows to India shrank to $45 billion. In 2021, FDI in Latin America and the Caribbean rose 56%-with South America’s growth of 74% sustained by higher demand for commodities and green minerals. “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 report says. “Fiscal space in many countries will be significantly reduced, especially in oil- and food-importing developing economies.”

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