Global foreign direct investment (FDI) could decline or remain flat at best this year after recovering to pre-coronavirus levels in 2021, as the impact of the Russia-Ukraine war and the continuing Covid-19 disruptions heighten uncertainty, a UN agency has said.
The probability of more interest rate increases in major economies, as well as negative sentiment in financial markets and a potential economic recession are also weighing on the outlook for FDI flows, the UN Conference on Trade and Development (Unctad) said in a report on Thursday.
Preliminary data for the first quarter of 2022 shows greenfield project deals declined by 21 per cent a year while cross-border mergers and acquisitions (M&A) and international project finance deals fell 13 per cent and 4 per cent, respectively, in a sign of risk aversion among investors.
Despite high profits, investment by multinational companies in new projects overseas was still a fifth below pre-pandemic levels in 2021. For developing countries, the value of greenfield deals stayed flat.
“The global environment for international business and cross-border investment changed dramatically in 2022. The war in Ukraine — on top of the lingering effects of the pandemic — is causing a triple food, fuel and finance crisis in many countries around the world,” Unctad said.
“Investor uncertainty could put significant downward pressure on global FDI in 2022.”
“The 2021 growth momentum is unlikely to be sustained. Global FDI flows in 2022 will likely move on a downward trajectory, at best remaining flat,” Unctad said.
“However, even if flows should remain relatively stable in value terms, new project activity is likely to suffer more from investor uncertainty.”
The World Bank this week warned of stagflation and slashed its 2022 growth forecast for the global economy for the second time in 2022 as the Ukraine war, now in its fourth month, worsens the pandemic-induced slowdown.
The Washington-based multilateral lender expects growth of 2.9 per cent, down from the 3.2 per cent projection it made in April, as the geopolitical crisis threatens to lead to a “protracted period of feeble growth and elevated inflation”, it said.
The International Monetary Fund, the Institute of International Finance and the 38 countries that comprise the Organisation for Economic Co-operation and Development have all cut their growth projections for this year as well.
Global FDI in 2022 and beyond will be affected by the conflict-induced security and humanitarian crises, energy and food price increases, macroeconomic shocks and increased investor uncertainty, Unctad said.
The direct effects of the war on investment flows to and from Russia and Ukraine include the suspension of existing investment projects and the cancellation of announced projects, the mass departure of multinational companies from Russia, a widespread loss of asset values and sanctions that inhibit outflows.
The value at risk is significant, with multinational companies from developed economies that support the sanctions accounting for more than two thirds of FDI stock in Russia. A significant part of the remainder is accounted for by offshore financial centres, Unctad said.
Among the top 10 non-financial multinationals ranked by assets held in Russia, energy sector companies hold the largest share.
In Ukraine, a number of multinationals hold significant assets, mostly in steel, information and communications technology (ICT), pharmaceuticals and agricultural commodities.
Arcelor Mittal, which is based in Luxembourg, is the largest investor, with assets of $6.5 billion.
The war, with its ripple effects, is not the only factor cooling FDI prospects for 2022.
“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,” Unctad said.
In addition, the expected interest rate rises in the US, Europe and other major economies battling significant inflation increases could slow M&A markets later in the year and dampen the growth of international project finance, Unctad said.
“Negative financial market sentiment and signs of a looming recession could accelerate an FDI downturn,” it said.
However, there are some signs of FDI resilience as cross-border M&A deals and international project finance in infrastructure sectors “may provide a floor to global FDI in 2022", Unctad said.
The agency also highlighted that the introduction of a global minimum tax on FDI will have important implications for the international investment climate.
However, developed and developing countries are expected to benefit from an increased revenue collection.
“While the tax reforms are going to increase revenue collection for developing countries, from an investment-attraction perspective they entail both opportunities and challenges,” said Unctad secretary general Rebeca Grynspan.
“Developing countries face constraints in their responses to the reforms because of a lack of technical capacity to deal with the complexity of the tax changes, and because of investment treaty commitments that could hinder effective fiscal policy action. The international community has the obligation to help.”