Global FDI to drop by up to 40 per cent due to coronavirus, UN report says

Merger announcements are on course to fall 70 per cent in first quarter

The global Foreign Direct Investment is expected to fall between 30 to 40 per cent during 2020-21 due to the spread of coronavirus. Qilai Shen/Bloomberg

Global foreign direct investment (FDI) is expected to fall 30 to 40 per cent during 2020-21 due to restrictions put in place to fight the spread of coronavirus, according to a new report from the United Nations.

“The outbreak and spread of coronavirus (Covid-19) will cause a dramatic drop in global foreign direct investment flows,” the United Nations Conference on Trade and Development (UNCTAD) said on Thursday.

“Since our first special issue on the impact of the pandemic, updated economic impact estimates and earnings revisions of the largest multinational enterprises (MNEs) now suggest that the downward pressure on FDI could be 30 per cent to 40 per cent during 2020-2021.”

Energy and basic material industries, airlines and the automotive industry are expected to suffer the most with FDI plunging by 208 per cent in the energy and basic materials sector, 116 per cent in airlines and 47 per cent in the automotive sector.

The UN agency in an earlier report this month predicted a global drop of 15 per cent in FDI due to the coronavirus. It revised numbers upwards due to the rapid spread of the disease across the globe.

“Earnings guidance by multinational enterprises in UNCTAD’s Top 100, a bellwether of FDI trends, confirms the rapid deterioration of prospects,” it said, adding 61 per cent of MNEs have issued statements about disruption since the first week of March.

“In addition to earlier concerns on production and supply chain disruptions among firms with strong supply chain links to China, 57 per cent of MNEs have added warnings on the impact on sales of the global demand shock caused by the pandemic. Covid-19 is no longer just a global value chain (GVC) problem.”

The latest assessment from the UNCTAD comes as coronavirus cases rise globally with over 460,000 infections and more than 22,000 deaths, according to Johns Hopkins University as of Thursday. Nearly 114,000 people have recovered.

The report noted the pandemic and the mitigation measures that governments are forced to impose are affecting all components of FDI.

“Real capital expenditure, greenfield investments and expansions are being hampered by physical closures of sites and production slowdowns. Cross-border M&As (mergers and acquisitions) are being delayed and new M&A announcements are on course to drop by 70 per cent globally in the first quarter.”

Cross-border M&A transactions worldwide averaged 1,200 deals per month in 2019, but only 874 deals were recorded in February and just 385 until March 20.

“They would be on course for a 50 per cent decrease in March, and at this clip a 70 per cent decline from last year’s levels next month.”

UNCTAD also said the decline in FDI will depend on the severity and duration of the pandemic across different regions and countries, and the scope of the containment measures that governments are forced to put in place.

“Importantly, it will also depend on the nature and scale of policy packages that most governments are now putting together to support their economies, which will determine the duration of the recession and the speed of recovery.”

“Most of these packages are expected to include investment support measures, such as accelerated depreciation of post-pandemic capital expenditures (especially in Asia, where a larger proportion of GDP is tied to investment demand).”

Governments across the world are announcing different packages to boost the economy. The US Senate this week unanimously approved a $2 trillion (Dh7.3tn) rescue plan, the largest in the country's history, to help soften the impact of the coronavirus pandemic on the world's largest economy.

In the region, the UAE government increased its stimulus package to Dh126 billion to support the economy and help small businesses whereas Saudi Arabia, the biggest economy in the Arab world, has also announced 120bn riyals (Dh117.3bn) worth of initiatives to mitigate the impact of the coronavirus outbreak on its economy.