ISLAMABAD: Global foreign direct investment (FDI) flows are forecast to decrease by up to 40 per cent in 2020 from 2019’s value of $1.54 trillion, according to UNCTAD’s ‘World Investment Report 2020’.

This would bring FDI below $1tr for the first time since 2005. In addition, FDI is projected to decrease by a further 5pc to 10pc 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.

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.

In Pakistan, FDI recovered in 2019, growing 28pc to $2.2 billion after a deep fall of 30pc in 2018 as the country faced balance-of-payment challenges. The growth was driven by equity investments in the energy, financial, and textiles industries, with major investors from China and the United Kingdom, report says. FDI to South Asia grew 10pc to $57bn. The growth was driven largely by a rise in investment in India, which further relaxed investment barriers in mid-2019. Inflows to Bangladesh, an important FDI recipient in South Asia, fell by 56pc to $1.6bn. The decline reflects an adjustment from a record-high level in 2018.

The export-oriented apparel industry remains an important FDI recipient, with major investors from the South Korea, Hong Kong, China and China. In 2020, the sector is expected to be severely affected by both factory close-downs and falling global demand for apparel. As of April 2020, the country’s garment manufacturers and exporters association estimated that more than $3bn worth of exports have been cancelled or suspended.

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 40pc on average, with some industries plunging into losses. Lower profits will hurt reinvested earnings, which on average account for more than 50pc 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 50pc 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 40pc.

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.

Published in Dawn, June 20th, 2020