Foreign direct investment (FDI) flows around the world are expected to nosedive 40% in 2020 due to the coronavirus crisis, the United Nations (UN) said Tuesday, 16 June.
In a report from the United Nations Conference on Trade and Development (UNCTAD), FDI is estimated to plunge below $1 trillion for the first time since 2005. This is a steep decline from the $1.54 trillion value of FDI in 2019. The World Investment Report 2020 of UNCTAD also paints a dull scenario for 2021, with FDI decreasing by a further 5 to 10 per cent. Recover is expected to begin only in 2022.
“The global economy is in a direr situation than it was during the 2008 financial crisis,” said UNCTAD secretary-general Mukhisa Kituyi. “The pandemic represents a supply, demand and policy shock for FDI.”
Kituyi noted that the impact of COVID-19 will be harsher in developing countries. He highlighted how the crisis disrupts major productive industries, causes a decline in remittances and contracts world trade at large.
“Managing the disease is only part of the persistent challenges facing developing countries,” he said.
The UNCTAD official also mentioned possible food security issues “as production of major food items is concentrated in a few big countries where the pandemic is expanding.” This echoes the sentiment of UN secretary-general Antonio Guterres in his video message and policy brief dated 10 June that warned of an impending global food emergency in light of the crisis.
Plummeting FDI may precipitate a fall in reinvested earnings of foreign affiliates in Asia. The crisis has also accentuated the importance of global production hubs in China and other Asian economies.
The report drew attention to 32 landlocked less-developed countries, too. Border closures have been a particular pain point for these economies, which cannot turn to direct sea transport that carries about 80% of global trade.
“As we saw in the past, international investment played a lead role in recovery from global financial crises,” said UNCTAD director of investment and enterprise James Zhan. The director added that recovery could open up opportunities for middle-income countries as value chains become more regionalised.
Global FDI flows rose by a modest 3% in 2019 after seeing significant declines in 2017 and 2018. Higher flows to developed economies were the primary reason for the increase, following the waning impact of the 2017 tax reforms in the United States.