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Foreign investment faces U-shaped recovery: UN

Global foreign direct investment flows are set to go through a U-shaped recovery, staying weak in 2021, the United Nations warned on Sunday.

FDI is likely to bottom out this year before picking up again in 2022, said the UN Conference on Trade and Development.

“Global FDI flows will remain weak in 2021,” UNCTAD said in its latest Investment Trends Monitor report, with the world still in the grip of the Covid-19 pandemic, which has eviscerated economies.

The UN agency said FDI collapsed last year, falling by 42 percent to from $1.5 trillion in 2019 to an estimated $859 billion in 2020. UNCTAD predicts a further drop of five to 10 percent this year.

FDI finished 2020 more than 30 percent below the trough after the global financial crisis in 2009, and at a level last seen in the 1990s, the report said.

“The decline of global FDI will bottom out in 2021, and a real recovery will start in 2022,” James Zhan, UNCTAD’s investment and enterprise director, told reporters in Geneva.

“Overall, the global FDI is likely to follow a U-shaped recovery, unlike global trade and GDP (gross domestic product), which have been predicted to be a V-shaped recovery starting already 2021.”

The ongoing risks surrounding the coronavirus pandemic, the speed at which vaccination campaigns can be rolled out, and sluggishness in releasing economic aid will put the brakes on an FDI comeback this year, he explained.

“Investors are likely to remain cautious in committing capital to new overseas productive assets,” said the report.

– Green-field outlook –

Green-field project announcements — considered an indicator of future FDI trends — were 35 percent down in 2020, figures that “do not bode well for new investment in industrial sectors in 2021”, said the report.

Green-field investment typically refers to projects that create new physical facilities which are considered productive, in part because they normally create jobs.

The indicator is flashing red for developing countries.

“For developing countries, the prospects for 2021 are a major concern,” said Zhan.

Although FDI flows in developing economies seemed relatively resilient in 2020, greenfield announcements in such countries plunged by 46 percent, while international project finance — typically financial arrangements from several partners for large infrastructure projects — dropped by seven percent.

International investment projects tend to have a long gestation period and react to crises with a delay, both on the downward slope and in the recovery.

The biggest shocks on these indicators were felt in Africa in 2020, with a 63 percent drop in greenfield announcements, while international project finance in the continent fell by 40 percent.

Greenfield announcements dropped by 51 percent in Latin America and the Caribbean, and by 38 percent in Asia.

– Bargain hunt –

“Any increase in global FDI flows is more likely to come from cross-border mergers and acquisitions, rather than from new investment in productive assets,” the report said, citing deals already announced but not yet completed.

Mergers and acquisitions bounced back in the second half of 2020, especially in the tech and healthcare sectors, which are not as affected by the pandemic as other sectors.

Meanwhile bargain-hunting companies should benefit from low interest rates and rising stock market valuations.

European companies are set to attract more than 60 percent of technology deals in value terms, but several developing economies are also seeing an increase, the report said.

India and Turkey are attracting “record numbers of deals” in the digital and information technology consulting sectors.

Acquiring firms are mostly based in developed economies (80 percent), with European companies “significantly increasing” mergers and acquisitions activity.