The UN Conference on Trade and Development (UNCTAD) has issued a warning that global foreign direct investment could drop by up to 15% on previous estimates because of the spread of Coronavirus.
The warning comes in its March edition of the Investment Trends Monitor.
Even in a ‘best case’ scenario in which Coronavirus and the associated disease Covid-19 is controled in the first half of 2020, the downward pressure on FDI is of the magnitude of -5%.
“The outbreak and spread of Coronavirus (Covid-19) will negatively affect global foreign direct investment (FDI) flows,” the Monitor states.
“With scenarios of the spread of the epidemic ranging from short-term stabilization to continuation throughout the year, the downward pressure on FDI will be -5% to -15% (compared to previous forecasts projecting marginal growth in the FDI trend for 2020-2021).”
“The impact on FDI will be concentrated in those countries that are most severely hit by the epidemic, although negative demand shocks and the economic impact of supply chain disruptions will affect investment prospects in other countries.
“More than two thirds of the multinational enterprises (MNEs) in UNCTAD’s Top 100, a bellwether of overall investment trends, have issued statements on the impact of Covid-19 on their business. Many are slowing down capital expenditures in affected areas. In addition, lower profits – to date, 41 have issued profit alerts – will translate into lower reinvested earnings (a major component of FDI).
“On average, the top 5000 MNEs, which account for a significant share of global FDI, have seen downward revisions of 2020 earnings estimates of 9% due to Covid-19. Hardest hit are the automotive industry (-44%), airlines (-42%) and energy and basic materials industries (-13%). Profits of MNEs based in emerging economies are more at risk than those of developed country MNEs: developing country MNE profit guidance has been revised downwards by 16%.”
Continuing its warning, UNCTAD stated: “UNCTAD’s forecast for the underlying trend in the World Investment Report 2019 (confirmed in the January 2020 Global Investment Trends Monitor) projected a stable level of global FDI inflows in 2020-2021 with a potential increase of +5% (relatively marginal for FDI).”
“Based on an expected GDP growth impact of -0.5% under a scenario in which Covid-19 would be brought under control in the first half of 2020, and a potential impact of -1.5% under a scenario in which the epidemic continues to affect the global economy throughout the year – in line with projections by other international organizations – UNCTAD projects a negative impact on global FDI flows ranging from -5% to -15% in 2020 (with the effect of the demand shock filtering through 2021).
“This is based on UNCTAD’s forecasting model, early indications from monthly transaction data, and estimates of the potential impact on reinvested earnings. Much of the impact will be driven by delayed investment as a result of the global demand shock.
“However, significant negative impact will result in economies and industries that are highly dependent on GVC trade. As such, the Covid-19 outbreak will potentially accelerate existing trends of decoupling (the loosening of GVC ties) and reshoring driven by the desire on the part of MNEs to make supply chains more resilient.
“UNCTAD will continue to monitor the outbreak and its potential impact on FDI and GVCs.”
