The latest Investment Trends Monitor published by the United Nations Conferences on Trade and Development (UNCTAD) this week shows that Foreign Direct Investment inflows to Nigeria fell by 21.21 percent from $3.3 billion in 2019 to $2.6 billion in 2020, the lowest since 2005.
The plunge in FDI was not unrelated to the global coronavirus outbreak, which saw oil prices fall to record lows between March and April 2020 and led to the closure of oil development sites, affecting inflows into Africa’s biggest economy which relies on the oil sector for 90% of its foreign exchange earnings.
Similar to Nigeria, the pandemic, which has pretty much slowed global economic activity and growth since the virus broke out in China in December 2019, led to a 42% decline in global FDI last year.
The global collapse in FDI to an estimated $859 billion, from $1.5 trillion in 2019, represents a historic low. Direct investment flows had not fallen to such a level since the 1990s. It is also more than 30% below the flows that followed the 2008-2009 global financial crisis.
‘Zero’ FDI inflows
The bulk of FDI decline was in developed economies, where flows declined as much as 69% to an estimated $229 billion.
In the United States, direct investment fell by 49% to around $134 billion and to zero in the United Kingdom, reflecting a dearth of investment to Europe where flows fell by two-thirds to -$4 billion.
Although countries like Sweden and Spain saw significant increase in FDI – they doubled from $12 billion to $29 billion in the former and rose 52% in Madrid.
Among other developed economies, flows to Australia fell -46% to $22 billion but increased marginally for Israel, from $18 billion to $26 billion, and Japan, from $15 billion to $17 billion.
China the top FDI destination
Beijing received the world’s largest share of FDI in 2020 – flows into the Asian giant rose by 4% to $163 billion. This was as a result of “a return to positive GDP growth (+2.3%) and the government’s targeted investment facilitation programme.” These “helped stabilize investment after the early lockdown,” the report says.
Another major emerging economy in Asia, India, also recorded positive growth (13%), boosted by investments in the digital sector, according to the UNCTAD data.
China’s lead and India’s growth reflect a broader dominance by developing economies as they accounted for 72% of global FDI – the highest share ever recorded. Although flows decreased by 12% to an estimated $616 billion compared to the previous year.
In Africa, FDI inflows fell by -18%, -37% in Latin America and the Caribbean, and -4% in developing countries in Asia, in what was an uneven decline across developing regions.
Major concern for developing economies in subdued outlook
The global economy is expected to recover this year but FDI flows will remain weak, UNCTAD said, citing uncertainty over the evolution of the pandemic. It had projected a 5-10% decline in FDI this year, in its 2020 World Investment Report.
“The effects of the pandemic on investment will linger (and) investors are likely to remain cautious in committing capital to new overseas productive assets,” director of UNCTAD’s investment division James Zhan said.
Existing data – on Mergers & Acquisitions, greenfield investments, and project finance – provides a mixed picture on the outlook and confirms the weak outlook for 2021, UNCTAD said in the report. “Greenfield project announcements in 2020, 35% lower than in 2019, do not bode well for new investment in industrial sectors in 2021.”
The prospects for 2021 are “a major concern” for developing countries, Zhan said, even though FDI flows in the regions appear relatively resilient in 2020. This is because greenfield announcements and international project finance fell by 46% and 7% respectively, the types of investments that are “crucial for productive capacity and infrastructure development and thus for sustainable recovery prospects.”
Any increase in global FDI flows this year will most likely not come from new investment in productive assets but from cross-border M&As, especially in technology and healthcare – two industries booming amid the pandemic, UNCTAD said.
The organisation also cautioned that the “far more limited capacity of developing countries to roll out economic support packages to stimulate investment in infrastructure will result in an asymmetric recovery of project-finance-driven FDI.”