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UN sounds warning on global FDI flows

UN sounds warning on global FDI flows

June 08
00:15 2017

Cross-border investments by businesses around the world have still not returned to their pre-crisis peak, almost a decade after the 2008 global financial crisis, the UN warned. It said it would probably take at least two more years to do so, as foreign direct investment into emerging economies continued to fall.

The caution came as the United Nations Conference on Trade and Development on Wednesday said global FDI flows fell 2 per cent to $1.75tn last year, as companies invested less in the developing world and more in the US and other advanced economies. FDI into emerging economies slumped 14 per cent to $646bn last year, according to the UN agency.

“These developments are troublesome,” said António Guterres, UN secretary-general. 

The data highlight the rotation in FDI flows in recent years away from emerging economies such as China and back into older, wealthier countries in Europe and to the US. But they also point to one of the most significant ways in which the global economy’s recovery from the 2008 crisis has continued to be rocky. 

James Zhan, lead author of the UN World Investment Report, said he now expected global FDI flows to recover modestly both this year and next. But even then he said that by the end of 2018 flows of long-term capital around the world were likely to be below their 2007 peak.

“What is worrisome still is that overall at a global level the FDI flows remain low and the road to recovery remains bumpy,” he said. 

Holding back offshore investment, Mr Zhan said, were corporate fears of the growing threat of protectionism and other political risks, as well as persistent slow growth.

FDI flows to developing Asia contracted in 2016 for the first time in five years, falling 15 per cent to $443bn. Investment in mainland China made up $134bn of that and was down $2bn from 2015. FDI flows to Africa and Latin America also fell thanks to low commodity prices.

In contrast, investment destined for advanced economies rose 5 per cent in 2016 to $1tn, with the US attracting $391bn of that. That took rich economies’ share of new FDI to 59 per cent in 2016, their highest level since 2007.

But a significant portion of that investment in advanced economies also came in the form of a series of one-off mega deals. In the UK, for example, last year’s $254bn in FDI inflows (up from $33bn in 2015) was boosted by just four deals, including the $101bn acquisition of SABMiller by Anheuser-Busch InBev, Mr Zhan said. All of those deals were consummated before British voters decided in June 2016 to leave the EU.

The latest data came just days after the World Bank warned that falling investment into developing economies was leading to stalling productivity gains and may already be leaving a scar in the form of reduced potential economic output.

Mr Zhan said FDI remained by far the largest external source of financing for the world’s developing economies, accounting for almost half of the $1.4tn in external financial flows to developing economies. But that overall figure was down from more than $2tn in 2010 and well below the level needed to achieve the poverty reduction and other “sustainable development goals” agreed by the UN in 2015. 

Last year’s slump in global FDI came as companies in rich countries decided to invest less offshore, with FDI flows from developed countries falling by 11 per cent to $1tn. That was mainly because of a decline in offshore investments by European companies, UN economists said. Outflows from North American countries were flat last year, while Asian companies invested the most offshore since the 2008 crisis. 

While offshore investment by Chinese companies surged to $183bn, making it the second-largest investing country in the world behind the US, overall outbound investment by developing economies fell 1 per cent to $383bn.

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