Crisis Makes Itself Felt

It was during 2008 that the economic crisis started to take hold globally; by September 2008 the U.S. financial sector meltdown had reached its climax and this led to severe credit constriction for businesses and governments worldwide. Coupled with reduced demand from recession-hit consumers, this understandably put the brakes on new investment, both domestic and foreign. The UN Conference on Trade and Development (UNCTAD) provides the most authoritative annual data on FDI flows as part of its World Investment Report (WIR) and the abrupt shift in trends is plain to see in the 2009 edition, published last week.

Global FDI flows fell 14% from an historic high of US$2.0 trillion in 2007 to US$1.7 trillion in 2008, and UNCTAD expects them to contract even more sharply in 2009, falling to below US$1.2 trillion. Limited data for the first quarter of 2009 shows a 44% contraction over the same period in 2008. FDI flows to developed countries plunged by 29% during 2008, reflecting a sharp reduction in mergers and acquisitions (M&A) activity. M&A sales were down 39% globally in 2008 and by as much as 56% in Europe. During 2010, a gradual recovery in overall FDI is expected to be under way, up to US$1.4 trillion, and only by 2011 are flows expected to have returned to 2008 levels. The United States continued to be the largest single recipient of FDI during 2008, followed by France, China, the United Kingdom (which lost its top spot in Europe), Russia and Spain. The biggest sources of outward flows were the United States, France, Germany, Japan and the United Kingdom. Japan, Switzerland and Canada were particularly notable for the growth of their outward investment in 2008. Countries suffering particularly sharp declines in inward investment included the United Kingdom, Italy and Germany.

The headline figures disguise significant variations in trends in different parts of the world. 2008 turned out to be a bumper year for many developing markets and their share of total global FDI rose to some 43%. During the earlier part of the year, they were spared the financial contagion from developed markets and strength in commodity markets boosted income. Africa's particularly strong performance (up 27%, albeit from a low base) is explored in a separate section below, but South, East and South-East Asia also saw a 17% increase to a new record high. Latin America and the Caribbean saw flows rise by 13% and Eastern Europe continued to gain.

The developing countries' experience during 2008 was impressive, but UNCTAD warns that during 2009 these regions have increasingly suffered the tailwinds of the economic and financial crisis in developed markets. Even though their financial systems have generally weathered the crisis well, all regions are forecast to suffer drops in inflows from developed countries where the crisis has been pronounced. If one looks by industry, there are some brighter spots during 2009. The agricultural and extractive industries tend to be holding up reasonably well, while manufacturers tend to be suffering as they are more sensitive to business cycles. Greenfield investments tended to be strong in 2008, but have fallen back in 2009. The recovery in FDI flows in 2009/10 is likely to be led instead by a revival of cross-border M&A activity. Private equity funds were badly burnt by the crisis, as were many sovereign wealth funds, but their activities will begin to pick up once more as access to credit improves. In recent years sovereign wealth funds have been increasingly important players in global FDI. Their M&A investments rose 16% to a new record high of US$20 billion in 2008, while they were still flush with earnings from oil and other exports. During 2009 many have cut back on investments, burnt by falling values of previous investments and lower export earnings in their home countries.

Africa's Roller-Coaster Ride

As mentioned above, Africa is projected to suffer a sharp contraction in investment flows through 2009 after a record year in 2008. Through 2008, total FDI in the region rose to US$88 billion, with a larger percentage of aid flowing to sub-Saharan countries rather than North Africa. The former's share increased to 73%, up from 64% in 2007, led by significant FDI into Nigeria, Angola, South Africa, Congo, Ghana, Guinea and Madagascar. Indeed, total FDI into North Africa fell slightly through 2008, with this trend expected to continue due to less greenfield investment and a fall in cross-border M&A. West Africa saw a huge increase in total FDI to US$26 million, up from US$16 million mainly driven by investment into extractive industries in Nigeria, Burkina Faso and Mali. Investment into East Africa remained fairly stable at around US$4 billion, with an increase in cross-border M&A driving the increase. A similar trend was experienced in Central Africa as the region's FDI stayed fairly level at 7%, although focused on the extractive industry. Southern African FDI was dominated by investment in Angola and South Africa, with total regional investment hitting US$27 billion, up from US$19 billion in 2007. According to the report, the Southern African region's prospects look the strongest through 2009.

Despite the record amount of FDI through 2008, the subsequent collapse in commodity prices and credit has lead to a significant contraction in FDI. According to the report, FDI has fallen roughly 67% year-on-year (y/y) through the first quarter of 2009. The contraction in commodity prices has reversed investment in greenfield sites and a sharp reduction in energy companies' share prices have led to a cut in capital spending. A lack of available credit and investors' aversion to debt are also projected to decrease M&A activity through 2009. The report also notes that UNCTAD’s latest World Investment Prospects Survey projects that FDI into the regions is only expected to pick up towards the end of 2011.

Outlook and Implications

The trends described in the WIR come as no great surprise. During 2008, the rush to invest in raw materials in Africa and elsewhere supported demand from the likes of China, but in 2009 the available credit to do this, and to engage in M&A activity, has contracted sharply. Moving into 2010, the global FDI flow figures should be supported somewhat by the gradual revival in M&A activity, but most of this will be among developed countries. A number of large recent bids (including Kraft's attempt to acquire Cadbury) have highlighted this new momentum. FDI into developing markets will take longer to recover to 2008 levels, but the need for raw materials and cheap manufacturing locations will drive renewed interest before long. Thankfully, the global economic crisis has not seen a significant wave of trade and investment protectionism that might have held up a recovery of flows. UNCTAD's Survey of Changes to National Laws and Regulations finds that during 2008, 110 new FDI-related measures were introduced, 85 of which are gauged to be favourable. Meanwhile, some 59 new bilateral investment treaties were concluded during 2008, bringing the total to 2,676. These treaties have proved less controversial politically than free-trade deals. UNCTAD puts particular stress in its report on the potential for multinational investment in emerging markets' agricultural production. This makes commercial sense given the problems with global food supply seen recently and would also pay handsome dividends for development in some of the poorest parts of the world. However, UNCTAD does acknowledge the potential pitfalls of this investment, such as the painful social consequences of poorly regulated land sales.

Global Insight (Reino Unido)