Cautious outlook for 2013 in view of risks on multiple fronts:

Global investment flows fell sharply in 2012, says UN

by Kanaga Raja

Global foreign direct investment (FDI) inflows declined last year by 18 percent to reach an estimated $1.3 trillion, mainly on account of macroeconomic fragility and policy uncertainty faced by investors, the United Nations Conference on Trade and Development (UNCTAD) has reported.

In its latest Global Investment Trends Monitor, UNCTAD cautioned that the recovery in FDI flows that had begun in 2010 and 2011 will now take longer than expected.

"FDI flows could rise moderately over 2013-2014, although significant risks to this scenario persist," said UNCTAD, noting that the strong decline of FDI flows is in stark contrast to other macroeconomic variables, including GDP (estimated 2.3 percent growth in 2012), trade (estimated 3.2 percent growth in 2012) and employment (estimated 1.3 percent growth in 2012).

According to the Investment Trends Monitor, global FDI flows fell by 18 percent to an estimated $1.3 trillion, down from a revised $1.6 trillion in 2011, as significant investor uncertainty continues to hamper the FDI recovery.

"This uncertainty is driven by a weakening macroeconomic environment with lower growth rates for GDP, trade, capital formation and employment, and by a number of perceived risk factors in the policy environment, related to the Eurozone crisis, the United States fiscal cliff, changes of government in a number of major economies in 2012, and broad-based policy changes with implications for FDI."

FDI flows to developing economies remained relatively resilient in 2012, reaching $680 billion, the second highest level ever recorded. Developing economies absorbed an unprecedented $130 billion more than developed countries.

According to UNCTAD, FDI inflows to developing Asia fell by 9.5 percent as a result of declines across most sub-regions and major economies, including China, Hong Kong-China, India, the Republic of Korea, Singapore and Turkey.

However, 2012 inflows to Asia were still at the second highest level recorded, accounting for 59 percent of FDI flows to developing countries.

FDI flows to China declined slightly but the country continues to be a major FDI recipient - the second largest in the world. FDI inflows to China declined by only 3.4 percent to $120 billion in 2012, despite a strong downward pressure on FDI in manufacturing caused by rising production costs and weakening export markets. The 7.8 percent growth of the Chinese economy helped maintain investor confidence.

FDI to India declined by 14 percent, although it remained at the high levels achieved in recent years. The country's prospects in attracting FDI are improving thanks to ongoing efforts to open up key economic sectors.

Despite an overall 7 percent decline in FDI inflows to the Association of Southeast Asian Nations (ASEAN), some countries in this group of economies appear to be a bright spot: preliminary data show that inflows to Cambodia, Myanmar, the Philippines, Thailand and Viet Nam grew in 2012.

FDI flows to West Asia did not turn around their negative trend in 2012, declining for the fourth consecutive year. With continuing political uncertainty at the regional level, and subdued economic prospects at the global level, foreign investors are still holding back, said UNCTAD.

Latin America and the Caribbean registered positive growth in FDI in 2012. The rise was strongest in South America due to the sub-region's economic buoyancy, leading to a significant number of market-seeking investments, and persistent strength of commodity prices, which continue to encourage investments in the extractive industries, particularly in Chile, Peru and Colombia.

"Inflows registered also strong growth in Argentina. FDI to Brazil slowed but remained robust, confirming the country's primacy as the leading investment destination in the region, accounting for 28 percent of the total. FDI flows to Central America decreased mainly as the result of a decline in Mexico."

UNCTAD found that FDI flows to Africa rose in 2012. Flows to North Africa reversed their downward trend, as Egypt saw a rebound of investment from European investors. Angola - an important holder of FDI stock in Africa - posted lower divestments in 2012 compared with 2010 and 2011 while positive growth of FDI flows to South Africa contributed to a rise in inward FDI flows to Southern Africa.

The transition economies experienced a decline in FDI flows of 13 percent, reaching $81 billion. FDI flows to South-East Europe fell 52 percent, as a result of sluggishness of investment from EU countries, the main investors in the region. Flows to the Commonwealth of Independent States (CIS) declined, as the rise of FDI to Kazakhstan and Ukraine were not enough to compensate the 17% fall of FDI flows in the Russian Federation.

UNCTAD also reported on trends in cross-border M&As, finding that in 2012, the value of cross-border M&As fell by 41 percent to the lowest activity level since 2009. "The weak M&A market reflected global macro-economic uncertainty and the resulting low corporate confidence, especially in developed markets," it added.

In many European countries, cross-border M&A sales decreased significantly from 2011 levels.

Many developed countries such as Australia, France, Luxembourg, Portugal and the United Kingdom saw large divestments by their TNCs of assets abroad in 2012. Examples include the divestments of ING Group in the United States and Canada for $12 billion, and the sale by BP of a stake in a group of oil fields in the Gulf of Mexico for $5.6 billion.

In contrast, purchases by TNCs from developing economies reached $115 billion, accounting for a record-high share of 37 percent of total world M&A purchases. Large deals include the acquisition by Petronas (Malaysia) of Progress Energy Resources Corp (Canada) for $5.4 billion, the purchase by Sinopec Group (China) of Petrogal Brasil Ltda (Brasil) for $4.8 billion and the purchase of Energias de Portugal SA (Portugal) by China Three Gorges Corp

While M&A purchases by TNCs from Latin America saw the most rapid increase (to $28 billion), Asian investors continue to account for the lion's share (75 percent) of acquisitions from developing countries.

As for greenfield projects, the UNCTAD report found that the value of announced projects declined for the fourth straight year, falling by 34 percent to their lowest level ever. However, the value of greenfield investments still account for two thirds of global investments. As for prospects for FDI for 2013 and 2014, UNCTAD projected that FDI flows could rise moderately to $1.4 trillion in 2013 and $1.6 trillion in 2014 as the global economy is expected to make a hesitant and uneven recovery over the coming two years.

GDP growth, gross fixed capital formation and trade are projected to rise gradually, both at the global level and, especially, in developing countries. Such a slight improvement in macroeconomic conditions could prompt TNCs to transform their record levels of cash holdings into new investments.

If investor confidence returns, TNCs may also be induced to make strategic investments to cement their business plans for the post-crisis period. In addition, possible further sales of publicly owned assets to restructure sovereign debt may also provide FDI opportunities, UNCTAD said.

"Significant risks to this scenario persist, including structural weaknesses in major developed economies and in the global financial system, the possible further deterioration of the macroeconomic environment, and significant policy uncertainty in areas crucial for investor confidence, including fiscal policy and investment regulations and restrictions. Should these risks prevail, FDI recovery could be further delayed," it cautioned.

- Third World Network Features.