Jun 21 | 2021
(Global) Investment to Recover Lost Ground in 2021
The United Nations Conference on Trade and Development forecasts that global foreign direct investment, or FDI, flows will bottom out, before going on to recover some lost ground this year.
Global investment flows plummeted 35 percent in 2020, according to UNCTAD in its latest World Investment Report 2021. This unprecedented decline marked a sharp fall in project development and breakbulk activity, but the low baseline, coupled with the rapid rollout of vaccines in many countries, is expected to drive recovery in 2021, with growth of 10 percnt to 15 percent forecast.
“The Covid-19 crisis caused a dramatic fall in foreign direct investment in 2020. Global FDI flows dropped by 35 percent to U$1 trillion, from U$1.5 trillion in 2019 … The decline was heavily skewed towards developed economies, where FDI fell by 58 percent [but] FDI patterns contrasted sharply with those in new project activity, where developing countries are bearing the brunt of the investment downturn,” said Isabelle Durant, acting secretary-general of UNCTAD.
Asia Drives Recovery
The recovery in FDI is forecast to be led by strong performance in developing Asian countries, with breakbulk demand impervious to many of the issues faced in other regions.
“Despite the pandemic, FDI to and from the region remained resilient in 2020. Developing Asia is the only region recording FDI growth, accounting for more than half of global inward and outward FDI flows,” said James Zhan, UNCTAD's director of investment and enterprise.
Overall, Asia remains the world’s largest FDI recipient with growth driven by China, Hong Kong, India and the United Arab Emirates. East Asia, and specifically China, is expected to be the powerhouse behind much of this growth, with breakbulk demand increasing in parallel with investment. FDI for the region hit US$292 billion last year, equivalent to 21 percent growth, and a further 5 percent to 10 percent growth is forecast for 2021. Asia is expected to drive global growth as the only region recording growth in FDI outflows in 2020, when investment increased 7 percent to US$389 billion.
“This underscores the region’s prominence as an important investor for the developing region. Growth was driven by strong outflows from East and Southeast Asia, in particular from Hong Kong (China) and from Thailand,” UNCTAD noted.
Outside of Asia, much of the developed world is expected to witness a robust recovery this year as FDI inflows increase by 15 percent to 20 percent, as mature infrastructure allows investors to capitalize on improved macroeconomic fundamentals and huge fiscal stimulus.
Despite this positive prognosis, systematic issues remain for many developed economies as unprecedented debt levels and fallout from the pandemic continue to hamper investors. UNCTAD predicts that the majority of growth in investment will come from crossborder mergers and acquisitions rather than from new investment, while "frothy" financial markets will add certain risks.
“After the 5 percent contraction recorded last year, real GDP growth in developed economies is projected to accelerate to 5 percent in 2021, bolstered by a US$1.9 trillion rescue package in the U.S. and additional fiscal support in Japan. The infrastructure investment boost from economic recovery packages will lift international project finance – a sizable component of FDI. Reinvested earnings are also expected to pick up as profits return,” Zhan noted.
A sharp fall in investment for greenfield oil and gas projects last year is also expected to drive uncertainty for many breakbulk operators in the developed world, as investors switch away from greenfield project development or delay investment decisions. Balancing this trend is the expected growth in sustainability-linked investments, with UNCTAD highlighting growing pressure to mobilize "vast sums of capital." This is forecast to drive major breakbulk demand over the next decade as large-scale renewable project boom.
“There has been a proliferation of sustainability-themed financial products in recent years, including sustainability-themed funds, bonds, and derivative products. Institutional asset owners, such as pension and sovereign wealth funds, are having an impact on companies and markets through asset allocation decisions and active ownership practices," Zhan said.
CIS and LatAm impacts
One of the hardest hit areas in the global economy have been the transition economies of South-East Europe, the Commonwealth of Independent States (CIS) and Georgia. These states had been forecast to see positive growth but a combination of factors has decimated the outlook over the last year.
These economies shrank by more than half in 2020, to US$24 billion, their lowest level since 2003, UNCTAD estimates. Heavy reliance on natural resource-based investment has been hit by a shift to clean energy while geopolitical tensions have limited investors risk appetites. Major oil and gas projects in the Eurasia region, such as in Kazakhstan or Amur gas project, are forecast to drive significant breakbulk activity but may now be curtailed or postponed.
“Despite recovery efforts, a return to pre-pandemic levels of inward FDI is unlikely in the coming years. The road to FDI recovery will be difficult, owing to slow economic growth affecting market-seeking FDI, the constraints of the pandemic limiting fast diversification, economic sanctions and geopolitical instability in parts of the region,” Zhan explained.
One exception to trend of falling FDI was Kazakhstan, where inflows grew by 35 percent to US$3.9 billion, supported by major breakbulk drivers like the Tengiz megaproject and the offshore development of the Kashagan oil field.
Breakbulk demand in Latin America is also forecast to face great uncertainty over the medium term as sharp falls in FDI inflows last year more than halved to US$52 billion, with flows to Brazil and Peru reaching their lowest level in two decades.
“The region suffered the sharpest FDI decline in developing countries. Latin American economies faced a collapse in export demand, falling commodity prices and the disappearance of tourism, leading to one of the worst contractions in economic activity across the world,” Zhan added.
Headquartered in Geneva, Switzerland, UNCTAD is the part of the United Nations Secretariat dealing with trade, investment, and development issues and currently comprises 195 member states.
Subscribe to BreakbulkONE and receive more industry stories and updates around impact of COVID-19.