Considering the latest data on COVID-19 spread and contagions outside China, specially in Europe and the USA, it is evident for UNCTAD that pandemic mitigation efforts and lockdowns around the world will have devastating effects on all economies, independent of their links to global supply networks. But the demand shock will be by far the biggest factor pushing down investment.
While the global supply chain shock that initially appeared to be the main concern for FDI prospects. The evolution of the COVID-19 pandemic shows now that the expected worldwide recessionary effects of the coronavirus will be even worse and that the damage done to global value chains may well bear the most persistent effects in the long term.
The actual negative impact of Covid-19 could be significantly worse than it was that caused by the global financial crisis in 2008, warns the UNCTAD Special Monitor on Investment Trends considering the impact of COVID-19 Pandemic on Global FDI and Global Supply Chains.
UNCTAD forecast a downward pressure on FDI (foreign direct investment) between -30% to -40% during 2020 and 2021.
Cross-border M&A transactions worldwide averaged 1’200 deals per month in 2019 (with all months above 1’000). They fell to 874 in February and 385 in March so far (until 20 March). They would be on course for a 50% decrease in March, and a70% decline from last year’s levels next month.
Anyway, UNCTAD Monitor points that there’s a high degree of uncertainty at the time to forecast COVID-19 pandemic contracting effects in FDI stemming from the asymmetric effects of the different shocks that global FDI will absorb.
While the demand shock is expected to be deep, an effetive policy response could push recovery relatively quickly when delayed investment plans are brought back on track.
The demand shock may desappear relatively fast but negative impact of the pandemic on investment linked to global production networks could be more durable, as there’s a risk of decoupling (loosening global value chain ties) by returning to local supply chains and production sites as multinationals try to make their supply chains more resilient, UNCTAD experts warn.
The latest UNCTAD Monitor recalls that the risk of decoupling not only emerges from the disrupting COVID-19 hit in value chains derived from the fact that China and other developing economies have become the part pieces and product mill of the world. UNCTAD underscores that decoupling was a trend on the rise before the COVID-19 outbreak that may have been strengthened by the pandemic effects in some sectors, such as automotive, just to quote an example.
Lower benefit projections to bring contraction in FDI for and from multinationals
A 61% of the companies included in UNCTAD’s top 100 MNEs (multinational enterprises) ranking have reported reductions in earnings prospects since thefirst week in March. UNCTAD’s top 5000 MNEs account for a significant share of global FDI.
A 57% of MNEs have added warnings on the impact on sales of the global demand shock caused by the pandemic, to their earlier concerns on production and supply chain disruptions among firms with strong supply chain links to China.
The sectors which show the hardest drop down in earnings forecast are energy and basic materials industries (-208% for energy, with the additional shock caused by the drop in oil prices); airlines (-116%), and the automotive industry (-47%).
Automotive was the first sector thatmade earnings revisions anticipating the supply chain shock. Industries now expecting to be hit by a global decline in demand are rapidly catching up.
On average, downward revisions in profits are now higher in developed countries (-35%) compared to developing economies (about a 20%).
Average downward revisions have been particularly strong in the United States (projected profits dwn a 50%) due to the weighting of energy sector MNEs. Downward revisions in Europe have now also exceeded those in Asia.
While Chinese multinationals have improved their earnings forecast from -26% to 21% South Korean multinationals experienced the opposite trend worsening profit expectations form -20% to -29%. At lower earnings lower reinvestment and lower capex.
UNCTAD latest forecast: A -30% to -40% reduction in FDI
Sumarising, latest UNCTAD FDI Monitor shows that the pandemic and the mitigation measures and lockdowns that governments are forced to impose are affecting all components of FDI:
a) Real capital expenditures.
b) Greenfield investments and expansions are being hampered by physical closures of sites and production slowdowns.-
New investment projects usually have a long gestation period and a lifecycle that can span decades. That’s why many projects will only be delayed. But depending on the severity of the recessionary impact of the pandemic, projects could be interrupted or shelved indefinitely.
Announcements of new greenfield projects (normally reported in UNCTAD’s data for the purpose of projecting future trends) are likely to be delayed.
c) Cross-border M&As (mergers and acquisitions) are being delayed and new M&A (mergers and acquisitions) announcements are on course to drop by 70% globally in Q1 2020.-
Completions of M&A transactions already announced are running into delays that could result in cancellations. Besides, financial markets have been pricing down stocks of firms that had been the subject of takeover plans or, which were awaiting regulatory approval for a merger.
While cross-border M&A transactions worldwide averaged 1’200 deals per month in 2019 (with all months above 1’000), this kind of agreements fell to 874 in February and 385 in March until 20 March. Cross-border M&A are expected to experience a 50% decrease in March, and a 70% fall from last year’s levels in April.
The new UNCTAD projections of downward pressure on FDI are based on:
1) The decline in FDI and top 5000 MNE capex experienced after the last global recession
2) A potential 50-70% decline in the cross-border M&A part of FDI for part of the current year
3) the immediacy of the projected decline in capex, based on the first data reported by China
4) The mechanical effect of reduced MNE earnings on the reinvested earnings component of FDI
However, the decline in FDI will depend on the severity and duration of the pandemic across different regions and countries, and the scope of the containment measures that governments are forced to put in place.
And not less important, the extent of the cut in FDI investment will also depend on the nature and scale of policy packages that most governments are now putting together to support their economies. These packages will determine the duration of the recession and the speed of recovery, UNCTAD underscores.
Image over the headline.- Source of the images UNCTAD Investment Trends Monitor published on 26th March 2020. Composition, © Eastwind.
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UNCTAD Investment Trends Monitor published on 26th March 2020
