Letter IEDI n. 1102—FDI fall in the world and in Brazil
The latest World Investment Report from the United Nations Conference on Trade and Development (UNCTAD) shows that the COVID-19 crisis caused a dramatic drop in foreign direct investment (FDI) in 2020, particularly in the first half of the year.
Lockdown periods to combat coronavirus outbreaks around the world have slowed down existing investment projects and the prospect of a severe recession has led multinational companies to suspend or postpone new projects, interrupting international investment flows.
In the second half of 2020, however, international financing of projects and cross-border M&A operations resumed, especially in industrial sectors such as food, beverages and tobacco; information and communication; pharmaceuticals, medicinal chemicals and botanical products. This partially mitigated the contraction in world FDI for the year as a whole.
Total global FDI flows fell 35% between 2019 and 2020, going from US$1.5 trillion to US$1 trillion in this period. The value registered in 2020 was the lowest in the last 15 years and 20% lower than that registered in 2009, that is, during the global financial crisis.
In developed economies, FDI flows fell more intensely, registering -58% from 2019 to 2020, while in developing economies the contraction was of only -8%, thanks to flows to Asia, which resisted the crisis.
However, the less accentuated reduction in the inflow of FDI in developing countries hides distinct impacts of the COVID-19 crisis on the different types of FDI in each group of countries. The number and value of greenfield projects announced (-44%), as well as international project finance operations (-53%), decreased more in developing countries than in developed nations. This is a harmful development since these types of flows are the ones with the greatest potential to expand and improve the productive capacity of these countries.
As for regional distinctions, the total inflow of FDI into China and India was positive, reaching +5.7% and +25.5%, respectively. In contrast, in Latin America and the Caribbean FDI plummeted by 45%. Despite the internal asymmetries in this group, developing economies now hold two-thirds of global FDI, versus less than half in 2019.
As for the rankings prepared by UNCTAD, there were important changes among the countries with the highest FDI outflows in 2020. China became the leader, followed by Luxembourg, Japan and Hong Kong. Some great powers lost positions in this exceptional year, such as the USA, which dropped from 4th place in 2019 to 5th in 2020, as well as Germany (from 2nd to 8th), Italy (from 15th to 19th) and the United Kingdom, which left the top of the ranking in question.
Among the largest recipients of FDI in the world, the US remained in 1st place in the UNCTAD ranking, closely followed by China, which received US$ 149 billion in 2020 compared to US$ 141 billion in 2019. Next came Hong Kong (3rd place), Singapore (4th place) and India, which rose from 8th in 2019 to 5th in 2020.
Brazil, on the other hand, plummeted in the ranking of top FDI destinations in 2020. We went from 6th in 2019 to 11th in 2020 as a result of a 62% decline in our FDI inflows. Brazil's US$25 billion received as FDI in 2020 was the lowest level in two decades, according to UNCTAD.
It is also worth noting that the outflow of FDI from Brazil was negative by US$ 26 billion, which is associated with fundraising operations through overseas subsidiaries of domestic multinationals.
UNCTAD's current forecasts suggest that, after an improvement of around 10% to 15% in 2021, global FDI flows are likely to continue expanding in 2022 to the point of matching the 2019 level. In Brazil, with the expectation that the privatization program will move forward, UNCTAD expects FDI inflows to grow in 2021 and assesses that they will contribute to making the country one of the first Latin American economies to return to the pre-pandemic level of GDP.
However, UNCTAD emphasizes that the prospects for 2021 and the “new normal” remain immersed in high uncertainty and depend, among other factors, on combating relapses in the control of the pandemic and also on economic recovery spending coordinated by governments.