As countries around the world implement measures to slow the spread of Covid-19, the impact on global FDI flows is expected to be even more severe, according to an updated report published by the United Nations Conference on Trade and Development (Unctad) on March 26.

Initial estimates released on March 9 forecast a cut of between 5% and 15% in global FDI flows in the 2020-21 period. As coronavirus has spread to become more than just a problem for global value chains (GVCs) originating in China, Unctad now estimates FDI flows could drop as much as 30% to 40%.

“It is now evident that pandemic mitigation efforts and lockdowns around the world will have devastating effects on all economies, independent of their links to global supply networks,” the Unctad report reads. 

The rapid spread of Covid-19 and the subsequent mitigation measures implemented across the world have caused both supply chain disruptions and significant demand shocks. Some 57% of multinational enterprises (MNEs) have added warnings on the impact to sales from the global demand shock.

On average, the world’s top 5000 MNEs by revenue have seen downward revisions of 2020 earnings estimates of 30%. As reinvested earnings are a key component of FDI and the top 5000 MNEs account for a significant share of global FDI, Unctad predicts that capital expenditure will be heavily affected. 

Average downward earnings revisions were stronger in developed countries (35%) than developing countries (20%), and were particularly strong in the United States. Downward revisions in Europe also now exceed those in Asia.

The latest expected earnings revisions were highest in sectors most affected by the crisis, including airlines (-116%), hotels, restaurants and leisure (-41%), energy (-208%) and automotives (-47%). Some of the worst affected industries normally account for a large share of total capital expenditure, indicating that many normally important investors will be affected. 

Unctad expects coronavirus to put significant pressure on both greenfield investments and crossborder mergers and acquisitions (M&As). As many greenfield investment and expansion projects have long gestation periods and life cycles that can span decades, many will likely be delayed, interrupted or even shelved indefinitely. 

Implementation of investment projects are also being delayed due to the physical closure of businesses, manufacturing plants and construction sites 

Announced cross-border M&A deals fell from 874 in February 2020 to 385 between 1 and 20 March, compared with a monthly average of 1200 deals in 2019. M&A announcements are also on course to drop by 70% globally in the first quarter of 2020.

Unctad reiterated that pre-existing trends such as decoupling - or the loosening of global value chain (GVC) ties - and reshoring, as MNEs attempt to build supply chain resilience, could be accelerated by the Covid-19 outbreak.