As countries around the world implement measures to stem the spread of Covid-19, the impact on global FDI inflows is expected to worsen, according to a report published by Unctad on March 26.

The outbreak and spread of this strain of the coronavirus could cause up to a 40% drop in global FDI flows, according to the Unctad report. This is much higher than the initial estimates of between 5% and 15% that Unctad released in a previous forecast on March 9.

Early expectations of the economic impact of Covid-19 had centred around the ripple effects caused by production stoppages in east Asia, particularly China. Now, it is evident that the efforts of governments around the world to mitigate the disease will have hit all economies. “It is now evident that lockdowns around the world will have devastating effects on all economies, independent of their links to global supply networks,” says the Unctad report.

Falling earnings

As governments have implemented policies to prevent the rapid spread of Covid-19, global supply chains have been majorly disrupted and demand has fallen. Some 57% of multinational enterprises (MNEs) have warned that the global demand shock will impact sales, according to Unctad. 

The world’s top 5000 MNEs have experienced an average downward revision of 30% to their revenue estimates, and this trend is likely to continue. Reinvested earnings are a key component of FDI and the top 5000 MNEs account for a significant share of global FDI, leading to Unctad’s prediction that capital expenditure will be heavily impacted.

Companies in developed countries have experienced stronger downward earnings revisions (35%) than developing country peers (20%). The West has been harder hit, as projected profits halved in the US, and downward revisions in Europe have exceeded those in Asia. 

Tourism is among the sectors most affected by the crisis, and its latest earnings revisions reflect this. The airline industry (-116%) and hotels, restaurants and leisure (-41%) have all recorded lower earnings. The energy (-208%) and automotives (-47%) sectors have also been heavily affected. 

Worse than 2008

Comparison with the global financial crisis of 2008 shows that the impact of Covid-19 could be significantly worse on many accounts. First, it could be more widespread, affecting FDI in developing countries just as much as developed countries. Second, the impact could be more immediate, as a drop in demand is compounded by interruptions in investment projects. The physical closure of production plants and construction sites means the implementation of investment projects could be delayed or even suspended immediately, particularly in the hardest hit sectors. 

The coronavirus will put a significant strain on both greenfield investments and crossborder M&As, according to Unctad. Since greenfield investment and expansion projects tend to have long development periods and life cycles that can span decades, they are more likely to be delayed than shelved completely. 

On the other hand, completions of already announced M&A transactions are running into delays that could result in cancellations. Regulators in the US and Europe are seeing delays in approval processes for some of the world’s biggest mergers, including Amazon’s acquisition of Deliveroo, according to the Financial Times.

Announced crossborder M&A deals fell from 874 in February 2020 to 385 between March 1 and March 20, 2020. There was a monthly average of 1200 deals in 2019, the Unctad report says. M&A announcements are also on course to drop by 70% globally in the first quarter of 2020.

The economic shocks of the coronavirus will depend on the severity and duration of the pandemic and, crucially, on the nature and scale of  governments’ responses to support their economies.  

Emerging fears 

The twin shocks of a health pandemic and global recession will be especially catastrophic for developing countries, according to Unctad. In the two months since the virus began spreading beyond China, developing countries have been hit by currency depreciation, as well as lost export earnings from falling commodity prices and declining tourism revenues.  

Commodity prices have fallen across the board by an average of 37% in 2020. This will especially affect developing countries as they depend on it for their foreign exchange. With domestic economic activity also now declining, it is increasingly unlikely there will be the rapid rebound that followed the 2008 crisis, according to Unctad. “The economic fallout from the shock is ongoing and increasingly difficult to predict, but there are clear indications that things will get much worse for developing economies before they get better,” says Unctad secretary-general Mukhisa Kituyi.

The world economy is predicted to enter recession in 2020, with losses of global income forecast in the trillions of dollars. This will lead to tightening fiscal and foreign exchange constraints over the course of the year, with developing countries facing financing gaps of up to $3000bn over the next two years, according to Unctad. With two-thirds of the world’s population living in developing countries (excluding China), the UN has called for a $2500bn package for these countries, to turn expressions of international solidarity into meaningful global action. 

This proposal would be implemented through a four-pronged strategy. It comprises: a $1000bn liquidity injection through the reallocation of special drawing rights at the IMF; an immediate debt standstill on sovereign debt payments, followed by a significant debt relief of about $1000bn; a Marshall Plan for emergency health services and related social relief programmes; and the implementation of capital controls to curtail the surge in capital outflows and reduce illiquidity driven by sell-offs in developing country markets, and to prevent currencies and asset prices from declining.

“Advanced economies have promised to do ‘whatever it takes’ to stop their firms and households from taking a heavy loss of income, but if G20 leaders are to commit to a ‘global response in the spirit of solidarity, there must be commensurate action for the 6 billion people living outside the core G20 economies,” says Richard Kozul-Wright, director of globalisation and development strategies at Unctad.

This article first appeared in the April-June edition of fDi Magazine.