Foreign direct investment will fall by up to 50% year-on-year in Latin America this year due to the crisis caused by COVID-19, something that will have especially adverse effects on the tourism, transport and raw materials sectors, predicts a report published on Tuesday (16.06.2020) by the United Nations (UN).
The study on global investments of the UN Conference on Trade and Development (Unctad) places Latin America as one of the regions that will be most affected by the fall in investment, resulting from the collapse of supply, demand, and anti-crisis policies, which will restrict the flow of capital.
"The pandemic combines political and social unrest with structural weaknesses, pushing Latin American economies into a deep recession and exacerbating challenges in attracting foreign investment", analyzed, when presenting the report, the director of Investment and Enterprise of the Unctad, James Zhan.
The report predicts that low oil and commodity prices will particularly hurt foreign investment in South America's major economies. (Colombia, Brazil, Argentina, Chile and Peru), which depend on this foreign capital for their extractive industries.
Other economies, especially those in the Caribbean, “will be severely affected by the collapse of tourism and the disruption of travel and leisure investment", analyses the organization, which also foresees adverse effects on the automotive and textile manufacturing industries in the region.
On the other side of the scale, “Central America and the Caribbean could see new international investments to expand medical equipment production", the UNCTAD study stresses.
The first investment indicators in the initial months of 2020 in Latin America already anticipate bad figures at the end of the year, such as a 78% year-on-year drop in mergers and acquisitions in April, and that considering that the pandemic has arrived later in the region and has not yet reached its peak.
South and Central America
In 2019, foreign direct investment in Latin America grew 10% to US$ 164,000 billion, driven mainly by the rise in flows from countries such as Brazil, which attracted almost half of this capital and experienced a 20% year-on-year increase in this indicator.
En Colombia, the increase was 26% compared to 2018, from 63% in Chile and of 37% in PeruWhereas in Mexico The drop in flows to the automotive and extractive industries led to a 5% decline in foreign investment, the report said. Unctad.
Regarding the flows towards Argentina were halved to $6.2 billion in 2019, hampered by a deepening economic crisis. The economy shrank by 2 percent, the inflation rate averaged more than 50 percent, taxes rose sharply and capital controls were imposed. Prospects for developing the Vaca Muerta shale gas field and providing much-needed export revenue are fading as intense foreign investments are drying up. Uncertainty over external debt restructuring was already negative before the COVID-19 outbreak.
Global level
At a global level, the United Nations agency predicts that foreign direct investment fall 40% year-on-year in 2020, fall again in 2021 between 5% and 10% and do not recover until 2022.
If confirmed, this would mean a foreign investment of just over US$600,000 billion, the worst figure in 17 years, according to the organization's statistics.
The world's top 5,000 multinationals, which account for a large part of global foreign investment, have revised their 2020 profit outlook downwards by an average of 40%, which will contribute to a decline in investments, which in more than half of cases tend to be reinvested profits.
In addition, restrictive capital flow policies are expected to increase following the pandemic, another factor that will surely harm foreign investment, which last year amounted to US$1.54 trillion, a year-on-year increase of 3%.
A revolution in the global assembly line
Unctad In its report, it also analyses the future of the international production chain after the pandemic, and predicts that it will only accelerate the processes of slowing down investment flows and global value chains, along with slow trade growth.
These processes had already begun after the global financial crisis of 2008, fueled by the growing economic nationalism, the new industrial revolution (with a boost from robotization) and awareness of the impact of production on the environment and global warming.
Unctad This predicts greater government intervention in production, more protectionism, shift towards regional and bilateral operational frameworks rather than multinational ones, or an increase in disinvestment and relocation, which will trigger tougher competition to attract foreign investment.
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