The rapidly spreading pandemic of Covid-19, widely known as coronavirus, will have a major impact on global flows of FDI as global corporations put their investment decisions on ice while their earnings quickly shrink.
The downward pressure on global FDI caused by Covid-19 for the 2020-2021 period will range between 5%, in a scenario where the pandemic is reined in within the first half of 2020, and 15% should it continue throughout the year, according to a report by the United Nations Conference on Trade and Development (Unctad) published on March 9. Prior to the viral outbreak, Unctad estimated marginal growth in the underlying FDI trend for 2020-2021.
“The impact on FDI will be concentrated in those countries that are most severely hit by the epidemic, although negative demand shocks and the economic impact of supply chain disruptions will affect investment prospects in other countries,” James Zhan, Unctad’s director for investment and enterprise, wrote in a note.
Evidence of the negative shock demand caused by Covid-19 in China has already started to emerge. Among others, Japanese car powerhouse Toyota, one of the world’s most active foreign investors, has reported a 70% drop in sales in China in February. Internal demand in other countries that are facing a major Covid-19 outbreak such as, among others, South Korea and Italy, will also be heavily affected as they follow in China’s footsteps in locking down entire cities and regions and urging the population to stay home.
Additionally, the role of China and South Korea, at the heart of global value chains also means that manufacturers around the world are facing major supply chain disruptions. Another carmaker, Fiat Chrysler Automobiles, has temporarily halted a production line at a plant in Serbia due to disruption in the supply of audio system components from China.
In this volatile environment, “announcements of new greenfield projects could be delayed […] and, similarly, mergers and acquisitions could see a slowdown”, the Unctad report reads. Early 2020 figures are already tracking plummeting global FDI flows. In February alone, the completion rate of cross-border acquisitions fell below $10bn from normal monthly values of between $40bn and $50bn, Unctad reported.
A further (indirect) mechanism through which FDI flows could be affected in the coming period is through lower profits in foreign affiliates leading to lower reinvested earnings, Unctad’s report highlights.
Of the 100 biggest multinational companies tracked by Unctad, 69 have already made a statement regarding the impact of Covid-19 on their business. Of those, 41 have issued profit alerts or signalled increased risks, with 10 anticipating lower sales, 12 expecting negative effects on production or supply chain disruptions, and 19 expecting to be affected by both. Companies in the automotive sector, as well as the electronics and equipment sectors, appear to be the most affected so far.