Forecasts for emerging markets remain grim as commodities prices continue to drop, currencies are further devalued and companies are increasingly unable to pay off their loans. Companies across emerging economies that borrowed heavily in the past few years are now struggling to free themselves of debt following the end of the US Federal Reserve’s quantitative easing programme.
While recovery in the developed world is expected to pick up slightly, emerging market activity is projected to slow for the fifth consecutive year, primarily as a result of slowdowns in larger emerging economies and oil-exporting countries, reports the International Monetary Fund in its 2015 World Economic Outlook. The drop in global oil and commodities prices, reduced capital flows to emerging markets and increased market volatility does not bode well for future prospects, yet FDI levels remain comparatively healthy.
“Despite the change in the emerging market macroeconomic situation, FDI has not really reacted yet and remains resilient,” said James Zhan, director of Investment and Enterprise at Unctad. “These markets continue to attract healthy levels of investment, compared to their mature market counterparts, but the rate of growth has certainly slowed down. And we are seeing declining activity in crossborder mergers and acquisitions in developing countries, whereas these deals have risen in developed countries.
“What we had seen over the past few years has been a remarkable rise in south-south FDI flows and it seems this trend is tapering off. Because of this lull we anticipate that emerging markets will see a decline of investment flows. The decline, however, is not anticipated to be as strong as that for other capital flows,” he said.
FDI flows to Latin America are predicted to remain flat while flows to Africa are in decline, said Mr Zhan. “West Asia also continues to struggle, but developing Asia continues to attract high levels of investment, especially east and south-east Asia, which is partly driven by infrastructure and connectivity needs.
“On a sectoral basis we are seeing large funds still pouring into infrastructure, particularly in developing Asia. The sectors that are struggling are the labour-intensive manufacturing ones, due in part to manufacturing automation, and of course the commodities sector’s woes due to weak global aggregate demand is
a familiar story.”