UN economists forecast a drop of up to 15 % in FDI worldwide due to Novel Coronavirus outbreak

The outbreak and spread of Coronavirus (Covid-19) will negatively affect global foreign direct investment (FDI) flows and may shrink it by 5%-15%, as compared to previous forecasts projecting marginal growth in the FDI trend for in 2020-21.

A fresh report from the United Nations Conference on Trade, Investment and Development (UNCTAD) warned that regardless of how quickly the COVID-19 outbreak lasted, it would significantly drag down global FDI, which is a measure of cross-border private sector investment.

It says, "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." It says, more than two-thirds of the multinational enterprises (MNEs) in UNCTAD's Top 100, a bellwether of overall investment trends, have issued statements on the impact of Covid-19 on their business. Many of them are slowing down their capital expenditures in affected areas and 41 have issued profit alerts, which will translate into lower reinvested earnings (a major component of FDI).

On average, the top 5000 MNEs, which account for a significant share of global FDI, have seen downward revisions of 2020 earnings estimates of 9% due to Covid-19. The hardest-hit industry are

1) The automotive industry (-44%)

2) Airlines (-42%)

3) Energy and basic materials industries (-13%).

Profits of MNEs based in emerging economies are more at risk than those of developed country MNEs: developing country MNE profit guidance has been revised downwards by 16%.

Efforts to halt the spread of the virus, which has killed more than 3,500 people and infected more than one lakh people around the world, have wreaked havoc on international business.

The UN agency pointed to estimates that growth in the global economy will slow between 0.5% and 1.5% this year, depending on whether the outbreak is reined in during the first half of this year or if it rages through the end of 2020.

How will Covid-19 affect FDI?

The report says Covid-19 will have an uneven impact on economy due to negative demand shocks that are concentrated in those economies most severely hit by the epidemic, and effects caused by production stoppages and supply chain disruptions felt especially in economies that are closely integrated in global value chains cantered around China, Korea and Japan, as well as South-East Asian economies. It will also have an impact on investment and it will be more concentrated. It will be strongest in those countries that have been forced to take the most drastic measures to contain the spread of the virus.

The outbreak of Covid-19 will slow down capital expenditures of MNEs and their foreign affiliates. Production locations that are closed or that operate at lower capacity will temporarily halt new investment in physical assets and delay expansions.