Foreign direct investment into Latin America and the Caribbean will fall by 50 per cent in 2020, when it reached US$164 billion, according to the United Nations Conference on Trade and Development’s World Investment Report 2020 .
He explained also that the shock would have a different impact across sectors, with commodities, tourism and transportation among the most severely hit.
Whereas the report predicts that low oil and commodities’ prices will negatively affect investment in major South America economies, it also predicts that Caribbean countries will be hardest hit in the by the collapse in tourism and the halt to investment in the travel and leisure sector.
“In manufacturing, automotive and textiles, two important industries in the region, are suffering both supply and demand shocks. Central America and the Caribbean might see some new international investment to expand the production of medical equipment,” a release from UNCTAD read.
So far, evidence from the report shows there is a of 36 per cent decline in the number of newly announced greenfield projects of when comparing the first quarters of 20220 and 2021.
However, UNCTAD notes that projections from the report are still conservative since most of the impact on projects will be evident from April, after the lockdown, as shown by the trend of cross-border deals.
“The number of foreign acquisitions in the region decreased every month with respect to the average number in 2019 to eventually drop by 78 per cent in April,” the UNCTAD release points out.
In general, the impact of the COVID-19 crisis on companies is evident in their shrinking margins for reinvestment. The shutdowns, falling demand and limited access to trade — both for imports of inputs and exports — have resulted in companies reporting significant losses.
“Since the beginning of February, major companies in the region revised their earnings expectations for fiscal year 2020 downwards by more than 50 per cent, more than companies in other regions,” the release says.
“For major recipient economies in the region, reinvested earnings account for more than a third of inflows, and for some important destinations such as Mexico, Argentina, Panama and Costa Rica, they represent more than half,” it continues.
The impact of the pandemic also has implications for foreign subsidiaries based in the region, as they could also suffer significant losses due to a drop in inflows.
With predictions that assume that countries will see a spike in COVID-19 cases if they reopen their international borders and reduce restrictive measures too early, UNCTAD said these actions “could prolong the health crisis and the related economic” challenges. As a result, in the medium term, the implications of the pandemic for FDI flows to the region will depend on the severity of the economic contraction and the speed of the recovery.
Last year FDI in Latin America and the Caribbean grew by 10 per cent to US$164 billion, driven by increased flows to Brazil, Chile and Colombia.
Brazil recorded a 20 per cent jump to US$72 billion as investors gravitated to the oil and gas extraction and electricity industries, supported by a privatisation programme.
“In Colombia, FDI inflows increased by 26 per cent to [US]$14 billion, mostly in extractive industries. Flows into Chile increased by 63 per cent to [US]$11 billion in 2019, sustained by investment in utilities, mining and services. In Peru, flows increased by 37 per cent to [US]$8.9 billion, boosted by non-financial services,” the release also stated.
On the other hand, Mexico saw a reduction in flows to the automotive and power generation industries, which contributed to a five per cent decrease to US$33 billion.
In Costa Rica, FDI inflows increased by 13 per cent to US$2.5 billion in 2019 as investment in special economic zones grew.
“In the Caribbean, flows to the Dominican Republic, the largest recipient in the subregion, increased by 19 per cent to [US]$3 billion, pushed by investments in the telecommunication and power industries,” UNCTAD noted.
“Outflows grew to [US]$42 billion, sustained by intra-regional flows and a reduction of negative outflows that dampened the totals in previous years,” it continued.
Brazil, Mexico and Chile registered the biggest increases.