Development & Aid, Economy & Trade, Financial Crisis, Global, Global Geopolitics, Headlines

ECONOMY: Global Investment Feels Impact of Crisis

Gustavo Capdevila

GENEVA, Sep 24 2008 (IPS) - The international turmoil and economic slowdown triggered by the U.S. financial crisis are having a major impact on global investment, which will drop 10 percent this year from last year’s record level of 1.8 trillion dollars.

At the presentation of the ‘World Investment Report 2008’ Wednesday, the secretary-general of the United Nations Trade and Development Conference (UNCTAD), Supachai Panitchpakdi, predicted that foreign direct investment (FDI) would reach 1.6 trillion dollars this year.

All aspects related to investment will depend on the magnitude and duration of the current crisis, said Supachai.

The head of UNCTAD welcomed the U.S. government’s 700 billion dollar plan to bail out banks by covering bad mortgage debt.

“I think everyone in the world today agrees that it is a commendable attempt by the U.S. administration to tackle the financial crisis by having a comprehensive package to support the system, which is much needed,” said Supachai with respect to the government proposal that is pending approval by Congress.

Supachai pointed out that UNCTAD, created in 1964 to help developing countries integrate into the world economy in order for them to benefit to the greatest possible extent from trade, investment and development, has long maintained “the need to put in some regulatory framework into the financial system in a way that we can see more transparency and accountability.”

UNCTAD maintains that, “in spite of the functioning of the market mechanism, it is just inevitable that the state will have to come back in and play a more pronounced role in this area,” he added.

The financial crisis, which already began to be felt in August 2007, had not at that time interrupted the four consecutive years of growth of FDI, which topped 1.8 trillion dollars last year, surpassing the previous record, set in 2000.

Despite the financial and credit difficulties that appeared in the second half of 2007, industrialised and developing nations and economies in transition in southeastern Europe and the Commonwealth of Independent States (CIS) experienced a steady increase in foreign investment.

The rise in FDI was largely due to the relatively high rates of economic growth and strong performance by companies in many parts of the world.

Also affecting investment to a certain extent was the depreciation of the dollar against other major currencies.

Nevertheless, developing countries saw a 21 percent rise in FDI, to 500 billion dollars, due to factors like the increase in commodity prices and improved investment policies.

According to UNCTAD, 75 percent of the reforms introduced in foreign investment policies were favourable to investors.

The rest, says the report, were adopted as part of more restrictive models applied mainly to extractive industries in Latin America, especially Bolivia and Venezuela.

However, UNCTAD acknowledged that the restrictions reflected concerns of a strategic nature and relating to national security.

Some two-thirds of the increase in developing countries went to Asia, one-third to Latin America and the Caribbean and one-tenth to Africa.

Record FDI flows were experienced by the countries of the CIS (former Soviet republics), which received 74 billion dollars; the least developed countries, which took in 13 billion dollars; and Africa, which attracted 53 billion dollars.

The report also notes that sovereign wealth funds (SWFs) – massive investment pools run by foreign governments – “are emerging as new actors on the FDI scene” because of their involvement in a growing number of cross-border mergers and acquisitions.

“Although the history of SWFs dates back to the 1950s, they have attracted global attention only in recent years,” says UNCTAD.

The SWFs, which invest state savings in foreign assets, tend to assume greater risks and seek higher returns than traditional investments by monetary authorities.

For example, the Government of Singapore Investment Corporation (GIC) helped bail out UBS in March when it paid 9.7 billion dollars to acquire a nine percent stake in the bank, Switzerland’s largest, which was the first prominent victim of the U.S. mortgage crisis.

Alongside its ‘World Investment Report 2008’, UNCTAD released the ‘World Investment Prospects Survey 2008–2010’, which states that the contraction of the economy and financial turbulence has forced transnational corporations to be more cautious with respect to FDI in the medium term.

Most of the corporations surveyed by UNCTAD responded that they still planned to increase their investment flows in the next three years, but with a more moderate increase, said Anne Miroux, the head of the team that produced the two reports.

The five countries considered most attractive by transnational corporations for future investments are China, India, the United States, Russia and Brazil. UNCTAD noted that the interest in Russia and Brazil was already mentioned in last year’s report, although it has grown significantly.

The next countries on the list are Vietnam, Germany, Indonesia, Australia, Canada, Mexico, Britain, Poland, South Africa, France and Turkey.