Geneva: The growing danger of a currency war is threatening the recovery in global investment, the United Nations Conference on Trade and Development (UNCTAD) said on Thursday.
Disputes between different countries about their exchange rates were adding to uncertainty which was deterring businesses from investing abroad, said James Zhan, director of UNCTAD’s investment and enterprise division.
“We have seen recently fluctuations of major currencies in a significant manner. There is a danger of a currency war,” Zhan told a briefing.
Zhan’s comments follow a series of warnings by policy-makers that the world is in or heading for a currency war as governments try to push down their exchange rates to make their exports more competitive.
Competitive devaluations were a double-edged sword as far as investment is concerned, Zhan said.
They could attract inward investment by making assets cheaper and strengthening a country’s export competitiveness.
But they would also reduce the value of profits repatriated from foreign affiliates, making investment less attractive for a multinational corporation, he said.
UNCTAD, whose monitoring of global investment flows is closely followed by economists and businesses, said it appeared that re-invested earnings, which typically account for one third of foreign direct investment (FDI), had fallen in the second quarter of this year as companies repatriated profits in anticipation of further currency depreciation.
Total FDI inflows fell by about 25% in the second quarter of this year from their level in the first 3-month and were also some 15% lower than a year earlier, according to data in UNCTAD’s latest Global Investment Trends Monitor.
UNCTAD said it now expected global FDI inflows -- a key source of finance for many developing countries - to stagnate at about $1.12 trillion this year -- little changed from 2009’s $1.11 trillion but 40% below the pre-crisis peak of $2.1 trillion in 2007 and 25% below the 2005-2007 average.