Singapore: Foreign direct investment, or FDI, in developing nations will drop by $180 billion, or 31%, this year as a global recession prompts multinationals to cut spending on factories and mines, according to the World Bank.
The decline will put renewed pressure on emerging market currencies, even as asset sales by fund managers slow, according to Mansoor Dailami, manager of international finance in the global development prospects group. Rallies in the South Korean won, Brazil’s real and the Polish zloty have all faltered since the end of 2008. “This is the most serious reaction so far to the global recession,” Dailami said in an interview in Washington.
FDI fell an estimated 10% in the developing world in 2008 and will cool further this year, the United Nations said in its 2009 outlook. FDI, which typically involves spending on plant and machinery or the purchase of a controlling interest, accounted for 38% of inflows into emerging markets in recent years, compared with 10% for investment by funds and 54% for loans, according to Morgan Stanley estimates.
Bloomberg-JPMorgan indexes tracking currencies in Asia, Latin America and Eastern Europe in 2008 posted declines of 5.9%, 19% and 11%, respectively, and have since dropped further. The won is down 8.3% versus the dollar so far this year following a 17% jump in December. The real is 2.6% weaker and the zloty lost 12%.
Rio Tinto, the third largest mining company, this month postponed a $2.15 billion (Rs10,556.5 crore) expansion of an iron ore mine in Brazil. Honda, Japan’s No. 2 auto maker, delayed construction of a $100 million factory in Argentina and has shelved expansion plans in Turkey and India. Hitachi Construction Machinery Co., the world’s largest maker of giant excavators, froze a $1 billion plan to expand production in China and other emerging markets.
“I’ve never before experienced seeing sudden, simultaneous drops in worldwide demand,” Hitachi chief executive officer Michijiro Kikawa said this month in an interview in Tokyo.
Of the world’s five largest economies, only China has so far escaped recession. The nation will on Thursday report a 6.8% expansion for the fourth quarter, the slowest growth in seven years, according to the median estimate of economists surveyed by Bloomberg.
The World Bank estimates that FDI in developing countries will shrink to $400 billion this year from an estimated $580 billion in 2008 and $500 billion in 2007, according to Dailami, author of the lender’s annual Global Development Finance report.
The World Bank predicts global trade will contract this year for the first time since 1982 and Brazil, Latin America’s biggest economy, forecast its exports will drop as much as 20%. Germany, the world’s biggest goods exporter, reported a record slide in shipments for November, and China, the second largest, last month had its worst decline in a decade.
Investment in China, the largest developing economy, fell 5.7% from a year earlier to $5.98 billion in December, sliding for a third straight month, official figures show. Net flows to Brazil, the second biggest, slid 14% to $2.18 billion in November and the country’s central bank last month cut its 2009 estimate for FDI to $30 billion from $33 billion. Some $67 billion was pulled out of emerging market equities and bonds funds in 2008, after net inflows of $62 billion the previous year, according to EPFR Global, a Cambridge, Massachusetts-based research company. The outflows eased this year as the funds took in $4.29 billion in the first 14 days of 2009, the data show.
So far this year, 22 of 26 emerging market currencies tracked by Bloomberg have weakened versus the dollar.
Government-led bailouts of finance companies in the US and Europe are forcing lenders there to pull funds back from emerging markets, forcing the sale of “prized jewels” such as stakes in Chinese banks, David Bloom, global head of currency strategy at HSBC Holdings Plc., said on 16 January in Hong Kong.
Masumi Suga in Tokyo contributed to this story.