Foreign direct investments (FDIs) in South East Asia in the first semester of 2020 contracted by 20 percent but the Philippines one of only two exceptions that bucked the investment trend with its FDI inflows rising 20 percent, the United Nations Conference on Trade and Development (UNCTAD) report reported.
According to the UNCTAD Investment Trends Monitor, FDI in the Philippines rose by 20 percent to $3 billion in the first half of 2020 while flows to Thailand, the other exception, more than doubled to $4.8 billion from a lover level in 2019.
“Mergers and acquisition deals in agriculture and energy in these two countries played a role in sustaining inflows,” UNCTAD said. However, overall cross-border M&As in Southeast Asia decreased by 44 percent because of a significant fall in activity in Singapore. Announced greenfield investment dropped by 36 percent, with services and manufacturing suffering the most.
The UNCTAD Investment Trends Monitor belied other reports showing that the Philippines was the laggard among ASEAN countries in attracting foreign investments, especially those relocating from China. Although the Philippine FDI level still pales in comparison to other major ASEAN countries, it was only one of two countries in the region that attracted foreign investments during the first half of 2020, which was the height of the lockdowns due to the COVID-19 pandemic.
Nonetheless, UNCTAD report that the FDI’s in the entire South-East Asia region contracted by 20 percent in the first half of 2020 to $62 billion due to a significant fall in flows to Singapore (-28 percent to $33 billion), Indonesia (-24 percent to $9.1 billion) and Vietnam (-16 percent to $6.8 billion). These three countries have the largest FDI inflows among the 10-member ASEAN grouping.
The UNCTAD report further noted that developing economies saw their FDI flows decrease by 16 percent as the value of announced greenfield projects suffered a 49 percent decline and the number cross-border project finance deals fell by 25 percent, cross boarder M&A rose by 12 percent. The overall decline was spread across the regions – Africa (-28%), Latin America and Caribbean (-25%) and developing Asia (-12%).
The FDI contraction though in developing economies has so far been less served than in developed economies with FDIs in developing economies contains more greenfield investments and project finance, which tend to be more stable.
According to UNCTAD, FDI inflows to developed economies reached only $98 billion in the first semester of 2020, only a quarter of the level in 2019 at $397 billion. The low level was mainly due to sharply negative FDI in countries with significant conduit flows, such as Switzerland and the Netherlands, and the decrease of FDI in the US. FDI flows to North America fell by 56 percent to $68 billion.
Globally, UNCTAD said FDIs dropped 49 percent in the first half with the biggest decline in Europe and US. FDI outlook has been negative as new project announcements also dropped by 37 percent.
FDI remains the largest source of external financing for developing economies although official development assistance and remittances play a relatively great role to the least developed economies. Remittances, UNCTAD said are the second largest source of finance for developing economies, but they rarely translate into investment in productive capacity. Remittances in 2020 are also strongly affected by the economic downturn in developed economies where migrant workers earn their incomes.
“The lockdowns around the world slowed existing investment projects and the prospects of a deep recession led multinational corporations to re-assess new projects,” the report added.
Although cross-border M&As picked up in the third quarter of 2020, UNCTAD said that new greenfield and project finance activities remains weak.
“Projections for 2020 remain laden with uncertainty. With a second wave of the pandemic in some developed economies undermining efforts to return to normal, the near 50 percent decline in 2020 H1 could persist longer,” the report concluded.