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Jul 05, 2012

$500bn cash ‘overhang’ may fuel FDI surge once confidence returns

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Foreign direct investment (FDI) flows are likely to remain flat in 2012. But the latest World Investment Report (WIR 2012) also estimates that “upwards of $500-billion in investable funds” are being held back by multinationals and that this cash ‘overhang’ could fuel a surge in FDI once global economic conditions improve.

The United Nations Conference on Trade and Development (Unctad) report, published on Tuesday, estimates total transnational corporation (TNC) cash holdings have climbed to a record $5-trillion, based on projections from data for the world’s top 100 TNCs.

Such hoarding has also been witnessed in South Africa, where corporate deposits have reportedly swelled to more than R530-billion.

“Renewed instability in international financial markets will continue to encourage cash holding and other uses of cash, such as paying dividends or reducing debt,” the authors argue.

Therefore, the WIR 2012 forecasts that FDI will “level off at $1.6-trillion in 2012”, having recovered 16% to $1.5-trillion in 2011, slightly better than the precrisis average of about $1.4-trillion. Nevertheless, the 2011 figure remains 23% below the 2007 FDI flows peak of $1.97-trillion.

However, barring any macroeconomic shocks, Unctad expects flows to rise to $1.8-trillion in 2013 and $1.9-trillion in 2014.

Besides the $500-billion in TNC capital, which equates to a third of current global flows, the outlook for FDI could receive an additional boost from sovereign wealth funds (SWFs), which currently have assets under management estimated to be around $5-trillion.

To date, SWFs have made a relatively modest $125-billion cumulative contribution to FDI flows. But the report believes these funds are well placed to invest in productive activities and infrastructure, owing to their long-term and strategically oriented investment outlook.

During 2011, developing countries accounted for 45% of all inflows, which rose to a record $648-billion. But flows to Africa declined for the third consecutive year, mainly as a result of a pullback in Egypt and Libya.

That said, inflows to sub-Saharan African surged 25%, from R29.5-billion in 2010 to $36.9-billion, approaching the peak of $37.3-billion achieved in 2008.

The value of greenfield project investments, which have been declining since 2009, held steady at $904-billion, while cross-border merger and acquisitions surged 53% to $526-billion.
 

Edited by: Creamer Media Reporter
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