Potential modest global FDI increase in 2024, but geopolitical, debt and global fracturing are risks

17th January 2024 By: Schalk Burger - Creamer Media Senior Deputy Editor

The United Nations Conference on Trade and Development's (Unctad's) 'Global Investment Trends Monitor' shows that global foreign direct investment (FDI) flows increased marginally by 3% in 2023 to reach an estimated $1.37-trillion and defy expectations as recession fears early in the year receded and financial markets performed well.

However, economic uncertainty and higher interest rates affected global investment. The headline increase was owing largely to higher values in a few European conduit economies. Excluding these conduits, global FDI flows were 18% lower, it notes.

"A modest increase in FDI flows in 2024 appears possible, as projections for inflation and borrowing costs in major markets indicate a stabilisation of financing conditions for international investment deals. However, significant risks persist, including geopolitical risks, high debt levels accumulated in many countries and concerns about further global economic fracturing," it says.

FDI flows to developing countries fell by 9% to $841-billion, with declining or stagnating flows in most regions. FDI decreased by 12% in developing Asia and by 1% in Africa. It was stable in Latin America and the Caribbean as Central America bucked the trend, Unctad says.

FDI flows to Africa were almost flat at an estimated $48-billion, lower by 1%. Greenfield project announcements increased, mostly owing to strong growth in Kenya, Morocco and Nigeria.

However, project finance deals fell by one-third, which is more than the global average decline and weakens prospects for infrastructure finance flows.

Further, FDI in the European Union jumped from negative $150-billion in 2022 to positive $141-billion because of large swings in Luxembourg and the Netherlands. Excluding those two countries, inflows to the rest of the EU were 23% down, with declines in several large recipients.

Inflows in other developed countries also stagnated, with zero growth in North America and declines elsewhere.

In the US, FDI inflows in 2023 were down by 3%, greenfield project numbers by 2% and project finance deals by 5%. China reported a rare decline in FDI inflows, at 6% lower, but showed growth in new greenfield project announcements, 8% higher.

The Association of Southeast Asian Nations region, which is normally an engine of FDI growth, reported a 16% decline in FDI. However, the attractiveness of the region for manufacturing investment was underlined by a 37% jump in greenfield project announcements, with strong growth in Cambodia, Indonesia, Malaysia, Philippines, Thailand and Vietnam.

"In developed regions, international investment project announcements were down across the board. Mergers and acquisitions values were $280-billion lower than in 2022, directly depressing FDI flows. Project finance deals were $157-billion lower. Lower values of greenfield project announcements will affect 2024 FDI flows," the trade body says.

International investment project announcements, including mainly industry greenfield projects, project finance mainly into infrastructure, and cross-border mergers and acquisitions were mostly in negative territory.

"International project finance and mergers and acquisitions suffered the most from higher financing costs in 2023, with 21% fewer international project finance deals and 16% fewer mergers and acquisitions.

"Greenfield project announcements were also 6% lower in number. However, they were 6% up in value and showed higher numbers in manufacturing in an initial sign of recovery following a long-term declining trend," the Global Investment Trends Monitor states.

Meanwhile, in 2023, project numbers rose 16% in global value chain-intensive sectors, especially in automotives, textiles, machinery and electronics.

The number of newly announced greenfield projects in semiconductors fell by 10% and by 39% in value after the strong growth in 2022, Unctad notes.

The number of greenfield project announcements and international project finance deals in infrastructure industries, including transport, power, water and telecommunications, fell by 4% overall, largely driven by lower project finance in renewable energy, it says.

"New international project finance deals in the renewable energy sector fell by 17% in number and 10% in value, which is only marginally less than the overall project finance decline. The decline in the number of new projects was the first since the Paris Agreement in 2015," it highlights.

Additionally, the number of international investment projects announced in developing countries in sectors relevant to the United Nations Sustainable Development Goals (SDGs), including infrastructure, renewables, water and sanitation, food security, health and education, remained flat.

The number of SDG-relevant international project finance deals declined by 27% and by 40% in value, while the number of SDG-relevant greenfield projects rose by 12% and by 6% in value.

Project numbers in food and agriculture rose marginally from low levels in 2022, but most other sectors registered a decline during 2023, Unctad says.