Emerging Markets FDI Bear Brunt Of Covid-19 Blow

Total foreign direct investment inflows to drop by 30%-40% of 2019 levels this year, Kearney says.

Only three emerging markets—China, Brazil and the United Arab Emirates—made the 2020 index of top 25 countries ranked by investment attractiveness by global consultancy Kearney as investors turn to more stable and predictable markets after the Covid-19 storm.

While the United States retained the lead for the eight-consecutive year, China dropped one spot to eighth, its lowest ranking in the history of the Kearney Foreign Direct Investment Confidence Index (FDICI). 

China, which dominated the index for a full decade through 2012, remains the highest-ranked emerging market on the 2020 FDICI list, followed by the United Arab Emirates and Brazil, both of which returned to the index this year to sit respectively at a distant 19 and 22. European markets hold 14 spots.

“Developed markets once again dominated our survey. For the second time in the 22 years of the index, all of the top five spots are held by developed markets,” Paul Laudicina, founder of the FDI Confidence Index and Kearney’s Global Business Policy Council, tells Global Finance. Canada, Germany, Japan and France completed the top five.

“The spread of Covid-19 appears to be encouraging investors to double down on this trend and seek what they perceive as a return to fundamentals—to large, more stable markets with more predictable political and regulatory structures,” says Laudicina, chairman emeritus of Kearney.

The survey of 500 senior executives of the world’s largest corporations shows a significant shift in investor sentiment between the outset of the survey period in January and its conclusion in March when the pandemic was in full swing.  The FDICI Confidence Index declined from a score of 1.75 in the first two weeks of the survey to 1.26 in the last two. The scores for each of the developed, emerging and frontier market categories all fell by 25%—33%.

Kearney expects FDI flows to increase in the medium term on prospects of a rebound in the global economic outlook, but the pool of investment capital available could be much smaller.

“We do anticipate that growing concerns of economic crisis in developed markets will reduce the pool of investment capital available for FDI. We expect the damaging economic effects of Covid-19 to decrease FDI inflows in 2020 by between 30%-40% of 2019 levels, in line with UNCTAD estimates,” says Laudicina, citing a report from the United Nations Committee on Trade and Development. During the financial crisis, FDI flows dropped 23% in 2008 and 44% the following year.

The study of 70-plus countries, which together represent more than 95% of FDI inflows, also highlights risks to the economy and FDI in most commodity-exporting markets dealing with plunging oil prices because of the pandemic. Investors were however attracted to the UAE’s efforts to diversify its economy away from oil, the report reads. African countries, which saw an increase in FDI flows last year led by Egypt’s reforms, did not make the ranking this year amid a lack of confidence in their response to the virus.

“More broadly, we anticipate that emerging markets will face serious challenges as a result of the virus; while developed markets will be hard hit economically, emerging markets are generally at even greater risk,” Kearney Chairman Emeritus Laudicina says.

Looking ahead, trade tensions between the US and China and climate change will continue to impact investors’ decisions, the report says. As the speed and nature of the economic recovery remain uncertain, Kearney invited investors to better anticipate and prepare for exogenous shocks.