Global crisis to affect FDI this year
THE GLOBAL ECONOMIC downturn will this year take its toll on foreign direct investments (FDI) to developing countries, reversing a slight growth in 2008, a United Nations agency yesterday said.
The Philippines is not expected to be spared as officials of foreign business chambers and a trade office predicted flat to negative growth in 2009 FDI inflows.
The gloomy picture, the UN Conference on Trade and Development (UNCTAD) said in a report, could turn around as early as end-2009 or extend until 2012 depending on several factors.
“Flows into developing countries continued to grow in 2008, but at a much lower rate than the year before,” the report stated.
FDI to South, East, and Southeast Asia were estimated to have grown by 3.3% to $256.1 billion last year even as the global total fell by 21% to $1.4 trillion.
“[A]n outright decline in FDI inflows to those countries is possible in 2009 due to a pull-back ... in FDI aimed at exporting to advanced economies that are currently depressed and in FDI aimed at servicing local markets with growth prospects ... that have receded,” the UNCTAD said.
The fall will be caused by the inability of firms to fund investments due to lower profits and less accessible and costlier bank loans. Risk aversion will also lead to firms cutting costs for investments abroad.
“In the very short term ... companies are more likely to undertake divestments than to seize investment opportunities. This is why a further decline in FDI in 2009 can be expected.”
The Philippines will experience the same downtrend as there will be a decline or no growth in investments from US, Europe, Korea and Japan this year, representatives of economies that were the Philippines’ top investment sources last year said.
“Unlike the previous year, there will be a lot of descent. Foreign investment [from Korean firms] will be reduced by maybe 30%,” Korean Chamber of Commerce in the Philippines President Jae J. Jang told BusinessWorld.
Korean firms in the semiconductor, garment and real estate sectors are not likely to invest this year, he said in a recent interview.
Japanese investments will also decline, the Manila office of the Japan External Trade Organization (JETRO) yesterday said.
“It will be negative because the Japanese economic environment is bad and [firms] are hesitating,” JETRO Manila Executive director Ryoichi Ito said in a telephone interview.
Investments from Japanese firms involved in the manufacture of electrical appliances and automobiles will be the worst hit, Mr. Ito said. Small- and medium-scale businesses supplying these firms will also be affected.
The UNCTAD also cited automotives and consumption goods as sectors in which investments have been most affected, along with financial services and building materials.
Officials from the American and European business chambers were more optimistic.
“It’s going to be flat. American companies are going through wrenching times. If anything, they will look at conserving their cash and bringing it back,” American Chamber of Commerce of the Philippines, Inc. (AmCham) Executive Director Robert M. Sears yesterday said.
Henry J. Schumacher, executive director of the European Chamber of Commerce of the Philippines, said: “I’m happy just to stay with the prediction of the government which is flat.”
Trade Secretary Peter B. Favila has said that there would be no growth in pledges at the Board of Investments this year as the agency expects to post the same figure of P288.35 billion from last year. Investments to be committed with the Philippine Economic Zone Authority, meanwhile, are expected to hit P170 billion by yearend, up by 9.8%. Projects from business process outsourcing firms will fuel the growth, he said.
Aside from the customer service industry, UNCTAD noted the production of medical equipment, intermediate food products and food additives, processed aquaculture, hybrid automotives, and software development as bright spots.
Messrs. Jang and Ito echoed this, noting that Japanese and Korean investments may continue to flow into game development and agriculture.
In the medium term, the UNCTAD offered three scenarios as to when investment flows would improve.
There may be a quick upturn starting at the end of 2009 if the recession ends by the second half, if investors’ confidence immediately returns, and there is no protectionist setback, it said.
AmCham’s Mr. Sears supported this outlook, saying: “I am an optimist. My sense is [recovery] would be later this year.”
But it may take a while for investments to start trickling in even if the world economy recovers by yearend, University of Asia and the Pacific economist Peter Lee U said.
Another scenario is that FDI will pick up only by 2011, on the condition that the recession ends by the first half of 2010, the UNCTAD said.
Favorable factors would ensure growth in the medium term, UNCTAD said, citing cheap asset prices, industry restructuring, the large supply of finances in emerging economies, and “a resilient trend in the internationalization of companies.”
“To date, this scenario appears as the most probable one,” the UNCTAD said.
Mr. U expects investment flows to improve in the second half of 2010 at the earliest.
The worst-case scenario in which FDI does not recover before 2012 will occur if countries impose measures to protect local industries and if companies remain cautious.
“For effectively dealing with the crisis and its economic aftermath, it is important for policy makers to resist the temptation of quick-fix solutions or protectionism and to maintain an overall favorable business and investment climate,” the UNCTAD said. 2009