Ukraine war to hit foreign direct investment: UN

Foreign direct investment is expected to fall this year, with the food, fuel and financial crises triggered by Russia’s war in Ukraine dampening the business climate, the UN said Thursday.

Global FDI recovered to pre-pandemic levels in 2021, reaching nearly $1.6 trillion, but this is unlikely to be sustained in 2022, said the United Nations’ trade and development agency UNCTAD.

“The global environment for international investment changed dramatically with the onset of the war in Ukraine,” said UNCTAD chief Rebeca Grynspan.

“The war is having effects well beyond its immediate vicinity, causing a cost-of-living crisis affecting billions of people.”

Investor uncertainty and risk aversion “could put significant downward pressure on global FDI this year”, the former vice president of Costa Rica said.

Signs of weakness are already emerging, UNCTAD said in its World Investment Report 2022.

Preliminary first-quarter data shows greenfield project announcements have plunged 21 percent globally, cross-border mergers and acquisitions activity are down 13 percent and international project finance deals dropped four percent.

Greenfield investment typically refers to projects that create new physical facilities which are considered productive, in part because they normally create jobs. New greenfield projects are considered an indicator of future FDI trends.

“This year, the business and investment climate has changed dramatically as the war in Ukraine results in a triple crisis of high food and fuel prices and tighter financing,” UNCTAD said.

“Other factors clouding the FDI horizon include renewed pandemic impacts, the likelihood of more interest rate rises in major economies, negative sentiment in financial markets and a potential recession.”

The agency said the growth momentum of 2021 could not be sustained and that global FDI flows in 2022 would “likely move on a downward trajectory, at best remaining flat”.

UN chief’s fears

“This fragile growth of real productive investment is likely to persist in 2022,” said UN Secretary-General Antonio Guterres.

“The fallout of the war in Ukraine with the triple food, fuel and finance crises, along with the ongoing Covid-19 pandemic and climate disruption, are adding stresses, particularly in developing countries.

“There is significant risk that the momentum for recovery in international investment will stall prematurely, hampering efforts to boost finance for sustainable development.”

The top 10 economies for FDI inflows in 2021 were the United States, China, Hong Kong, Singapore, Canada, Brazil, India, South Africa, Russia and Mexico.

Coming off a low base in 2020, global FDI flows rose 64 percent to $1.58 trillion last year thanks to booming merger and acquisition activity and rapid growth in international project finance due to loose financing and major infrastructure stimulus packages.

Flows to developing economies rose 30 percent to $837 billion — the highest level ever recorded — largely due to strength in Asia, a partial recovery in Latin America and the Caribbean and an upswing in Africa.

Announced international project finance deals hit a record of 1,262 projects last year and more than doubled in value to $656 billion.