The Hindu Business Line : OECD paints gloomy picture of global investment patterns

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OECD paints gloomy picture of global investment patterns

Stating that FDI flows would fall sharply in the second half of 2008 and continue to decline into 2009, OECD said this is reflected in global merger and acquisition (M&A) activity, a major driver of FDI.

G. Srinivasan

New Delhi, Nov. 23 For emerging and developing economies such as India that had benefited from the recent sustained portfolio flows and private debt, the outlook at the moment is none too encouraging with a sure and fast retreat of capital flows, diminishing their dependence for development and expansion purposes by both the Government and the private sectors.

This is the broad conclusion of the latest study by the Paris-based inter-governmental think tank of 30 rich industrial countries, the Organisation for Economic Cooperation & Development (OECD), which has painted a gloomy outlook for foreign direct investment (FDI) for the world economy and shifting global investment patterns to both developed and developing countries.

It said the composition of global flows to developing countries has changed ‘dramatically’ between 1999 and 2007 when FDI’s share of total capital inflows plummeted from almost 90 per cent to under 50 per cent, while the medley of portfolio flows and private debt zoomed from 6 per cent to 55 per cent. Interestingly, the net position of official creditors actually turned negative at $4 billion because loan repayments have exceeded lending. This diversification was a salutary feature and reflected a spate of factors, including robust growth in developing countries, accompanied by high rates of return on investment, as well as the sound investment frameworks that these countries have been undertaking.

Contraction of flows

But in the current context, following the meltdown of major financial markets and drying up of overseas credit, this increased reliance on portfolio flows and private debt could result in a “sharp contraction of international capital flows for many developing countries”.

Citing a study by the Institute of International Finance, it said private credit financing into 30 developing countries surveyed (including the BRICS – Brazil, Russia, India and China and South Africa) would decline by half between 2007 and 2009 from $600 billion to $300 billion.

Even net portfolios, already negative, would decline further from minus $6 billion to minus $20 billion.

The saving grace is that FDI flows into these 30 developing countries are likely to decline by a moderate 7 per cent from $302 billion to $282 billion, OECD said.

The outlook for FDI for the developed countries has darkened as on current trends, inflows would be down 13 per cent and outflows by 6 per cent by the end of the year. However, these declines would be much less acute than those encountered in 2001 when FDI inflows and outflows plunged by 49 per cent and 43 per cent respectively, following the bursting of the dotcom bubble.

On current trends, international M&A would decline by 29 per cent from the record levels reached in 2007 at $1.7 trillion.

Two factors contribute to this gloomy scenario, it said. The foremost is the freezing of credit markets, combined with sharp declines in equity markets have compelled firms to rely largely on cash reserves to finance investment. Second, with global growth forecast for 2009 at 2.2 per cent and growth in the rich world likely to fall to 0.3 per cent, the need for companies to investment in new capacity is considerably reduced.

However, a redeeming feature is that while aggregate FDI flows are down, inward FDI into the OECD from outside has represented a “rare bright spot” during the crisis to date. Thus M&A activity in the OECD originating from non-OECD sources is set to grow by 25 per cent this year over 2007-levels. This M&A activity has already reached $71 billion in 2008, exceeding the total for 2007 and accounted for 15 per cent of the value of the largest M&A investments in the OECD area in 2008.

Thus, “FDI has served to channel capital from places where it has been abundant to where it has become scarce during the crisis”, OECD quipped.

Barring a few protectionist responses (resulting from political pressure to stop foreign investors from taking advantage of the economic crisis), OECD said this “positive role for international investment from developing countries will likely increase over time”.

Policy analysts highlight the ‘irony’ that even as the emerging economies find foreign capital scarce to borrow with the exit of portfolio flows, countries such as Saudi Arabia and Singapore through sovereign wealth funds (SWFs) serve as ‘rescue FDI’ to the rich world buffeted by economic crisis of the worst kind.

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