Before he took office in early 2018, South African president Cyril Ramaphosa outlined how foreign direct investment would be the cornerstone of his plan to get a stalled economy moving again. Four high profile investment-seeking envoys were dispatched to engage with potential investors around the world. The plan’s success was trumpeted in Ramaphosa’s State of the Nation address and his high-profile annual investment conference. Initially, the plan seemed to be working. Investment flows in the authoritative report compiled by the United Nations showed FDI rebounding from depths plumbed during the business-hostile Zuma Administration. Not surprisingly, Covid-19 crisis has wiped out those gains – as it has pretty much for almost half of global FDI. But more relevant for South Africa, as UNCTAD’s Richard Bolwijn explains with unfurnished frankness in this podcast, the slide had already started long before the virus put SA into lockdown. Biznews.com’s Alec Hogg caught up with Bolwijn to discuss his team’s latest Investment Trends Monitor…
Before he took office in early 2018 South African President Cyril Ramaphosa outlined how foreign direct investment would be the cornerstone of his plan to get a stalled economy moving again for high profile investment seeking envoys were dispatched to engage with potential investors around the world. The plan’s success was trumpeted in Ramaphosa’s State of the Nation addresses and his high profile Annual Investment Conference. Initially, the plan seemed to be working. Investment flows in the authoritative report compiled by the United Nations showed FDI rebounding from depths plumbed during the business hostile Zuma administration. Not surprisingly the Covid-19 crisis has wiped out those gains – as it has pretty much for almost half of global FDI. But more relevant for South Africa as UNCTAD’s Richard Bolwijn explains with unfurnished frankness in this podcast – the slide had already started some time before the virus put South Africa into lockdown. I caught up with Bolwijn this week to discuss his team’s latest investment trends monitor.
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Normally we do three per year and in the middle we have our World Investment Report in June. So we basically have one at the start of the year which we publish around the time of the World Economic Forum in Davos where we have the first annual data for the previous year and we have one towards the end of the year again with three quarter data. We have now just had two special issues and rapid succession to reflect the updates that are required now with the coronavirus situation. The first issue was a normal issue before the coronavirus really became a problem with our regular data on FDI flows last year in the first estimates for 2019. We projected worldwide minus 2 percent for FDI and that’s based on three quarters data and some initial indications for the final quarter of last year. Within that we had a decline in South Africa from 8% decrease from $5.4bn to $4.6bn in 2019. That was the regular updates of 2019 – we’ll see when we get the final data in the world investor report, but usually we aren’t getting quite close in the January estimate. Much of the FDI last year in South Africa was M&A deals, so not greenfield investments which is normally the preferred type of an investment. A greenfield investment in South Africa was slightly down as well. The overall FDI trend in South Africa was inflated by a couple of very large M&A deals; one of them being the Mondi takeover that was already $2.5bn. So, when you see that – half of the FDI was already made up just by that.
So it was a tough year last year already – going into 2019 we were expecting with the Ramaphosa investment seminar in November. There were different figures; there he was expecting big numbers to come in, big FDI to come in, but it hasn’t yet registered.Â
One has to put it in the context of global trends. In reality, FDI was slightly down worldwide last year so it’s difficult to break out of that trend, of course. And we have been measuring on top of that the normal headline numbers for FDI which are very volatile because of mergers and acquisitions which can really inflate the numbers from one year to the next. And because of inter-company financial flows and offshore financial centres – these numbers are quite volatile. But we have been measuring what we call underlying investment trends removing that volatility and we’ve basically monitored already about 10 years’ gradual slowdown in FDI worldwide, and within that context – it’s less of a surprise that the numbers on the African continent and for South Africa have been slow for a number of years already. South Africa had a number of years of really quite low investment – below $2bn – and I believe it was 16, 17 in the last few years have been slightly higher, but they are distorted by some large takeovers and inter-company financial flows. A lot of the FDI in South Africa is reinvested earnings of businesses that are already there or foreign affiliates that are already there and the number of new greenfield projects is disappointingly low. Last year, we counted 130 greenfield projects amounting to $4.1bn of investment – but that’s lower than the year before when it was about $5bn.
So even without Covid-19 the trend was in the wrong direction. But as we now look at where we are going into the future and reading your report; it looks pretty drastic what’s happened as a consequence of Covid-19. Can you unpack that for us?
Yes, it looks drastic. The forecast we have for before the Covid-19 pandemic was already negative 5-10% for the underlying trend worldwide. So we were already on a downward slope continuing from the last decade. It’s a difficult environment worldwide for FDI in general; but now with Covid-19 and with a forecast of a recession worldwide – the trend will be much more negative. A – for very practical reasons. All of the greenfield projects that were announced last year or announced in the final quarter of last year are on hold. It’s difficult with plant closures and physical closures of construction sites to continue investing. So a lot of projects are on hold. Capital expenditures are on hold and a lot of recently announced projects are basically shelved imminently. So we see a big decline there. It’s difficult to have hard data on this at the moment. The only country where we can really see what is happening is China because they were the first to be hit, and in China the national statistics agency showed a 25% decline in capital expenditures in the first quarter. And, one has to reckon with the fact that in reality or in the first two months of the year, that the crisis really only started midway through January and the harsh measures to mitigate or to slow down the crisis started mid-January – only in part of the country gradually, which means that the peak effect on Capex is going to be much more severe than the 25% that have been measured so far. Other data that can show how investment plans are really being shelved or postponed indefinitely is just by looking at announced M&A projects. They are usually between a thousand and 12, 13 under every month worldwide and they are just sinking now in this month that is wrapping up to about 400. So that’s on course for a 70% decline if it moves on like this. So those are just the first indications – it is really hard to put a number on it. We have simply looked at the earnings expectations for multinational companies. To look at trends in foreign direct investment worldwide, we closely monitor the top 5,000 multinational enterprises because they account for a significant share of global FDI. Just since the first of February they have shown revised earnings estimates by analysts of minus 30% over the year with peaks of minus 200% in the energy sector because of the much lower oil prices but also more than 100% downward revision basically at zero profits for a number of other consumer cyclicals for airlines for the leisure sector and big declines also for the automotive sector and other sectors that depend heavily on global supply chains. The type of firms that saw the first earnings revisions were exactly those; automotive electronics, because at first the impact was thought to be mostly a global supply chain problem when much of the pandemic, or at the time epidemic crisis, was confined to China East Asia. But now this has become a global crisis and it’s translated into estimates consensus now around the world of a global recession. It is no longer just a global supply chain problem, it is now a big issue of demand for investment worldwide.
Richard, there’s been some suggestions, particularly coming out of the United States, that the recession is going to be short and sharp and that the rebound is going to be just as strong. From the numbers that you’re talking about here, certainly 30-40% decline in foreign direct investment around the world and those earnings revisions that are coming through from the multinationals – that might suggest differently?
That could still be short and sharp and, if I look at the two types of impact on global foreign direct investment flows that I implied in what I just said; one is the impact of interruptions and production stoppages in global supply chains and the other is simply a global collapse in demand. The latter could hopefully be a short and sharp shock. It is the most severe impact for the first year. Normally a big shock in GDP or in global growth has an impact on FDI that has a time lag, so after the global financial crisis, for example, we saw that the real trough in FDI flows worldwide really was only in 2009 and 2010 with about a 30% decline in global FDI flows as a result of the global financial crisis. Now, we think that the time lag is much shorter because this year there is a physical impossibility to make capital investments already. So it’s a combination of a demand and supply shock in reality. But still – if we get the pandemic under control somehow in the course of the year world wide and if the largest markets in the world put in place policy measures that really support business, it is possible that investment projects that were put on the shelf are taken off again and that investment can recover quite quickly. Where I see more lasting implications is the other type of impact – the global supply chain impact – because there I think that one of the reasons we have had a long term negative trend in foreign direct investment is that the global environment for FDI is really being rethought at the moment. The policy environment for investment isn’t as stable as before – there is a lot more investment screening, there are more protectionist measures coming up globally on both the trade side and on the investment side and, in general with technological advances, companies are perhaps looking less for locations with low labour cost or at least putting equal weight on closeness to markets and efficiency seeking investment looking for low labour costs worldwide. So there is already a trend towards lower investment worldwide. Now, Covid-19 is just another driver of this – it could accelerate this trend because now companies are really thinking to improve their supply chain resilience in the long term. They’re really going to look at; what if this happens again, what if we get supply chain and production stoppages again that we depend on. At the moment the crisis broke out now in February and early March, supply chains in the car industry were stopped worldwide because of a lack of components coming from China and companies will be looking long term at the implications of that and perhaps replicating at home some of their production capacity.
This is really disturbing news for a country like South Africa which has a high unemployment ratio, has already got a very very weak fiscal situation and, on top of it, it’s got poor economic growth. If you were to be advising the president of South Africa who’s trying to get FDI or has identified FDI as being the one driver for economic growth into the country and it’s putting enormous amount of effort into it if you are going against the global trend – which is downwards as you explained very well – how then do you manage to buck that trend?
It’s very difficult but there are the basics which are making sure that the investment environment, policy environment and administrative environment for businesses is attractive or at least facilitating the operations of international businesses. So that’s simply the basics they need – it’s important to get them right. And in that respect, we have to look at the fact that in South Africa the trend of for example Ease of Doing Business rankings is not positive. So it’s really important to get those basics right to facilitate investment. The risk rating of the country is a factor but it is not the only factor. Foreign direct investment in real productive capacity is a very long term decision. Normally, it is quite sticky so a decision like that isn’t going to be reversed very easily. Other countries have seen downgrades of risk ratings and still attracted more investment; for example Brazil in 2016 saw a downgrade and still in the subsequent years attracted more foreign direct investments including an increase last year. But we’re talking completely different levels of foreign direct investment there – a multiple of what is going to South Africa.
Bucking the global trend is simply a question looking at what companies are looking for in future. So it is perhaps no longer just looking for low cost locations for manufacturing; it is more looking at markets, at the skill base that’s available in a country, at the links perhaps with local institutions – universities through which attractive clusters of investment can be built to produce for a region. So I think it is really important to look at the changes in the drivers of multinational enterprises, to go and look for our location abroad which is really rapidly changing.
Just as a final kind of overview of the report that you put out today; as mentioned it doesn’t make happy reading. Are you able to quantify what the number would be in the drop in foreign direct investment around the world for this year as a result of Covid-19? In other words; is there a particular number that you can pull out to say – this is what the virus has cost the world or is likely to cost the world this year?
Anywhere between R400bn and R500bn. The different global FDI flows last year were about R1.4trn and we are projecting a 30-40% drop this year at this moment under current conditions. That figure, as you have seen from the rapid succession of our assessments on this, is on its way down. So it could cost the world quite a lot already this year in global FDI flows and it might well go into next year because, as I said, the effect on foreign direct investment of the shock in GDP growth is usually a longer term effect – it takes at least a year to work itself out.
Richard Bolwijn is with the United Nations UNCTAD.
