ECLAC: Latin America will have the biggest drop in FDI in the world

The Economic Commission for Latin America and the Caribbean (ECLAC) projected that Latin America will have the largest drop in arrivals of Foreign Direct Investment (FDI) among all world regions in 2020.

The Latin America and the Caribbean region is expected to experience the greatest decline, with a projected fall in FDI of between 40 and 55% in 2020.

Much of the FDI in the region is concentrated in the extractive industries, which represent an important part of the total FDI in Argentina, Brazil, Chile, Colombia and Peru.

According to ECLAC, Latin America and the Caribbean received 160,721 million dollars in FDI in 2019, which represented 7.8% less than in 2018.

«(This fall) would worsen in 2020, since as a consequence of the crisis derived from the Covid-19 pandemic, a decrease of between 45 and 55% in the entry of these flows is expected,» said ECLAC.

Globally, the amounts of FDI would fall by 40% in 2020, and from 5 to 10% in 2021.

Perspectives

The combination of the collapse in oil prices and the demand shock from the pandemic affecting the prices of most commodities is lowering FDI forecasts in this region more than elsewhere.

According to UNCTAD, relatively weak starting conditions due to structural vulnerabilities and political uncertainty also make the region more exposed to shock.

Investment flows to the region are expected to halve in 2020 from the $ 164 billion received last year.

The pandemic arrived relatively late in the region and exacerbated political and social unrest and structural weaknesses to push the region’s economies into a deep recession, exacerbating challenges in attracting foreign investment.

ECLAC

Since 2012, when the historical maximum was reached, the fall in foreign investment flows has been almost uninterrupted in Latin America and the Caribbean, which has made evident, mainly in the countries of South America, the relationship that exists in the region between FDI flows, the macroeconomic cycle and commodity price cycles, says ECLAC.

As in previous years, a study by ECLAC shows great heterogeneity in the national results and there is no subregional pattern: in 17 countries there is a drop in inflows in 2019 compared to 2018 and in nine countries there is an increase.

In 2019, the five countries that received the most investment were Brazil (43% of the total), Mexico (18%), Colombia (9%), Chile (7%) and Peru (6%).

Central America

In this subregion, FDI inflows grew only in Panama and Guatemala.

In the Caribbean, FDI directed to the Dominican Republic overcame the fall of the previous year, Trinidad and Tobago registered positive investments after three years of negative balances and in Guyana, as in 2018, there was a very important year-on-year increase, driven by investments for the exploitation of hydrocarbons and related sectors, capitals that positioned the country as the second recipient of FDI in the subregion.

When analyzing the period 2010-2019, Europe is consolidated as the most important investor in the region, followed by the United States. Intraregional investments, meanwhile, are reduced from 12 to 6 percent.

On the other hand, the ECLAC report highlights the renewable energy sector as the sector with the highest number of project announcements in the last five years.

Trends

Regarding the behavior of Latin American transnational companies, known as trans-Latins, the ECLAC publication reports an increase of 75% in the outflow of FDI from the region in 2019. However, if the decade 2010-2019 is analyzed, it is observed that Latin American investment has lost steam, according to the Commission.

“The contributions made by FDI in the region have been relevant, as a complement to national investment and a source of new capital, as well as for the expansion of export activities and the development of the automotive industry, telecommunications, some segments of the digital economy and also of sectors that today acquire strategic importance in the context of the Covid-19 pandemic, as is the case of the pharmaceutical and medical device industries ”, highlights the ECLAC study.

However, the structural problems of the region’s economies and the new international scenarios also make it necessary for FDI and the policies to promote it to be part of a broader project that promotes progressive structural change, that is, a change that allows increasing productivity and achieve social inclusion, equality and environmental sustainability, highlights ECLAC.

“The FDI received by Latin America and the Caribbean has not catalyzed relevant changes in the productive structure of the region, largely because the policies to attract these flows have not been coordinated with those of productive development. FDI offers great opportunities to advance towards a new sustainable economy ”, declared Alicia Bárcena, executive secretary of ECLAC. «It is urgent to recover the role of industrial policies as an instrument of transformation of the productive structure of the region,» she remarked.

Choices

Bárcena recalled that ECLAC has identified seven dynamic sectors that have a strategic role because they promote technical change, create jobs and reduce external restrictions and the environmental footprint. These sectors, which could be underpinned by FDI, are: transformation of the energy matrix based on renewable energies; sustainable mobility and urban spaces; digital revolution for sustainability; health manufacturing industry; bioeconomy, that is, sustainability based on biological resources and natural ecosystems; the circular economy; and sustainable tourism.

Opportunities

In the second chapter of the report, entitled “Towards a new post-pandemic global productive geography: the reorganization of global value chains”, ECLAC poses as challenges for the region to contain the pressure of national relocation (reshoring) towards the United States, to capture the Relocation opportunities that would make it possible to strengthen regional production systems (nearshoring) and articulate strategies to attract FDI with industrial policies to create local capacities.

Finally, the third chapter indicates that Latin America and the Caribbean have achieved a good export position in medical devices, driven precisely by transnational companies, with the case of Mexico, Costa Rica and the Dominican Republic standing out.

“In Latin America and the Caribbean, the Covid-19 crisis shows the growing importance of stimulating regional cooperation and the development of a regional market for health and medical devices and cross-border industrial centers. The medical device industry requires manufacturing, scientific and technological capacities that are present in several countries in the region and whose potentialities were revealed in the face of the health emergency. The development of national industrial and technological capacities and the improvement of access to medical devices for the inhabitants of Latin America and the Caribbean is a strategic challenge, and to face it successfully, national and regional policy guidelines will be required ”, concludes the document of the Cepal.