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Global foreign direct investment (FDI) flows picked up in 2011, in spite of economic uncertainty. QNB Group’s analysis of new FDI data suggests that there are structural reasons that are likely to further increase international capital flows in the coming years.

 

The UN Conference on Trade and Development (UNCTAD) recently published its annual report on FDI flows. The data shows that global FDI (defined as foreign investments involving an equity stake of above 10%) rose by 16% in 2011, to US$1.5trn. This is the third year of growth, and the level of annual investment is now back in line with the average seen in the years before to the global crisis, although it is still below the peak of $2trn in 2007. The sharp drop in 2009 was a result of the global credit crunch, which resulted in tight liquidity and falling asset prices, thereby causing companies to postpone FDI plans. The total stock of FDI now totals US$20.5trn, equivalent to 29% of global GDP.

 

 

enForeign direct investment flows1Some significant trends underlie the headline figures. In particular, FDI to developing countries reached a new record in dollar terms in 2011. In relative terms, they received 51% of all FDI inflows in 2011, up from 33% in 2006. (These figures include some former Soviet countries, which UNCTAD categorises as “transition countries”, within the developing countries group). In contrast to the developing countries, FDI inflows to developed countries in 2011 were still more than 40% below their peak level, although they were up 21% on 2010.

As regards outflows, developed countries are still the source of most FDI. However, the share coming from developing countries is growing, and was 27% of global FDI in 2011, up from 17% in 2007.

Looking ahead, the outlook is for further growth in FDI flows, provided that the global economy does not face another major shock. One reason for this positive outlook is the large cash pile that transnational corporations have built up over the past three years. During this period, corporate profits have remained reasonably stable, but the turbulent global economy has discouraged them from making capital investments at home and abroad.

UNCTAD estimates that transnational corporations are currently sitting on around US$5trn of cash. Of this, at least US$500bn is estimated to be in excess of their usual level of cash holdings. This excess cash could therefore be rapidly deployed to boost FDI when conditions are suitable.

An investment sentiment poll of major transnational corporations suggests that whereas more are negative than positive about the conditions for investment in 2012, the majority are positive about the outlook for 2014. As a result, global FDI flows are expected to grow to around US$1.9trn by 2014, in part because of the deployment of this excess cash, and they may even exceed the 2007 peak.

Another structural factor that could contribute to increased flows is the currently low level of FDI from sovereign wealth funds (SWF). These funds mainly make portfolio investments and only a few, such as Singapore’s Temasek and the Qatar Investment Authority (QIA), are active in taking larger ownership stakes. The total FDI stock owned by all SWFs is only about US$125bn, a tiny fraction of their total assets. A reallocation of some of their portfolio investments to FDI could have a noticeable impact on global flows.

The status of FDI in the GCC is a mixed picture. Rising hydrocarbon revenues in 2011 prompted an increase in foreign direct investments by both SWFs and companies in the GCC, totalling US$22bn. Inflows to the region, however, fell for the fourth year in a row, to US$26bn, less than half their peak in 2008. The decline is due to global credit crunch and to the suspension and cancelation of various major construction projects in the region.

However, FDI inflows to the region are likely to pick up again in the future. This is because there is a large pipeline of projects planned, particularly in Qatar, which will be partly financed with FDI.

The FDI potential index which UNCTAD produces to assess countries’ attractiveness as destinations for FDI implies that the GCC is currently receiving fewer inflows than might be expected. Kuwait and Bahrain, in particularly, have been attracting considerably less FDI in recent years than implied by ranking for potential. Qatar is also expected to see an increase, as it ranks 1st in the world in terms of market attractiveness, a key component UNCTAD’s index.

 

 

enForeign direct investment flows2

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