Economy

Foreign direct investment will sharply fall in Latin America

The World Investment Report 2020 shows that FDI flows to the region are expected to halve this year due to COVID-19

Image: Shutterstock
  • The region will be under severe pressure this year as a result of the coronavirus pandemic;
  • The low oil and commodities’ prices will hurt investment in major economies in South America;
  • Early indicators show a decline of 36% in the number of new announced greenfield projects in the first quarter of this year.

Foreign direct investment flows to the Latin America are expected to halve in 2020 from the $164 billion received last year, according to UNCTAD‘s World Investment Report 2020.

READ ALSO: Facebook launches WhatsApp Pay in Brazil

The region will be under severe pressure this year as a result of the COVID-19 pandemic. Since flows to developing countries will be hit especially hard, as export-oriented and commodity-linked investments are among the most seriously affected, the ones directed to emerging countries will have a different impact across sectors, with commodities, tourism and transportation among the most severely hit, according to UNCTAD’s director of investment and enterprise, James Zhan.

“The pandemic compounds both political and social unrest and structural weaknesses, pushing the region’s economies into a deep recession and exacerbating challenges in attracting foreign investment,” he said.

READ ALSO: Mexico and Colombia-based real estate startup La Haus raises $16 million in Series A funding

The low oil and commodities’ prices will hurt investment in major economies in South America such as Colombia, Brazil, Argentina, Chile and Peru, that depend on foreign direct investment in extractive industries.

Other economies, especially those in the Caribbean, will be hit hard by the collapse in tourism and the halt to investment in the travel and leisure sector. According to the research, in manufacturing, automotive and textiles, two important industries in the region, are suffering both supply and demand shocks. Central America and the Caribbean might see some new international investment to expand the production of medical equipment.

Decline in greenfield projects

Early indicators show a decline of 36% in the number of new announced greenfield projects in the first quarter of this year, according to the survey. However, this is still a conservative projection as most of the impact on projects will be evident from April, after the lockdown, as shown by the trend of cross-border deals.

The number of foreign acquisitions in the region decreased every month with respect to the average number in 2019 to eventually drop by 78% in April.

The report also ponders that in the medium term, the implications of the pandemic for foreign investment flows to the region will depend on the severity of the economic contraction and the speed of the recovery.

As many countries in other regions are starting to ease confinement measures, many in Latin America and the Caribbean are still on an upward slope of contagion, some of them at the beginning of their winter; this could prolong the health crisis and the related economic struggle.

Summing up, the region’s economies will be strongly affected by the slowdown in global demand, particularly in their trade partners, notably China and the United States.