ISLAMABAD: A modest increase in foreign direct investment (FDI) flows in 2024 appears possible, as projections for inflation and borrowing costs in major markets indicate a stabilisation of financing conditions for international investment deals, says the Investment Trends Monitor.

Published by the UN Conference on Trade and Development (UNCTAD), the monitor, however, says significant risks persist, including geopolitical risks, high debt levels accumulated in many countries, and concerns about further global economic fracturing.

The report says FDI flows in 2023, at an estimated $1.37 trillion, showed a marginal increase of three per cent over 2022, defying expectations as recession fears early in the year receded and financial markets performed well.

Economic uncertainty and higher interest rates, however, did affect global investment. The headline increase was due largely to higher values in a few European conduit economies; excluding these conduits, global FDI flows were 18pc lower.

Report says significant risks persist, including geopolitical and high debt levels in many countries

In developed countries, FDI in the European Union jumped from negative $150 billion in 2022 to positive $141 billion because of large swings in Luxembourg and the Netherlands. Excluding those two countries, inflows to the rest of the EU were 23pc down, with declines in several large recipients. Inflows in other developed countries also stagnated, with zero growth in North America and declines elsewhere.

FDI flows to developing countries fell by 9pc, to $841bn, with declining or stagnating flows in most regions. FDI decreased by 12pc in developing Asia and by 1pc in Africa. It was stable in Latin America and the Caribbean as Central America bucked the trend, the report says.

International investment project announcements, including greenfield, mainly industry, project finance, mainly infrastructure, and cross-border merger and acquisitions (M&As), were mostly in negative territory.

International project finance and M&As suffered the most from higher financing costs in 2023, with 21pc and 16pc fewer deals, respectively. Greenfield project announcements were also 6pc lower in number. However, they were 6pc up in value and showed higher numbers in manufacturing in an initial sign of recovery following a long-term declining trend.

In developed regions, international investment project announcements were down across the board. M&A values were $280bn lower than in 2022, directly depressing FDI flows. Project finance deals were $157bn lower. Lower values of greenfield project announcements will affect 2024 FDI flows.

In the United States, the largest FDI recipient, FDI inflows in 2023 were down by 3pc, greenfield project numbers by 2pc and project finance deals by 5pc. China reported a rare decline in FDI inflows by 6pc, but showed growth in new greenfield project announcements by 8pc.

Trends by industry in 2023 show project numbers rose in global value chain (GVC) intensive sectors by 16pc, especially in automotives, textiles, machinery, and electronics. The number of newly announced greenfield projects in semi-conductors fell by 10pc (39pc in value) after the strong growth in 2022.

The number of greenfield project announcements and international project finance deals in infrastructure industries including transport, power, water, telecommunications fell by 4pc overall, largely driven by lower project finance in renewable energy.

New international project finance deals in the renewable energy sector fell by 17pc in number and 10pc in value, only marginally less than the overall project finance decline. The decline in the number of new projects was the first since the Paris Agreement in 2015.

The number of international investment projects announced in developing countries in sectors relevant to the SDGs — including infrastructure, renewables, water and sanitation, food security, health and education — remained flat.

Published in Dawn, January 21st, 2024