The changing dynamic of FDI

By Laza KekicEconomist Intelligence Unit

Vienna, May 14th 2012

Outline

1. Emerging markets and the growth outlook

2. Differentiation in performance among emerging markets

3. Risks to the outlook

4. Changing FDI patterns

5. FDI and political risk

Emerging markets resilience during crisis

• Early 2008-2009 very sharp falls in trade, commodity prices, capital inflows; fears of global meltdown

• However, no emerging market crisis and performance was far better than expected

• Growth acceleration in 2010 and 2011• Normal rule – ‘when the rich world sneezes,

emerging markets get flu’; but not any more; partial ‘decoupling’ from developed world

• Better fundamentals than in earlier crises; debt/GDP ratio of 20 largest ems half of that of 20 richest nations. Will be one third by 2016

• Accelerated shift in economic power to East

Surging ahead

-10 0 10 20 30 40 50 60

UK

France

US

Japan

Germany

South Africa

Russia

Turkey

Brazil

India

China

Sources: National governments, Haver, EIU

The cost of the crisisDifference, in % terms, of real output per head before the recession started in 2007 compared with 2012 (forecast)

%

Where’s the growth?

-8

-4

0

4

8

China

India

Mid

dle

East

ASEAN

Africa

Latin

Am

eric

aCIS

E Eur

ope US

Japan

Euro

zone

2010 2011 2012

Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of April 2012. Source: Economist Intelligence Unit, CountryData.

Key stuctural points

• Emerging markets the place to be Favourable costs; rising

productivity Generally young populations Slowly shifting to reliance on

domestic demand Competitive multinational

companies• Rich countries: slower growth

Battered financial sectors Fiscal austerity Poor demographics

Contribution to global growth, %

0

10

20

30

40

50

60

70

80

1991-2000 2001-2008 2012-2016

Developed

Emerging markets

BRICs

China

Real GDP growth, %

0

1

2

3

4

5

6

7

8

2001-08 av 2009-2011 2012-2016

Developed

Emerging markets

Eastern Europe

Developing Asia

Latin America

Middle East and NorthAfrica

Sub-Saharan Africa

Emerging markets regions

• Asia: will continue to enjoy the fastest growth; regional growth driven by China and India; strong exports; high rate of domestic savings. Most attractive for FDI among ems.

• Eastern Europe: hit very hard by crisis in developed world; impact of EU membership less than hoped; becoming less attractive for foreign investors; Russia still dominates.

• Latin America: Fundamentals better than in the past. But still heavy dependence on primary commodities; low domestic savings.

• MENA: good business in parts of MENA on the back of high oil prices. But political turmoil and uncertainty, huge commodity dependence and questions about growth sustainability.

• Sub-Saharan Africa: fastest growth in decades but dependent on commodity prices; South Africa and Nigeria account for 60% of regional GDP – minus South Africa the rest is the size of Austria.

Key risks to the outlook

• The global economy falls into prolonged recession

• Sovereigns default as public debt spirals out of control

• Euro zone breaks up• China’s economy experiences a hard landing• Social and political unrest• Protectionism takes hold• Geopolitical shocks

Changing global FDI patterns

Sharp decline in global FDI in 2009 (34% in US$ terms); weak recovery in 2010, stronger in 2011

For the first time ever in 2010 emerging markets attracted over 50% of global inflows

Not only because of differential impact of recession Impact of improving business environments Increasing competitive pressure on companies

increase opportunity cost of not going into more dynamic and lower-cost destinations

EIU surveys: strong positive link between firm performance and presence in emerging markets

Increased outward FDI by emerging markets; disproportionate share to other emerging markets

Global FDI inflows (% of GDP)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Global FDI inflows (US$ bn)

0

200

400

600

800

1,000

1,200

1,400

1,60020

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

12

Developed

Em markets

Inward FDI flows, US$, % change

-50

-40

-30

-20

-10

0

10

20

30

40

50

2009 2010 2011 2012

World

Emerging markets

Eastern Europe

Developing Asia

Latin America

Middle East and NorthAfrica

Sub-Saharan Africa

Small em club (FDI inflows, US$ bn)

0

50,000

100,000

150,000

200,000

250,000

Ch

ina

Bra

zil

Ru

ssia

Ind

iaS

aud

iA

rab

iaM

exic

o

Ind

on

esia

Tu

rkey

Co

lom

bia

Ch

ile

Kaz

akh

stan

Po

lan

d

2011

Medium-term FDI outlook 1

• The positivesBack to growth Competitive pressuresImprovements in business environments in

some countries• But constraining factors

Policy tighteningPolitical risksFinancial sector weakness

• Downside risks Global macroeconomic imbalancesCommodity markets volatilityProtectionism

Medium-term FDI outlook 2

• Global recovery from recession sluggish and fragile; no quick return to pre-2008 trend

• Global FDI inflows will recover slowly• Supply side damaged by recession; appetite

to invest in new plant and equipment is down• Weakened banks and tighter regulation will

dampen foreign capital flows; will affect FDI too, although less seriously than other forms of flows

• South-South FDI will be more resilient• Medium-term FDI flows to ems to decrease

from previous boom-period 3.5-4% of GDP to about 3% of GDP at most

FDI and political risk

• Despite global macroeconomic concerns, political risk is still near the top of the list of perceived constraints on investment into emerging markets.

• The economic crisis has brought to the forefront again some traditional concerns for investors in emerging markets, including the risk of the non-honouring of contracts and transfer and convertibility risk.

• Some surveys also reveal a significant concern about the risk of conflict and civil disturbances.

• Risk of trade and FDI protectionism around the world in response to the global crisis.

EIU-MIGA definition of political risk

• Covers breach of contract by governments; adverse regulatory changes by governments; restrictions on currency transfer and convertibility; expropriation; political violence; non-honouring of sovereign guarantees.

• Political risk measure based on EIU Risk Ratings and EIU-MIGA definition (based on the ratings of the risk of armed conflict, terrorism, violent demonstrations, social unrest, various measures of governmental instability, external tensions, enforceability of contracts, expropriation, and the risk of the imposition of current and capital account controls).

Political risk, 2008-2012, EIU measure

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2008 2009 2010 2011 2012

Emerging markets

Eastern Europe

Developing Asia

Latin America

Middle East and NorthAfrica

Sub-Saharan Africa

Economic weakness and political risk

• Clear trend of rising political risk since 2008• Interplay of underlying vulnerabilities and

economic weakness.• Political instability and social unrest follows

economic downturns with a lag.• Severe social impact in many countries,

primarily in the form of rising unemployment.• Increases in the number of people in poverty

and reduced size of the middle class in some.• Weak state of many countries' politics. Support

for democracy is fragile in many regions; public trust in institutions is low.

• Reduction in access to foreign funding and unpopular austerity policies.