Foreigners Halved Investments in Brazil in 2020, Says UNCTAD

RIO DE JANEIRO, BRAZIL – Ford’s decision to close plants in Brazil was only the tip of the iceberg, and the national economy is experiencing one of the sharpest declines in direct investment among emerging countries.

On the eve of the start of the World Economic Forum on Sunday, January 24th, the United Nations Conference on Trade and Development (UNCTAD) released data showing that foreign direct investments in Brazil in 2020 recorded a 51% drop compared to the 2019 figures. The reduction is higher than the average global decline but not as bad as in developed countries.

“In Brazil, foreign investment decreased to US$33 billion, while the privatization program and infrastructure concessions stopped during the pandemic crisis,” stated UNCTAD.

“The most affected industries were transport and financial services, with inflows dropping by over 85% and 70%, respectively, and the oil and gas and automotive industries, both of which registered a (preliminary) drop of 65% in flows,” explains the UN.

James Zhan, UNCTAD’s representative, warns that Brazil’s rebound may be slow, given that a sharp drop in investment in new production plants has been recorded. According to him, this would be an indication that the rebound will not occur immediately, even with the end of the pandemic.

“The recession and the shock caused by the pandemic impacted investments in Brazil and in the region. We saw production affected,” he said. “In the short term, it may take longer for Brazil to rebound, compared to other parts of the world, such as Europe,” he said.

However, in the long term, there is hope that the restructuring of production chains around the world may also lead to greater regional integration in Latin America, with opportunities for investment and diversification in the technology sector.

But among the world’s major economies, only four experienced even deeper declines than Brazil in 2020: the UK, Italy, Russia and Germany.

The volume of investment is only not lower than it was in 2009, when the global financial crisis also rocked the flows to Brazil and totaled only US$26 billion.

Nevertheless, the country closed 2020 as the fifth largest recipient of foreign investments in the world, topped by India, Singapore, USA and China. In 2011, a decade ago, Brazil was already the fifth largest recipient.

Overall, 2020 recorded a collapse in global investment, with a drop of 42% and a total of US$859 billion. In 2019, the volume had reached US$1.5 trillion. Data for 2020, therefore, show that flows are 30% below the minimum after the global financial crisis in 2009. The pandemic has further pushed investments to their lowest level in 25 years.

Latin America fails to cope

Brazil was not the only country unable to withstand the pandemic. Overall, Latin America experienced a 37% drop, with a total of US$101 billion. According to the UN, the region is experiencing “one of the deepest recessions in the whole developing world”. “Investments in oil-related industries and market demand flows have declined sharply. Among the larger economies, only Mexico has experienced a decline of less than 10%, due to resilient reinvested profits,” he said.

Flows to Peru, Colombia and Argentina fell by 76%, 49% and 47%, respectively. In Chile, flows dropped 21% to US$8.9 billion.

Investments in wealthy countries “dried up”

But not all suffered equally. On average, wealthy countries experienced a 69% decline, with a total of US$229 billion. Of the global US$630 billion decline, nearly 80% was recorded by developed economies.

“The flows to Europe have dried up completely,” said the organization, which points to a US$4 billion resource flight. In the United Kingdom, investments were zero, while there was a US$150 billion disinvestment in the Netherlands and Switzerland.

Considering the 27 EU countries, the drop stood at 71%, with a total investment of US$110 billion. In Germany, the volume dropped from US$58 billion in 2019 to US$23 billion in 2020. Similar declines were also recorded in Italy, while France saw a 39% slump to US$21 billion.

A sharp drop was also recorded in the United States (-49%) to US$134 billion.

Emerging economies have withstood the strain, particularly in Asia. The drop in investments in developing countries stood at 12% and, in total, the bloc added US$616 billion.

With this change, the share of developing economies in global investments reached 72% – the highest share record.

China topped the ranking of the largest investment recipients, outperforming all wealthy economies. The year also closed with a 4% increase in the flow to China. In total, the country attracted US$163 billion in flows, placing the USA second.

However, the biggest leap was registered in India which, in full pandemic, saw investments increase by 13%, driven by the digital sector.

Flows dropped in the Russian Federation from US$32 billion in 2019 to US$1.1 billion due to the Covid-19 crisis. “In addition, low international demand for crude oil and a price conflict with other major producers in April 2020 pushed prices to historically low levels, exerting a downward pressure on investments in the oil sector,” the UN reported.

Rebound: only in 2022

With insufficient vaccines and uncertain economic policies, the UN estimates that investment flows will only rebound in 2022. By 2021, there could be a further contraction of up to 10%, with “continued downward pressure”. The 35% drop in new investment in production in 2020 suggests that there is still no prospect of a turnaround in industrial sectors. In Latin America, this drop stood at 51%.

One of the hopes is the infrastructure sector, as well as business in the technological and pharmaceutical industries.

But for developing countries, the trends are “a major concern”. “These types of investment are crucial for the development of productive capacity and infrastructure and, therefore, for the prospects of a sustainable rebound,” he says.

According to the UN, the risks related to the latest pandemic wave, the pace of implementation of vaccination programs and economic support packages, fragile macroeconomic situations in major emerging markets and uncertainty about the global political environment for investments will continue to impact investments in 2021.