The exporters’ crisis is contributing to a significant shift in investment patterns across the globe. China’s economic slowdown, coupled with lower world commodity prices, has led export-dependent countries to experience serious economic crises. Geopolitical Futures has outlined what, in our view, are the top 10 victims of the exporters’ crisis, as well as the five most vulnerable countries. But the exporters’ crisis has not only impacted revenues, currency values and trade volumes: foreign direct investment (FDI) is moving away from formerly attractive export giants and toward Europe, the United States and India. Over the coming year, we expect Latin America to also become a sought-after destination for foreign investment as Eurasia’s crises deepen.
Foreign investment levels in export-dependent countries fell dramatically in 2015. Data from the United Nations Conference on Trade and Development shows that in Russia, one of the countries most hurt by the exporters’ crisis, FDI fell by 92 percent in 2015. In Africa, commodity exporter South Africa experienced a 74 percent fall in FDI, while Nigeria saw FDI decline by 27 percent. When it comes to China, the situation is more nuanced. Overall, FDI to mainland China has increased by 6 percent, but FDI flowing to the manufacturing sector has declined, as the services sector drives the overall increase in investment levels.
Investors are abandoning these exporters, or at least holding off on new investments, primarily for two reasons. First, much foreign investment was concentrated in the commodity sector. With reduced world commodity prices, there is much less incentive to continue investing in the sector. Second, the exporters’ crisis has led to internal economic disruptions, which in some cases have already led to protests and instability. On one hand, exporting countries are making efforts to implement privatization programs and attract investment in order to plug holes in budgets that formerly relied on export revenues. On the other hand, emergency measures to stem financial problems have made exporting countries less predictable and attractive for investors. For example, Nigeria and Angola have both introduced restrictions in foreign exchange markets. Deteriorating economic conditions and currency fluctuations have led to small protests in Russia and Kazakhstan, as well as more significant demonstrations in Azerbaijan.
The UN data indicate that over the past year, as FDI decreased in export-dependent countries, it increased in three areas. First, Hong Kong saw a boost, which is likely in part due to concerns over economic conditions in mainland China, but much of the increase is a result of inversion deals and corporate restructuring. Second, FDI flows to the European Union and the United States increased. Much of this growth came from mergers and acquisitions, and was motivated in part by low interest rates. In fact, last year FDI in the U.S. was at its highest point since 2000. And third, FDI flows to India nearly doubled in 2015. Investors were likely attracted to India because it is an emerging market working to implement reforms, but has not been affected significantly by the woes of commodity export-dependent countries.
In our forecast for 2016, we projected that reforms and relative stability would improve Latin America’s investment prospects, especially at a time of crisis in the Eastern Hemisphere. Last year, according to the UN data, FDI in Latin America declined by more than 11 percent. Nevertheless, the statistics indicate that already some countries are making headway in becoming more attractive destinations for investment. Equity investments led to an increase of 11 percent in FDI flows to Peru, while foreign investment in Mexico increased by 14 percent.
The U.S. and Latin America will likely become preferred destinations for investors. The Western Hemisphere is relatively stable, while political shifts in Latin America will over time transform the region’s economies. Eurasia, on the other hand, is in crisis. The European Union’s fragmentation and Italy’s banking problems threaten the eurozone’s stability and highlight the erosion of EU institutions’ ability to effectively address crises. While some European Union countries will continue to attract investor interest, investment in the region as a whole will likely stagnate or decline. Meanwhile, China’s economic troubles, coupled with Beijing’s efforts to maintain centralized control, will continue and will undermine efforts to elicit significant new investment flows to China.
As exporters experience economic disruptions, foreign investment patterns are shifting away from some export-dependent countries. China’s economic decline and continued low world commodity prices are making exporters increasingly vulnerable. But as export growth rates slow down, and as exporters grapple with the domestic implications of their economic troubles, investors are becoming interested in other markets. This shift will have far-reaching consequences, both for exporters and for countries now enjoying new interest from investors as more stable and attractive destinations for foreign direct investment.