UNCTAD: Foreign investment faces U-shaped recovery

A recent report from the United Nations Conference on Trade and Development (UNCTAD) reveals that global foreign direct investment (FDI) flows are anticipated to undergo a U-shaped recovery, remaining weak throughout 2021. The UN agency has expressed deep concern about this year's FDI prospects for developing countries, especially in East Africa. CNBC Africa had the opportunity to speak with James Zhan, the Director for Investments and Enterprise at UNCTAD, to delve into the details of this important issue. The COVID-19 pandemic has had a significant impact on FDI, exacerbated by low commodity prices and the demand for raw materials. These are additional challenges for the region, compounding the disruption to global supply chains and the operations of foreign affiliates in East Africa. Preliminary data from UNCTAD indicates that FDI flows to East Africa decreased by 21% in 2020, amounting to an estimated $6.2 billion compared to $7.8 billion in 2019. Despite these setbacks, some countries in East Africa fared better than others during the pandemic. For instance, Ethiopia experienced a 17% decline in FDI inflows but still attracted a significant amount of $2.1 billion, mainly in the manufacturing, agriculture, and hospitality sectors. Similarly, Mozambique saw a 6% decrease in FDI to $2 billion, reflecting the resilience of planned investments totaling $20 billion. However, the picture was starkly different in Europe, where FDI flows nearly ceased, with the European Union suffering a $2.3 billion reduction. Looking ahead, global FDI volumes are expected to remain weak in 2021, with a potential rebound only in the latter part of the year and substantial growth projected for next year. Unlike the V-shaped recovery forecasted for global GDP and trade, FDI is anticipated to follow a U-shaped recovery due to time lags in the sector. The volume of FDI is crucial for economic recovery in the region, particularly in open economies like those in East Africa. Key countries such as Kenya, Ethiopia, Mauritius, and Rwanda heavily rely on FDI for economic growth and job creation. Various sectors are attracting FDI into the region, with a notable shift towards investment in sustainability and the digital economy. Traditional sectors like natural resources and extractive industries continue to draw FDI, alongside the rising importance of processing commodities and increasing efficiency in exports. Opportunities in horticulture, garments, food, travel goods, and infrastructure have gained momentum, with a recent focus on personal protective equipment (PPE) due to the pandemic. The region's transition towards green and blue economies will likely drive future FDI inflows, along with investments in the digital economy, ICT, finance, and infrastructure. Impact investments and sustainable development initiatives, involving equity, green bonds, and social bonds, are also poised to play a significant role in attracting FDI to the region. The policy environment significantly influences FDI inflows, ensuring that investments positively impact the country and its population while minimizing adverse effects. Regional agreements like the Continental Free Trade Agreement and investment protocols play a crucial role in promoting and facilitating investment in East Africa. Despite challenges and potential competition, Africa's potential in attracting FDI remains high. Improving investment policies to focus on sustainable development can attract substantial FDI into green and blue economy projects and vital public service infrastructure. The outlook for FDI in 2021 remains uncertain, with the rapid rollout of COVID-19 vaccines offering a glimpse of hope for increased activity. However, immediate prospects for FDI in Africa may still be challenging, with investment announcements and project finance experiencing significant declines, impacted by the ongoing effects of the pandemic.