Announced greenfield projects drop 78% in Bangladesh in H1 of 2020: UNCTAD

Announced greenfield investment projects dropped by 78% in Bangladesh in the first half of 2020, according to a report by the United Nations Conference on Trade and Development (UNCTAD). 

Greenfield investment project announcements are an indicator of future FDI trends, the report titled "Investment Trend Monitor" said on Tuesday.  

Experts think the fall is not unusual.

Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue, told The Business Standard that foreign investment situation in Bangladesh was sub-par, but there had been some re-investments.

He said the 78% fall concerned new investments.

The economist thinks there are strong reasons for the decline in investments during this period.

Global investment giants are worried about where to make fresh investments amid the uncertainty caused by the Covid-19 pandemic, said Moazzem. 

"There are scopes for attracting foreigners to re-invest in our existing manufacturing sector, including apparels, even if we do not get fresh investments," he explained.

Dr Ahsan H Mansur, executive director of Policy Research Institute, said although the big negative growth in fresh investment was worrying, it was normal.   

He said foreign investment in Bangladesh had been in a negative state even before the pandemic hit the country, although it was positive in other Asian nations.   

Confidence of big investors had declined further during the pandemic, said Ahsan. 

He said big corporations were still uncertain about where they could invest to attract consumers.  

"Greenfield project investments will fall before we can do a complete assessment of the pandemic's impact on consumers' earnings," added Ahsan.  

Apart from Bangladesh, announced greenfield projects fell by 97% in Sri Lanka, the report said.

It said global foreign direct investment (FDI) flow contracted 49% in the first half of this year compared to last year, as lockdowns around the world slowed down existing investment projects.

The decline cut across all major forms of FDI. For example, new greenfield investment project announcements dropped by 37%, cross-border mergers and acquisitions fell by 15%, and newly announced cross-border project finance deals, an important source of investment in infrastructure, declined by 25%.

The value of greenfield investment project announcements stood at $358 billion till August 2020. Developing economies faced a more severe fall (-49%) than developed economies (-17%), indicating their more limited capacity to roll out economic support packages.

On the other hand, cross-border mergers and acquisitions declined by 15% globally, while it rose by 12% in developing countries. However, it dropped by 21% in developed economies, which account for 80% of global transactions.

The number of announced cross-border project finance deals declined by 25%, with the biggest drops in the third quarter, suggesting that the slide is still accelerating.

FDI remains most important source of finance for developing countries

Despite the drastic decline, FDI remains the largest source of external financing for developing economies, although Official Development Assistance (ODA) and remittance play a relatively greater role in the Least Developed Countries (LDCs).

Remittance, the second largest source of financial flows for developing countries, was strongly affected this year by the economic downturn in developed economies where most of the migrant workers earn their income.

The overall picture of external financial flows is especially important for developing countries facing external payment problems, which may be aggravated by a prolonged downturn in FDI inflows, said the report.

Overall situation

Developed economies experienced the biggest contraction in FDI (75%) overall. The trend was exacerbated by sharply negative inflows in Europe. In North America, it fell by 56% to $68 billion.

Due to resilient investment in China, Asia's FDI inflows dropped only by 12%, while the value was 28% lower in Africa, and 25% in Latin America and the Caribbean.

However, as investment activities have started picking up in developed economies, the rate of decline in such countries is likely to flatten in the third quarter of 2020.

On the other hand, the recovery sign in East Asian countries may stabilise the declining trend in developing nations.

Country-wise, Italy experienced the highest fall (-74%) in FDI flow in the first half of 2020, followed by the United States (-61%), Brazil (-48%), and Australia (-29%).

Neighbouring India lost 29% of FDI inflow during this period.

The report said the outlook remains highly uncertain, depending on the duration of the health crisis and the effectiveness of policy interventions to mitigate the economic effects of the pandemic.

Geopolitical risks also continue to add to the uncertainty.