Tuesday, 21 February 2017 Sydney

FDI in 2016: Weak global flows but a strong Australian performance::

UNCTAD have released their preliminary estimates (pdf) for global foreign direct investment (FDI) flows in 2016. The numbers show that total flows dropped by 13 per cent last year, falling from US$1.75 trillion in 2015 to US$1.52 trillion in 2016. That soft performance is in line with the 2016 outcomes for world GDP and trade growth, which were also quite weak.

UNCTAD still expects that FDI flows will rebound this year on the back of stronger forecast global growth and healthier world trade, with 2017 FDI projected to increase by about ten per cent in value terms. That said, the agency also cautions that there is ‘substantial uncertainty about the shape of economic policies in the near-future, especially in developed economies, which may serve to dampen FDI’.

The reported decline in FDI inflows last year occurred in both developed and emerging economies, with flows into developed economies falling by nine per cent to reach US$872 billion, while inflows to developing and transition economies were down more sharply, dropping by about 17 per cent, to US$652 billion[1]. Developed economies received about 57 per cent of total FDI inflows by value last year, their highest share since 2007.

By region, FDI inflows into Europe fell significantly (down US$157 billion, or 29 per cent) in 2016. Note, however, that within that European total, FDI flows to the United Kingdom increased by almost sixfold, rising from US$33 billion in 2015 to an estimated US$179 billion in 2016, due to a surge in cross-border merger and acquisition (M&A) ‘mega-deals’[2].

Other regions that experienced a sizeable decline in FDI inflows last year included developing Asia (down US$115 billion or 22 per cent) and Latin America and the Caribbean (down US$32 billion or 19 per cent).

Meanwhile, FDI inflows to ‘other developed economies’ jumped by 138 per cent or US$43 billion in 2016, driven by strong inflows into Australia and Japan.

According to UNCTAD, the United States and the United Kingdom were the two most popular country destinations for FDI in 2016, followed by China and Hong Kong SAR.

While estimated total FDI flows were down, worldwide cross-border M&A activity reached a new post-2007 high last year, rising to US$831 billion. That increase of 13 per cent was much smaller than the previous two years’ worth of growth however, (with cross-border deals up 67 per cent in 2014 and 68 per cent in 2015) prompting UNCTAD to suggest that the recent big wave of international M&A activity may now be ebbing. The value of greenfield FDI was also up last year, rising by five per cent to US$810 billion. But this increase was driven a ‘handful of very large investments in a small number of countries’ that served to mask what was otherwise a general worldwide decline in new investment activity.

Finally, and as noted above, the new UNCTAD numbers suggest that 2016 was a strong year for FDI into Australia. According to UNCTAD, estimated inflows more than doubled last year to reach US$44 billion. This surge in investment has reversed the relatively soft performance in 2015, and has also seen Australia return to the ranking of top ten FDI host nations after a one year absence.

While the Australian Bureau of Statistics (ABS) isn’t scheduled to release Q4:2016 balance of payments data until 28 February, and we won’t get any details on country or sectoral FDI breakdowns until May this year, these new estimates are consistent with the upbeat story told by the data that we have already seen for the first three quarters of 2016, which depict the strongest performance for several years.

Although note that within this aggregate, FDI inflows to transition economies jumped by 38 per cent, rising from US$38 billion in 2015 to US$52 billion last year. This only partially offset a 20 per cent decline in the value of FDI inflows to developing economies, however, which dropped from US$749 billion in 2015 to US$600 billion last year.
[2]  Including the US$101 billion acquisition of SABMiller by Belgium’s Anheuser-Busch and the US$32 billion purchase of ARM Holdings by Japan’s SoftBank Group.