THE coronavirus 2019 (Covid-19) outbreak could slash up to 15 percent of global foreign direct investments (FDI) if the spread continues for the rest of the year, according to the United Nations Conference on Trade and Development (Unctad).
In a special issue of its investment trade monitor, Unctad said if Covid-19 is controlled in the first semester of the year, FDI will decline 5 percent.
Unctad said countries closely integrated in global value chains, such as China, Korea, Japan, and the rest of Southeast Asia may be significantly affected.
“The impact on FDI will be concentrated in those countries that are most severely hit by the epidemic, although negative demand shocks and the economic impact of supply chain disruptions will affect investment prospects in other countries,” Unctad said.
Unctad said a 15 percent contraction in FDI would likely cut GDP growth by 1.5 percentage points in affected countries.
The primary impact on the global economy, Unctad said, would be delayed investments due to the global demand shock.
“As such, the Covid-19 outbreak will potentially accelerate existing trends of decoupling—the loosening of GVC ties—and reshoring driven by the desire on the part of MNEs (multinational enterprises) to make supply chains more resilient,” Unctad said.
Covid-19 would likely cause production stoppages in the manufacture of various goods which could also lead to disruptions in GVCs.
Automobiles
One example, Unctad said, is the stoppage in production of the Fiat 500L model by Fiat Chrysler automobiles. The temporary halt in production was due to the disruption of audio system components from China.
The UN agency said currently, over two thirds of the multinational enterprises (MNEs) in Unctad’s Top 100 have already issued statements on the impact of Covid-19 on their business.
“Many are slowing down capital expenditures in affected areas. In addition, lower profits—to date, 41 have issued profit alert—will translate into lower reinvested earnings—a major component of FDI,” Unctad said.
However, Unctad said ongoing greenfield investment projects will likely be more insulated from the contagion given that these projects have a long gestation period.
Philippine exports
Last week, Unctad said the Philippines’s exports are estimated to fall by roughly $300.4 million due to the spread of the coronavirus.
Exports of communication equipment could go down by $115 million, the Unctad projected, on disruption in the global value chains caused by factory closures in China, where the respiratory illness was first detected.
Further, shipments of office machinery are seen to drop by $76.8 million, while those of electrical machinery are anticipated to slide by $41.8 million. The Unctad also projected Philippine exports of auto parts and various machinery to decrease by $22 million and $16.9 million, respectively.
Export losses in precision instruments could decline, too, by $16.6 million, and damage is to be expected as well in chemicals, metals, leather goods, rubber and plastics, wood products and furniture, textiles and apparel, and paper products and publishing, although they will be in the single digit level, the Unctad estimated.
ADB: PHL to be hit hard
Last Friday, the Asian Development Bank (ADB) said the Philippines will be among the most affected Developing Member Countries (DMCs) by Covid-19 because of its “strong trade and production linkages” with China.
In the hypothetical worst-case scenario, the Philippine economy stands to lose $5.52 billion. This scenario takes into account that Covid-19 will continue for six months and an outbreak in other DMCs will last for three months, as well as a 2-percentage point decline in personal consumption expenditures in China; a 2-percentage point drop in China investments; and a 2-percentage point decline in the country’s domestic consumption.
The bulk of the cost will be borne by business, trade, personal and public services worth $2.44 billion, followed by light/heavy manufacturing, utilities, and construction worth $1.19 billion.
Other sectors that will be affected are hotels and restaurants and other personal services which will account for $767 million of the losses; transport services, $586 million; and agriculture, mining and quarrying, $543 million.