Investment outlook

ARTICLE: In these times of great uncertainty about economic outlook of countries in the wake of the pandemic, at least in the next year or so or until an adequate vaccine for Covid-19 is discovered, investment outlook also remains quite weak, especially for developing countries where, according to a recently released report by World Bank Group: "More than two-thirds of multinational investors in developing countries are reporting disruptions in supply chains, declines in revenues, and falls in production as a result of COVID-19 - and the impacts are projected to worsen in the coming months - based on a new World Bank survey on the impact of the pandemic."

While the same report titled 'Global Investment Competitiveness Report 2019/2020: Rebuilding investor confidence in times of uncertainty" points towards this uncertainty being an important causal factor in the significant drop in investment outlook, it indicates that trends of investment over some time were showing a decline. In this regard, the Report highlights, "Even before the COVID-19 outbreak, global foreign direct investment (FDI) was in decline due to trade policy uncertainty, rising protectionism, falling rates of return on FDI, and changing forms of international production."

In fact, a report released a little earlier than this by the United Nations Conference on Trade and Development (UNCTAD), and titled "World Investment Report 2020: International production beyond the pandemic" explained the impact of the pandemic on investment outlook globally by arguing that "Global flows of foreign direct investment (FDI) will be under severe pressure this year as a result of the COVID-19 pandemic. These vital resources are expected to fall sharply from 2019 levels of $1.5 trillion, dropping well below the trough reached during the global financial crisis and undoing the already lackluster growth in international investment over the past decade. Flows to developing countries will be hit especially hard, as export-oriented and commodity-linked investments are among the most seriously affected."

This situation rings serious alarm bells for developing countries that are already suffering from drop in exports earnings and remittances in the recent months. These countries find themselves with heightened risks with regard to keeping in check current account deficits, and defaulting on sovereign debt obligations. Hence, falling investment levels, in these times of uncertainty, weaken any chances of going for privatization. In this regard, the Report by UNCTAD points out: "The COVID-19 crisis will cause a dramatic drop in foreign direct investment (FDI) in 2020 and 2021... Global FDI flows are forecast to decrease by up to 40 per cent in 2020, from their 2019 value of $1.54 trillion. This would bring FDI below $1 trillion for the first time since 2005. The downturn caused by the pandemic follows several years of negative or stagnant growth... [whereby] expected level of global FDI flows in 2021 would represent a 60 per cent decline since 2015, from $2 trillion to less than $900 billion."

What it means in the particular case of Pakistan where, reportedly, a move is being suggested in government corridors to go for privatization of Pakistan Steel Mills (PSM), among other public sector enterprises is for the policy makers to postpone, at least in the short-term, any such plans till the global investment outlook improves, as the pandemic abates. At the same time, the country may wish to reform the public sector entities, including PSM, in the meanwhile for greater investor interest, and possibly much higher returns, later on. Moreover, given a greater move by countries in general over the last decade or so, whereby rather than outright privatizations of public sector entities, they have been run successfully by the public sector, and perhaps Pakistan too would be well served to explore in this direction, including looking into adopting such options as mixed-ownership enterprises (MOEs), as China has so successfully done, where it has looked to open a particular public sector enterprise to foreign/domestic (or both) investment.

More than an academic inquiry into the causes that hold back investment potential in developing countries, the Report by World Bank Group conducted a survey "of more than 2,400 business executives representing foreign direct investment (FDI) in 10 large developing countries: Brazil, China, India, Indonesia, Malaysia, Mexico, Nigeria, Thailand, Turkey, and Vietnam... [where]... interviews were conducted from June to November 2019... [and]... The surveyed companies cumulatively represent around US$400billion in total investment (about 10 percent of FDI stock in the surveyed countries) and employ nearly1 million workers, based on conservative estimates."

Hence, even though the pandemic has raised significantly the level of uncertainty, the fundamental issues from before the crisis have only exacerbated in terms of depth and pace, but resolution of which is important for the long-term sustained interest of foreign investors; especially in developing countries lacking needed political and economic institutional stability in this regard. Such issues included "trade policy uncertainty, rising protectionism, falling rates of return on FDI, and changing forms of international production." Here, according to the responses in this survey by multinational investors that invested in developing countries, "The top three factors influencing investment decisions are political stability, macroeconomic stability, and a country's legal and regulatory environment; nearly 9 in 10 businesses consider them to be "important" or "critically important." These factors rank ahead of considerations such as low tax rates, low labor and input costs, and access to resource endowments. Furthermore, large firms (those with more than 250 employees) rank an enabling regulatory environment as their top investment consideration. Investors that encounter major legal and regulatory obstacles are more likely to reduce or withdraw investment."

According to the Report by UNCTAD, "In Pakistan, FDI recovered in 2019, growing 28 percent to $2.2 billion after a deep fall of 30 percent in 2018 as the country faced balance-of-payment challenges. The growth was driven by equity investments in the energy, financial, and textiles industries, with major investors from China and the United Kingdom." Hence, the pandemic has seriously dented this initial momentum of some progress being made in this labor and input costs, and access to resource endowments. Furthermore, large firms (those with more than 250 employees) rank an enabling regulatory environment as their top investment consideration. Investors that encounter major legal and regulatory obstacles are more likely to reduce or withdraw investment."

According to the Report by UNCTAD, "In Pakistan, FDI recovered in 2019, growing 28 percent to $2.2 billion after a deep fall of 30 percent in 2018 as the country faced balance-of-payment challenges. The growth was driven by equity investments in the energy, financial, and textiles industries, with major investors from China and the United Kingdom." Hence, the pandemic has seriously dented this initial momentum of some progress being made in this regard.

It is, therefore, of significant importance, according to the World Bank Group Report, for Pakistan, and developing countries overall, that "in addition to short-term crisis response, governments should address international and domestic sources of policy uncertainty by reaffirming commitments to global and regional trade and investment systems, promoting political stability, enhancing macroeconomic stability, and improving legal and regulatory frameworks for FDI. Creating a predictable, business-friendly regulatory environment goes beyond the rules on the books and includes their full and consistent implementation in practice.

Copyright Business Recorder, 2020