Emerging economies dependent on overseas financing to balance their books look vulnerable to another looming slowdown in bricks-and-mortar investment, as rising deficits in many countries force reliance on volatile financial market flows.
A report last month report by the United Nations agency UNCTAD painted a bleak picture of the outlook for foreign direct investment (FDI), noting a sharp slowdown globally in the third quarter of 2011 after a strong start to the year.
That's hardly surprising, given the euro crisis threatens to tip the world economy into recession and companies across the West have embarked on a multi-year deleveraging cycle. In this environment, FDI, involving big-ticket investment in factories, mines and land, will inevitably take a harder hit than stock and bond flows as companies scale back long-term commitments.
This is dismaying at a time private investment is urgently needed to jump-start growth and create jobs. But it is in the emerging world an FDI slowdown has big repercussions - above all for the ability to fund balance of payments deficits.
David Hauner, head of EEMEA economics and fixed income strategy at BofA Merrill Lynch Global Research, cites Turkey and Poland as prime examples of emerging countries where FDI has not kept pace with booming economic growth.
Like many developing countries, Turkey's low interest rates and loose fiscal policy after the 2008 crisis unleashed a growth and credit boom, leading to a massive import surge. The result is its current account deficit is almost triple 2005 levels.
But FDI halved in this period to $9 billion this year to cover 16 percent of Turkey's deficit versus 50 percent in 2005. Poland has seen its current account deficit double in the past six years.
Back in 2005 it, like other countries in central Europe, was a key investment destination for German manufacturing giants looking to capitalise on lower labour costs. That FDI then covered almost the entire Polish deficit.
This year, Poland should receive $2 billion in FDI, or just over 6 percent of its financing needs, BofA-ML data shows. FDI is considered safest form of investment as it is long-term focused and generates jobs and tax receipts.