Foreign direct investment in developing nations will drop by $180 billion (Dh660bn), or 31 per cent, this year as the total FDI worldwide reached an estimated $1.4 trillion in 2008, 21 per cent less than the previous year, according to reports issued by the World Bank and UNCTAD.
The decline will put renewed pressure on emerging-market currencies, even as asset sales by fund managers slow, according to Mansoor Dailami, manager of international finance in the global development prospects group at World Bank.
Rallies in the South Korean won, Brazil's real and the Polish zloty have all faltered since the end of 2008 as companies, including Rio Tinto Group and Honda Motor Co, put expansion plans on hold.
"This is the most serious reaction so far to the global recession, the factory level," Dailami, who joined the bank in 1986, said in an interview in Washington. "Most emerging-market currencies are already under pressure and this tendency will continue. In 2008, it was a stocks and portfolio story. This year, it will be an FDI story."
Foreign direct investment fell an estimated 10 per cent in the developing world in 2008 and will cool further this year, the United Nations said in its 2009 outlook.
FDI, which typically involves spending on plant and machinery or the purchase of a controlling interest, accounted for 38 per cent of inflows into emerging markets in recent years, compared to 10 per cent for investment by funds and 54 per cent for loans, according to Morgan Stanley estimates.
Bloomberg-JPMorgan indexes tracking currencies in Asia, Latin America and Eastern Europe in 2008 posted declines of 5.9 per cent, 19 per cent and 11 per cent, respectively, and have since dropped further. The won is down 8.3 per cent versus the dollar so far this year following a 17 per cent jump in December. The real is 2.6 per cent weaker and the zloty has lost 12 per cent.
Of the world's five largest economies, only China has so far escaped recession. The nation will today report a 6.8 per cent expansion for the fourth quarter, the slowest growth in seven years, according to the median estimate of economists surveyed by Bloomberg News.
The World Bank estimates that foreign direct investment in developing countries will shrink to $400bn this year from an estimated $580bn in 2008 and $500bn in 2007, according to Dailami, author of the lender's annual Global Development Finance report.
The outlook is "pretty grim", said Peter Elston, a Singapore-based strategist at Aberdeen Asset Management Plc, which is Scotland's largest independent money manager and oversees $154bn. "Given that exports have fallen off a cliff, you would expect FDI to do the same."
The World Bank predicts global trade will contract this year for the first time since 1982 and Brazil, Latin America's biggest economy, forecast its exports will drop as much as 20 per cent.
Germany, the world's biggest goods exporter, reported a record slide in shipments for November and China, the second largest, last month had its worst decline in a decade.
Investment in China, the largest developing economy, fell 5.7 per cent from a year earlier to $5.98bn in December, sliding for a third straight month, official figures show.
Net flows to Brazil, the second biggest, slid 14 per cent to $2.18bn in November and the country's central bank last month cut its 2009 estimate for foreign direct investment to $30bn from $33bn.
"If we start seeing very severe cutbacks for more than a year, then you start moving into a world where shortage of FDI will become an issue for currencies," said Richard Urwin, head of asset allocation at BlackRock, the largest publicly traded US asset manager with $1.26trn of funds.
"Emerging currencies have already been weak due to the slower capital inflows from stocks."
Some $67bn was pulled out of emerging-market equities and bonds funds in 2008, after net inflows of $62bn the previous year, according to EPFR Global, a Cambridge, Massachusetts-based research company. The outflows eased this year as the funds took in $4.29bn in the first 14 days of 2009, the data showed.
So far this year, 22 of 26 emerging-market currencies tracked by Bloomberg have weakened versus the dollar. Hungary's forint was the worst performer, sliding 14 per cent, as Europe's recession crimps demand for products assembled in the country such as Audi cars and Nokia phones.
Eastern European countries are the most vulnerable among developing regions to a slide in foreign investment as they have relatively large overseas debt, the World Bank's Dailami said. The International Monetary Fund has already offered emergency funding to Belarus, Latvia, Hungary, Iceland, Serbia and Ukraine.
Government-led bailouts of finance companies in the US and Europe are forcing lenders there to pull funds back from emerging markets, forcing the sale of "prized jewels" such as stakes in Chinese banks, David Bloom, global head of currency strategy at HSBC Holdings, said in Hong Kong.
"The flow of money and the cross-border flows will slow," said Bloom, who predicts the world's economic output will decline this year for the first time since the Second World War.
In another report, inflows of foreign direct investment worldwide reached an estimated $1.4trn in 2008, 21 per cent less than the previous year, according to preliminary annual data released by the UN Conference on Trade and Investment.
Last September, UNCTAD had forecast a 10 per cent dip in cross-border investment over 2007, when FDI reached a record $1.8trn.
UNCTAD said in an advance copy of its annual FDI assessment that 2008 would mark the end of a four-year cycle of growth in international investment.
There were signs the trend was continuing into 2009, the agency added, as leading companies cut costs and investment because of the poor economic outlook.