The Organisation for Economic Co-operation and Development (OECD) said it expects global flows of foreign direct investment (FDI) to fall sharply this year as cross-border mergers and acquisitions slow to a trickle.
"While 2007 was a record year for both OECD outflows and inflows, sharp declines are expected in 2008," the OECD said.
The OECD said companies from its 30 member countries made cross-border investments of about $1.82 trillion (Dh6.6trn) in 2007, a 50 per cent increase from 2006 and a record. Some $1.37trn in foreign investments were made in companies based in the OECD member countries; those investments came from OECD economies and from other, primarily emerging-market, countries.
The Paris-based OECD expects investment flows to fall sharply this year, based on first-quarter evidence from developed economies. Cross-border investments made by OECD-area companies could fall 37 per cent, or $680 billion, while investments in OECD-area companies could fall by 24 per cent, or about $335bn, it said.
"A slowdown in international mergers and acquisitions, which make up a significant share of FDI, during the first half of 2008 also suggests sharp declines for OECD FDI flows in 2008," the OECD said.
M&A activity has been hit by reduced availability of financing since the credit crunch began in mid-2007, as well as by falling share prices. The records set in 2007 for OECD inflows and outflows were helped by the fall in the US dollar against most other major currencies, the group said.
In addition to greenfield investment and M&A, the FDI total includes reinvested earnings, cross-border loans and capital transactions between related firms.
The OECD yesterday urged Portugal to speed up reforms, especially of the labour market, if it hopes to catch up with faster-growing developed economies.
In its 2008 economic survey of Portugal, the OECD also warned the country's short-term outlook is challenging because of the downturn in the United States and tighter credit markets.
"The ongoing structural reforms, if fully implemented, will contribute to raising potential growth in the future; but the short-term outlook remains worrisome, as the external environment is not expected to be as benign as in recent years," the OECD said.
In May, Portugal's Government lowered its forecast for 2008 GDP growth to 1.5 per cent from 2.2 per cent.
Portugal has had one of Europe's slowest-growth rates this decade.
The OECD applauded Portugal's reduction of its high budget deficit – one of the reasons for poor economic performance this decade – but said that the effort must continue.
OECD Secretary-General Angel Gurria said Portugal's deficit reduction had been "impressive" but said Portugal had to move quickly to boost growth.
"All Portugal's European and non-European partners are moving at high speed," Gurria told journalists.
"The challenge is to consolidate the results already achieved and reduce the deficit further. Portugal has to prepare to attain more lasting and sustainable growth."