As with the global recession, South Africa failed to escape the effects of a sharp pullback in global foreign direct investment (FDI) flows during 2009, with a new report showing that FDI inflows to South Africa slumped by 24,6% to $6,8-billion last year, from $9-billion in 2008.

The estimate, which was released on Tuesday as part of the United Nations Conference on Trade and Development's (Unctad's) second ‘Global Investment Trends Monitor', was also far worse than initial FDI forecasts for South Africa.

In fact, in its World Investment Report, released in September, Unctad indicated that South Africa could surprise on the upside, despite the country's retreat into its first recession in 17 years, as well as falling global flows.

The country had recorded strong FDI growth in 2008 relative to the $5,7-billion worth of inflows recorded in 2007. It had also become customary for the country's FDI inflows to be influenced materially by single large transactions - the 2008 inflows, for instance, were underpinned by $5,6-billion investment by the Industrial and Commercial Bank of China into Standard Bank.

As of September, it was still possible that South Africa's figures would be pushed upwards by the mooted R14-billion MTN-Bharti Airtel deal. However, the proposed transaction was subsequently abandoned.

Nevertheless, South Africa's performance was slightly better than the estimated 39% fall in global FDI flows for 2009, with Unctad calculating that inflows fell from $1,7-trillion in 2008 to around $1-trillion last year.

It was also better than the performance for developing countries generally, whose FDI flows declined by 35%, and Africa, in particular, where FDI inflows retreated by 36% in 2009, after peaking in 2008. In fact, the decline in FDI inflows to developing countries followed on from six years of uninterrupted growth.

South Africa-linked crossborder merger and acquisition (M&A) activity also declined, falling 36,9% to $4,2-billion in 2009, from $6,7-billion in the previous year.

MODEST RECOVERY IN 2010
However, the UN body expected the overall environment for international investment to improve slowly during 2010.

"Improving conditions will ultimately encourage companies to revise upward their international investment plans for 2010 onward, which, in turn, should give rise to growing FDI flows in 2010," Unctad stated, cautioning, though, that the recovery was expected to be modest.

For 2009, the study showed that the decline in FDI was broadbased and that developed countries continued their dramatic decline in 2009, slumping by a further 41%, despite experiencing a severe fall in 2008.

All components of FDI - equity capital, reinvested earnings, and other capital flows (mainly intracompany loans) - were affected by the downturn. However, the decrease was especially marked for equity capital flows, which are most directly related to longer-term investments strategies of transnational corporations.

Crossborder corporate activity was the most affected, with a 66% decrease in 2009 as compared to 2008, while the number of international greenfield projects also declined by 23%.

Unctad described the decline in Africa's FDI as a concern, owing to the fact that it is a major contributor to the continent's capital formation -the share of FDI flows in gross fixed capital formation was as high as 29% in 2008.

Further, FDI flows to Africa's 33 least developed countries suffered a material decrease in 2009, owing mainly to a crisis-induced lull in the global demand for commodities.

"The cancellation of some cross-border M&A deals, combined with absence of any exceptionally large one-off acquisitions, depressed the value of cross-border M&A operations in Africa during 2009 compared to the previous year," the report stated.

Unctad warned that, based on initial estimates, FDI flows during the fourth quarter of 2009 were expected to show little increase when compared with quarter-three levels, and would, thus, remain far below those for the same period in 2008.