Foreign investment is drying up thanks to COVID-19. But there may be a silver lining

• The COVID-19 case has created massive uncertainty in global capital flows.

• Governments might be wise to introduce short-term protections, but they must not be over-cautious.

• The post-crisis winners will open early to foreign investment.

Just over a year ago, InvestChile – the South American country’s Foreign Direct Investment Promotion Agency – welcomed 300 foreign investors of 21 nationalities in Santiago. In a two-day event, they attended plenaries, workshops and over 200 meetings including with the president, advancing over $7 billion in potential projects.

Fast-forward to today, and the view from Chile could not have changed more radically.

FDI roadshows in Santiago, and every other capital, are a picture of the past. InvestChile’s work shifted almost overnight. In confronting the coronavirus emergency, priorities changed: from attracting FDI overseas to deploying a crucial domestic effort to help international companies ensure their business continuity in Chile, thus keeping the economy running.

Uncharted waters

This is not an isolated case. All over the world, foreign investors are navigating uncharted waters. The COVID-19 pandemic is leaving not only desolation for the lives that are being lost, but also many questions about the post-coronavirus economy, such as how global investment flows will behave as the emergency clears.

Among all the issues that matter right now, FDI should not be forgotten: It has historically been a barometer of health of international companies, and their ability to bring about global growth. With the current freezing over of foreign investments, a spectre looms on the horizon once the health emergency subsides: a deeper economic recession to confront.

There is a possible silver lining: Investors attracted by good value may kickstart a "virtuous cycle", fresh capital in one sector benefiting the next, as soon as economies open again. After all, one should never let a good crisis go to waste.

Worse yet to come

But the immediate news are bad. The UN’s trade and development arm (UNCTAD) recently revised its forecasts about the effects of COVID-19 on global FDI flows from a conservative -5 to -15% drop, to a decisive -30 to -40% contraction. Even without further downward revisions, those losses are potentially more dramatic than at any time in modern history.

The reference point, of course, is the financial crisis of 2007-08. In its immediate aftermath, FDI flows fell by 37% in 2009, down to $1.1 trillion, and the Great Recession took hold. Today, at the onset of the pandemic, the virus has already wiped off some $500bn in foreign investment, and worse is very likely to come. That doesn’t bode well for what’s next.

Consider also a second indicator: protectionism. Already, the COVID-19 crisis is hitting at the high point of one of the fiercest trade wars on record, arguably since the Smoot-Hawley Tariff Act of 1930 – introduced after the Great Depression – which led to a 61% dip in US exports by 1933. If a study by the University of St. Gallen about massive new export curbs on medical supplies – which today are costing lives directly – is any indicator, the crisis will lead to even more restrictions.

Beware of predators

In one way, safeguarding makes perfect sense: The COVID-19 crisis has already wiped off trillions of dollars off companies’ valuations. It may well be in a country’s best interest to put up temporary barriers on investment as a protective measure. With companies losing so much value, foreign acquisition bids may be possible at bargain-basement price in key industries that need to remain in domestic hands.

A first sign of this came from Australia, as the country announced the temporary tightening of conditions for entry of foreign investment, with a strengthened review process lasting between 30 days and six months. The goal was clear: “We do not want predatory behavior,” Treasurer Josh Frydenberg stated.

While such measures make short-term sense, the tricky part is not to make them stick once the health emergency subsides. If the global economy was in a Prisoner’s Dilemma, the clear optimal outcome would be to be collaborative and open borders as quickly as possible. But it’s also clear the “first mover” to lift restrictions may get the short end of the stick, if its initial openness isn’t reciprocated.

Silver linings

In the coming months, we will find out how much these measures and the prospect of deglobalization is further impacting free flows of FDI, and if what we are seeing today in terms of restrictions is only the tip of the iceberg. For now, and until we figure out the long-term impact of the pandemic on foreign investment, the only option – for host countries and investors alike – is to keep on navigating the storm.

As for InvestChile, their next investor conference will happen virtually, which is likely to become the new normal. Although governments today need to first and foremost work with established investors in keeping their projects afloat, the silver lining for Chile, and emerging markets alike, may reside in being moving early to attract foreign investment – with opportunities, incentives and promotion agencies ready to go – as the emergency eases.

In this new normal, the winners will be those governments that pioneer novel ways to help investors, in a world where prosperity remains depending on open economic borders.