Emerging Markets Face $180 Billion Investment Decline

Foreign direct investment in developing nations will drop by $180 billion, or 31 percent, this year as a global recession prompts multinationals to cut spending on factories and mines, according to the World Bank.

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. 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.

Foreign direct investment fell an estimated 10 percent 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 percent of inflows into emerging markets in recent years, compared with 10 percent for investment by funds and 54 percent for loans, according to Morgan Stanley estimates.

Investment Delays

Bloomberg-JPMorgan indexes tracking currencies in Asia, Latin America and Eastern Europe in 2008 posted declines of 5.9 percent, 19 percent and 11 percent, respectively, and have since dropped further. The won is down 8.3 percent versus the dollar so far this year following a 17 percent jump in December. The real is 2.6 percent weaker and the zloty has lost 12 percent.

Rio, the third-largest mining company, this month postponed a $2.15 billion expansion of an iron-ore mine in Brazil. Honda, Japan’s No. 2 automaker, delayed construction of a $100 million factory in Argentina and has shelved expansion plans in Turkey and India. Hitachi Construction Machinery Co., the world’s largest maker of giant excavators, froze a $1 billion plan to expand production in China and other emerging markets.

As recently as Oct. 28, the Tokyo-based company was predicting 26 percent growth in China sales for the current financial year. The nation’s excavator market shrank 50 percent from year-earlier levels in November and 37 percent in December.

Weaker Currencies

Of the world’s five largest economies, only China has so far escaped recession. The nation will tomorrow report a 6.8 percent expansion for the fourth quarter, the slowest growth in seven years, according to the median estimate of economists survey.

The World Bank estimates that foreign direct investment in developing countries will shrink to $400 billion this year from an estimated $580 billion in 2008 and $500 billion in 2007, according to Dailami, author of the lender’s annual Global Development Finance report.

Tumbling Exports

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 percent. 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 percent from a year earlier to $5.98 billion in December, sliding for a third straight month, official figures show.

Net flows to Brazil, the second-biggest, slid 14 percent to $2.18 billion in November and the country’s central bank last month cut its 2009 estimate for foreign direct investment to $30 billion from $33 billion.

Banks Bailing Out

Government-led bailouts of finance companies in the U.S. 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 Plc, said Jan. 16 in Hong Kong.

Royal Bank of Scotland Plc, the biggest government- controlled bank in the U.K., sold its $2.3 billion stake in Bank of China Ltd. last week to replenish capital and Zurich-based UBS AG raised some $900 million by selling shares in the Chinese lender. Bank of America Corp., the largest U.S. lender by assets, this month sold part of its stake in China Construction Bank Corp. for $2.8 billion.