FDI In Caribbean To Drop Significantly During 2009, Says Report

by Phillip Morton, Investors Offshore.com

29 May 2009

Foreign Direct Investment (FDI) flows to Latin America and the Caribbean in 2008 reached USD128.3bn but are expected to decline dramatically considering the current economic difficulties, according to the Economic Commission for Latin America ECLAC report Foreign Direct Investment in Latin America and the Caribbean 2008, presented on May 27 by Commission Executive Secretary Alicia Bárcena.

Several investments that contributed to the 2008 figures were accorded before the financial crisis hit. The economic conditions that led to this result have changed since then, and accordingly, FDI flows to the region are expected to fall between 35%-45% during 2009.

FDI flows to the region were 13% higher in 2008 than during the previous year. Although this is a steep drop from the 52% increase in FDI in 2007, the result is nevertheless significant when compared to the 15% contraction in global FDI flows. According to ECLAC, the rise in FDI in the region is due to the high price of basic commodities and the growth of some developing economies.

Developing countries increased their participation as recipients of overall FDI from 31% in 2007 to 39% in 2008. The main recipients were Asia and Oceania (21%) and Latin America and the Caribbean (8%).

South America received 24% more FDI in 2008 (USD89.8bn), thanks to the high price of basic commodities and sub regional economic growth. However, FDI flows to Mexico and the Caribbean Basin fell 5% (USD38.4bn).

Brazil, Chile and Colombia were the main recipients in South America, concentrating 80% of FDI. Brazil was the foremost FDI recipient in the region, with a 30% increase from its record FDI in 2007.

At the other end, Mexico and the Caribbean Basin's close ties with the United States economy had a negative impact on FDI flows to that subregion. The recession in the United States dragged down export manufactures and tourism. Moreover, the deceleration of local economies caused a drop in market-seeking investments.

FDI inflows to Mexico fell 20% with regard to 2007, while investment in Central America increased 7%. FDI towards the Caribbean went up 42%, although this was due specifically to investments in the Dominican Republic and Trinidad and Tobago, which compensated falling FDI elsewhere in the area.

In small nations such as those in the Caribbean, FDI as a ratio of GDP was significantly higher. Among large and medium-sized economies, Chile stands out in terms of the volume of FDI it received as well as the proportion of FDI to GDP.

The United States and Spain continued to be the main source of FDI in the region during 2008 (24% and 9% of the total, respectively), although their relative participation fell. Canada (8%) and Japan (6%) increased their presence in the region through natural resource projects.

According to ECLAC, the uncertainty regarding the length and depth of the crisis makes it difficult to predict future volumes of FDI. Although it is expected to drop in 2009, investment would nevertheless be higher than flows to the region between 2001-2006.

ECLAC believes it is important that governments continue building and strengthening the productive capabilities of their national economies so as to make the most not only of FDI, but also of their own investments abroad. This could help them react better to periods of economic crisis such as the current one.

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