FDI in Singapore up in 2018 despite slowdown in global flows

Singapore

FOREIGN direct investments (FDI) continued to flow into Singapore last year, even when global FDI fell for a third straight year to its lowest since the 2008 global financial crisis.

FDI in Singapore jumped from US$76 billion in 2017 to US$78 billion in 2018, lifting Singapore by one placing to 4th in the top 10 world rankings of FDI destinations, according to the World Investment Report 2019 issued by the United Nations Conference on Trade and Development (UNCTAD).

The US again tops the ranking despite a drop in FDI to US$252 billion, from US$277 billion in 2017. China, where FDI rose from US$134 billion to US$139 billion in the past two years, remains in second position.

Investments flowing out of Singapore however dipped from US$44 billion in 2017 to US$37 billion last year, dragging Singapore down two placings to 10th in the top 10 ranking of global foreign direct investors.

The US, the previous year's top investor, wasn't on the latest top 10 list at all as large scale repatriations of funds by US multinational corporations - encouraged by US tax reforms - translated into negative FDI outflows. Japan, the second biggest investor in 2017, is now the single biggest investor with outflows of US$143 billion - though this was down from US$160 billion, mainly because of a 40 per cent decline in their FDI in developed economies.

Like FDI inflows, global outflows also weakened in 2018. Developed economies' investments abroad as a whole plunged 40 per cent to US$558 billion. Outward flow from developing economies, including Singapore, fell 10 per cent to US$418 billon.

Outflows from Asia slipped 3.0 per cent to US$401 billion, due mainly to reduced investments from China. But despite the overall drop in China's FDI outflows, Chinese investments in Asean continued to grow - due partly to several big merger and acquisition (M&A) deals in the services sectors in Singapore, Indonesia and the Philippines.

FDI flowing out of South-east Asia was flat last year, at US$70 billion. The sub-region accounted for 7.0 per cent of global outward flows in 2018. "Investment from Singapore - the sub-region's largest investor - declined by 15 per cent to US$37 billion, which contributed to the stagnating level of investment from Asean," the report says.

Global FDI inflows tumbled 13 per cent to US$1.3 trillion last year. The Unctad report blames the decline largely on US tax reforms in late 2017, which removed the tax liability of enormous profits US MNCs had amassed overseas. This led to a huge repatriation of US foreign earnings, dampening FDI flows. But the blow to FDI inflows was softened by a jump in cross-border M&A and greenfield investments.

Global FDI is tipped to rebound in 2019, especially in developed economies, as the impact of US tax reforms wind down. But Unctad sees only a "modest recovery" of 10 per cent to about US$1.5 trillion - below the average over the past 10 years.

The underlying FDI trend remains weak - and trade tensions also pose a downward risk for 2019 and beyond,the report cautions.

"The underlying FDI trend has shown anaemic growth since 2008," it says. "Explanations include declining rates of return on FDI, increasingly asset-light forms of investment and a less favourable investment policy climate."

FDI flowing into developed economies sank 29 per cent last year to US$598 billion - the lowest since 2004. Flows into developing economies rose 2.0 per cent to US$702 billion, equivalent to a record 54 per cent of the US$1.3 trillion FDI pie.

Asia took in 4.0 per cent more in FDI, which jumped to US$512 billion. "Growth occurred mainly in China, Hong Kong, Singapore, Indonesia and other Asean countries, as well as in India and Turkey," the report says.

The region continued to be the world's largest FDI recipient region, accounting for 39 per cent of global inflows in 2018 - up from 33 per cent in 2017. Despite trade tensions between China and the US, FDI flows into China rose 4.0 per cent to hit an all-time high of US$139 billion - more than 10 per cent of the global total. "China continued to absorb increasing flows from developing Asia, including Hong Kong, South Korea and Singapore," the report says.

Flows into South-east Asia increased 3.0 per cent to a record US$149 billion in 2018, enlarging the region's slice in the global FDI pie from 10 per cent in 2017 to 11 per cent.

The growth was mostly driven by higher investments in Singapore, Indonesia, Vietnam and Thailand. Manufacturing and services, especially finance, retail and wholesale trade, including the digital economy, continued to underpin rising inflows to this sub-region.

"Robust investment from other Asian economies, including investment diversion and relocations of manufacturing activity from China, supported FDI growth in the region," the report says. "Strong intra-Asean investments also contributed to the trend, although Singapore played a significant role in this as a regional investment hub."

Singapore - including investments channelled through it - accounted for more than half of the flows in 2018, according to the report. Singapore pumped more than US$10 billion into Indonesia alone last year.

The Unctad report is "cautiously optimistic" about the prospects for FDI flows into Asia - thanks to a favourable outlook and ongoing efforts to improve the investment climate in several major economies.