THE IMPACT OF COVID-19 ON FOREIGN INVESTORS: EARLY EVIDENCE FROM A GLOBAL PULSE SURVEY APRIL 2020 Abhishek Saurav, Peter Kusek, Ryan Kuo Global Investment Climate World Bank Group worldbank.org/en/topic/investment-climate KEY FINDINGS The prevalence of pandemic-induced shocks is increasing, exacting an unusually high toll on MNEs: • In the last 3 months, the pandemic has affected 80% of MNEs. On the supply side, three in four MNEs report a decline in supply chain reliability. On the demand side reduced final and intermediate consumption has reduced revenues and profits for four in five MNEs. Consequently, more than 60 percent of MNEs are experiencing decline in liquidity of about 28% on average. • In the next 3 months, the impacts are likely to become more prevalent: More than 85% of surveyed MNEs expect deteriorating business operations. • Over the next 3 months, most rapidly intensifying effects are slated to be with respect to Availability of Finance / Liquidity (13pp); Investment (12pp); Employment (9pp). MNE responses point to three high-priority areas of rapid-response policy support, namely: • Providing tax relief (including tax cuts, tax credits, deferred payments); • Catalyzing financial support (special low-interest lines of credit, grants, broad-based subsidies, and loan guarantees) to counter the liquidity crunch; and • Relaxing labor or business regulations to reduce costs, support recovery, respond to changing world of work. 1 INTRODUCTION The COVID-19 pandemic has severely impacted multinational enterprises (MNEs) globally. Existing global value chains (GVCs) on which the majority of MNEs rely have been disrupted, and a series of demand and supply shocks threaten the viability of many businesses. The pre- COVID-19 global environment for foreign direct investment (FDI) was already characterized by rapidly eroding investor confidence due to trade and investment policy uncertainty, flagging global growth, falling commodity prices, and rising protectionism. The COVID-19 crisis presents a new, unprecedented source of investor risk that is depressing investor confidence. Recent business surveys have attempted to assess the effects of the COVID-19 pandemic on businesses and future investment by directly asking corporate decisionmakers: • YPO’s global survey of chief executives2 shows that more than half (51%) of respondents view the pandemic as a severe business risk. Risk perceptions are high in Africa (68%), Middle East and North Africa (61%), Asia (54%), and Latin America (53%). Globally, 11% of chief executives report that businesses survival is a risk over the next year. This risk is most severe in the hospitality/restaurant (41%), aerospace/aviation (30%), education (19%), and retail and wholesale sales (19%) sectors. In emerging markets, revenue declines are reported by respondents in India (54%), Mexico (50%), and Brazil (34%). About 35% and 25% of respondents globally expect declines exceeding 20% in total fixed investment and employment. • A PricewaterhouseCoopers (PwC) survey of global CFOs3 finds that over two-thirds (70%) of CFOs are greatly concerned about the effects of the pandemic on their operations, with 80% expecting a decrease in revenues. Respondents are focusing on containing operations costs (77%) and deferring or cancelling planned investments (65%). The effects on the workforce are likely to materialize through temporary furloughs (42%) and layoffs (28%) over the short term. Several businesses (45%) plan to leverage government support, mainly related to tax deferrals and deadline extensions. • Mercer’s live global survey4 to assess the impact of the pandemic on businesses finds that 87% of respondents anticipate moderate to high impacts on their financial performance. 27% of respondents reported that workforce productivity had been negatively impacted and was lower than normal. To complement these insights and assess the impact of the pandemic on MNE affiliates in developing countries, the World Bank Group conducted a foreign investor pulse survey in March 2020. This survey covered three components: the actual effect of the pandemic on businesses in the past 3 months, the likely effect of the pandemic in the next 3 months (forward-looking), and areas for policy support measures. 2 worldbank.org/en/topic/investment-climate EFFECTS OF COVID-19 ON FOREIGN INVESTORS IN THE LAST THREE MONTHS Within a short period of time, the COVID-19 pandemic in output (experienced by two thirds of businesses)1 has subjected MNEs to a series of adverse shocks. and investment (experienced by 56% of businesses). Over 60 percent of the world’s 100 largest MNEs have The shockwaves are also reaching companies’ made downward revisions to their earnings projections workforces: Two in five businesses report declines in (UNCTAD 2020). Relatedly, the top 5,000 MNEs, which employment, on average by 16 percent. account for a significant share of global FDI, have revised their 2020 earnings estimates downwards by Figure 1. The COVID-19 pandemic has already 30% on average. adversely affected a vast share of MNEs Survey data show that the successive and cascading effects of the pandemic-induced demand and supply shocks on MNEs in developing countries is acute (Figure 1). Demand has fallen sharply due to mobility restrictions, precautionary behavior, and high uncertainty. Reduced consumer spending and corporate orders have depressed MNE sales, especially in sectors such as travel, tourism, entertainment, and construction. Nearly four in five MNEs report reductions in revenues and profits, on average by about 40 percent. The pandemic is also affecting the availability of finance for businesses, with over half of all respondents (62 percent) are experiencing reduced availability of finance. Source: Computation based on the March-April 2020 Investor Confidence On the supply side, three in four MNEs report declines Pulse Survey. in supply chain reliability, hampering their access to Note: The reference period of last three months ranges approximately from January to March 2020. raw and intermediate production inputs. On top of direct pandemic-related impacts, access to inputs is likely further disrupted by the inability of suppliers to meet contractual obligations, rising freight costs, and competitors paying premiums to build input reserves. In addition, declines in worker health, restrictions on movement, and alternative work arrangements (e.g., remote work and distributed work locations) have required a shift away from ‘normal’ work environments, adversely affecting worker productivity. More than 70 percent of MNEs report an average 34 percent decline in worker productivity. The aggregate effects of these shocks include average reductions of roughly one third 1 The decline in production output registered in survey data may have fallen not only in response to lower demand and supply constraints, but also due to the fall in commodity prices resulting from lower industrial demand. 3 ANTICIPATED EFFECTS OF COVID-19 ON FOREIGN INVESTORS IN THE NEXT THREE MONTHS Even more worrisome than the effects experienced report further deterioration on almost all metrics during the last three months are companies’ covered in the pulse survey. The most precipitous expectations about the next three months (roughly anticipated declines are predicted in the reduced April – June 2020), with performance anticipated to availability of finance / liquidity (13pp), likely driven deteriorate along every single measured dimension by falling revenues and diminishing profits. Similarly, (Figure 2): More than 85% of surveyed businesses investments are reported to further decline by 12 expect that their revenues and profits will decline, percentage points driven by increasing uncertainty. And on average by more than 40%. Four in five businesses as businesses face limited ability to afford the pre-crisis expect an average 35% reduction in output. Impacts wage bill and reduce demand for labor as production are particularly likely to worsen with respect to falls, employment is likely to decline. Businesses report employment: Three in five business expect to reduce a further 9 percentage point decline in employment employment, on average by a 25%. In addition to the over the next three months. likely downsizing of the workforce, the most precipitous declines are anticipated in the availability of finance Figure 3. The adverse effects are likely to intensify (by 41%) and in investments (by 42%). over the next three months Figure 2. The prevalence of pandemic-induced shocks is likely to increase Source: Computation based on the March-April 2020 Investor Confidence Pulse Survey. Note: The reference period of last three months ranges approximately from January to March 2020 and next three-month Source: Computation based on the March-April 2020 Investor ranges from April – June 2020. Confidence Pulse Survey. Note: The reference period of next three months ranges from April – June 2020. In addition to the increase in prevalence of pandemic- induced shocks affecting MNEs, a major cause for concerns is that the effects are intensifying, i.e. driving deeper over time (Figure 3). Beyond the effect already actualized in the first quarter of 2020, MNEs 4 worldbank.org/en/topic/investment-climate INVESTMENT OUTLOOK IN TIMES OF HEIGHTENED UNCERTAINTY Several aspects of the pandemic (e.g., its continued Figure 4. High uncertainty is resulting in steep decline spread and the development of treatments) remain in investments uncertain, and no consensus exists regarding how long the pandemic will continue to arrest economic activity. The limited ability to forecast the likelihood of future events and outcomes has meant that business uncertainty has spiked (Bloom 2014; Knight 1921). This uncertainty is reflected in the high values registered in 2020 in the World Pandemic Uncertainty Index (Ahir, Bloom, and Furceri, 2018). The heightened uncertainty is likely to translate into additional coordination and transaction costs as MNEs re-assess business models under new market conditions. Driven by increasing business uncertainty, MNEs are likely to adopt a “wait and see” approach and delay or cancel planned investments, which otherwise would have occurred towards maintaining production capacity and technological upgrades.6 Well over half of all MNEs report having reduced Source: Computation based on the March-April 2020 Investor investments in their operations in the last three months, Confidence Pulse Survey. with a decline of 30 percent on average (Figure 1). Larger Note: The reference period of last three months ranges approximately from January to March 2020 and next three-month investors, with over USD 10 million in host economies ranges from April – June 2020. have experienced a 4-percentage point larger decline in investments (Figure 4). This difference is expected to further increase to 8 percentage points in the next The gloomy outlook shared by survey respondents 3 months. In the last three-month period, the services is consistent with emerging evidence on declining and manufacturing sectors have experienced similar investment activity. In February 2020, new cross-border magnitudes in average investment decline (about acquisitions fell below US$10 billion from the normal 30 percent). Given the sharp decline in commercial monthly average of US$40-50 billion7. Estimates from activity in services sectors such as travel, tourism, food UNCTAD (2020) suggest that global FDI can decline up service, and entertainment, the effects are expected to to 40 percent in 2020. The world’s largest 5,000 MNEs, further intensify to an average 47 percent decline over who account for a significant share of global FDI, have the next three months. revised their earnings estimates downwards by an average of 30%. Since a major share of FDI materializes through reinvestment earnings, reduced earnings in MNEs will limit re-investments. 5 CRITICAL AREAS OF POLICY SUPPORT Recognizing the urgency of the situation not just for MNEs but for the private sector overall, governments around the world have begun instituting active fiscal policy measures nearing USD 8 trillion (IMF 2020). Fiscal support has typically included tax relief (tax cuts, tax credits, VAT exemptions, deferred payments), wage subsidies, and capital support to vulnerable businesses. Simultaneously, several central banks have eased monetary policy to maintain market liquidity and provide relief to lending institutions and borrowing businesses (IMF 2020). Monetary policy measures have typically included reduction in interest rates, regulatory forbearance, loan guarantees, and financing and credit provision for businesses. The World Bank Group foreign investor pulse survey confirms the critical nature of these measures for foreign businesses. The pulse survey results point to three high-priority areas of rapid-response policy support (Figure 5): • Providing tax relief (including tax cuts, tax credits, deferred payments) is important or critically important for nearly 9 in 10 businesses. Consistent with similar “keep the lights on” support provided to businesses to stay afloat during previous crises, providing tax credits, waivers, deferrals, VAT exemptions, and reduction in social security contributions can go a long way in stabilizing the private sector. • Catalyzing financial support to counter the liquidity crunch caused by falling cash flows and access to financing is viewed as important or critically important by more than 75 percent of surveyed MNEs. These support programs could include special low-interest lines of credit, grants, broad-based subsidies, or loan guarantees. Extending support to businesses adversely affected by falling sales or supply-side shocks can mitigate the effects of the pandemic and improve investor confidence. • Relaxing labor or business regulations is considered important or critically important by more than 80% of the surveyed businesses. Regulatory flexibility to reduce costs and support recovery could include fee waivers and reductions for standard business permits and licenses, extension of deadlines for regulatory filings (e.g., tax filings), and new regulations to respond to the changing world of work characterized by flexible and remote work arrangements. Figure 5. Demand for Policy Support: Tax Relief, Financial Support, Relax Regulations Source: Computation based on the March-April 2020 Investor Confidence Pulse Survey. 6 worldbank.org/en/topic/investment-climate As the COVID-19 pandemic spreads and its economic impact deepens, governments must act resolutely and effectively in order to maintain private sector vitality and to restore investor confidence. It is important that the measures they deploy are timely, time-bound, targeted, and transparent. Right now, governments have to do all they can to limit the health, economic, financial, and corporate distress. The prospects for recovery rest squarely on the breadth and depth of policy support extended to the private sector in the face of these unprecedent global shocks. Governments will also have to begin planning for the next phase of economic policies to steer the economy back to a new normal. 7 REFERENCES Ahir, Hites and Bloom, Nicholas and Furceri, Davide, The World Uncertainty Index (October 29, 2018). Available at SSRN: https://ssrn.com/abstract=3275033 Bloom, Nicholas. 2014. “Fluctuations in Uncertainty.” Journal of Economic Perspectives 28 (2): 153-176. IMF. 2020. “Fiscal Monitor - CHAPTER 1 Policies to Support People During the COVID-19 Pandemic.” International Monetary Fund. Knight, Frank H. 1921. Risk, Uncertainty, and Profit. Boston, MA: Hart, Schaffner, and Marx. UNCTAD. 2020. Investment Trends Monitor March 2020: Special Issue. United Nations Conference on Trade and Development. 1 Such as, lower demand for goods and services from consumers and producers; changing consumption behavior; labor and skills shortage; lower worker productivity; reduced access to raw and intermediate inputs due to disrupted supply chains, among others. 2 A global survey of chief executives who are members of YPO (a community / organization of chief executives spanning about 130 countries). Results are based on the second round of the survey in mid-April 2020 and includes more than 3,500 respondents from 109 countries. More information: https://www.ypo. org/2020/04/latest-ypo-survey-explores-covid-19-business-outlook/ 3 A global biweekly survey of finance leaders. Results are based on biweekly updates as od April 28th and April 14th, 2020 and includes more than 800 respondents from over 20 countries. More information: https://www.pwc.com/gx/en/issues/crisis-solutions/covid-19/global-cfo-pulse.html; https://www.pwc.com/gx/en/ issues/crisis-solutions/covid-19/global-cfo-pulse/april-14.html A global live survey results are effective as of April 27th, 2020 and are automatically updated with new data. Results are based on more than 700 respondents. 4 More information: https://www.mercer.com/our-thinking/career/covid-19-global-survey-coronavirus-impact-to-global-market.html 5 This short, English-language, web-based survey was sent to known email addresses of MNEs, leveraging existing sampling frames for developing countries. To extend reach, the survey was also circulated through countries’ Investment Promotion Agencies (IPAs) to known foreign investors. The period of data collection was March 24 – April 24, 2020. Data underlying the analysis comprise 105 MNE affiliates from 26 developing countries. The results of the pulse survey are not generalizable to all developing countries but are indicative of the experience of MNEs operating in developing countries. 6 Investment in MNE affiliates comprise capital allocation by parent firms and reinvestment of profits from host country operations. 7 Thomson Reuters Refinitiv Mergers and Acquisitions Database. https://www.refinitiv.com/en/financial-data/company-data. 8 worldbank.org/en/topic/investment-climate investmentclimate@worldbank.org