U.N. sees potential for deals worth trillions as FDI revives

By Tom Miles

GENEVA (Reuters) - Global foreign direct investment (FDI) will rise 12.5 percent to $1.62 trillion this year as the economic recovery tempts China, private equity and big companies to spend their warchests, a U.N. survey said on Tuesday.

The United Nations' annual World Investment Report, published by the U.N. economic think tank UNCTAD, also forecast sustained growth in coming years for FDI, reaching $1.75 trillion in 2015 and $1.85 trillion in 2016.

FDI largely consists of money spent on cross-border mergers and acquisitions and corporate expansions overseas and acts as a barometer of confidence in the global economy and a driver of international trade.

Global flows of FDI touched $2 trillion in 2007 but slumped to $1.2 trillion in 2009 and have struggled to regain momentum.

But in the first four months of 2014, global M&A was worth about $500 billion, the highest since 2007 and double the value in the same months of 2013. This year's ten largest deals all targeted developed countries, marking a return to the "traditional pattern" of FDI, the UNCTAD report said.

The potential growth in the market is huge. The European Union, traditionally the top FDI target, has been trailing far behind Asia as a target for FDI. But last year several of the biggest casualties of the economic crisis rebounded, with Spain the largest European FDI recipient, attracting $39 billion.

More FDI is expected to head to Europe and other developed countries as confidence in the recovery picks up, while FDI flows to developing countries will remain at a high level, according to UNCTAD's director of investment James Zhan.

However, regional conflict and "policy uncertainty" could still derail the recovery. Although most investment policies aim to promote and liberalise FDI, the share of restrictive policies rose to 27 percent from 25 percent in 2012, the report said.

USA TOP, CHINA RISING

The biggest recipient of FDI is the United States. Although its receipts have dwindled since the start of the crisis, its inbound FDI of $188 billion in 2013 was still 50 percent above that of the second biggest recipient, China.

Shale gas deals made up more than 80 percent of cross-border M&A in oil and gas last year. The prospect of cheap gas turned the U.S. into a major beneficiary of international funds for new manufacturing projects, especially chemicals.

Many other oil and gas deals involved takeovers of European or U.S.-owned assets, often in Africa, by firms from China or other developing countries. The banking sector saw a similar pattern, which is set to continue, the report said.

Although African resources assets are changing hands, 90 percent of new FDI projects on the poorest continent are in manufacturing and services.

"The poorest countries are less and less dependent on extractive industry investment," the report said.

China's FDI spending rose 15 percent to $101 billion last year, and its outflows should surpass its inflows - $124 billion in 2013 - within two or three years, the report said.

China is not the only one with deep pockets. FDI outflows from the Gulf jumped by two-thirds last year to $31 billion, with potential for more. And the biggest 5,000 corporations globally are holding $4.5 trillion in cash.

Firms' cash-to-asset ratios in developing countries have been stable at about 12 percent over the past five years, but the ratio in developed countries grew from 9 percent before the financial crisis to 11 percent in 2013.

"This increase implies that, at the end of 2013, developed-country trans-national corporations held $670 billion more cash than they would have before - a significant brake on investment," the report said.

A further $1.07 trillion is held by private equity, which is "keeping its powder dry", the report said, funding 21 percent of cross-border M&A in 2013, compared to 31 percent in 2007.

(Reporting by Tom Miles; Editing by Tom Heneghan)