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European DFIs and their countercyclical role

Paddy Carter

Director of Research and Policy, British International Invest (BII)

Just when the global economy seemed to be recovering from the shock of Covid, the “polycrisis” of war, inflation and unsustainable debt arrived. After sharp declines in 2020, the headline statistics for foreign direct investment (FDI) into developing economies had rebounded in 2021, and the first half of 2022 had showed further modest growth (World Investment Reports for 2021 and 2022; Investment Trends Monitor Issue 44). Greenfield FDI, which is a more relevant comparator for DFIs than headline FDI, fell 42% in 2020 before recovering by 16% in 2021. Preliminary data for 2022 showed a 6% increase in the first half of the year. But the upturn did not last, and forecasts now are for another downturn in 2023. Even before the current crisis hit, there were signs of weakness. Within the set of less developed countries (LDCs) there was no recovery at all. Both international project finance and greenfield FDI in LDCs are expected to be lower in 2022 than they were in 2020 (Investment Trends Monitor Issue 45).

DFIs are asked to step forward when others step back. This is never easy. Demand for investment falls when businesses face uncertainty. Projects in the pipeline get put on hold as firms decide to pause fund-raising plans. DFIs have a duty to swim against the tide, but that does not make losing money by attempting to prop up failing businesses a responsible use of taxpayers’ funds that could be invested for impact elsewhere. Covid made taking investment decisions doubly difficult because travel was impossible and, for a while, there was fundamental uncertainty about where support would be most needed and which businesses would be viable once some sort of normality returned. In 2020, the volume of EDFI commitments fell by 18%. A substantially smaller drop than the 42% decline in greenfield FDI, so relatively countercyclical but still illustrative of how difficult it was to close investments that year. EDFI members were also able to maintain the share of investments going to LDCs and lower-middle income countries across the years, in contrast to FDI. The sample size of European DFIs is small and idiosyncrasies with individual DFIs’ funding situations introduce noise to the data, but there is some sign that the regulated DFIs found it harder to invest countercyclically: the weighted average decline among regulated DFIs in 2020 was -26%, for unregulated it was -4%. In 2021, total EDFI commitments rose by 14%, slightly less than global greenfield FDI, which reflects the fact there was less of a drop in 2020 to bounce back from. Growth continued in 2022 at a rate of 2%:

New commitments of European DFIs over the past 5 years (2018-2022)

New commitments of European DFIs over the past 5 years (2018-2022)

Looking ahead to 2023, the headwinds that DFIs face are somewhat different compared to the pandemic. Monetary tightening means investors in OECD economies can now find more attractive returns at home, making it harder to mobilise private investment in countries perceived as higher risk. In some countries, debt crisis will put the brakes on large infrastructure investments where the government backstops revenues, and inflated input prices will also put some projects in peril. There are also foreign exchange shortages and recessions to contend with. But the crisis has also drawn attention for the need for investment in food and energy security, among other things. Just Energy Transition Partnerships are being struck to hopefully smooth the way for more investment. To say more would create a hostage to fortune, but there are reasons to be optimistic that European DFIs will be able to sustain the pace of investment despite worsening market conditions.


This essay is prepared for our 2023 Annual report