UPDATE 2-Currency war risk threatens investment recovery-UN

Thu Oct 14, 2010 6:57am EDT

* FDI inflows fall 25 pct in 2nd qtr vs 1st qtr

* Repatriated earnings rise on currency depreciation fears

(Recasts, adds byline, details, link)

By Jonathan Lynn

GENEVA, Oct 14 (Reuters) - The risk of a currency war as governments try to push down exchange rates to make exports more competitive is deterring businesses from investing abroad, a United Nations expert said on Thursday.

Uncertainty about exchange rates is already causing multinational corporations to scale back foreign investment, said James Zhan, a senior official at the United Nations Conference on Trade and Development (UNCTAD).

As a result foreign direct investment (FDI) -- a key source of finance for developing countries -- is likely to stagnate this year at about $1.1 trillion, one quarter below its level in the years running up to the financial crisis, said Zhan, who heads UNCTAD's investment and enterprise division.

"We have seen recently fluctuations of major currencies in a significant manner. There is a danger of a currency war," Zhan told a briefing.

Zhan's comments follow a series of warnings by policy-makers that the world is in or heading for a currency war as governments try to push down their exchange rates to make their exports more competitive. [ID:nLDE69D0ST]

Competitive devaluations were a double-edged sword as far as investment is concerned, Zhan said.

They could attract inward investment by making assets cheaper and strengthening a country's export competitiveness.

But they would also reduce the value of profits repatriated from foreign affiliates, making investment less attractive for a multinational corporation, he said.

UNCTAD, whose monitoring of global investment flows is closely followed by economists and businesses, said it appeared that re-invested earnings, which typically account for one third of foreign direct investment (FDI), had fallen in the second quarter of this year as companies repatriated profits in anticipation of further currency depreciation.

Total FDI inflows fell by about 25 percent in the second quarter of this year from their level in the first three months and were some 15 percent lower than a year earlier, according to data in UNCTAD's latest Global Investment Trends Monitor.

"A new FDI boom clearly remains a distant prospect," Zhan said.

UNCTAD said the fall in FDI in the second quarter was particularly pronounced in developed countries, with some, such as Britain, a traditional destination for investment, actually seeing outflows of $7 billion against inflows of $42 billion in the previous three months.

Belgium and Ireland also suffered outflows amid turmoil on sovereign debt markets in Europe.

The United States, traditionally the biggest destination for foreign investment, saw inflows almost halve to $28.5 billion in the first quarter.

That figure was barely ahead of China, with inflows of $28.0 billion. Two other emerging economies, Hong Kong and Russia, were among the top five destinations.

Preliminary data for the third quarter pointed to an increase in the value but not the number of cross-border mergers and acquisitions. But greenfield investments fell in both number and value terms in the third quarter. (For full UNCTAD monitor go to link.reuters.com/wab58p ) (Editing by Jon Boyle) (jonathan.lynn@reuters.com; +41 22 733 3831; Reuters Messaging: jonathan.lynn.reuters.com@reuters.net ))

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