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World Bank warns FDI in emerging nations to fall 31%

FOREIGN direct investment in developing nations will drop by US$180 billion, or 31 percent, this year as a global recession prompts multinationals to cut spending on factories and mines, according to the World Bank.

The decline will put renewed pressure on emerging-market currencies, even as asset sales by fund managers slow, according to Mansoor Dailami, manager of international finance in the global development prospects group. Rallies in the South Korean won, Brazil's real and the Polish zloty have all faltered since the end of last year as companies, including Rio Tinto Group and Honda Motor Co, put expansion plans on hold.

"This is the most serious reaction so far to the global recession, the factory level," Dailami, who joined the bank in 1986, said in an interview in Washington. "Most emerging-market currencies are already under pressure and this tendency will continue. In 2008, it was a stocks and portfolio story. This year, it will be an FDI story."

The United Nations said in its 2009 outlook that FDI fell an estimated 10 percent in the developing world last year and will cool further this year.

FDI, which typically involves spending on plant and machinery or the purchase of a controlling interest, accounted for 38 percent of inflows into emerging markets in recent years, compared with 10 percent for investment by funds and 54 percent for loans, according to Morgan Stanley estimates.

Bloomberg-JPMorgan indexes tracking currencies in Asia, Latin America and east Europe last year posted declines of 5.9 percent, 19 percent and 11 percent, respectively, and have since dropped further. The won is down 8.3 percent versus the United States dollar so far this year following a 17-percent jump last month. The real is 2.6 percent weaker and the zloty has lost 12 percent.

Rio, the third-largest mining company, this month postponed a US$2.15-billion expansion of an iron-ore mine in Brazil. Honda, Japan's No. 2 auto maker, delayed construction of a US$100-million factory in Argentina and has shelved expansion plans in Turkey and India. Hitachi Construction Machinery Co, the world's largest maker of giant excavators, froze a US$1-billion plan to expand production in China and other emerging markets.

"I've never before experienced seeing sudden, simultaneous drops in worldwide demand," Hitachi Chief Executive Officer Michijiro Kikawa said this month in an interview in Tokyo. "New investment won't be implemented until we can foresee how the market will recover."

As recently as October 28, the Tokyo-based firm was predicting 26-percent growth in China sales for the current financial year. The nation's excavator market shrank 50 percent from year-earlier levels in November and 37 percent last month.


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