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Global FDI Falls

In a landscape increasingly defined by shifting geopolitical alliances, persistent economic headwinds, and the relentless march of technological innovation, the latest World Investment Report from the United Nations Conference on Trade and Development (UNCTAD) paints a nuanced, somewhat paradoxical picture of global foreign direct investment (FDI). While the headline figure suggests a modest 4% overall increase in global FDI in 2024, a deeper dive into the data reveals a more complex and concerning trend: excluding financial flows routed through European conduit economies, FDI actually experienced a significant 11% decline. This stark contrast underscores a fundamental re-evaluation of global investment strategies, driven by a confluence of macroeconomic and geopolitical factors.

UNCTAD Secretary-General Rebeca Grynspan encapsulates the profound implications of these trends, stating in the report: “Investment is more than just capital flows and project pipelines. It’s a signal of where we’re placing our bets as a society.” Her words serve as a powerful reminder that FDI is not merely about financial transactions; it reflects confidence, strategic foresight, and the collective direction of the global economy.

Adding to the complexity, UNCTAD has taken the unusual step of revising its outlook for global FDI for 2025 from an initial “possibility of modest growth” to a definitively “negative” prognosis. This dramatic shift is attributed to pervasive investor uncertainty, largely fueled by escalating geopolitical tensions, the increasing assertiveness of industrial policy goals, persistently high borrowing costs, and volatile exchange rates. These elements collectively weave a tapestry of risk that makes long-term, cross-border investments a more perilous endeavor than in recent memory.

The Geopolitical Chessboard and Its Impact on Capital Flows

The specter of geopolitical tensions looms large over the global investment landscape. From ongoing conflicts like the Russia-Ukraine war (Al Jazeera report on Russia-Ukraine war), which continues to disrupt supply chains and energy markets, to heightened tensions in the South China Sea (Brookings article on South China Sea tensions) and the Middle East (Al Jazeera report on Middle East conflicts), stability, a cornerstone for investment, has become elusive. Companies are increasingly wary of committing capital to regions that could suddenly become unstable, leading to project delays, cancellations, or outright withdrawals. The ongoing fragmentation of the global economy into blocs based on political alignment rather than purely economic efficiency adds a new layer of complexity for multinational corporations. This “de-risking” or “friend-shoring” strategy is about ensuring resilience in supply chains, even if it means sacrificing some cost advantages.

This environment has spurred a global shift towards what economists and policymakers are calling “friend-shoring” or “reshoring.” Instead of prioritizing the lowest cost production locations, multinational corporations are now focusing on securing supply chains by investing in countries considered geopolitically aligned or within their own borders. Governments, in turn, are actively promoting these strategies through incentives and protective measures, further influencing FDI flows. This is particularly evident in critical sectors such as semiconductors (Semiconductor Industry Association) and rare earth minerals (USGS report on rare earth minerals), where national security and economic sovereignty are paramount. The competition for these strategic resources and technologies is intensifying, becoming a central feature of modern geopolitical rivalry.

Economic Headwinds: Borrowing Costs and Currency Swings

Beyond geopolitics, macroeconomic factors are exerting significant pressure on FDI. Central banks around the world, including the US Federal Reserve (Federal Reserve System) and the European Central Bank (European Central Bank official website), have aggressively raised interest rates in a bid to combat persistent inflation. While these measures are designed to cool overheated economies, they inevitably drive up borrowing costs for businesses. Higher interest rates make it more expensive to finance new investments, whether it’s building a new factory (greenfield investment) or acquiring an existing company (merger and acquisition). This increased cost of capital directly reduces the attractiveness of many projects, especially those with longer payback periods, making the hurdle for profitable foreign investment significantly higher.

Compounding this challenge is exchange rate volatility. For companies investing across borders, fluctuations in currency values can significantly impact the profitability of their ventures. A sudden depreciation of the host country’s currency can erode the value of profits when repatriated, making foreign investments riskier and less appealing. This unpredictability adds another layer of complexity for financial planners and often leads to a more cautious approach to international expansion. Businesses that rely on imported raw materials or components also face increased costs if their local currency weakens, impacting their operational profitability and potentially deterring foreign investors.

Industrial Policy Resurgence: Shaping Investment Destinations

The global economic climate has also witnessed a robust resurgence of industrial policy. Governments worldwide are increasingly intervening in markets, offering substantial subsidies, tax incentives, and other protective measures to foster growth in strategic sectors or to onshore critical industries. The US CHIPS and Science Act (White House fact sheet on CHIPS Act), designed to boost domestic semiconductor manufacturing, is a prime example, offering billions in incentives to lure chipmakers back to American soil. Similarly, the European Union’s Green Deal Industrial Plan (European Commission Green Deal Industrial Plan) aims to accelerate the transition to a net-zero economy by supporting green technologies and manufacturing within the EU. These policies are not just about economic growth; they are often deeply intertwined with national security concerns and the desire for technological sovereignty.

While these policies are intended to strengthen national economies and secure supply chains, they can also distort traditional FDI patterns. Companies might be incentivized to invest in locations offering generous subsidies, even if those locations wouldn’t be the most economically efficient choice under normal market conditions. This creates a “subsidy race” among nations, potentially diverting FDI from developing economies that cannot compete with the financial firepower of wealthier nations. This competition for capital, driven by policy rather than pure market forces, can lead to inefficiencies in global resource allocation and poses challenges for international trade rules.

Uneven Development: Regional Disparities in FDI Inflows

The UNCTAD report meticulously details the uneven distribution of FDI inflows across various regions, highlighting pronounced disparities that exacerbate global inequalities.

Europe’s Steep Decline: Europe experienced a particularly harsh contraction, with FDI flows plummeting a stark 58% in 2024. Major economic powerhouses like Germany saw an astonishing 89% drop (Germany Foreign Direct Investment data). This significant decline can be attributed to several factors:

  • Lingering Effects of Brexit: The UK’s departure from the European Union continues to create uncertainty and regulatory hurdles, deterring some investors who previously used the UK as a gateway to the EU market.
  • Energy Crisis: The fallout from the Russia-Ukraine war led to an acute energy crisis in Europe, driving up operating costs for industries and impacting investor confidence. Many energy-intensive industries have faced immense pressure, leading to scaled-back investment plans or even relocation considerations.
  • Stricter Regulatory Environments: Europe’s robust environmental and labor regulations, while beneficial for society, can sometimes be perceived as additional costs or complexities by foreign investors, especially when compared to regions with lighter regulatory burdens.
  • Economic Slowdown and Inflation: Several European economies have faced headwinds in recent years, including higher inflation and slower growth rates compared to other major economies, impacting their attractiveness as investment destinations. Consumer demand has also softened in some areas, further reducing investment appetite.

Latin America & the Caribbean: This region also saw a 12% drop in FDI. However, the report noted greater investment interest in larger economies such as Argentina, Brazil, and Mexico.

  • Argentina: Despite its perennial economic instability, high inflation, and significant debt burden, Argentina’s recent political shifts, including a more market-friendly government, and its vast natural resources (lithium, gas) may have piqued some investor interest, particularly in the extractive industries, albeit amidst high risk.
  • Brazil: Latin America’s largest economy often attracts FDI due to its vast internal market and rich natural resources, especially in agriculture and mining. Fluctuations in commodity prices and the domestic political landscape heavily influence these flows. Brazil’s efforts to improve its business environment and attract renewable energy investments are also playing a role.
  • Mexico: Benefiting significantly from the nearshoring trend (KPMG report on nearshoring in Mexico), Mexico has become an increasingly attractive manufacturing hub for companies seeking to shorten supply chains and reduce reliance on distant production centers, particularly in Asia. Its proximity to the US market, existing free trade agreements (USMCA), and relatively lower labor costs make it a compelling destination for a range of industries, from automotive to electronics.

Middle East’s Resilience: The Middle East demonstrated strong inflows, primarily driven by governments’ ambitious efforts to diversify their oil-dependent economies. Nations like Saudi Arabia (Saudi Vision 2030 official website) with its “Vision 2030” and the United Arab Emirates (Dubai Future Foundation official website) with its focus on tourism, technology, and logistics, are actively investing in non-oil sectors to build sustainable economic futures. These large-scale national development plans, often backed by substantial sovereign wealth, are creating new industries and attracting foreign expertise and capital in areas like green hydrogen, tourism infrastructure, and advanced technology parks.

North America’s Surge: North America experienced the biggest growth, a robust 23% increase in FDI, predominantly fueled by major semiconductor projects. The aforementioned CHIPS Act in the US, providing billions in subsidies for chip manufacturing and research, has directly incentivized significant foreign investment in this strategically vital industry. Companies like Intel, TSMC, and Samsung have announced massive investments in new fabrication plants across the US, creating a ripple effect of associated investments in supporting industries and infrastructure. This surge highlights the effectiveness of targeted industrial policy in redirecting global capital and bolstering national strategic capabilities.

Africa’s Mixed Fortunes: Africa saw a substantial 75% rise in FDI, though this figure was largely skewed by one colossal megaproject in Egypt. While the report doesn’t specify, this likely refers to large-scale infrastructure developments, potentially related to the Suez Canal Economic Zone (Suez Canal Economic Zone official site) or emerging green hydrogen initiatives aimed at leveraging Egypt’s abundant renewable energy resources and strategic location. Excluding this single project, FDI still grew by a respectable 12%, indicating broader, albeit more modest, investment interest across the continent. This underlying growth can be attributed to ongoing economic reforms, improved business environments in certain countries, and the continent’s long-term demographic and resource potential. However, challenges such as governance issues, inadequate infrastructure beyond key corridors, and perceived higher risks continue to temper larger inflows across many African nations, leading to uneven distribution of investments.

Asia’s Divergent Paths: Asia experienced a 3% decline overall, but this was primarily driven by a significant 29% decrease in FDI into China. China’s decline is multifaceted, stemming from:

  • Legacy of Zero-COVID Policies: Strict and prolonged lockdowns and economic disruptions impacted business confidence and highlighted operational risks for foreign companies.
  • Regulatory Crackdowns: Unpredictable regulatory actions in sectors like technology, education, and real estate created an uncertain operating environment, leading some foreign firms to reconsider their presence.
  • Slowing Economic Growth: A general slowdown in China’s economy, coupled with concerns about its property sector and consumer demand, has made it less appealing to some investors seeking high-growth opportunities.
  • Geopolitical Tensions and De-risking: Ongoing trade disputes and geopolitical rivalry with the US and other Western nations have prompted many companies to “de-risk” their supply chains, seeking to reduce their reliance on China and diversify production to other Asian countries or back home. This strategic shift is influencing long-term investment decisions.

In stark contrast, ASEAN countries (ASEAN Secretariat official website) enjoyed record inflows of $225 billion, a remarkable 10% increase. Nations like Vietnam, Indonesia, Malaysia, and Thailand are increasingly viewed as attractive alternatives to China for manufacturing and supply chain diversification, offering competitive labor costs, growing domestic markets, and increasingly business-friendly environments. Investment in these countries is being driven by companies looking for diversified manufacturing bases, strong export potential, and growing consumer markets, further solidifying their role in global value chains.

The Shifting Sands of Investment: Sources and Destinations

The report underscores a continuity in investment patterns, noting that the top sources and destinations for FDI largely overlap, with six countries appearing in the top ten for both. The United States (SelectUSA official website) maintains its dominant position at the apex of both lists, reaffirming its status as both a magnet for and a generator of global capital. This reflects the size and dynamism of the US economy, its robust innovation ecosystem, and its role as a global financial hub. UNCTAD highlights a noteworthy trend: five of the top ten sources of FDI outflows are now Asian economies. This significant development underlines Asia’s burgeoning role not just as a recipient of foreign investment, but as a powerful, growing force in global capital markets, increasingly shaping international investment flows and investing heavily in other developing and emerging economies.

Investment Trends: Greenfield, M&A, and International Project Finance

The granular data on investment types reveals crucial shifts in how capital is being deployed globally:

  • Greenfield Investments: These involve setting up new facilities or operations from scratch. While the number of greenfield projects rose, their value surprisingly fell by 5%. This could suggest that new projects are becoming smaller in scale, more diversified across various ventures, or are perhaps less capital-intensive, focusing on areas like digital services, research and development, or smaller manufacturing units rather than mega-factories. This trend might reflect a more cautious approach to large-scale, long-term commitments in the face of uncertainty.
  • Cross-border Mergers and Acquisitions (M&A): This activity, involving the purchase of existing companies across borders, saw a 14% rise. However, it still remained below the average of the past ten years. This indicates that despite an uptick, pervasive uncertainty, challenges in valuation due to volatile market conditions, and perhaps increased regulatory scrutiny of large mergers are keeping M&A activity subdued compared to historical norms. Companies might prefer smaller, more targeted acquisitions or strategic partnerships over large-scale consolidations.
  • International Project Finance: This critical form of financing, essential for large-scale international development and infrastructure projects, fell by 26%, marking the second consecutive year of decline. This is particularly concerning as it directly impacts major infrastructure developments worldwide. The drop was most pronounced in the infrastructure sector, where the value of international investment project announcements fell by 14%. This decline is a major red flag for global development efforts, as sustainable infrastructure is foundational for economic growth, job creation, and poverty reduction.

SDGs at Risk: The Decline in Sustainable Investment

Perhaps one of the most alarming findings of the report is the decline in foreign investment in sectors critical to advancing the UN Sustainable Development Goals (SDGs) (UN Sustainable Development Goals official website). Developing countries saw substantial drops in vital areas:

  • Infrastructure: A 25% fall, hindering development and connectivity. This decline slows down progress on SDG 9 (Industry, Innovation, and Infrastructure), which is fundamental for economic growth and societal well-being. Without robust infrastructure – roads, ports, energy grids, and digital networks – developing nations struggle to attract further investment, facilitate trade, and provide basic services to their populations.
  • Renewable Energy: A 31% decrease, undermining global efforts to combat climate change and transition to cleaner energy sources. This directly impacts SDG 7 (Affordable and Clean Energy) and SDG 13 (Climate Action). The urgency of transitioning away from fossil fuels is amplified by climate reports, making this decline particularly worrisome for global sustainability targets and the long-term health of the planet.
  • Water and Sanitation: A 30% drop, directly impacting public health and living standards. This decline poses a severe threat to SDG 6 (Clean Water and Sanitation), which is crucial for preventing disease, promoting hygiene, and ensuring basic human dignity, especially in vulnerable communities.
  • Agri-food Systems: A 19% decline, threatening food security and rural livelihoods. This directly affects SDG 2 (Zero Hunger) and SDG 1 (No Poverty). Investment in sustainable agriculture is vital for feeding a growing global population and supporting the millions who depend on farming for their income. It’s also crucial for climate adaptation and mitigation within the agricultural sector.

Only healthcare saw modest growth, likely a continued ripple effect of increased global focus on health infrastructure post-pandemic and ongoing efforts to bolster resilience against future health crises (SDG 3: Good Health and Well-being). This trend highlights a stark disconnect: while the world faces pressing challenges in sustainable development, the financial flows needed to address them are dwindling. It underscores a critical policy gap where short-term economic or strategic interests, such as the semiconductor race, may be overshadowing long-term global well-being and environmental sustainability.

In sharp contrast, international project finance into semiconductors and the digital economy soared by 140% and 107% respectively. This illustrates a clear shift in investment priorities, driven by both national strategic interests (semiconductors, due to their foundational role in almost all modern technology) and the undeniable commercial opportunities presented by digitalization. While these investments are crucial for technological advancement, their rapid growth relative to vital SDG sectors raises questions about balanced development and the equitable distribution of global capital.

The Digital Economy: A Double-Edged Sword of Growth and Disparity

The UNCTAD report emphatically highlights the ascendancy of the digital economy, noting its staggering growth since 2020, almost tripling in value to an impressive $360 billion. It now accounts for a significant one-third of all FDI greenfield projects globally. This explosion in digital investment is driven by the ubiquitous nature of technology, the rapid adoption of digital services, and the ongoing digital transformation of industries worldwide. From e-commerce and cloud computing to artificial intelligence (AI) and blockchain, the digital sector is proving to be a fertile ground for new ventures and expansion. This growth is also heavily influenced by the convergence of AI, big data, and cloud technologies, enabling new financial models and operational efficiencies, as hinted by the partner content on “Innovating tomorrow: The convergence of AI, big data and cloud in finance.”

However, the report also issues a stark warning: this growth, while impressive, risks exacerbating inequalities. The reason is simple: investment in the digital economy is highly concentrated in certain countries. “About 80% of the greenfield projects in digital sectors in the Global South went to just 10 countries – most of them in Asia,” the report states. This concentration means that while a few developing nations are riding the digital wave, many low-income countries remain firmly “locked out” of these transformative opportunities, deepening the digital divide.

Several major obstacles stand in their way:

  • Infrastructure Gaps: Many low-income countries simply lack the foundational digital infrastructure – reliable high-speed internet, adequate power supply, and secure data networks – necessary to support advanced digital operations. The report points out that in 2024, out of the $62 billion in funding needed to build essential ICT infrastructure in developing countries, a mere $9 billion was actually invested. This colossal funding gap is a critical bottleneck, hindering their ability to participate meaningfully in the global digital economy. Without this basic connectivity, the benefits of digital services, e-learning, remote work, and digital trade remain out of reach for vast swathes of their populations, effectively locking them out of future growth.
  • High Investment Risks: Perceived political instability, insufficient legal frameworks, and a lack of skilled labor in some developing regions can deter foreign digital investors, who seek stable, predictable environments for their technology-driven operations. The perceived higher country risk premiums in some low-income nations make digital projects less attractive, despite their high potential returns.
  • Weak Regulatory Frameworks: Ambiguous or non-existent regulations around data privacy, cybersecurity, intellectual property, and e-commerce can create uncertainty for investors, making them hesitant to commit significant capital. A robust and transparent regulatory environment is crucial for fostering trust and attracting long-term digital investment, providing clarity and confidence for international players.

Regional Disparities in Digital Adoption:

While the overall picture for low-income countries is bleak, some middle-income countries in Latin America and Asia have seen significant growth, particularly in the burgeoning fintech sector (PwC Fintech in ASEAN 2024 Report) and as increasingly attractive destinations for data centers (Data Center Knowledge Hub). Fintech, or financial technology, leverages digital innovation to improve and automate financial services, offering opportunities for financial inclusion in previously underserved markets. The rise of data centers reflects the global demand for cloud computing, artificial intelligence processing, and data storage, requiring massive infrastructure investments. These countries are often strategically located, have improving regulatory environments, and a growing pool of tech talent.

However, the least-developed economies, particularly in Africa, have largely missed out on this digital boom. Africa, despite its immense potential and young, tech-savvy population, saw only 18 fintech projects in 2024 – almost 200 fewer than in developing Asian countries. Moreover, the continent received a meager 3% of global data center investments. This disparity further entrenches existing economic inequalities, as countries unable to embrace digitalization risk falling further behind in terms of economic growth, job creation, and access to modern services. The challenges here are systemic, encompassing not only infrastructure but also human capital development, access to affordable energy, and the establishment of conducive legal and regulatory frameworks.

The Environmental Footprint of the Digital Age

Beyond economic disparities, UNCTAD also highlights a pressing environmental concern: “The digital economy’s environmental footprint is growing, with rising energy use and e-waste.” The massive server farms that power cloud computing and artificial intelligence consume enormous amounts of electricity, much of which is still generated from fossil fuels, contributing significantly to carbon emissions. The rapid obsolescence of electronic devices also generates vast quantities of electronic waste, or e-waste, which often contains hazardous materials and poses significant disposal challenges if not managed responsibly (UNEP e-waste Report). This aspect necessitates a more sustainable approach to digital development, integrating green practices into the design, operation, and disposal of digital infrastructure and devices, and promoting circular economy principles.

Investment Policy in a New Global Context

Investment policy is increasingly being shaped by a dual desire: to attract capital and to develop secure supply chains for critical industries. The use of investment incentives has been highly pronounced in 2024, accounting for a record 45% of all measures to attract capital. These incentives can range from tax breaks and subsidies to preferential access to land or energy. While seemingly attractive, the report highlights a critical caveat: “The greater the reliance on incentives as investment attraction instruments runs counter to the objectives of international tax reform efforts aimed at curbing harmful tax competition for investment.” This refers to global initiatives like the OECD/G20 Inclusive Framework on BEPS (OECD BEPS Framework), which seeks to establish a global minimum corporate tax rate to prevent a “race to the bottom” in corporate taxation and ensure that multinational enterprises pay their fair share of tax wherever they operate. The proliferation of incentives, particularly significant ones, can undermine these efforts by creating loopholes or competitive distortions.

At the same time, FDI screening measures continue to rise and represent more than 40% of measures less favorable to investors in the past year. Most of these measures are from developed countries in the critical raw materials and high-tech industries. These screening mechanisms, often driven by national security concerns, allow governments to review and potentially block foreign investments deemed a risk to national security, critical infrastructure, or sensitive technologies. Examples include investments in rare earth mining, advanced semiconductor manufacturing, or critical data infrastructure, reflecting a growing geopolitical competition for technological advantage and control over essential resources.

Policy Gaps and Recommendations for a Digital Future

A crucial finding of the report is the disconnect between national digital strategies and broader economic and environmental policies in many developing countries. While an overwhelming number of these nations have articulated national digital strategies, “few are linked to broader industrial, environmental or investment policies.” This siloed approach means that digital initiatives might not be fully integrated into overall economic development plans or might fail to address their environmental impact comprehensively. For instance, a digital transformation plan might not explicitly consider the energy demands of new data centers or the lifecycle management of digital hardware.

Furthermore, most of these strategies also fail to leverage local Investment Promotion Agencies (IPAs) (WAIPA official website), with only 20% mentioning them in their initiatives. IPAs are crucial government bodies designed to attract and facilitate foreign investment, serving as a vital link between potential investors and host countries. Their underutilization in digital strategies represents a missed opportunity to proactively court and support digital FDI, as IPAs possess the expertise in marketing investment opportunities, facilitating bureaucratic processes, and connecting investors with local partners.

To effectively capitalize on the advantages of international investment in the digital age, UNCTAD offers clear recommendations:

  1. Design Integrated Strategies: Countries should develop comprehensive strategies that facilitate FDI into the digital economy while carefully balancing the imperatives of national security. This means creating clear, transparent rules that protect critical infrastructure and data, without stifling innovation or deterring legitimate investment. Such strategies should be holistic, linking digital goals with broader industrial and environmental objectives.
  2. Increase the Role of IPAs: Investment Promotion Agencies must be empowered and fully integrated into national digital strategies. They can play a pivotal role in identifying opportunities, attracting targeted digital investments, and streamlining the investment process, acting as a single point of contact for potential digital investors.
  3. Strengthen Regulations: Robust and adaptive regulatory frameworks are essential. This includes developing clear rules for data governance, cybersecurity, intellectual property, and digital taxation, ensuring a predictable and fair operating environment for digital businesses while protecting consumer interests and national sovereignty. A well-defined regulatory landscape reduces uncertainty for investors and fosters a trustworthy digital ecosystem.

The Road Ahead: Navigating a Complex Investment Landscape

The UNCTAD World Investment Report for 2024 serves as a critical barometer of global economic health and investment sentiment. The overall decline in FDI, masked by conduit economies, signals a heightened sense of caution and a retreat from purely cost-driven global supply chains. The pronounced impact of geopolitical tensions, high borrowing costs, and the re-emergence of aggressive industrial policies are undeniably reshaping where and how companies choose to invest. This shifting landscape means that traditional investment models are being challenged, requiring businesses and governments to adapt quickly.

While the booming digital economy offers immense opportunities for growth and innovation, its highly concentrated nature threatens to widen the economic chasm between developed and developing nations. The stark contrast between investment flows into semiconductors and digital technologies versus the critical, yet underfunded, Sustainable Development Goals highlights a fundamental imbalance in global priorities. This divergence could lead to a two-speed world where some nations leap forward digitally while others struggle with basic development needs.

Moving forward, policymakers, investors, and international organizations face a formidable challenge. The imperative is to foster an investment climate that not only prioritizes economic growth but also promotes inclusive, sustainable development. This will require greater international cooperation, a commitment to fair and transparent investment policies, and a strategic focus on bridging the digital divide that threatens to leave many behind. The “bets we’re placing as a society,” as UNCTAD Secretary-General Grynspan aptly puts it, will determine whether the future is characterized by shared prosperity or deepening inequality. The report is a clear call to action, urging a re-evaluation of global investment strategies to ensure a more equitable and sustainable future for all. This will involve significant investment in human capital, fostering local innovation ecosystems, and developing robust infrastructure that supports both traditional and digital economies. The global community must work collaboratively to ensure that the benefits of the digital revolution are accessible to all, and that essential sustainable development goals receive the investment they critically need.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

25th June, 2025

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