Is the Middle East Ready for Investment

7/29/2019 Is the Middle East Ready for Investment

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This article is an extract from Performance, Volume 5, Issue 2, May 2013. The full journal is available at

www.ey.com/performance

Article

Is the Middle East

ready for investment?

Volume 5 Issue 246


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Author

Damian Reilly Former Editor

Arabian Business

Middle East

Damian Reilly talks to Gus Freeman, Ernst & Youngs Head of Middle East Economic Advisory

Services, about the steps Middle Eastern and North African (MENA) economies have taken to

make themselves as attractive as possible to international investors. Has enough been done?

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48 Volume 5 Issue 2

The Middle East came late to the foreign direct

investment (FDI) party. While countries all over the

world competed with increasing ferocity to attract

overseas investors from as early as the 1970s, the

Middle East was not focused on this at that time.

This was particularly true of the GCC1 economies.

Up until 2000, the widely held perception was that

the Gulf countries were themselves too small to

absorb even a small quantity of their own wealth and, therefore,

looked instead to invest outward. The question of how or why to

attract FDI was moot.

This attitude has changed dramatically in the last decade. Today,

as Middle Eastern countries try to address the biggest challenge

they face creating jobs for rapidly burgeoning populations the

regions economies are wide open to the opportunities overseas

investment brings.

But do overseas investors still have the appetite to invest in

the Middle East? The nancial crisis, the Arab Spring and the real

possibility of tensions between Iran and Israel boiling over are all

factors that give corporate boardrooms pause for thought when it

comes to signing off on Middle Eastern projects.

Gus Freeman, Head of Middle East Economic Advisory Services

at Ernst & Young, says: Until 2000, FDI was not a feature for

Middle East countries. This was certainly not through lack of desire

from major investors, globally. The economies in the region werelargely closed to FDI.

However, with the economic boom from 2004 to 2008, this

changed. The Middle East became a major destination for foreign

investment. The change in attitude coincided with an increase in

the availability of international investment and investors looking

for places to place money. In response, very concerted efforts were

made by countries in the GCC led by the United Arab Emirates

to open up.

Of all Middle Eastern destinations, Dubai has been easily the

most active in terms of attracting FDI. It has operated freezone

areas, allowing foreign organizations to operate exempt from

local regulations, since the 1980s. But, in the last decade, Saudi

Arabia and Oman have also enacted laws to liberalize the economic

environment sufciently for foreign investors. Saudi Arabia, too,has worked hard to become recognized on the World Bank index of

the worlds leading centers for business.

But it is not only Gulf economies that have looked to attract

investors; Lebanon and Egypt have also worked hard to achieve it.

Freeman says: The United Arab Emirates, particularly Dubai,

has long led the charge of Middle East destinations for FDI.

However, when the nancial crisis struck, it was the UAE that

was impacted the most, in 200910. Investment from overseas

reduced dramatically.

The UAEs loss was an opportunity for other Middle Eastern

economies. Saudi Arabia, whose energy and construction were

largely state backed, and therefore insulated against the ravages

of global nancial uncertainty, remained attractive to overseas

investors. Egypts tourism, manufacturing and textiles industries

likewise continued to look like good investments.

Freeman says: Egypt beneted from not being overly linked to

the American nancial system. Egypt has the Middle Easts only

vertically integrated textiles industry, because they grow the cotton,

and that was not affected by subprime mortgages in America.

The race to be the pre-eminent

center for FDI in the Middle East is

very much on, but there are many

who believe Dubais position as the

leader is unassailable.

Article

1. The Gulf Cooperation Council (GCC) is a political and economic alliance of the following six

Middle Eastern countries: Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrainand Oman.

2. Shifting perspectives: Ernst & Youngs 2012 attractiveness survey, Middle East, Ernst & Young,2012.


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However, where the UAE was blown off course by the globalnancial crisis, it was not affected by the Arab Spring of 2011, and

thus regained some degree of allure in the eyes of the international

investment community. Investors began to refer to the country as

the Switzerland of the Middle East.

Uprisings against governments across the region saw foreign

investment into Egypt virtually cease instead, millions of dollars

a day went out of the country and Saudi, too, saw FDI halve as

investors became nervous. All Arab countries, in fact, saw the

inow of liquidity from overseas markedly lessen.

Freeman says: The UAE was the winner from the Arab Spring.

Where it suffered from the nancial crisis, it benetted from the

Arab Spring. Distressed countries in the region were looking for

somewhere to put their money. A lot of that money went into Dubai

real estate, which is a big industry segment for the emirate.

Sector watchToday, FDI into the Gulf and the broader

Middle Eastern countries is still well below

the levels seen in 200809, but certainly

that trend is being reversed. The sectors

that have traditionally proved most

attractive to foreign investors, namely

energy and construction, still retain their

luster. Ernst & Young gures2 show that

although only 4.4% of all FDI deals done

between 2003 and 2011 were in theenergy sector, they accounted for some

23.3% of overall monetary value.

Tourism, too, is on the up across almost

all Middle Eastern countries. It is widely

valued as not only a lucrative contributor to

GDP, but as an effective means of engaging

with the world and changing perceptions of

the Middle East that are often long out of

date or simply wrong.

Manufacturing, too, is increasingly

popular as an investment opportunity.

Evidence of the ways in which Middle

Eastern economies are maturing as FDI

hotspots is apparent in the increased number of deals that aretaking place in the regions nancial services and banking sectors.

Dubai is very much the leader in this area, as it is across the MENA

FDI spectrum.

In 2011, 368 FDI deals were struck in Dubai, the most in the

Middle East. Saudi Arabia saw the second most deals, with 106.

Competing for FDIThe race to be the pre-eminent center for FDI in the Middle East is

very much on, but there are many who believe Dubais position as

the leader is unassailable.

Freeman says: Take Ernst & Young as an example. We have 750

people in our Dubai ofce. The next largest ofce has something

like 300 people, in Bahrain. If you consider cities as competitive

entities, competing to be seen as sustainable, attractive places for

Is the Middle East ready for investment?


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50 Volume 5 Issue 2

Article

foreign investment, then it is all about where innovators, investors

and their employees want to live. The other Gulf cities must try to

compete with that.

It is worth remembering, however, that the race for FDI has a

long way to go. Although Dubai has operated freezones since the

1980s, most other Middle Eastern economies have only sought

FDI since 2000. The competition is only a decade old. However, the

playing eld is anything but level.

Freeman says: Nearly all of the countries in the region are

trying to become more attractive to investors, but doing so depends

largely on where they have got to in their economic development.

He points out that the World Forum Global Competitiveness

Report has a useful three-step method of benchmarking countries

progress toward being competitive for FDI.

The rst stage is the identication of a resource, such as oil,

which is valuable regardless of the sophistication of the local

nancial markets. To compete internationally, a country can just

maximize this asset. But there is a limit to how competitive this

enables it to be because, realistically, all it can do is raise or lower

the price, Freeman says.

The second stage is to develop domestic markets nancial,

labor and land ensuring they are efcient and transparent.

The third stage is to become a center for innovation, attracting

talent and creating a dynamic business environment.

Freeman says: The UAE is the only country in the region thatis in the third stage. The next two closest countries are Oman and

Bahrain. The countries in the region that have considerable oil

wealth Saudi, Qatar and Kuwait are moving between stages one

and two. They still have a way to go in developing their markets and

innovation ecosystems

Bahrain or Oman, to compete globally for FDI, must now work

on developing an entrepreneurial ecosystem and infrastructure.

It is not a simple task. In UAE, the infrastructure and the nancial

systems are comparatively well advanced. The focus now is on

developing SMEs and entrepreneurialism. It is also on the soft

infrastructure: the legal infrastructure for the ownership of

companies, intellectual property and real estate.

Not all Middle Eastern countries are doing as much as they could

to attract FDI. Kuwait is notable, in that it is not so active to enactinitiatives to seek overseas investors. Regular political stasis, often

resulting in the dissolution of Parliament, has acted as a deterrent

to potential investors. In fact, Kuwaitis are the most keen of all Gulf

inhabitants to see their money invested outside the country, a sign

that is hardly likely to encourage external investment.

Freeman says: They are politically stuck. Kuwait is the model

of Gulf democracy in that it has had a parliament the longest. But

The world wants to invest in the

Middle East. The question is,

does the Middle East want that

investment enough to challenge old

ways of going about business?Gus Freeman, Head of Middle East Economic Advisory Services,

Ernst & Young


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Is the Middle East ready for investment?

in the last ve years, it has been in deadlock. Look at the Five

Year Plan: a comparison of budgeted expenditure against actual

expenditure shows that it is largely unspent. They are not able to

collectively decide or execute investment projects. It is a decision-

making problem.

Looking to the futureIt is not surprising that the Middle East remains enticing for FDI;

MENA rates of growth far outstrip those of Western economies.

Multinational corporations looking to grow funds will see far

greater returns, if they can overcome their concerns, by placing

them in the MENA region than by investing them in traditional

Western portfolios.

However, there is still much the Gulf and MENA can do to make

the region more attractive, even in the short term, and thereby

return FDI levels to those witnessed during the boom.

More can be done, for example, to modernize laws relating to

ownership of companies and real estate, and laws that result in the

jailing of debtors, or the necessity of obtaining permission from an

employer to exit the country. These laws make attracting the best

talent to the region difcult, Freeman says.

Shifting perspectives, Ernst & Youngs report on the

attractiveness of MENA economies for foreign investment,

was released in 2012. Based on interviews with 355

international decision-makers and extensive empirical

research, the report is a must read for anyone looking to

invest in, or to learn more about, the economies of the

MENA region. For further information, go to

http://emergingmarkets.ey.com/middle-east-attractiveness-

survey-2012/

Documents

Is the Middle East Ready for Investment