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?

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Volume 5 Issue 2

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

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?

Author
Damian Reilly Former Editor Arabian Business Middle East

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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

he 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 financial 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 were largely 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 sufficiently for foreign investors. Saudi Arabia, too, has worked hard to become recognized on the World Bank index of the worlds leading centers for business.

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.

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 financial 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 financial uncertainty, remained attractive to overseas investors. Egypts tourism, manufacturing and textiles industries likewise continued to look like good investments. Freeman says: Egypt benefited from not being overly linked to the American financial 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.

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

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Volume 5 Issue 2

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

Is the Middle East ready for investment?

Sector watch
Today, 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 figures2 show that although only 4.4% of all FDI deals done between 2003 and 2011 were in the energy 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 are taking place in the regions financial 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.

However, where the UAE was blown off course by the global financial 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 inflow of liquidity from overseas markedly lessen. Freeman says: The UAE was the winner from the Arab Spring. Where it suffered from the financial crisis, it benefitted 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.

Competing for FDI

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. Freeman says: Take Ernst & Young as an example. We have 750 people in our Dubai office. The next largest office has something like 300 people, in Bahrain. If you consider cities as competitive entities, competing to be seen as sustainable, attractive places for

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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

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

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 field 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 first stage is the identification of a resource, such as oil, which is valuable regardless of the sophistication of the local financial 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 financial, labor and land ensuring they are efficient 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 that is 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 financial 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 enact initiatives 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

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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

Is the Middle East ready for investment?

in the last five 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 decisionmaking problem.

Looking to the future

It 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 difficult, 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-attractivenesssurvey-2012/

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