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Is the Middle East Ready for Investment
Transcript of 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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This article is an extract from Performance, Volume 5, Issue 2, May 2013. The full journal is available at
www.ey.com/performance
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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This article is an extract from Performance, Volume 5, Issue 2, May 2013. The full journal is available at
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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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This article is an extract from Performance, Volume 5, Issue 2, May 2013. The full journal is available at
www.ey.com/performance
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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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This article is an extract from Performance, Volume 5, Issue 2, May 2013. The full journal is available at
www.ey.com/performance
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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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This article is an extract from Performance, Volume 5, Issue 2, May 2013. The full journal is available at
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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/