Investor Watch: August 2015
Issue date: August 2015 Page 2
Investor Watch: August 2015
A host of acronyms, from BRICS to CIVETS, MINT or N11, provide guides to potentially high growth economies, which sit
alongside such regional labels as the “Asian Tigers” or the over-used “Africa Rising” to categorise emerging markets for
companies and investors. However, using a methodology based on political economy, there is a grouping of countries, which
span multiple geographies, where seismic political changes combine with market dynamics to offer investors and companies the
long-term prospect of sizeable returns. Cuba, Iran, Egypt, Ethiopia, Côte d’Ivoire, Myanmar (Burma) and Saudi Arabia have
each either recently experienced, or are soon to experience, decisive shifts in their political and commercial environments,
which make them an attractive market of interest for investors with a higher risk appetite.
Each of these markets is comparatively closed, or lacking international engagement, which offers advantages for early movers
to gain competitive advantage, market share and a diverse portfolio. Whilst at the riskiest frontier of investment, operations
and global equities, where substantial risks persist, the upside is significant, and only growing.
Elevated levels of political risk are a common theme across these countries. However, the presence of a reformist politician,
or faction, is accelerating investment reforms. Largely untapped domestic consumer markets are found alongside cheap labour,
with demographic advantages of an increasingly prosperous middle class combined with low levels of private indebtedness.
Sovereign debt is often low and natural resource wealth or entrepreneurial human capital frequently present, with the
potential for strong domestic and capital market growth. The isolation of many of these regimes from the business cycles of
developed economies has inhibited growth and trade, but simultaneously forced diversification and reduced vulnerability to
global shocks.
These are not markets for the risk averse. Considered some of the world’s last untapped markets, these countries have been
left on the fringes of international commerce for reasons ranging from sanctions to self-imposed isolation or conflict. Large
returns and market dominance are on offer, but expectations must be tempered with realism and patience. Governments will
speak of new investment laws with bombast and of enormous untouched sectors waiting to be exploited. However, investors
should enter these markets with their eyes wide open. Long-held views will need to be re-evaluated to engage with the
markets as they exist now and into the future. Investors will neither find the Cuba of the 1950s, nor the Iran of 1979.
Early movers are opening offices and hiring new staff, after deploying fact-finding missions, eager to gain the competitive edge.
However, engagement in these markets is predominantly at the initial stages and many investors and companies will be
watching for trigger points before ramping up involvement. With elevated levels of
political risk, even early engagement with these countries will require strategic advice,
ongoing risk monitoring, new market entry advice and due diligence. Requirements for
partnerships, joint ventures or teaming arrangements will also raise regulatory risk and
political exposure.
Investment will initially suit those with a longer timeframe and already experienced in
frontier or emerging markets. As engagement grows, momentum will build in these
markets. Acting as a pull on further macro- and microeconomic reform, these market
openings will be propelled alongside the development and implementation of new
technology, creating opportunities long expected to outstrip the next decade.
Cuba 3
Côte d’Ivoire 6
Egypt 9
Ethiopia 11
Iran 14
Myanmar (Burma) 18
Saudi Arabia 21
Issue date: August 2015 Page 3
Cuba
Cuba has been locked in a frozen state of autocracy since the 1960s, when the US imposed an escalating series of financial,
commercial and economic sanctions on the revolutionary government of Fidel Castro. Decades of bad blood between the
two countries has seen the solidification of “el bloqueo” and the entrenchment of the Castro regime., most recently under
the stewardship of Raúl, Fidel’s younger brother. US sanctions de facto cut Cuba off from international trade, whilst the
domestic reforms of Castro’s communist agenda saw a programme of nationalisation and expropriation in the shift to a
centrally planned economy, alongside curtailed social and economic freedoms. This restricted, and restrictive, environment
sent Cuba into the trade and investment wilderness.
However, a slowly shifting US policy crystalised in December with the end of diplomatic isolation marking the start of a new
chapter in US-Cuba relations. The US State Department aims to lift restrictions on travel, commerce and financial activities
and new rules in January opened some space. US-issued credit and debit cards can now be used in Cuba and restrictions on
Internet access have been relaxed. Most significantly, on 29 May, Cuba was removed from the US list of state-sponsors of
terrorism, which enables access to Western banks, and on 20 July the two countries opened embassies on the other’s soil
for the first time in 54 years. Both political sentiment and these initial steps go further than the previous loosening of
sanctions in the 1990s.
A limited agreement has been reached on the restoration of diplomatic ties and whilst the economic embargo remains in
place, talks are underway for a further downscaling of the sanctions regime. This new phase of engagement is seeing a steady
stream of visiting business delegations and, accompanied by Cuban investment reform, foreign deals are already in place to
expand Havana’s international airport, as well as successful partnerships emerging in brewing, bottled water, nickel mining,
hotels and offshore oil exploration.
An isolationist regime begins to look outwards
With some of Cuba’s largest bilateral partners, including
Venezuela and Russia, facing their own turmoil, Raúl Castro
recognises the need to build closer trade and investment ties
with the rest of the world. The weight of global public
opinion towards Cuba has long been ahead of US foreign
policy and no specific EU sanctions are in place. However, the
easing of US sanctions is critical for global investment, given
their punitive reach extends out to foreign subsidiaries of US
companies and US courts have not been afraid to use the
principle of extraterritoriality to pursue prosecutions.
Moves have begun to end restrictions on the use of US credit
cards in Cuba, which will make it easier to live, work and do
business on the island. However, this is not universal across
all cards, most private businesses will still not accept them
and, most critically, no US bank has yet said it is willing to
face the exposure of handling such transactions. Several US
airlines have also expressed interest in running direct
commercial flights and delegations have visited from New
York and Texas, among other states. Although the embargo
has been relaxed for the import, travel and
telecommunications industries, which has facilitated a move
into the Cuban market for Netflix, most US companies will
remain blocked for the short-medium term. In the meantime,
gains for non-US firms could be significant.
Recent trade delegations have arrived from the EU, France,
Netherlands, Russia and Italy, whilst cultural ties will continue
to make Spain and Latin America important partners. The EU
is already the island’s second largest trading partner, although
talks on normalisation are not expected to see substantive
results until 2016. Levels of UK-Cuba trade are historically
low, but recent commitments in the agricultural, tourism,
infrastructure and energy sectors have been buoyed by a
trade mission and a December agreement for Havana to
repay its short-term debt to the UK, facilitating the provision
of short-term insurance in support of British exports.
Incremental domestic reform
Progression of sanctions relief should not overshadow Cuba’s
internal developments, hastened by Raúl Castro’s more
commercially-astute outlook. Slow or negligible growth,
coupled with generational shifts as Castro’s revolutionaries
age and begin to step aside, is forcing gradual reforms.
Lineamientos, a forward-looking blend of strategies and values
intended to adapt the island’s communist project to future
market demands, is starting to produce tangible, albeit slow
and incremental, reforms. A new foreign investment law in
early 2014 offers tax cuts to foreign investors and improves
investment security. More than one million state workers
have been made redundant, facilitating a shift into private
sector-led growth. Urban cooperatives have been created,
representing a quasi-privatisation of state enterprises, and
although their regulatory framework remains unclear,
cooperatives are gathering momentum.
However, free-market reforms are still largely cosmetic.
Cuba remains a one-party autocratic state, with a poor
record on human rights and personal freedoms, where Raúl
Castro heads both the government and the Partido Comunista
de Cuba (PCC). The state interferes in all areas of
Issue date: August 2015 Page 4
economic activity, with a risk of arbitrary decision-making and
legal problems as a result of inconsistent and opaque
regulations. Private entrepreneurship is still on a very small
scale and the government controls virtually all of the island’s
business and trade. In the 2015 Index of Economic Freedom,
Cuba ranked 177 out of 178 countries. Only North Korea
ranked lower. Cuba is still not even featured on the World
Bank’s Ease of Doing Business Index.
Foreign investment has arrived, and failed, before. During the
last hint of liberalisation in the 1990s, an ill-prepared state
was unable to cope with a raft of unsuitable investments.
Some 60% of foreign investment projects closed, leaving
behind a sparse corporate record. Neither a member of the
IMF nor the World Bank, Cuba lacks the access to and
resources from the global marketplace to assist with reform.
In the worst cases, assets are confiscated and executives
imprisoned. Whilst foreign-run companies can point to
success in the mining, construction, refining and meat
packaging sectors, those companies which are bucking the
historical trend still face being cut off from US capital markets
and having bans on executives travelling to the US.
Yet, the country is badly in need of capital. Growth
fundamentals for trade and investment are strong and the
impetus for economic development is greater than ever. The
Paris Club has agreed a figure for Cuba’s debt and Raúl
Castro talks confidently of an expected growth rate of more
than 4% in 2015. The state ambitiously says it wants to attract
$2-2.5 billion in FDI each year, with an annual economic
growth target of 7%. A stable political system can also
comfort investors, with Raúl Castro’s commitment to
standing down in 2018 both offering ample time to create a
succession strategy and potentially removing an important
block, the Castro name, in ending the US embargo.
Whilst changes will be phased and incremental, the sentiment
driving these should not be underestimated. Most significant
is Cuba’s shifting psyche. From the complete abolishment of
the private sector in the 1960s, economic reality has forced
the country to tacitly recognise its status quo is not working
and must open to external assistance, investment and trade.
Whilst refusing to compromise on a strong sense of
sovereignty, enthusiasm for a shifting social and economic
model is apparent.
Legislation and projects to attract foreign investment
Law 118 (LFI), Cuba’s new foreign investment law, recognises
that economic productivity requires a boost from a domestic
private sector, which can only be propelled by foreign
investment. Opportunities are available for commercial
contracts with domestic entities and JVs. Ventures 100%
foreign owned are possible, but remain the exception.
Contracts with a degree of Cuban involvement will benefit
the most from a series of incentives, including exemption on
profit taxes for eight years, the halving of profit taxes to 15%
and the abolishment of a 25% labour tax in a bid to attract
new investment. In seeking a more transparent regulatory
framework, Law 118 limits the government’s ability to seize
foreign assets to only under certain conditions, a level
comparable to many other countries. Disputes will be
handled predominantly by arbitration if internal attempts at
resolution fail and companies can select a neutral country
whose laws they wish to apply. These reforms are supporting
a small improvement in trade freedom, fiscal freedom and
freedom from corruption rankings.
The $900 million Mariel Special Development Zone, some 28
miles west of Havana, is a prototype of the more liberal type
of investment and trade regime that Havana is hoping will
attract foreign investors. A partnership with the Brazilian
government, and managed by the Ports of Singapore, the port
and trade zone is expected to be the Caribbean’s first
container terminal facility and offers a preferential tax regime,
including the deferral of a 12% profit tax for 10 years and all
equipment and materials imported duty free. Requests to
locate here are arriving from worldwide and success is likely
to see this model rolled out elsewhere on the island.
Progress held hostage to US political cycle
Whilst the normalisation of relations between the US and Cuba has gained irreversible momentum, the US electoral cycle
poses a potential stumbling block. President Obama can use executive authority to ease certain restrictions, but a
Republican-backed Congress is making it harder to reverse statutes on the sanctions regime. Secondly, as the fight for the
republican presidential nomination intensifies ahead of polls in 2016, Cuba is a subject of political contention. Two of the
frontrunners, Jeb Bush and Marco Rubio, want the embargo to continue or strengthen. Hillary Clinton, the likely Democrat
contender, wants the embargo ended. The speed of sanctions reform or removal will be tied to the vagaries of the US
electoral system and a vocal Cuban diaspora with influence in the presidential nomination battle.
Issue date: August 2015 Page 5
Banking and monetary reform are vital
Access to credit and a balkanised currency system in an
entirely cash-based economy pose significant commercial
challenges. Neither the “soft” national peso (CUP), nor the
“hard” convertible peso (CUC), are traded off the island and
themselves offer different exchange rates. This duel system,
“dia cero”, creates price distortions, offers implicit
government subsidies and complicates market pricing, as well
as creating the space for corruption. A stunted financial
system has no interbank funding mechanism or local public
debt market and lacks robust banking networks. Sanctions
prevent companies from accepting Cuban currency as
payment and Cubans are not allowed to hold foreign bank
accounts, making the payment of goods, both for consumers
and companies, more challenging as foreign investors arrive.
Shallow access to local credit in undeveloped capital markets
will also impede the ability of domestic businesses to offer
the right opportunities for foreign partnership. Whilst plans
are in place to end the dia cero, the government will need to
move quicker to address monetary freedom, banking reform
and the use of a single convertible currency if it is to realise
its economic objectives.
Cuba’s population of more than 11 million offers the most
skilled labour force in Latin America. However, poor
purchasing power and price controls will curtail opportunities
in the consumer market in the short term. Bans on
commercial advertising and marketing make it difficult to
create a competitive market and will require an innovative
approach by communications agencies. However, Internet
restrictions are easing, aiming to increase the rate of only 5%
of Cubans currently able to access Internet from their homes.
Harder to reform will be an institutionalised and multi-
layered bureaucracy, which has proved a stumbling block to
many foreign investors. Foreign firms in joint ventures must
still order raw materials a year ahead of time and a highly
regimented labour market requires businesses to hire
employees through the Cuban government. Whilst
undoubtedly still a challenging market, incremental reforms
are seeing an economy growing in confidence, which will be
needed to inspire a leap of faith by some foreign companies.
Sector opportunities
Pursuing foreign investment on its own terms, Havana has
released a Portfolio of Foreign Investment Opportunities,
identifying interest in tourism, energy, transport,
construction, biotech, mining and sugar production.
Opportunities also exist in agriculture, infrastructure,
technology, manufacturing and building materials. Capital is
starting to be raised for a few private equity funds geared
towards direct investment as restrictions on investing in
small local companies begin to ease.
Already accounting for 42% of inward investment, tourism
is a scalable industry. The easing of US travel restrictions
will propel the expansion of real estate development,
already buoyed by a threefold surge in foreign tourist
numbers in Q1 and an increase in business travel. A skilled
labour force will support a further strengthening of Cuba’s
biotechnology sector nationwide and Havana is seeking
strategic partners for the pharmaceutical industry.
Under-exploited agricultural land benefits from a tropical
climate and strategic location close to markets, producing
tobacco, citrus fruits, coffee, cacao and honey. Whilst land
ownership is de jure in the hands of the state, any produce
is owned by the business entity and 70% of current land is
managed by cooperatives rather than the government.
Agriculture will be one of the first industries to benefit
from an easing of sanctions.
Infrastructure is a core priority for the government, which
recognises the necessity of foreign investment to address
inadequate port, road and air capabilities. The government
is seeking foreign expertise and capital to support the
modernisation of existing plants and technology,
accelerating an industrial sector comprising 10% of the
domestic economy. Mining opportunities are easily
exploitable in open pit mines, whilst renewable energy is a
priority to remove current inefficiencies.
Prepare for a slow burner
More than any other new market highlighted, Cuba should be
considered a slow burner. Progress and retrenchment will
continue. The island is not suited for those looking for
quarterly results and internal rates of return with immediate
exits, but rather for long-term investors building long-term
relationships with patient and flexible capital. This is a tough
negotiating environment, where the Cuban government is
clear on its development priorities and red lines. The
government regularly draws up portfolios of projects in
which it requires foreign assistance – these are most likely to
receive the go-ahead and avoid bureaucratic delays.
Long-standing issues, such as thousands of US expropriation
claims, are intractable and will likely be shunted into the
future as US-Cuba relations continue to develop. However, a
healthy respect for Cuban sovereignty will be key to success
in this market. Foreign companies operational here will need
to consider themselves a Cuban company, playing by Cuban
rules, as the market continues to adapt.
Triggers to Monitor
Pace of thawing of US-Cuba relations
US Congress stance on sanctions
Major bank agreeing to support transactions
Rhetoric of the US presidential campaign
Currency reform
Raúl Castro’s commitment to standing down in
2018 and the identity of his successor
Issue date: August 2015 Page 6
Côte d’Ivoire
Part of West Africa’s Francophonie, for decades Côte d’Ivoire enjoyed a reputation for stability in an otherwise troubled
region. Home to Abidjan, once renowned as the Paris of Africa, the country’s reputation was battered by a 1999 coup and
an ensuing decade of instability and political upheaval. A repressive regime in the south of the country was opposed by a
northern rebellion, which caused capital flight and the undoing of decades of development. Following a disputed presidential
election in 2010 and a brief civil war, Alassane Ouattara, who claimed the loyalty of rebels, secured the presidency. A career
economist, Ouattara is placing economic growth and aggressive private sector development at the heart of his attempts to
reclaim Côte d’Ivoire’s former status.
Today, cautious optimism pervades ahead of the next presidential election in October. This election will take place under
very different circumstances from the chaos of five years ago. Ouattara’s Rassemblement des Républicains (RDR) is expected
to win another five-year term, provided he maintains the support of Rassemblement des Houphouëtistes pour la Démocratie et
la Paix (RHDP), the governing political coalition, ensuring political stability and further pro-market reforms. Whilst
Ouattara’s grip on power is not under serious threat, downside risk will persist in the run-up to the poll. The Front Populaire
Ivoirien (FPI), the party of the former president, Laurent Gbagbo, who is currently awaiting trial at the ICC, is boycotting the
polls, but continues to enjoy support. A new opposition coalition has formed and is expected to be vocal in criticising the
impunity offered to Ouattara’s allies following their part in the post-election violence of 2010-2011 and his failure to
reconcile the country.
Ouattara will need to ensure a peaceful election campaign and post-election reconciliation settlement rooted in a more
inclusive politics. If current pro-market reforms can be buttressed by political stability and the country seeks further
engagement outside of Francophone Africa, Côte d’Ivoire will emerge as a promising new investment destination and “could
be one of the motors of economic growth in Africa again” (Christine Lagarde).
An economy turned around
President Ouattara is on a drive for Côte d’Ivoire to join the
ranks of the emerging market economies by 2020, making the
country a regional business hub and meeting the objectives of
its National Development Plan, which focuses on improving
infrastructure, education and healthcare, as well as reducing
poverty. Since its debt default in 2011 and the exodus of
more than half of foreign companies during the civil war,
Côte d’Ivoire has undergone a revival. Economic growth
rebounded to 9.1% in 2014 and is estimated at 8.5% this year.
The economy has diversified and fundamentals are strong,
with debt to GDP levels at around 35%. Market confidence
was improved by the 2012 resumption of coupon payments
on the country’s first defaulted Eurobond. Buoyed by investor
appetite and a positive outlook from credit rating agencies,
Côte d’Ivoire is making a strong play for the capital markets,
becoming Sub-Saharan Africa’s second largest issuer. In the
last year, the country has issued two Eurobonds – a rate
unprecedented within the developing African markets. The
latest $1 billion Eurobond in February was four times
oversubscribed and still trades well in the secondary markets.
The “Invest in Cote d’Ivoire Forum (ICI) 2014” was designed
to attract new, and departed, foreign investment. Hundreds
of millions of dollars’ worth of investment pledges have been
made to support economic growth fuelled by investment and
trade as a priority. Initially reticent private investors are once
again ready to take the plunge. The African Development
Bank has returned after 10 years of relocation during the civil
strife and Citigroup’s regional office has also returned.
Others companies, such as Standard Bank, are selecting Côte
d’Ivoire for their first foray into West Africa.
The World Bank’s Ease of Doing Business Report of 2015
ranked Côte d’Ivoire as among the countries implementing
the highest number of business reforms, where a new
business can now be established in under 48 hours. In a bid
to improve what can initially seem an intimidating commercial
environment, the private sector is the new focus of reforms.
Investment has been strong in the public sector, but a new
focus on attracting foreign capital for the promotion of SMEs
and venture capital will enable local entrepreneurs to thrive.
Foreign investment already accounts for some 40-45% of
capital in Ivorian firms due to compromised local capital.
Multilateral support is improving the business climate,
including the World’s Bank’s creation of a commercial court
and the establishment of an anti-racketeering unit, as well as
the IFC committing to invest $1 billion over the next 2-3
years, equal to its total investment in Côte d’Ivoire to date.
More wide-ranging reforms required
Whilst the speed of reform is impressive, social infrastructure
and poverty alleviation are failing to keep pace. Corruption
remains an ongoing scourge and despite a public policy of
zero tolerance, rumours of public sector corruption persist.
Much government procurement is awarded via no-bid
contracts and many state-owned companies are slow to pay
their debts, negatively impacting private sector confidence.
Issue date: August 2015 Page 7
Tax collection also needs to be prioritised to reduce the
power of parallel, illegal tax systems and to bind a still divided
society into the state-building project. Whilst considered a
diversified market, Côte d’Ivoire still relies on a relatively
narrow export base, rendering it vulnerable to downturns in
external demand and world commodity prices, particularly
the cocoa price. Further export diversification is required to
reduce a current account deficit which has been temporarily
reduced by lower oil prices, as well as adding value within
national borders.
Regional reorientation
As the second largest economy of ECOWAS, after Nigeria,
Côte d’Ivoire commands regional clout. With the largest
economy within the Francophone bloc of the organisation,
the country is well placed to take a growing regional lead.
Côte d’Ivoire has also avoided the Ebola epidemic seen in its
western neighbours, damaging their trade and labour
markets, and as a net oil importer does not face the same
fiscal crises as its eastern neighbours.
As a member of the West African CFA currency bloc, Côte
d’Ivoire’s exchange rate is fixed with the Euro and on
permanent parity with the CFA. A monetary union with
Benin, Burkina Faso, Guinea-Bissau, Mali, Niger, Senegal and
Togo offers a market of some 150 million people. The IMF
identifies this trade bloc, of which Côte d’Ivoire’s economy
comprises nearly half, to benefit from more intraregional
trade than any other region in Africa. Whilst membership of
the CFA restricts domestic monetary policy-making and links
the bloc to economic travails in Europe or a wider global
downturn, to date this mechanism has provided much needed
macroeconomic stability, as well as improving trade flows
with France and between other member countries.
A wider region of West Africa has in principle agreed to the
introduction of a new shared currency, the Eco, which will
bring together a market of more than 300 million people, as
well as subsuming the current CFA. However, initial hopes
for a full monetary union by 2020 look unlikely. Despite the
benefits of enhanced regional links, a single monetary policy
will be unsuitable for this diverse range of countries, which
will include the enormous oil-exporting economy of Nigeria.
Through several ports and long terrestrial borders, Côte
d’Ivoire is already an entrepôt to the West African market,
straddling a strategic location bordering both Francophone
and Anglophone neighbours. Several ports stretch across a
515km coastline, which is well connected through a network
of roads and rail into the interior of West Africa. Abidjan
port, for example, is the key trade point for mining
companies in Burkina Faso. Confidence is propelling further
investment in critical port infrastructure, which will boost
longer-term growth prospects as well as provide immediate
employment and goods markets. Investment can be seen
along the Abidjan-Lagos corridor as road infrastructure
connects Côte d’Ivoire to Africa’s largest economy, Nigeria.
Further progress is required on corridor management and
the harmonisation of customs procedures, but the ECOWAS
Transport and Transit Programme is working to create joint
border posts to ease the movement of persons and goods,
facilitating regional trade and integration.
An emergent commercial hub around Abidjan
Emerging as a West African commercial hub, Abidjan has
received approval for direct US flights and the national carrier
was re-launched here in 2012, with an Air France holding
stake. The city is home to an estimated 5 million people, with
a diverse mix of consumers from the business district of
Plateau to the industrial area of Yopougon. The capital in all
but name, Abidjan has a prospering financial industry and
plays host to the regional headquarters of several
multinational companies.
Infrastructure development is focused around the booming
coastal city, which is already operating at overcapacity. A
second container terminal port is to be built at Abidjan,
funded by a conglomerate of private interests keen to exploit
the city’s strategic location. The construction of a third
bridge in the city was completed in December to ease
congestion problems and whilst there is a current mismatch
in the supply and demand of property, the government is
providing urban land for further development.
The BRVM, the regional stock exchange for eight West
African countries, is headquartered in Abidjan and reports
ongoing expansion, with an ambition to double its market
capitalisation within the next five years. Whilst the banking
penetration rate is low right across Francophone Africa, this
represent a strong area for growth. In Côte d’Ivoire, more
adults currently have mobile money accounts than traditional
bank accounts, which offers the opportunity for scalable
investment in a low cost and entrepreneurial market.
Issue date: August 2015 Page 8
Nevertheless, foreign capital will again prove decisive given
the domestic market is constrained, with concentrated credit
and weak supervision contributing to a comparatively high
non-performing loan ratio.
French influence remains strong
As the former colonial power, France remains Côte d’Ivoire’s
key partner and most important foreign investor. French
brands have a dominant and visible presence and French
linguistic abilities are still considered essential for doing
business here. However, long-standing French influence on
commercial and political decision-making in Côte d’Ivoire is
coming under increased criticism, including constraining
government decision-making in economic and foreign policy.
The country’s reforms and high growth rate are piquing
interest elsewhere. The Eurodollar market is predominantly
from the US and such oil companies as the UK’s Tullow Oil
and Russia’s Lukoil, as well as South Africa’s Standard Bank,
are increasing their engagement. Chinese interest is
comparatively weak, although India has expressed interest in
oil and mining projects, and as the country stabilises regional
connections with regional Anglophone countries, including
Ghana and Nigeria, are expected to develop.
Sectors
Some of Côte d’Ivoire’s strongest investment opportunities
are found in agribusiness. The country is already the world’s
leading cocoa producer and cashew nut exporter, as well as
the world’s third largest coffee producer, which together
comprise more than half of Côte d’Ivoire’s exports.
Continent-leading rubber production is expected to triple by
2025, with strong production figures also registered for
bananas, tuna, palm oil production and wood. Investment is
welcomed in the form of private investments, public-private
partnerships and increasingly venture capital in SMEs. Several
large-scale projects are already underway, benefitting from
multilateral funding and investment guarantees. This funding
will prove critical in unlocking Côte d’Ivoire’s potential to
become a regional energy hub. Power supply is growing and
capacity forecasts indicate medium- and long-term economic
growth will be supported. Already a regional power exporter,
onshore and offshore resources are available for exploitation,
including renewables, aiming to more than double electricity
generation to 4,000 MW by 2020.
Government infrastructure plans which had been shelved
during years of conflict and political deadlock have been re-
energised, opening a huge demand for capital expenditure,
partly facilitated by the Eurobonds, but also by direct
investment in specific projects. A motorway linking the port
of Abidjan to the administrative capital Yamoussoukro
opened late last year and further highways are a key priority.
The under-explored extractive sector offers longer-term
potential when prices rebound, with the oil ministry signing
18 PSAs in 18 months in 2012-2013. Mining concessions are
also being exploited as gold and manganese output rise as
investors flock to a wider array of opportunities.
Reconciliation must become a political priority
Political risk poses an enduring challenge for any foreign investor in Côte d’Ivoire. Outright conflict has ended, but
skirmishes persist and reconciliation is yet to start in earnest. Those allied with former president Gbagbo are in no position
to return to war, but tension is anticipated to rise ahead of the October presidential poll and the legislative elections next
year, with sporadic skirmishes, particularly in the west of the country. Clean and credible elections, endorsed by the
international community, will be critical to grant legitimacy to Ouattara and his policy agenda.
Whilst Ouattara has largely stabilised the security situation since the civil war, crime levels remain high. Root and branch
reform is required for a heavily politicised security sector, where former commanders of the civil war, with links to
criminality, enjoy positions of power. Some individuals are subject to EU sanctions, with violations alleged against several of
Ouattara’s allies, meaning foreign investors are advised to conduct stringent due diligence. Many former combatants have
not undergone DDR and Gbagbo supporters have been excluded from virtually all power structures. The FPI is boycotting
the political process and with Gbagbo imprisoned in The Hague and his wife in prison in Côte d’Ivoire, millions of his
supporters feel excluded from the political process. Meanwhile, no Ouattara supporters have yet faced justice. As internal
divisions persist, a failure to pursue reconciliation rather than retribution holds the potential for destabilisation.
Ouattara is politically dominant, but question marks persist over longer-term succession planning. Septuagenarians hold both
the presidency and the prime ministership and more than a decade of conflict has hindered the emergence of a new
generation of leaders. Unless a mature political process develops, Côte d’Ivoire faces the prospect of longer-term instability.
Triggers to Monitor Conduct of government and opposition around
October’s election
New programme of national reconciliation
Economic reforms widened
Push for regional dominance
Opening up from French influence
Levels of insecurity and crime
Issue date: August 2015 Page 9
Egypt
One of the first countries to see regime change through the Arab Spring, Egypt has endured a turbulent few years. From the
stable autocracy of Mubarak, to mass protests and the rise and fall of an Islamist president, stability looks to be returning
under President Abdel Fattah al-Sisi. Amid wider turmoil in Africa and the Middle East, Egypt is back in favour with investors,
rebounding after the exodus of capital and investment during the Arab Spring. The government is prioritising foreign
investment as a vehicle for economic growth and implementing reforms to address long-standing structural problems. The
next challenge for a country still grappling with an Islamist insurgency and a restive population with stagnant living standards
is to make the process of reform and growth an inclusive one.
Economic growth is dependent on the arrival of foreign investment, which in the fiscal year 2014-15 was up 32% on the
previous 12 months. In 2014, the Financial Times identified Egypt as Africa’s top capital investment destination, receiving $18
billion, with a 42% increase in the number of foreign investment projects started in the year. Whilst figures remain
significantly lower than before the Arab Spring, the government is capitalising on this rising interest. A high-profile economic
summit was held in Sharm el-Sheikh in March, intended to put Egypt firmly on the investment map. Focused on energy and
real estate initially, the summit secured nearly $60 billion in investment pledges, supported by a new investment law unveiled
just days earlier and several further sector-specific summits. This momentum on reform and foreign investment will need to
be sustained and supported by political commitment and security improvements.
Cautious economic optimism
Egypt has received a series of credit rating upgrades on the
back of gradual economic recovery and its bourse recently
turned positive after Cairo struck a $10 billion deal with
China. Some estimates suggest economic growth rates of
4.3% over 2015-18, with talk of 6.5% by 2020. These
improvements follow a range of fiscal, monetary and
investment policies implemented under Sisi, including lower
interest rates and subsidy cuts which are starting to address
long-awaited energy reforms. The devaluation of the
exchange rate is also whetting the appetite of foreign banks
to return to the Egyptian T-Bill market.
A 2014 raft of reforms in particular has begun to reverse the
capital outflow of the Arab Spring. Reforms are focused on
subsidies and income tax, as well as introducing VAT on
goods and services. A ban on companies transferring money
has also been relaxed, enabling a weaker Pound, and the
government is offering a greater variety of land use models,
providing flexibility and the opportunity to save money on
land capital.
The government is proud of its new investment law, which
reduces bureaucracy and offers incentives to encourage the
funding of labour intensive projects, as well as explicitly
banning price fixing and reducing the vulnerability of
companies to legal or governmental changes. A cumbersome
bureaucracy is to be streamlined by turning the General
Authority for Investment (GAFI) into a “one-stop shop” for
investors, speeding up the process of starting a company in
Egypt, which can currently require applications for permits
from up to 78 government agencies. Whilst bureaucracy can
still be expected, the opportunities for corruption under the
new law are reduced, or at least more easily traced.
However, there is currently no oversight or auditing of GAFI,
which is becoming an increasingly powerful government
agency.
Further reforms are expected within the year and there are
signs the government will respond to feedback in a flexible
and consultative manner. Ministers concede the investment
law was written in haste in time for the Sharm el-Sheikh
summit and recognise some provisions can be reviewed,
whilst the premise of the law itself will endure. Already a 2%
tax on capital gains, originally included as part of Sisi’s reform
agenda, has been frozen following investor criticism, resulting
in an injection of liquidity into the Egyptian bourse. A weekly
cabinet led by the minister of investment will continue to
meet to discuss investment and report to the prime minister
monthly, ensuring reforms stay relevant.
Unofficially, the IMF says these policy reforms are starting to
pay off. At the start of the year, Egypt issued its first
Eurobond since the fall of the Mubarak regime and the fiscal
deficit is expected to stabilise, whilst the government
embraces a selective expansionary and tight fiscal policy.
Difficult economic conditions still prevail
Whilst growth is now on an upward trajectory and ratings
agencies are expressing cautious optimism, Egypt still suffers
from a stubbornly large budget deficit, high debt levels and
low income. With little monetary policy flexibility, the
Egyptian pound remains weak and a scarcity of US dollars and
hard currency can make it difficult to fund business activity.
As a result, an illegal black market proliferates. Investors have
long had difficulty in repatriating funds, although the Central
Bank has made recent progress, covering 50% of the foreign
currency needs of investors seeking to repatriate funds
outside the country.
Issue date: August 2015 Page 10
However, the economy starts from a low base. Sisi is still
grappling with embedded political, economic and judicial
dysfunctionality after generations of political classes have
shunted tough decisions down the line. Yet an increasingly
assertive military is turning into an economic giant itself,
raising the ire of an already disaffected youth. A balance of
payments crisis and perpetual fuel shortages are doing
nothing to improve the economy, combined with an uptick of
attacks by Islamist militants against state infrastructure. Such
factors combine with a historically poor business
environment to stymie economic growth and there will be a
lag before policies have a discernible impact on chronic issues
of inflation, poverty and unemployment. Reforms need to be
balanced by social spending commitments, translating
economic growth into employment opportunities, as well as
support for small- and medium-sized enterprises and a
tangible improvement in living standards.
Bureaucracy and corruption remain deeply engrained
Corruption and opacity have long been a hindrance to
attracting foreign investment to Egypt, as well as a weak
enforcement of property rights and contracts. In an
environment where the government, and therefore the
military, is omnipresent, it will need to learn to step aside,
whilst providing a reassurance of policy stability, if reforms
are to succeed and facilitate a private sector base as well as
state-led growth. However, the government still remains
wedded to the type of mega projects associated with
previous generations of Egyptian leaders, which are more
prone to corruption and often lack the wider impact on
society. A more nuanced approach would open up a greater
variety of employment opportunities, as well as providing a
much-needed boost to small– and medium-sized enterprises.
A strategic market location
In a strategic location bordering both Africa and the Middle
East, as well as a short journey across the Mediterranean
from the European market, Egypt also benefits from
membership of both COMESA and TFTA. Integration is now
stretching further and in recent weeks Egypt became part of
China’s Silk Road Economic Belt trade and investment union.
The Suez Canal expansion project is due for completion in
two years and, with the advent of two-way traffic, will almost
double the current capacity, bringing in further revenue as
well as cementing the country’s strategic value.
A large population, which comprises more than 40% youths,
is growing by around 1% annually. Whilst a huge potential
labour force and consumer group, poverty and a lack of skills
are proving a drag. Reforms are still insufficient to provide
the 700,000 new jobs estimated to be required to keep up
with the current birth rate, without even tackling the backlog
of current unemployment, which is believed to be
considerably higher than the official rate of 12.8%. Although
companies no longer have to meet a cap of 10% of foreign
workers, a lack of skilled labour means this policy reform is
unlikely to help shift high unemployment levels. At least 26%
of the population is now living below the poverty line, which
must start to reverse if a viable consumer market is to
emerge and social instability to be avoided. Institutions and
social stability remain fragile following a turbulent few years
and concerns still persist over the doctrinaire style of Sisi’s
government, including police brutality, restricted freedom of
expression and politically-motivated arrests. If the
government is to effectively counter the upswing in domestic
attacks by Islamist militants, it will need to open up the
monopoly on power held by a largely unaccountable political,
business and military elite and start offering its citizens a
bigger stake in the country.
Insecurity a growing concern
Whilst the days of mass protests have ended under a heavy-
handed crackdown by Sisi, militant attacks are on the rise.
Ansar Beit al-Maqdis, now allied with the Islamic State, is
targeting state institutions, infrastructure and officials in the
Sinai and Cairo and there has been one attempted attack on
tourist sites at Luxor. The Egyptian government responds
robustly to any threat and acts outside of its borders to
reduce potential threats within the region. However, Egypt
will remain a key target for both home-grown and
transnational militants and just one successful attack on
foreign investment or individuals has the potential to derail
current progress.
Mega projects continue to dominate investment
Mega projects, requiring large amounts of capital and with
lengthy lead times, continue to dominate the government’s
investment objectives. A new “super city” to be built east of
the current capital, halfway towards Suez, is attracting
Issue date: August 2015 Page 11
controversy and Coca Cola has committed $500 million of
investment over the next three years, Energy projects
account for a large proportion of the most recent wave of
investment, with foreign companies attracted by improved
commercial incentives and reduced energy subsidies. The
government anticipates an investment of $30 billion in energy
and coal within five years, as well as opportunities in
renewable energy with a new tariff law, incentives and a
budget reduction in fuel allowances.
Other sectors attracting interest include infrastructure, retail
and finance, as well as a recent strong performance in
manufacturing. Service sectors for energy and real estate also
offer opportunities, from carbon capture technology to
building materials and manpower, as well as in education to
upskill the population and in public services and health care
following a recent furore over poor standards. An emerging
culture of start-ups and tech firms looks promising for Egypt’s
large youth population, but still struggles for finance as the
government focuses on mega projects. Funds are stepping in
to bring together public and private providers in this market
and focus on the growth of SMEs, which already employ
nearly 83% of the population.
Strong partnerships with China, the Gulf and the UK
Investment in mega deals has principally come from the Gulf
states and China. Most recently, China has committed to
more than 15 investment projects worth in excess of $10
billion, focusing on the electricity and transport sectors and
including such projects as the construction of a railway from
10th of Ramadan City to Bilbeis in Sharqeya governorate, as
well as the development of a wharf at Alexandria Port and a
power plant to serve the Attaka, Oyoun Moussa, and El-
Hamrawein zone. The strategic partnership between the two
countries is growing stronger, with an estimated 1,195
Chinese companies now working in Egypt. Similarly, Gulf
investors, with cultural and strategic interest in Egypt, are
preparing for a number of significant real estate and retail
projects, with $6 billion invested by Gulf Arab allies as
recently as March.
The UK has a strong investment history in Egypt, providing
nearly 50% of total FDI over the last five years. Investors are
again talking of the opportunities in the market as the UK
selected Egypt as the destination for its largest trade mission
last year, as well as providing the greatest number of
promised investments at the Sharm summit.
Triggers to Monitor
Government ability to mitigate and reduce the
Islamist militant threat
Financing of and growth in the SME market
Progress on reducing unemployment and poverty
rates
Impact of Suez Canal expansion
Cementing foreign pledges of investment
Ethiopia
Ethiopia has emerged as one of Africa’s top performers, with a double-digit growth rate and the continent’s fastest growing
non-oil economy. 2015 is expected to be a record year of foreign investment, reaching $1.5 billion, a 25% increase on 2014,
and there is no indication of a slowing. Coupled with political stability and the latest national elections in May returning the
EPRDF to power, Prime Minister Hailemariam Desalegn now has his own clear mandate to govern and pursue further
reforms.
Ambition is not lacking. Ethiopia aims to achieve middle-income status by 2025 and last year became the poorest country to
issue a Eurobond, which was hugely oversubscribed. The country received its first sovereign credit rating in May and moved
up to be Africa’s eight largest recipient of FDI in 2014. Whilst state-led investment is still dominant, the government is
prioritising infrastructure development and investment zones to facilitate foreign investment. Much growth is predicated off
foreign investment in manufacturing, although a large labour and consumer base offers wider potential. Most deals are still
below the $75 million mark, but the country is attracting private equity companies and interest from institutional investors
with significant capital available. In a commercially astute move, Ethiopia has identified a gap in the African market to carve
out a niche providing cheap energy, which has resulted in a surge in deal-making over the last four years.
A diplomatic hub seeks commercial success
As the diplomatic capital of Africa, Addis Ababa is home to a
range of multilateral institution headquarters, as well as
playing host to peace negotiations and trade deals. A strong
diplomatic community has emerged, which Ethiopia is hoping
to leverage off to attract an already expanding business
community. Ethiopia itself is part of a growing and
increasingly integrated East African market, as well as a
member of COMESA and, more recently, TFTA. State-owned
Ethiopian Airlines has the largest global network of any
African carrier, as well as cheap and reliable transport
between the country’s numerous domestic hubs. As a
diplomatic hub, and growing tourist destination, the country
is well suited for business travel and tourism investment.
Issue date: August 2015 Page 12
A supportive government directing growth
Growth is government mandated, led and supported.
Reforms have improved business registration and regulatory
institutions, whilst business support has improved in quality
and availability, reducing the costs and burden of doing
business. The time required to clear customs for export and
to secure a business licence has now been cut to 15 days and
the country offers additional protection from any threat of
expropriation through membership of multilateral agencies.
The government is tempering a rapid rise in GDP, estimated
by the World Bank to have averaged 10.4% annually over the
last 10 years, with a controlled investment plan. Funds are
directed towards carefully organised programmes, including
diversification, managing urbanisation and creating value-
added activities, in conjunction with the private sector and
the IFC.
Industrial parks are springing up across the country, offering
tax breaks of up to 17 years to domestic and foreign
investors, as well as foreign exporters, and exemptions from
income tax and the payment of customs duty, and the ability
to carry forward losses. The success of these state industrial
parks is now generating private sector alternatives and whilst
still contributing towards a small proportion of Ethiopia’s
growing economy, manufacturing is a priority sector for the
government. China’s Huajian is investing $2 billion to build its
own industrial park in Lebu on the south-western outskirts of
Addis Ababa, with other manufacturers, often in the textiles,
leather or garments industries, seeking to cluster. The
combination of cheap power and a large labour force is
attracting manufacturing industries here in droves,
particularly East Asian factories producing mass consumer
goods. Taiwan’s George Shoe Corp., for example, has opened
plants in an industrial zone in the Bole Lemi district. Ethiopia
is also receiving interest from FMCG companies, especially
multinationals, as well as attracting food and beverage
processing for domestic and international consumption, with
Heineken just opening the largest brewery in the country in
January.
Overt state control in a fledgling economy
Despite soaring levels of growth, Ethiopia remains a poor
country. The economy is still worth just $54.8 billion
according to 2014 estimates, with GDP estimated at less than
$600 per capita. Foreign exchange reserves are sufficient to
cover just 2.2 months’ worth of imports, making it harder to
manage a steadily depreciating exchange rate. Central bank
interventions have slowed the decline, including two
devaluations over the last two years, but foreign exchange
remains in short supply as the government uses it to finance a
massive infrastructure programme.
Banking and telecoms remain off the table for foreign
investors and the level of state involvement within the
transport, infrastructure and retail sectors is high, with
patience required to overcome bureaucratic hurdles. Yet, the
government will have to relinquish some of its tight grip on
the economy if the banking system is to improve and sustain
current levels of growth. International banks are awaiting the
market opening to a tantalisingly large population, the
majority of which is unbanked. Some investors complain of
trying to find deals of a sufficient size here, whilst others gain
market traction through purchasing local brands rather than
trying to instil unfamiliar but international names.
Political stability at the expense of freedoms
Ethiopia’s political stability is anticipated to endure, but has
come at the expense of democracy and political freedoms.
The government jails a large number of journalists, restricts
press freedoms and is regularly criticised for human rights
abuses. The governing EPRDF party won every one of the
546 parliamentary seats in May’s general election and a multi-
party system exists in name only. Significantly, this was the
first election for Desalegn as prime minister since he assumed
the position following the unexpected death of the long-
serving incumbent, Meles Zenawi, in 2012. Now, with his
own mandate to govern, Desalegn is able to pursue further
reforms. A mixture of economic growth and repression is
sufficient to keep a lid on simmering dissent, but the
government will need to address widening social gaps and
show that development is sensitive to, and inclusive of, the
wider population if it is to avoid protests and civil
disturbance.
Insecurity poses a constant threat
As a landlocked country, Ethiopia depends on cordial
relations with its neighbours. Access to ports at Berbera and
Djibouti through roads and railway, respectively, are critical
given fraught relations with Eritrea. Anxious to provide
Issue date: August 2015 Page 13
security along its borders, where a range of unstable regimes
or militant insurgencies are found, Ethiopia’s active military
engagements in the region make it vulnerable to attacks. Al-
Shabaab has identified Ethiopia as a designated target for
terror attacks, particularly Addis Ababa and new national
infrastructure. Whilst effective security forces help to
mitigate this threat, militants remain undeterred, particularly
in the east where incursions may be easier. Bandits also
operate in many border areas, including the Danakil
Depression, where potash and salt mining are found, whilst
the border region with Eritrea is rife with rebel groups and
landmines.
Infrastructure development will underpin sector growth
Ethiopia’s infrastructure spending, at 15% of GDP, is the
highest in Africa and forms the bedrock of its development
objectives in the five-year Growth and Transformation Plan.
A Chinese-built railway is also under construction in a bid to
open up markets overland and improve logistics. A
construction boom of road, rail and dam projects is evident
nationwide, but no more so than in Addis Ababa. A visitor to
the capital will quickly see this is a country on the move. A
construction boom has the government clearing slums to
build low-cost housing, whilst the private sector is focusing
on commercial construction and real estate. In support, the
Nigerian company, Dangote Group, says it will spend $500
million expanding its cement plant in Ethiopia, adding to $600
million already invested.
Often described as the Achilles heel of the African continent,
Ethiopia has managed to carve a lucrative niche in power
generation. The country now offers the cheapest electricity
per kWh in the world and the sector continues to attract
large investment. Hydropower provides some 90% of
Ethiopia’s electricity and the controversial Grand Renaissance
Dam on the Blue Nile will become Africa’s largest
hydropower plant, turning it into a regional power hub.
However, with less than 50% of Ethiopian towns and cities
connected to the national grid, investment is required to
capture and transfer this energy across the regions. The
government is offering incentives to other renewable energy
sources, including free land leases of up to seven years to
biofuels developers, in order to kick-start nascent industries.
Agribusiness accounts for more than 50% of GDP, employs
around 85% of the workforce and is responsible for 60% of
exports. Multiple agro-ecological zones create fertile areas
for the production of coffee, tea, maize, cereals and
floriculture, whilst Ethiopia has the largest livestock
population in Africa. Opportunities exist for improved
productivity, skills and processing and packaging. The
government is keen to bring these value adds within its
borders, potentially tripling the price earned for raw
materials and working towards domestic self-sufficiency and
the reduction of poverty levels.
Ethiopia has avoided being hit by falling commodity prices and
is not dependent on natural resource extraction. However,
oil and gas reserves have been discovered in the country’s
south-west over the last five years. Mining opportunities exist
in gold, tantalum, coal, potash and salt, but extraction is
predominantly either in its early stages or small-scale and
artisanal. The economy has sufficient diversification that, as
long as prices remain low, Ethiopia will not be forced into
premature and low-profit extraction.
An untapped consumer market
A large domestic market of more than 94 million with
comparatively low per capita consumption is anticipated to
triple its purchasing power by 2025 from $1,300 on current
growth trends. A population expected to grow to 120 million
by 2025 also presents a large pool of cheap, youthful labour.
However, the literacy rate remains below 50%, creating a
skills gap that needs to be plugged by more than a returning
diaspora. Inequalities are also on the rise. At least 30% of the
population still live in poverty and the country lacks the
emergent middle class to fill the consumption gap. The
majority of wealth is concentrated around Addis, but with
only 18% of the population urbanised, a dispersed market and
labour force are preventing benefits of economies of scale.
Reliance on Chinese loans and investment
Chinese involvement in Ethiopia is apparent to any visitor to
Ethiopia and it is not unsurprising to encounter large
infrastructure projects in remote parts of the country, fully
owned, staffed and run by Chinese companies. More than $1
billion has been invested by China here in the last year,
predominantly through infrastructure projects. Ethiopia is
heavily reliant on the Chinese market, particularly loans to
finance infrastructure investment, and any market slowdown
in China will have knock-on economic effects here.
Growing recognition of the growth prospects of Ethiopia is
seeing a rise in interest globally, including from such
multinationals as Unilever and GSK. UK and US engagement
is rising, whilst Turkey and India continue to contribute
significant value, with Turkish companies alone responsible
for the investment of $1.2 billion over the last decade.
Triggers to Monitor The invigoration or change of policy by Desalegn
following his re-election
The opening of closed sectors to foreign investors
Success and timeliness of the national
infrastructure programme
Successful militant attack
Economic growth channelled to poverty reduction
Issue date: August 2015 Page 14
Iran
Since the 1979 Iranian Revolution, a vast domestic market of some 80 million people has been isolated from the
international business community by both a self-imposed repudiation of the West and international sanctions. However,
protracted negotiations with the P5+1 countries resulted in the signature of a comprehensive agreement on the nuclear
programme of Iran on 14 July, which will spur the lifting of sanctions and pave the way for greater international engagement.
President Obama has invested considerable political capital in brokering this agreement and Iran’s President Rouhani has
effectively staked his presidency on securing the lifting of sanctions.
Since the first serious breakthrough in talks last year, business interest in Iran has rocketed. More than 600 foreign
companies sent representatives to the Iran Oil Show in Tehran in May, trade delegations have visited from Russia, Malaysia
and Italy, and Eni S.p.A. has recently reopened its office here. Whilst an agreement has been signed and the momentum
appears unstoppable, multiple moving geopolitical interests make the precise trajectory of the implementation of the
agreement difficult to forecast. Victorious rhetoric will be heard from both sides, but investors will need to concentrate on
the detail of the deal and its implementation path, rather than the accompanying bluster. The lifting of sanctions will now be
phased, meaning stringent compliance procedures will be required for some time. Nevertheless, the opening of Iran offers
the type and size of new market that comes around once in a lifetime, with investors already poised to gain strategic
advantage. In anticipation, fact-finding missions are taking place on a virtually weekly basis and early stage funds are being put
together for adventurous investors.
Strong political desire facilitated the nuclear deal
Talks over a nuclear deal were extended beyond several
deadlines due to large gaps in the positions of the opposing
sides over the inspection of nuclear and military sites and the
timetable for lifting sanctions. Strong political will eventually
broke through the impasse to reach a final agreement on 14
July, building on the framework agreement of 2 April 2015. In
return for cuts to its uranium stockpiles and enrichment
activities, as well as allowing inspectors to access nuclear
sites, Iran will receive relief from US, European and UN
nuclear sanctions. However, both the US and Iran will have
tough sells to their domestic constituencies and in the event
of a reneging on any parts of the deal, the UN will
automatically reinstate sanctions.
President Obama needed a deal before his term ends in 2016.
Whilst the President has now given Congress 60 days to
review the Iranian nuclear deal, he retains a veto should they
reject an agreement with less than a two-thirds majority. The
Congressional response will be subject to the vagaries of the
US electoral cycle as Republican contenders, in particular,
position themselves to win the party’s presidential
nomination. Nevertheless, Obama is anticipated to veto any
congressional rejection.
In Iran, the election of the moderate Hassan Rouhani to the
presidency in mid-2013 was instrumental in steering a less
adversarial path with the international community and
accelerating serious talks. The support of Iran’s supreme
leader, Ayatollah Ali Khamenei, has been critical in swinging
support behind Rouhani’s objectives. Khamenei, who has
prevented hardliners from sabotaging the talks, is ill and
preparations are underway for choosing Iran’s next supreme
leader. The Assembly of Experts, responsible for selecting the
Supreme Leader, has just elected Ayatollah Mohammad Yazdi,
a hardliner, as its new chairman and powerful vested interests
rooted in conservatism are pervasive. With legislative
elections due in February 2016 and for the presidency in June
2017, the implementation of the nuclear deal and the lifting of
sanctions are a political battleground for the hardliners and
moderates.
The sanctions regime will not disappear overnight
Iran’s multi-layered and multi-jurisdictional sanctions regime
is a complex process to navigate. Existing sanctions include
asset freezes of key individuals and companies, as well as the
specific targeting of the banking and energy sectors, which
was partially responsible for Iran’s economic contraction.
Whilst US sanctions are the harshest, where virtually all types
of trade have long been banned, some European companies
have been able to do deals in Iran, whilst avoiding all
sanctioned entities. However, several companies have fallen
foul of the sanctions regime, with penalties ranging from
prosecution to fines or being placed under sanction as well.
Credit Suisse, Standard Chartered and Schlumberger have all
been hit by multimillion dollar fines for violations, which often
relate to the transfer of money for sanctioned entities.
Iran’s status as an investor destination is now all about the
implementation of the nuclear deal and the lifting of this
sanctions regime. Sanctions relief worth around $7 billion
under the Joint Plan of Action (JPOA) has been ongoing since
2013 in response to Iran allowing UN inspectors better
access to its nuclear facilities. Whilst this was critical in
returning the domestic economy to growth after two years
of recession, a far more comprehensive lifting of sanctions
will be required for the economy to seriously restart.
Issue date: August 2015 Page 15
However, the nuclear deal is not a silver bullet solution. A
phased sanction lifting can be expected and many sanctions
will remain in place and enforced long after the
implementation of the nuclear deal begins. Qassem Suleimani,
for example, the commander of Iran’s Quds Force, will be
removed from UN sanctions and some EU sanctions, but will
remain on the US sanctions list and other EU sanctions lists
due to his ties with terrorism and the Syrian conflict. Further
sanctions, unrelated to the nuclear deal, can still be imposed
and indeed the US applied new sanctions as recently as May.
This means some Iranian companies, and partners, will
continue to wilfully obscure their ownership structures to
enable sanctions evasion. Any investor will need effective anti
-bribery and corruption policies, as well as due diligence
capabilities, to continue to face the daunting task of sanctions
compliance and navigate the tricky relationship in Iran
between politics and business.
Finance is usually the biggest sanctions hurdle, with Iran’s
banking sector cut off from international flows and systems.
Finance will be one of the first sectors to have its sanctions
lifted and is expected to propel economic growth to some 6-
8%. Nevertheless, regardless of the implementation progress
of the nuclear deal, cross-border payments will continue to
be difficult for the rest of the year, at minimum. An outdated
banking system requiring considerable reform, as well as rife
money-laundering, means that for many companies,
particularly larger entities with subsidiaries and multiple
stakeholders, the risk of sanctions contravention and
reputational risk is still too large.
An improving macroeconomic framework
The macroeconomic outlook is improving as Rouhani moves
away from a populist administration, implementing more
prudent budgets and reforms. A large liquid market now
combines with a high GDP and low public debt, whilst a lifting
of sanctions will support a strengthening of Iran’s sovereign
rating. The government is targeting a sustainable growth rate
over the next five years of 8%. A vast domestic market of
some 80 million people, with nearly 65% under the age of 35,
is awaiting consumer goods to arrive for a growing middle
class. Levels of education are high and most are keen to put
their expertise to use in a country where a poor job market
still sees trained engineers drive taxis rather than work in
industry.
Iran’s $100 billion stock market is severely undervalued,
although its rise and fall has run in close parallel to the
progress of the nuclear talks. Listed companies are worth
around 28% of the country’s GDP, a ratio more appealing
than in many emerging markets, and there is no limit on
foreign investment, with stocks offering high dividends. The
privatisation efforts of some of Iran’s most lucrative sectors,
including natural resources, are driven by the Tehran Stock
Exchange, and combine with the liberalisation of capital
markets to make foreign investment here both easier and
more attractive.
The costs of doing business in Iran are low as a result of a
weak currency, where both labour and products can be
acquired cheaply. However, inflation rates are stubbornly high
and currency stabilisation is required to mitigate risk.
Domestic companies will be important to international
investors as they seek to explore this new market. Having
already proven themselves adaptable and resilient to endure
the sanctions regime, as well as possessing a wealth of local
expertise, these enterprises will have well-developed and
loyal markets available to tap into.
Government is creating the conditions for investment
Despite a traditionally isolationist government, incentives are
available to entice foreign investors. The Foreign Investment
Promotion and Protection Act (FIPPA) provides a 50% full-
term tax reduction on income, loan structure and eligibility of
government funding. The unlimited transfer of profit capital
and dividends is permissible, although caution must still be
exercised in light of the sanctions regime, and property
ownership rights have been enhanced, including to 100%
ownership in certain zones.
The model of free trade and Special Economic Zones that
currently supports domestic industry will be available to
foreign investors. Tax exemptions will be applicable for 20
years, monetary and banking services, as well as employment
regulations, are all more flexible, and companies benefit from
a 100% guarantee on invested capital and profits. The
government has ambitious objectives for these Zones, once
freed from sanctions. Chabahar Free Zone, for example, is a
port in the south-east, which the government hopes to turn
into a mega port and a hub for petrochemical activities, as
well as a tourist destination. Some 2,000 companies are
Issue date: August 2015 Page 16
already in place, but capacity constraints persist. In May, India
signed a multimillion pound MOU to develop the port, partly
for strategic interest, offering access to South Asia that
bypasses Pakistan. Foreign interest in the Zone, as well as
investment, will help to spur the current projects to revamp
the local airport and construct or improve local rail and road
links.
Creaking but expansive infrastructure
A vast territory strategically located at the crossroads of
Eurasia and the Middle East, Iran has a wide network of
infrastructure. Terrestrial connections are good and a long
maritime border offers a gateway to the Indian Ocean, as well
as air travel to the booming Gulf economies and as a trade
outlet for landlocked countries in the interior.
Internally, despite a lack of new parts and maintenance, Iran
has a wide network of infrastructure to connect the vast
country. Airports are found in all major cities, rail links also
exist and roads between the main cities are largely of a high
quality. Internet connectivity levels are high. Some 40 million
people have access to the Internet and around 15% of the
population use the internet on their mobile. As internet
bandwidth grows and telecoms operators roll out further 3G
and 4G networks, a vast class of e-commerce customers will
emerge, as well as offering a springboard for tech-based
venture capitalists. The use of smartphones is widespread and
the emergent tech sector has not experienced stringent
regulation.
Isolationism has brought some benefits
Iran’s international isolation has made it comparatively
immune from the effects of global business cycles, including
downturns. Whilst having the world’s third largest oil
reserves and the second biggest cache of gas renders Iran
vulnerable to falling oil prices, its diversified economy
provides a cushion. Iran’s daily production of crude oil has
dropped in line with prices and another austerity budget is
therefore in place for 2015-16. However, diversification,
forced by sanctions, means that oil production now
Key Sectors
Tourism - domestic tourism is booming, but for international visitors, expense and logistics are problematic. British
visitors, for example, must send their visa applications to Dublin due to the absence of diplomatic relations. There is
a rising demand for religious, medical, eco and business travel and, despite the government offering incentives for
privatisation in this sector, there is a lack of high quality or international hotels nationwide to cater to the rising
demand.
Infrastructure – expansive networks require upgrades and maintenance. Iran Air, for example, which is still under
sanctions, is seeking to purchase 500 new planes to support its extensive, cheap domestic network.
Construction - real estate is one of the few sectors continuing to boom in spite of sanctions, both for residential
and commercial purposes. Accounting for 12% of employment and with an annual turnover of $38.4 billion, real
estate offers a substantial investment destination.
O&G and Services – a potentially lucrative industry is estimated to require at least $200 billion of investment, whilst
the national oil company is looking for investors to complete 67 unfinished O&G projects. Foreign capital and
technology are most in demand, but the sector is particularly sensitive to sanctions. Whilst a conventional PSC
cannot be offered due to constitutional restrictions, the government looks to be offering its most favourable terms in
decades, including shares in a field’s production, with the opportunity to seize market share from the country’s more
volatile neighbour, Iraq.
Automotive - the automotive sector has a long and resilient history in Iran and is already rebounding. Iran Khodro
has held talks on resuming its alliance with Peugeot, whilst Mercedes, Volkswagen and Renault are all said to be
negotiating joint ventures to offer products to both a specialised and large consumer market.
Healthcare - an educated workforce excels in the scientific development sector, offering opportunities across the
technology spectrum and in manufacturing, pharmaceuticals and medicines, where high levels of domestic demand
outstrip supply.
Venture Capital - a young, entrepreneurial and educated population offer attractive opportunities for venture
capital funds and angel or seed investors, keen to utilise the skillsets of those already immersed in the market.
Issue date: August 2015 Page 17
comprises only 23% of GDP, compared to a services sector
accounting for more than half of GDP. Significant
manufacturing and industrial activity is underway and small,
often entrepreneurial, businesses now form the backbone of
the economy.
An opaque regime needs to adapt
Iran’s move towards a market-oriented economy is
hamstrung by opaque vested interests, including the powerful
Revolutionary Guards, who are reluctant to cede control of
vast business empires. Privatisation, as a prevailing economic
objective of the government, is bumping up against a large
public sector and state-run goliaths. Any company looking to
enter Iran will need to fully understand the political
connections of its partners and competitors. Investors in Iran
will encounter onerous and overly bureaucratic regulation,
much of which is still directed towards protecting a domestic
economy rather than seeking foreign involvement. Tax law is
strict and complex and will often be applied arbitrarily. Whilst
the government has lowered some corporation taxes and
aims to simplify the system, uncertainty persists. Investors
will find inadequate legal services and tools for business,
which struggle to assuage concerns over the sanctity of
contracts, nationalisation, repatriation of funds and the
trustworthiness of the regime. Some companies may
therefore prefer to use offshore vehicles for their first dip
into the Iranian market.
Iran still remains a socially conservative Islamic Republic. The
Vali-e-Faqih exercises considerable power over the
government and the Guardian Council approves all legislation
to ensure that it complies with Islamic law. Hardliners are
already railing against the anticipated opening of the country,
particularly to those sectors considered avant garde. Whilst
considered unlikely in the short-medium-term, any change in
Iranian leadership could prove a potential roadblock to the
implementation of the nuclear agreement.
An opening economy does not guarantee political
reforms
Political risk is high and the opening of the economy should
not be assumed to lead to political reform. The domestic
political climate is sensitive, but the Guardian Council retains
effective control. The Majlis, Iran’s parliament, is still
dominated by conservatives, belying the more moderate tone
seen under Rouhani. Factionalism is long-standing and the
battle between hardliners and moderates can spill over into
the regulatory and business environment, as well as affecting
domestic stability.
Political risk is expected to rise ahead of the 2016
parliamentary election and as stakeholders react to the
outcome of the nuclear negotiations. The Majlis has the
power to block the president’s legislative agenda, meaning
Rouhani has had to build a constructive relationship with the
long-term Speaker of Parliament, Ali Larijani, the leader of
the United Fundamentalist Party (UFC), the largest
conservative bloc in the Majlis and a supporter of Ayatollah
Khamenei. Whilst the UFC was anti-Ahmadinejad in the 2012
election, the removal of this polarising figure causes greater
uncertainly over the conservatives’ stance towards Rouhani in
the run-up to 2016, particularly as he tries to push further
liberalising reforms. Political factions will manoeuvre to
protect their interests ahead of the polls and reformists, in
particular, are facing censorship and restrictions. The end of
sanctions offers a further opportunity to break down the
powerful business monopolies of the Revolutionary Guards,
although many reforms and changes will be fiercely resisted
by those with a vested interest. A slow lifting of sanctions will
make Rouhani’s position vulnerable.
Geopolitical adventurism
A prominent military offers a measure of internal security and
stability, albeit with the repression of freedoms. However,
this same military is deployed for regional adventurism, with
Iranian forces operating either directly or by proxy in a range
of conflicts across the Middle East, from Yemen to Syria. The
military has successfully prevented terror attacks within its
borders, but such ventures complicate Iran’s foreign relations
and elevate regional tension, creating a risk of retaliatory
attacks either against Iranian interests or within Iran’s
borders. An unpredictable and unorthodox foreign policy has
some of the greatest potential to derail the implementation of
the nuclear deal.
Sanctions have caused a shift in foreign trade and investment
towards the markets of Asia and the Middle East. Whilst
rebuilding relations with developed markets will be
important, Iran will continue to prioritise engagement with
China, its largest market, as well as Turkey and India. Despite
religious and political differences, for the UAE commercial
instincts prevail, making the Emirates the leading global
supplier to Iran. Dubai stands to benefit further as the
geographic base for those investors in Iran seeking to hedge
against any deterioration in economic or political conditions.
Commercial interest has also been noted from Germany and
Russia, to name a few. However, due to a combination of
inert diplomacy and focus on sanctions, the UK has fallen
behind the competition to enter this strategic market.
Triggers to Monitor Implementation path of the nuclear agreement
Sanctions begin to lift, specifically related to finance
Investment from a large US company or major
multinational
Moderates prevail over the hardliners in
government
Business empires of the Revolutionary Guards
disintegrate, whilst domestic stability continues
Issue date: August 2015 Page 18
New foreign investment law anticipated
Foreign direct investment is Myanmar’s key ingredient for
resilient economic growth, as well as a driver for job creation
and income generation. Rapid growth and development, built
off the country’s rich natural endowment, strategic location
and large labour force, offers prime opportunities. The
World Bank expects growth above 8% until at least 2017,
although predicated on ongoing banking sector reform, and
by some estimates Myanmar is now the world’s 13th fastest-
growing economy. The signs are already visible on the streets
of Yangon. International business delegations regularly rotate
through, the country plays host to business events and
international conferences, and the presence of multinationals
is tangible.
A new foreign investment law is currently in draft, under
public consultation in a promising show of government
inclusivity. The law is anticipated to meld together two
separate investment laws, as well as ending discrimination
against foreign companies and introducing an automatic
approvals process for selected projects and tax incentives for
specific regions and sectors, expected to include labour
intensive industries, infrastructure development and
agriculture. Regulations have been amended to create a more
secure contractual environment, whilst foreign companies will
be permitted to fully own businesses without the need for a
local partner. The United Overseas Bank (UOB) has already
established a Foreign Direct Investment Advisory Unit in
Yangon to share expertise with foreign investors, whilst an
anti-corruption law was pushed through in 2014 to try and
ward off this growing threat.
SEZ regime hopes to attract large-scale investment
The Special Economic Zone (SEZ) Law, established in 2014 as
an adjunct to the Foreign Investment Law, facilitates three
SEZs; Dawei in the south-east, Thilawa near Yangon and
Kyaukphyu in the north-west, as joint projects with Thailand,
Japan and China, respectively. Incentives will be concentrated
here to attract foreign investment and encourage export-
oriented industries. Benefits include an average of 50% tax
relief during the first five years of operations, import duty
relief and partial relief on reinvestment of export profits, as
well as longer-term leases and protections against
nationalisation. Alternative administration bodies also give
each SEZ the freedom to designate its own promotional
zones. However, Thilawa is the only SEZ to have projects
approved or operational, from countries including the US,
France and Singapore. Investor entry for the other two SEZs
is anticipated next year. The solidification of these SEZ
regimes and their full potential will form part of a longer-term
project for the country.
Myanmar (Burma)
Often described as the most exciting frontier market in South-East Asia, Myanmar is emerging from a long period of
international isolation. Shedding long-held political and economic sanctions, the country is expected to receive a record
amount of $8 billion in FDI in 2015.
After more than 50 years of a repressive military junta, which saw opposition leaders imprisoned, the country transitioned
to a quasi-civilian government in 2011. Under President Thein Sein, hundreds of political detainees were released,
censorship rules eased and talks began with the opposition, paving the entry of the revered Aung San Suu Kyi into
parliament. As a result, the majority of sanctions were lifted in 2012 and development aid flooded in. Whilst foreign
investors have long salivated over this resource rich country, investment has been slow to arrive, only after a series of
reforms and economic liberalisation. Myanmar’s current pace of change hinges on its general election due to be held on 8
November 2015 and the direction and pace of reform afterwards.
However, this is still an economy that only opened four years ago. Limited international sanctions persist and US companies
remain banned from dealing with specific entities, including the government and armed groups. A promising growth outlook
is met with rising concern of political risk surrounding November’s election. Whilst President Thein Sein is expected to
stand down, uncertainty persists over the reformist priorities of his as yet unidentified successor and how much more
power the military is willing to cede. Just as civil society grows increasingly assertive over issues ranging from education fees
to racial nationalism and labour rights, domestic decision-making is slowing and foreign investors are again wary of this
underexplored and underdeveloped market. A halt to reforms and further examples of violent ultra-nationalism and
regressive policies will see threats of a return to Western-imposed sanctions, although actual re-imposition remains unlikely.
Similarly, a peaceful election setting the stage for further progressive reform and a cementing of the transition to a market-
based economy, with more predictable policy making and longer-term political stability, could see Myanmar’s remaining
sanctions lifted.
Issue date: August 2015 Page 19
Banking reform will underpin economic growth
The banking sector has undergone much needed reform, with
nine foreign banks now granted licenses to operate in
Myanmar, both enabling the flow of inward investment and
improving domestic banking practices. Further openings in
the banking sector are anticipated, including an easing on
lending and banking regulation, with aspirations of an internal
credit rating system. The Yangon Stock Exchange is due to
debut in October, offering a major development in
Myanmar’s capital markets, and the country’s first sovereign
bond sale is expected within five years. However, financial
infrastructure is still lacking, with a low number of branches
and ATMs nationwide belonging to Myanmar’s four bloated
state-owned institutions. Banking penetration levels are
extremely low in this predominantly cash-based economy and
bank borrowing is virtually non-existent, inhibiting small- and
medium-sized enterprises. European and US banks remain
wary of the Myanmar banking regime and none of their banks
joined the bidding process for licenses in the latest round.
The government will need to push further on reforms and
incentives to attract foreign banks, as well as permitting them
to engage in retail banking if project finance and access to
credit are to be supported for both domestic and foreign
investment.
Labour regime requires reform
Myanmar offers a cheap labour force with a high literacy rate.
Whilst a population of more than 55 million is rushing to
learn English, decades of isolationism have left a dearth of
human and physical capital. Demand for skilled labour is
outstripping supply, particularly in the labour-intensive
manufacturing and retail sectors, and international companies
are already fiercely competing for the small pool of local
nationals with managerial skills. As well as talent acquisition,
labour laws and visa requirements can prove a deterrent.
Labour laws are outdated and often contradictory. Anger
over poor conditions and low wages results in the type of
disruptive strikes seen in the Shwe Pyi Thar Industrial Zone
in February and March 2015. Agreement on a minimum wage
is still contested by unions and workers, although for
corporates a Dispute Settlement Arbitration Council has
been established to avoid formal litigation in the courts. As
the government implements reforms and is forced to respond
to public pressure, not all of the new laws will be market
friendly. The Department of Labour is currently deciding
whether to require prior approval of employment contracts,
placing an additional regulatory burden on employers and
affecting the fluidity of the labour market.
Still a challenging operational environment
Membership of ASEAN has been critical in accelerating the
reform of Myanmar’s commercial environment, which is
anticipated to bring further networked benefits when the
ASEAN Economic Community is launched in December,
enabling the free flow of goods, skills, services and capital
across member states. Nevertheless, Myanmar is ranked 177
out of 189 countries in the World Bank’s Ease of Doing
Business report. Business registration can be cumbersome,
administration and bureaucracy off-putting and slow and real
estate costs high. Many bureaucrats still require face-to-face
dealings in the new capital, Naypyidaw, which is isolated from
the commercial realities and opportunities elsewhere in
Myanmar. Investor protection and criteria around foreign
investment remain ill-defined and a weak rule of law
compounds question marks over the absence of proper
mechanisms for enforcing contracts, property rights and
settling disputes. In the rush for development, much new
legislation has been pushed through in haste or without
expert advice, resulting in poorly drafted legislation littered
with loopholes. Regulation remains poor and there is a
danger that this scattergun approach will place the country
on a non-sustainable growth path. Myanmar would benefit
from a prioritisation of reforms needed to both attract and
retain foreign investors as well as give domestic industry a
boost.
Issue date: August 2015 Page 20
A political opening still has far to go
The opening of the Myanmar market has been enabled by a
preceding political opening. Whilst further progress is still
required, opposition parties no longer operate underground,
with 70 parties registered for November’s election, including
the National League for Democracy (NLD), which boycotted
the 2010 polls. Space has been created for muted public
criticism and an empowered civil society is willing to agitate
for change, whilst the installation of permanent secretaries
hints at a more professional civil service able to enforce
political stability in the event of regime change. However,
Myanmar is still not a free or democratic country. Aung San
Suu Kyi remains barred from running for the presidency.
State media is dominant and sensitive information is withheld
from the public. The current allocation of parliamentary seats
and cabinet posts grants the military effective veto over any
constitutional reform and the military will respond to
protests and provocation with violence. The lack of clarity
over how much further this political opening will go is
clouding the commercial environment. Government decision-
making is stalled until after the election, from new legislation,
to progress on the $50 billion Dawei deep sea port.
Myanmar is coming under growing international pressure for
its treatment of ethnic minorities and ethnic clashes in its
borderlands. The powerful Buddhist group, Ma Ba Tha, taps
into a vein of ultra-nationalism, stoking anti-Rohingya
sentiment, which has caused violent attacks and waves of
refugees attempting to flee from squatter camps already one
million strong. A population control law was passed into law
in May, permitting the government to impose birth control
measures in specific areas of the country, which it is feared
will be used to target the Rohingya minority. Three further
“race and religion protection” bills are on the table, with the
potential to generate violence and tension, particularly if they
pass into law before or around the election. Such ethnic
tension provides a pretext for the type of government
crackdown that could halt political reforms and stall or
reverse foreign investment.
Infrastructure, extractive and services opportunities
Investment in several mega projects is underway, affirming
the commitment of international business to Myanmar’s
future. Infrastructure, manufacturing, construction and power
are some of the first sectors where global companies are
competing for contracts. Further investment is required and
whilst visitors to Naypyidaw will find excellent but deserted
roads, in Yangon many roads still have gaping holes and in
rural areas are simply non-existent, or washed away in the
rainy season. Road journeys can be long, arduous and often
impossible during the four-month long rainy season. Energy is
an opening market, but current electrification rates are some
of the lowest in the world, with an absence of reliable and
efficient power a barrier to economic growth. A wealth of
natural resources are present in Myanmar, including jade,
mineral resources and timber, as well as O&G. Usually
receiving the most investor attention, O&G is vulnerable to
global prices, with Myanmar’s fledgling gas sector taking more
than one third of total FDI currently invested in the country.
The service sector also competes for investment, with
opportunities to provide legal advice for the multitude of new
businesses seeking to understand a complex market and new
legislation. Gaps exist in the education or communication
sectors, as well as a swiftly liberalising healthcare sector,
where the government has pledged to quadruple spending
from a very low base. International support is evident in
some of those sectors considered critical to Myanmar,
including agriculture. The government is working with the
OECD to boost foreign investment in this sector, which has
been slow to date, through the creation of a coherent policy
framework with contract stability.
Chinese power may be waning
According to government’s figures, contracted FDI in
Myanmar at the end of May reached $56.54 billion from 38
countries, invested in 929 projects. China has been
Myanmar’s largest and longest-serving partner, investing
throughout its years of international isolation, particularly in
strategic infrastructure projects and military support.
However, the forcible relocation of local populations,
environmental hazards and violence and border skirmishes
have soured this relationship.
Myanmar now has more options available. Indian engagement
has a long history as a result of its strategic location, as well
as a diaspora of Indians here some one million strong. Asian
companies have been active for some time and a recent UOB
survey found around 25% of Asian businesses plan to expand
in Myanmar in 2015, with particular interest from Hong Kong
and Thailand. Malaysia is already the country’s seventh largest
foreign investor, focusing on the banking, legal, construction
and O&G sectors, including Petronas, whilst Singapore
prefers the O&G and manufacturing sectors. However, many
operations here are still run from Asia Pacific regional offices.
Whilst the EU remains one of Myanmar’s smaller investors,
engagement is progressing, including in search of an
agreement on the promotion and protection of investment.
Triggers to Monitor A peaceful election and advance of further political
reform
Unblocking of political decision-making
Licensing of US or European banks
Lifting of remaining sanctions
Labour law reform
Passage of foreign investment law
Indication of government willingness to act against
ultra-nationalism
Issue date: August 2015 Page 21
Stock market hints at a slowly opening economy
The opening of the $590 billion stock market, the Tadawul,
one of the last major bourses to remain off limits to foreign
investors, provides a deeper equity pool, as well as
diversifying the investor base. At least 168 companies are
currently listed, covering 15 different industries and offering
stable dividends and strong profits from, among others, Saudi
Basic Industries Corp, the world's largest petrochemical
company, as well as banking giants. The partial opening of the
bourse means domestic companies will be exposed to higher
levels of corporate governance, transparency and financial
discipline. As the largest stock market in the Middle East,
stimulating growth in Saudi, with a trading volume of some
$2.4 billion per day, will also act as a wider pull towards the
region and facilitate the integration of Saudi businesses into
international markets.
Whilst the entry of foreign investors into the stock market
has initially been slow and inflows disappointingly small,
foreign equity investment was always expected to be cautious
at the outset. Restrictive regulations require foreign investors
to have at least $5 billion in assets under management and a
five-year investment record to be able to purchase a
maximum of only 10% of the shares of Saudi-listed
companies, hampering the type of smaller, more agile
investor often found in frontier or emerging markets. Many
companies in “sensitive” sectors, including real estate
companies building in Mecca, still remain off limits for foreign
investors and concerns persist over the settlement period of
trades and the level of feedback the bourse is willing to take
on board. However, foreigners already indirectly own some
1.5-2% of the market via P-notes and other swaps. Although
more expensive, these offer exposure whilst avoiding
inclusion in foreign ownership ceilings. As long as P-notes
continue to offer such benefits, many existing investors see
little reason to immediately swap to a restrictive direct equity
investment. The opportunity to invest in IPO funds has also
grown, with eight such funds licensed this year.
However, the partial opening of the Tadawul is a promising
marker for the rest of an economy that has remained largely
closed off from the rest of the world. Tens of billions of
dollars of both passive and active investment is expected in
long-term investment in the coming years as rules are relaxed
and refined and as the market matures. This type of gradualist
approach is exactly in keeping with the Kingdom’s preference
for a slow and managed process.
Spending splurge is not deterring investors
Whilst low oil prices are undeniably weighing on the Saudi
economy, the Kingdom has embarked on a dramatic domestic
fiscal spending programme. Pumping money into increasing
the size of the public sector, particularly the security and
defence forces, has resulted in a massive budget deficit of 20%
expected this year. Growth is projected to stagnate at 3.5%
in 2015, the same as in 2014, with the IMF expecting rates to
slow to 2.7% next year as export and fiscal revenues are hit.
Extensive fiscal buffers mean Saudi Arabia is one of the few
economies able to sustain such high levels of spending, with
its credit rating still unthreatened. The Kingdom remains on
track to be reclassified as an emerging market, which can still
happen only as early as 2017.
Investors will find a stable banking and financial platform,
where banks are well capitalised and benefit from liquidity
and implicit government backing. Nevertheless, an economy
dependent on oil for 90% of government and export revenue
is vulnerable to further oil price shocks, whilst also affecting
geopolitical relations as de facto OPEC leader. Current
spending levels are unlikely to increase further under
prevailing oil price conditions, constraining those businesses
reliant on further state spending.
Saudi Arabia
Characterised by a long period of stability under an aging gerontocracy, the political and commercial environment in this
petro-state is starting to evolve. Gradual change, including stock market reform and moderate social developments, including
allowing women to vote and run in municipal elections, took place in the final years of the late King Abdullah’s reign.
However, the accession of King Salman to the throne early in 2015 has initiated a period of the most profound political
change seen in decades. Salman has removed King Abdullah’s choice for crown prince, promoted his son, Mohammed bin
Salman, to Minister of Defence and replaced the world’s longest-serving foreign minister, marking a generational shift in
power to a group accustomed to growing up with wealth and more liberal environments overseas. The new King both has
the will to make these big decisions and the capability to shift powerbases to ensure he has the political capital to see them
through. Two new, powerful committees have been created to oversee defence and economic policy and an increasingly
assertive foreign policy is also now in effect as the Kingdom engages in regional military operations. Finally, a commercial
boom, supported by an expansionary fiscal policy, is underway, with a small, but significant, concession to foreign investors
when Saudi Arabia’s stock exchange opened to non-residents for the first time on 15 June.
Issue date: August 2015 Page 22
Foreign investment is an explicit target
As well as reshuffling politicians and technocrats, King Salman
has reorganised ministries in a bid to streamline decision-
making and improve government efficiency. A royal decree
has been issued for all government ministries to use spending
initiatives to provide incentives for foreign businesses to
invest and relocate to Saudi. The Saudi Arabian General
Investment Authority (SAIGA) has introduced a fast-track
programme to award investment licences in five days or less
in such key sectors as transportation. Wholly foreign
ownership is now permissible in most sectors and an
attractive tax regime offers no VAT, personal income tax,
sales tax or property tax on investors, as well as a
competitive rate of corporation tax of a maximum of 20%,
except in the oil sector where taxes can reach 85%.
Nevertheless, many investors remain wary of an opaque
regime where policymaking is unpredictable and the clarity of
rules is lacking. Some companies report lengthy delays in
payment and an overly onerous expectation of commitments.
All legislation is also constrained by the need for compatibility
with Islamic law, which can create cultural challenges,
particularly for women. Companies still waiting for others to
test the water will continue to handle Saudi business
remotely from regional offices in Dubai, at least in the short
term.
Whilst Saudi Arabia is seeking diversification from a fragile
revenue source and to add value within its borders, non-oil
growth is slipping. A greater onus will need to be placed on
manufacturing and services, as well as the development of the
private sector through services and utilities. Through a new
Unified Investment Plan (UIP), SAIGA has identified more
than 90 projects in which to explicitly seek foreign
investment, including the transportation and health care
sectors. The government is pointing to billions of dollars’
worth of domestic projects available, as well as a large
regional market estimated at some 300 million people living
within a three-hour flight of Riyadh.
High-value RFPs are being issued for opportunities around
new universities, financial districts, ports and airports as the
government embarks on a comprehensive plan to improve
infrastructure. At least $140 billion will be invested in the
transport sector alone in the next 10 years, across the rail
network, ports and airports. Projects are open to public-
private partnerships in the national expansion plan, covering
five metro and bus projects, including current metro system
construction in Riyadh and Jeddah, as well as thousands of
kilometres of rail network. $90 billion will go on rolling stock,
with another $50 billion spent on operations, including
requirements ranging from communications plans to the
training of staff as the Kingdom seeks to network Riyadh,
Jeddah, Mecca and Medina. Improved infrastructure will
enable the Kingdom to exploit the resilient demand of a $16
billion religious tourism industry, which currently sees nearly
14 million pilgrims flock to the holy cities annually, but rarely
spread their consumption elsewhere. Tourism from GCC
countries is already up 31% in the first five months of 2015
and a massive investment and construction programme is
underway at Mecca to meet growing demand.
A lucrative and abundant oil sector has national restrictions,
but opportunities are available to provide value added in
refining, as well as in the renewable sector, including solar.
Saudi Telecom Company, as the largest mobile company in
the Gulf, is receiving further interest, and whilst government
spending is stimulating the private healthcare sector, medical
insurance take-up is still low for a population facing greater
healthcare challenges, offering significant growth potential for
investors.
A large youthful population is not meeting labour
shortages
More than 50% of Saudi’s population is under 20 years old,
with no indication of growth slowing. Abundant oil and gas
reserves provide considerable wealth and the highest level of
consumption in the Middle East filtering down to a growing
middle class, offering opportunities to a wider range of
consumer goods. However, youth unemployment is high,
squeezed by an influx of cheap unskilled labour, often from
the Subcontinent, and skilled expatriates. Anxious to prevent
this large cohort of youngsters from engaging in political
agitation or excessively liberal pursuits, tackling youth
unemployment is now a priority for the government.
More than 150,000 students are studying abroad, but many
will not return for work in the foreseeable future. Labour law
reforms are intended to encourage Saudis to enter the
workforce, including quotas for local content and additional
training. Opportunities are available here for vocational and
professional training from external providers. However,
Issue date: August 2015 Page 23
those companies operating in Saudi Arabia may still
encounter a skills gap, which combined with difficulties in
gaining visas, can cause shortages in appropriate labour
expertise.
Domestic political changes are shifting foreign policy and
security threats
Under King Salman, political movements have concentrated
power among his close relatives and allies. This year has seen
the appointment of the new Crown Prince, Muhammed bin
Nayef, and the Deputy Crown Prince, Mohammed bin
Salman, as well as the appointment of a commoner to the
usually powerful role of Foreign Minister. Mohammed bin
Salman, as the King’s son, has also received a raft of public
appointments in business and defence, as well as other close
family members. Whilst risking a backlash from the family
branch of the late King Abdullah, Salman is working quickly to
solidify his powerbase.
Military operations against Iran-backed Houthis in Yemen is
distracting from internal political movements and generating a
nationalist support base, although enduring longer than the
Kingdom expected. Other regional adventurism sees Saudi
troops propping up the Sunni-minority government in
Bahrain, funding anti-government rebels in Syria and
supporting the US-led campaign against the Islamic State (IS),
creating a tricky diplomatic balancing act. High spending
levels, economic growth and burgeoning bilateral
relationships have each helped to facilitate these regional
power-plays.
Shoring up the Sunni powerbase in the Middle East makes
Saudi Arabia vulnerable to insecurity. Despite an effective and
capable security force, the last four months has seen a
significant rise in security incidents. Suicide bombers have
targeted Shi’a mosques, whilst gunmen and disgruntled
workers have shot dead foreign contractors in Riyadh, as well
as the south-western border coming under pressure from the
war in Yemen. Security forces are on high alert, mounting
multiple raids and arrests, but will have to remain at this
heightened level of vigilance whilst the Kingdom’s foreign
policy continues its current trajectory. Critically, for now,
foreign investors appear undeterred by the threat of terrorist
incidents, indicative of the high levels of confidence placed in
the Kingdom’s security and stability.
Triggers to Monitor Increased foreign investment in the Tadawul
Shift from P-notes to direct equity stakes in the
Tadawul
Further consolidation of power under King Salman
Reaction to the concentration of power among
King Salman’s close relatives and allies
A shift in momentum or targeting of terrorist
attacks within Saudi Arabian borders
Progress of social reforms alongside economic and
political reforms
Commentary and policy-making of the increasingly
powerful Prince Mohammed bin Salman
A breakthrough in the conflict in Yemen
Issue date: August 2015 Page 24
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