Mideast intra-regional investments on the rise
Dubai, October 18, 2012
Middle East has long been the ideal foreign direct investment (FDI) hub for investors from Western Europe and North America. But with global crisis causing a slowdown in most developed countries, the FDI scene is slowly shifting to the intra-regional investments, said a report by Ernst & Young.
Since 2003 the majority of investments in the Middle East – 79 per cent of FDI projects, 62 per cent by value and 65 per cent of jobs created – have gone to the GCC. Of this, the bulk has been netted by the 'trio’ of UAE, Saudi and Qatar, with Egypt the highest placed non-GCC country with 16 per cent of investments by value, said E&Y in its inaugural "Middle East Attractiveness Survey."
Launched to coincide with the Growing Beyond Summit 2012 in Qatar, the survey is a detailed analysis of how FDI into the region has evolved in the last decade.
According to the report, the region has seen the number of annual FDI projects increase from 362 in 2003 to a peak of 1,070 in 2008. Project numbers fell in 2009 and 2010 as the global and regional economies took a step backwards but recovered again in 2011 with an increase of 8 per cent to 928.
The value of the investments in 2011 remained low compared to 2008 but again showed a modest recovery on 2010. Initial findings for the first six months demonstrated a similar picture with investment project numbers and value flat or below that of the comparable period in 2011.
Despite the size of the projects declining as investors take a more cautious approach to large- scale projects given the recent political challenges, the region still has many positives as the long-term investment outlook from executives confirmed.
Jay Nibbe, E&Y Markets Area managing partner for Europe, MEA and India (EMEIA) said, “The Middle East has many of the qualities that companies look for in an FDI destination: solid investment fundamentals, strong demographic trends and vast natural resources.”
Although Western Europe and North America have historically brought the most projects by number to the Middle East, with 59 per cent of the total between 2003 and 2011, investment by value has become increasingly concentrated on intra-regional investment.
Initial analysis of the 2012 data shows that the number of projects originating from Middle East investors has exceeded that from Western markets for the first time.
Phil Gandier, E&Y Transaction Advisory Services managing partner, Mena said, “The GCC ‘trio’ has managed to occupy a positive space in the minds of investors and attract a large portion of actual FDI. International investors see bigger internal markets, more accessible customers, a stable political environment, and better transport and logistics infrastructure as some of the most attractive features of these economies.”
Saudi was the big regional winner in 2011 with 161 investments worth $14.7 billion establishing the kingdom as the largest recipient of FDI by value. Other markets that outperformed the previous year in 2011 included Bahrain, Iraq and Oman.
"This highlights the ongoing trend of intra-regional investment in the Middle East which has gained significant momentum in recent years. There is growing optimism among Middle Eastern companies in terms of tapping into the potential of their own region," said Phil.
However, the US, the UK and France were still amongst the top five investors in 2011 with 180, 100 and 61 projects respectively. India was also in the top five with 76 projects, an increase of 12 per cent from last year.
Early data from 2012 suggests that the 'Gulf Big 3' again attracted the most investment projects with UAE leading Saudi in terms of project numbers and value. There was also a welcome return of investment into Egypt.
Despite traditionally being seen as a region famous for its vast natural resources, the GCC countries have used the surplus cash to diversify into other sectors, said the report.
The first half continued to see increased diversity in the sectors attracting FDI in the Middle East. Retail and consumer products netted over 20 per cent of projects in the first half and – along with business services, real estate, hospitality and construction – became a top choice for investors, it added.
According to the E&Y report, the retail sector is capitalizing on the region’s rich and expanding consumer base. Real estate has seen a revival in 2012 and attracted the most capital investment.
Most regional governments are recognizing their citizen’s social infrastructure needs. In addition to massive outlays to respond to this - and the announcement of ambitious projects like the 2022 FIFA World Cup - the prospect for the infrastructure sector seems promising.
The business services sector is also becoming increasingly popular among investors and ranked second in terms of projects (16 per cent of the total) and third in terms of value. This sector draws strength from the presence of free trade zones.
“The responses to our survey make it clear that there is a lack of awareness amongst investors who are not doing business in the region. Respondents who are already doing business in the region are well aware of the diversification drive, political environment, and education and labor challenges,” noted Phil.
A quarter of the surveyed investors think that the energy sector will be the main driver of FDI growth in the Middle East over the next two years. However, this varies distinctly between those already present in the region and those who are not.
Forty percent of respondents who are not present in the Middle East consider energy as the main sector, compared to only 19 per cent among investors who are already there.
Established investors see real estate and construction as the most promising growth sector for the future. More opportunities are also emerging in the private and business services sector, real estate, hospitality and construction, information and communications technology, and life sciences sectors.
Seventy-five percent of respondents are optimistic about the Middle East’s future attractiveness in the medium-term, said the survey.
This is relatively high compared to most regions, particularly Europe and Russia where only 38 per cent and 57 per cent, respectively, were positive about their attractiveness in the medium-term.
The Middle East with its large market potential, coupled with investment and infrastructure programs, and abundant natural resources make it a natural choice for consideration by foreign investors, said Jay.
"However, challenges remain and the region must improve its technological readiness and regulatory environment, then - with a more stable political environment - it will be better able to compete with the larger rapid-growth markets for investment," he added.-TradeArabia News Service