Foreign companies are eager to work with regional governments, believing there are enormous advantages to be had by both sides developing freer market conditions
construction, as well as infrastructure and other services, thereby helping to create new jobs as well as new goods and services. Even countries with a surplus of oil revenues, such as Saudi Arabia, can benefit from the technology, marketing and access to export markets that FDI often facilitates. The UAE came second in the Arab world, partly because of the success of its huge free zones in Jebel Ali, Ras Al Khaimah and elsewhere in attracting foreign companies such as Sony, Nokia, Philips, Nestlé and DaimlerChrysler. Foreign investors were also attracted to real estate, financial services and tourism, especially in Dubai. However, the 2006 total inflow of $8.4bn, while almost double the figure recorded in 2003, still fell short of the $10bn and $10.9bn recorded in 2004 and 2005 respectively. Local analysts say the fall reflected an expected slowdown caused by shortages of both personnel and equipment following
30 The Middle easT May 2008

sheikh mohammeD al maktoum of Dubai (r) with crown prince sheikh salman al khalifa of bahrain represent a new wave of international players in global development

the breathtaking pace of expansion in the previous two years. Privatisation reforms and further measures to liberalise markets and to streamline investment procedures helped Egypt double its FDI in one year, rising from $5.4bn in 2005 to $10bn in 2006, almost five times as high as in 2004. Oil and gas, finance, telecoms and infrastructure were particularly favoured sectors. In North Africa, Tunisia did especially well; the country saw its FDI rise almost fivefold from 2004 to 2006, to $3.3bn. And while Morocco recorded an inflow in 2006 only slightly less than Tunisia’s – $2.9bn – this was marginally lower than the figure recorded a year earlier and just 19% higher than in 2004. Jordan came next on the list, with $3.1bn in FDI in 2006, also five times as high as in 2004, followed by Bahrain. Jordan’s success reflected intense mergers and

acquisitions activity in its telecoms sector, as well as the attactiveness of its Qualified Industrial Zones (QIZs) that allow goods to be exported both duty and quota free to the United States, and of the Aqaba Special Economic Zone, which had attracted FDI approvals amounting to $6bn by the end of 2006. Bahrain’s improvement, which saw FDI more than double since 2005, is partly due to the government’s willingness to open up its onshore, as well as offshore financial and banking sector to foreign firms. Qatar and Algeria both reported inflows of $1.8bn in 2006, followed by Libya with $1.7bn. FDI in Oman rose only slightly between 2005 and 2006, to $952m, but this was almost four times as high as in 2004. Although Yemen not only failed to record any investor interest in 2006 but actually ended up with an outflow of $385m in 2006, the greatest regional disappointment

Business and FinanCe

appeared to be Kuwait. FDI inflows to the country in 2006 totalled a derisory $110m, despite its wealth of oil and gas reserves and high GDP per capita. This was less than half the $250m recorded in 2005, although substantially higher than the negligible $24m recorded in 2004 and also a substantial turnaround from the FDI outflow of $67m experienced in 2003. These figures have now become an issue in the country’s forthcoming parliamentary elections to be held this month. Opposition leader, Nasser Al Sane, announced in March: “We are at political odds with the government which has failed to pass laws to attract foreign direct investment.” Al Sane and many other Kuwaiti MPs believe the country is lagging behind its neighbours in the Gulf as they rush to diversify their economies and prepare for the time when oil reserves decline. The country’s biggest bank, and the highest rated in the region, the National Bank of Kuwait (NBK), has stated that Kuwait had the worst record among the Gulf states for attracting FDI. “Kuwait has the capital due to record-high oil prices, but we need to make the country a more investor-friendly place through privatisation, as the government owns most of the hydrocarbon sector and lands,” NBK’s chief economist, Randa Azar-Khoury has asserted. Foreign companies are eager to obtain government permission to help it achieve its aim to increase oil production to 4m barrels a day by 2020, but are awaiting a resolution of the current disputes between the Cabinet and the Parliament. Foreign investors are also reported to be keenly interested in the planned privatisation of the state-owned Kuwait Airways Corporation (KAC), whose management has been seeking more private participation for the past decade in an effort to turn around its

Doha’s sporTs city complex, just one of the Qatari capital’s stunning architectural achievements

long-standing financial losses. An initial public offering (IPO) of KAC’s shares was expected this year before Sheikh Sabah al Ahmed Al Sabah, Kuwait’s ruler, dissolved Parliament for the third time in a decade in mid-March. Potential investors, both local and foreign, are now uncertain about what to expect, but they are still, according to local reports, bullish about the local stock market, which, by the end of March, had gained 15% this year. Kuwait’s problems in attracting FDI may be in the forefront at present, but other Arab countries are facing similar, if less dramatic, conflicts about their approach to foreign investment in a time of rapid globalisation, currency turmoil and geopolitical uncertainty. Above all, they are becoming far more mindful of the relationship of foreign investment to job creation, and to local and regional development, particularly in the private sector, within their own countries, as well as to overall development. Incentives that encourage labour intensive industries and services, particularly in rural and remote areas, are increasingly encouraged rather than just investment in oil and gas or real estate, where far fewer jobs are needed. Jordan’s QIZs, which, with just $379m in

foreign investment by 2004, had created more than 40,000 jobs in 79 projects, is seen as an example of what can be done. Unctad’s report cites several policy changes that can make a significant difference in a country’s attractiveness to FDI. Liberalisation of financial services, as has happened in Bahrain, is a case in point. Measures taken by the central bank and the Bahrain Monetary Agency (BMA) have enabled offshore banks to do business onshore for the first time, a move which has greatly encouraged FDI since the regulations were adopted. Saudi Arabia’s plan to build a new financial district in Riyadh by 2010 at a cost of $6.7bn to accommodate the growing financial activities in the kingdom is another example. So too is the agreement between the BMA and the Qatar Financial Centre’s Regulatory Authority to co-operate in the supervision of financial institutions operating both in Bahrain and in the QFC. Oman’s new rulings allowing non-Omanis to own residential property and land in new “integrated tourist complexes”, is a move that should help to encourage FDI in tourism. Qatar’s changes in its contract and tendering policies for the hydrocarbons sector should also help to “facilitate bidding for, and securing contracts, managed by Qatar Petroleum”. These changes, the report notes, “could have a positive impact on FDI inflows, especially in the context of Qatar’s gas initiative”. In general, the need for FDI reform in West Asia (Turkey and Iran as well as the Arab states in Asia), is being acknowledged and addressed. What is needed now, many Arab bankers and local investors say, is a willingness to speed up the current reforms and introduce measures to further streamline investment on a region-wide, as well as on a national basis, along with incentives to invest in the less developed parts of the Arab world. Local entrepreneurs, as well as foreign investors from countries such as Britain, the USA, Belgium and Greece, who made up the bulk of FDI funds pouring into the Arab world in 2006 would welcome such changes, even as they prepare for what Unctad predicts will be an even greater level of FDI investment in the Arab world in the next few years. n

Figures from the UN show the Arab world is now reaping some $60bn a year from its FDI investments, more than twice the $24bn recorded in 2004
The Middle easT May 2008 31