Foreign investors keep a close eye on Middle East
Companies worldwide are closely monitoring foreign investment opportunities in the Middle East, a region that remains politically volatile but has been ridding itself of the taint left by the 2009 Dubai debt crisis.
Three out of four executives polled by Ernst & Young said the attractiveness of the Middle East as a place for companies to invest will improve over the next three years. Forty-three per cent of the 355 respondents said their companies already have a specific strategy to invest in the region, which in 2011 received less in foreign direct investments than Europe, the Americas and China, but more than India.
The Middle East has many qualities that draw foreign investors. The region controls nearly 54% of the world’s proven crude oil reserves. Government spending is helping to boost GDP growth in the region’s oil exporting countries to a projected 6.6% this year. The region’s population is among the youngest in the world. And five countries in the region ranked among the top 50 countries in a 2012 World Bank index that measured ease of doing business.
Most popular among foreign investors are the United Arab Emirates (39.4%), followed by Saudi Arabia (19.2%) and Qatar (10.4%), the E&Y survey found.
“International investors see bigger internal markets, more accessible customers, a stable political environment, and a better transport and logistics infrastructure as some of the most attractive features of these economies,” the E&Y report says.
But many foreign investors also still hesitate. Foreign direct investments in the Middle East dropped to $99.6 billion in the year of the Dubai debt crisis, down from $202.7 billion the year before. In the following two years, the annual amount of money flowing into the region has been even less – $62.4 billion in 2010 and $63.8 billion in 2011 – but the number of projects was up last year.
The numbers reflect worsening economic conditions in Europe, which is where the largest share of foreign direct investment in the Middle East came from in the past decade. But concerns, which respondents in the E&Y survey expressed, also affected foreign direct investments in the region.
Fewer than 10% of the executives E&Y polled considered the regulatory environment, technological readiness, and research and innovation capabilities in the Middle East attractive.
To improve the region’s attractiveness, the executives called for efforts toward a better educated and skilled labour force (27.3%) and more political stability (25%).
Companies from the US, India and France have partly made up for lower foreign investments from Germany, Switzerland, the UK and others. But the largest increases in foreign investment came from within the Middle East, the E&Y report pointed out.
In 2011, the UAE came in second behind the US with 13.9% of all foreign direct investments to the Middle East, a 38.7% increase from the year before. During the same time period, investments from Kuwaiti companies more than doubled, and companies in Qatar invested four times as much in the region.
The E&Y survey also detected more optimism among executives whose companies had already invested in the Middle East than among those whose companies had not.
Among current foreign investors, 83% believed the region’s attractiveness will increase in the next three years compared with 54% of those without Middle Eastern operations.
Related CGMA content:
• “Survey: Middle East CFOs Most Optimistic Worldwide”: CFOs in the Middle East were the most optimistic about their companies’ prospects worldwide, but this optimism was muted by concerns about political tensions in the Middle East and the euro-zone crisis, a Deloitte survey suggested.
• “Interested in Buying Sukuk?”: Sharia law, the Muslim code of conduct, prohibits lenders from charging interest or trading in debt. Islamic bonds called sukuk comply with sharia, and they enjoy rising popularity in the Middle East, North Africa and Southeast Asia. Rising demand for sukuk is outstripping supply.
• “Emerging Markets Prove Resilient During Global Economic Uncertainties”: The Chinese economic boom is weakening, tensions remain high in the Middle East and inflationary pressures weigh on India, but as a group emerging economies are expected to grow. That growth is likely to change trade patterns and expand middle-class populations.
—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.