MENA FDI: Outperformers And Laggards

BMI View:  Political instability in large parts of the Middle East and North Africa will continue to weigh heavily on foreign direct investment inflows to the region as a whole over the coming years. That said, we see several bright spots for foreign investment and highlight particularly strong prospects for Morocco, Saudi Arabia and Egypt. By contrast, Iraq and Algeria are set to fall behind.

We expect continued political upheaval in large parts of the Middle East and North Africa (MENA) to remain an impediment to foreign direct investment (FDI) inflows over the coming years, weighing heavily on investor sentiment towards the region as a whole. According to UNCTAD data, FDI into MENA fell to USD55.6bn in 2013, their second lowest level since 2005. At 3.8% of the world's total FDI flows, this figure understates both the region's economic potential and its demographic weight (MENA accounts for 4.8% of global GDP and 5.7% of the world's population). Yet given the scale of the region's socio-political troubles, a broad-based recovery in FDI flows is unlikely for the time being.

A geographical breakdown of the 2013 data shows a mixed picture. Overall, eight countries recorded a rise in FDI inflows compared with 2012, while a similar number witnessed a fall. FDI to the five countries of North Africa combined fell by 12.3% on an annual basis, to USD12.4bn. Flows to the six economies of the Gulf Cooperation Council (GCC) declined for a fifth consecutive year but continued to account for 43% of the regional total (Israel alone made up another 21%). Within the Gulf, Saudi Arabia's traditional place as the largest host economy was overtaken by the UAE, which saw inflows of USD10.5bn amid favourable business sentiment and relative isolation from the regional political headwinds. 

Challenging Years Since The Arab Spring
MENA - FDI Inflows By Region, USDbn

BMI View:  Political instability in large parts of the Middle East and North Africa will continue to weigh heavily on foreign direct investment inflows to the region as a whole over the coming years. That said, we see several bright spots for foreign investment and highlight particularly strong prospects for Morocco, Saudi Arabia and Egypt. By contrast, Iraq and Algeria are set to fall behind.

We expect continued political upheaval in large parts of the Middle East and North Africa (MENA) to remain an impediment to foreign direct investment (FDI) inflows over the coming years, weighing heavily on investor sentiment towards the region as a whole. According to UNCTAD data, FDI into MENA fell to USD55.6bn in 2013, their second lowest level since 2005. At 3.8% of the world's total FDI flows, this figure understates both the region's economic potential and its demographic weight (MENA accounts for 4.8% of global GDP and 5.7% of the world's population). Yet given the scale of the region's socio-political troubles, a broad-based recovery in FDI flows is unlikely for the time being.

Challenging Years Since The Arab Spring
MENA - FDI Inflows By Region, USDbn

A geographical breakdown of the 2013 data shows a mixed picture. Overall, eight countries recorded a rise in FDI inflows compared with 2012, while a similar number witnessed a fall. FDI to the five countries of North Africa combined fell by 12.3% on an annual basis, to USD12.4bn. Flows to the six economies of the Gulf Cooperation Council (GCC) declined for a fifth consecutive year but continued to account for 43% of the regional total (Israel alone made up another 21%). Within the Gulf, Saudi Arabia's traditional place as the largest host economy was overtaken by the UAE, which saw inflows of USD10.5bn amid favourable business sentiment and relative isolation from the regional political headwinds. 

A Mixed Picture
MENA - FDI Inflows, USDbn

As noted, our baseline view sees only a slow recovery in overall FDI flows to the region over the coming years. This is in spite of a relatively strong macroeconomic backdrop: stripping out Libya, Syria, and the West Bank and Gaza, we forecast average real GDP growth across MENA to reach 3.6% in 2014 and 3.9% in 2015, compared with 3.4% over 2011-2013. However, political instability is set to remain prevalent across many of the MENA countries, clouding the outlook for investors and limiting greenfield investments. Indeed, Ernst & Young's latest Global Capital Confidence Barometer survey, which gauges corporate confidence, shows MENA executives overwhelmingly more concerned about political unrest than global peers, with 53% listing it as the biggest economic risk to their business.

Constant Deterioration In Political Environment...
MENA - Short-Term Political Risk Rating (0 to 100)

The situation in Iraq and in neighbouring Syria will remain the major risk to systemic stability in the Middle East, but we also highlight weak medium-term outlooks for Libya, Lebanon, Yemen and (to a lesser extent) Bahrain. Our proprietary Short-Term Political Risk Rating for the MENA region has declined to near-record lows - falling to 57.7 out of 100 in July 2014 - and has generally been on a downward trend since the onset of the Arab Spring. Greater risk perceptions will continue to impact even countries not directly affected by unrest, such as the Gulf Cooperation Council (GCC), which remains at the top of our ratings.

... Weighing On Investors' Minds
Global - Ernst & Young Capital Confidence Barometer (April 2014)

That said, beyond this broad trend we anticipate several bright spots for foreign direct investment. While we expect the GCC countries to maintain their lead in attractiveness, investment in North Africa is likely to see a gradual expansion - bolstered by increased stability in Egypt and our optimistic view towards the prospects for a successful transition to democracy in Tunisia. We regard Morocco, Saudi Arabia and Egypt as the three economies most likely to defy the regional trend and see a sharp uptick in FDI inflows. By contrast, Iraq and Algeria will fall behind, despite recent attempts by the latter to draw more foreign interest.

Regional Growth To Stay Relatively Robust
MENA - Real GDP Growth, % (simple average among 16 economies*)

Morocco: We retain our core view that Morocco will outperform the rest of North Africa in FDI inflows (when measured as a proportion of GDP) and the growth of high-value added industries in the years ahead. While domestic demand has weakened in recent years, the country retains substantial intrinsic assets for exports, including a favourable geographical position with access to Europe, Sub-Saharan Africa and the rest of the Middle East, a relatively high-skilled labour force, an active trade policy and an improving network of physical infrastructure. Investment from the GCC is rapidly increasing, helping to complement longer-standing flows from Europe (as late as 2011, 54% of Morocco's USD44.5bn FDI stock originated from France, according to latest UNCTAD data). 

Indeed, FDI into Morocco rose to a record high of USD3.4bn in 2013, up from USD2.7bn in 2012 and defying the decrease to North Africa as a whole. The country can point to a number of significant developments - including automaker Renault-Nissan's USD542mn investment to build a second production line at its Tangiers facility, and Dubai-based Abraaj Group's acquisition in April 2014 of a major stake in Moroccan chocolate manufacturer Kool Food for an undisclosed sum. In July, Morocco signed two new investment agreements worth USD61mn with aluminium producer Alcoa and Aerolia, a subsidiary of Airbus, for the development of aeronautic industrial activities. 

Hitting A New High
Morocco - FDI Inflows, USDbn

Saudi Arabia: We expect FDI flows to Saudi Arabia to see a sharp recovery from 2015 onward, after a multiyear slump. FDI into the kingdom decreased to USD9.3bn in 2013, marking the fifth consecutive year of decline from a historical high of USD39.5bn in 2008. While this partly reflects the regional trend, more idiosyncratic factors have also come into play, with the Saudi authorities having taken a more stringent stance towards foreign firms of late. The government has set out new regulations aimed at promoting the employment of nationals ('Saudisation') and begun to prioritise 'value-added' investments bringing technology and know-how. These efforts have led to the cancellation of a large number of foreign investment licenses and increased regulatory uncertainty.

That said, newly announced plans to open up the stock market to foreign investors by the middle of 2015 are set to provide a strong boost to FDI inflows, while the government is in the process of reforming the business environment and pursuing extensive economic diversification plans. These efforts will complement Saudi Arabia's traditional position as the Arab world's largest market. 

Multiyear Decline In Saudi Arabia's FDI Flows To Reverse
Select Countries - FDI Inflows, USDbn

Egypt: We forecast a turnaround in Egypt's economic performance, after several years of stagnation and decline. Relative political stability since the election of President Abdul Fatah al-Sisi in May 2014 will continue over the coming quarters, giving Egypt a degree of policy certainty and political continuity that it has not experienced since the onset of the Arab Spring in January 2011.  The government also has the strong support of the larger Gulf states, which have expressed willingness to channel investment into the Egyptian economy (see 'Investment To Drive Uptick In Growth', July 30).

As most greenfield projects have remained on hold since the Arab Spring, there is a significant amount of pent-up demand, which we believe could be unleashed thanks to the stabilisation of the political backdrop. Investment into the non-oil sector is starting to pick up, with The  Coca-Cola  Company announcing in March a USD500mn three-year investment plan revolving around the construction of a new juice plant and increased production at existing factories. While our outlook on FDI is broadly positive, we flag the gas extraction, manufacturing, and residential and transport infrastructure sectors as areas particularly ripe for GCC or Western investments.

Iraq: We expect FDI inflows into Iraq to decline significantly over the coming years, as increasing political instability hinders business confidence in virtually every sector of the economy. Despite substantial hydrocarbon reserves, significant reconstruction needs and elevated potential as a consumer market, most investors will be wary of entering the country given the ongoing political crisis and the extent of the gains made by radical jihadist group Islamic State (IS). Although we do not see foreign companies leaving in droves from Iraq's south and the semi-autonomous Kurdistan region - the two areas in which most foreign investment takes place - FDI inflows in these regions will decline. Conversely, investors will be forced to divest from the north and west of Iraq  (see 'Foreign Investment To Slow Significantly', August 12).

A Clear Menace To Investors
Syria & Iraq - IS Territory

On the back of the ongoing crisis, our industry research teams have revised downward their growth forecasts for the construction and autos industries. In addition, the erosion of investor confidence in the country's telecoms market will delay the execution of key network infrastructure development projects, including the roll out of 3G network services. Mobile operator Zain Iraq's initial public offering on the Iraqi stock market, due for completion in 2014, is likely to be pushed back. On the other hand, we expect the majority of investors in the hydrocarbon segment to remain in Iraq, given our view that the major production and export region in the south will be isolated from violence. However, new foreign investment will be low over the next five years, as the majority of oil companies will prefer to focus on less risky markets.

Algeria: Plans by the Algerian government to attract more FDI are unlikely to gain much traction, ensuring that the country's economy will remain a relative underperformer in North Africa over the coming years. Announcing the government's ambitions for 2015-2019, Prime Minister Abdelmalek Sellal recently called for more foreign interest in the agriculture, industry and tourism sectors, and pledged to undertake new initiatives to ease restrictions on investment. In practice, we expect the government to limit itself to timid steps towards greater liberalisation - with Algeria's business climate set to stay poor even by regional standards  (see 'No Uptick To Foreign Investment Ahead', June 20).

Improvements Needed On Many Fronts
Algeria - Ease Of Doing Business 2014 Rankings (out of 189 economies)

With a population of 38.5mn and GDP per capita of approximately USD5,727 as of 2014, Algeria boasts a large market by MENA standards, in addition to proximity to Europe. Yet foreign investors remain deterred by a combination of existing restrictions on investment, regulatory uncertainty, and Algeria's challenging business environment. The current investment law, adopted in 2009, requires foreign investors to find a local partner that owns at least 51% of any joint venture, and includes multiple other protectionist rules. We are sceptical that the government will be willing and able to undertake a comprehensive review of FDI policies, given internal divisions within the ruling elite and a long history of protectionism.

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