Trends in Foreign Direct Investment in the Arab Region

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1 Trends in Foreign Direct Investment in the Arab Region Souraya Zein Regional Seminar on Investment Policies toward Sustainable Development and Inclusive Growth, Rabat, Morocco, December 2013

2 Outline Trends of FDI inflows in Arab countries; Characteristics of the inflows; Main challenges facing Arab countries; Recommendations.

3 The Arab Region 22 Countries with Different Income Levels: Major Oil Exporting Countries; Diversified Economies; Least Developed Countries

4 Billions of US$ 25,000 FDI Inflows 20,000 15,000 World 10,000 5,000 0 Developing Countries Arab Countries Source: UNCTAD, WIR and National sources Global FDI Inflows declined by 33 per cent in 2009, then had a partial recovery, driven mainly by developing countries. The latter witnessed a period of sustained growth in FDI inflows. Arab countries were hit severely by the crisis, and were unable to attain the pre-crisis level.

5 Billion of US$ FDI Inflows to Arab Countries Arab Countries Inflows to Arab countries as % of World Inflows to Arab countries as % Developing Countries Source: UNCTAD, WIR and National sources 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Strong upward trend between 2002 and 2008 (boom in real estate sector, high oil prices and opening up of petroleum sector to foreign investments); Sharp decrease for 3 consecutive years between 2009 and 2011 (financial crisis, falling oil prices and declining profit margins within the petroleum sector, economic recession, sharp corrections in the real estate sector and - political instability in some countries).

6 Billions of US$ FDI Inflows to Arab countries by sub-region Least Developed Countries Major Oil Exporting Countries Diversified Economies Source: National sources Given the difference in the economic structure, Arab countries have been differently affected by the considerable decline of FDI in 2009.

7 FDI Inflows to Arab countries by sub-region (contined) The principal factors that explain the considerable gap in FDI inflows between Arab countries include: the pace of economic and investment reforms and the degree of enforcement of these reforms, the assessment of political risks by potential investors, the business climate and infrastructure, the access to inexpensive production factors (land, energy, and physical and human capital) and the integration into regional and global markets. Other reasons are attributable to the worldwide FDI decline and refer mostly to slowdown in economic growth in both developed and developing economies, more difficult access and more expensive funding, cautiousness of big companies to invest and of banks to finance new ventures and failure to boost cross-border mergers and acquisitions.

Exporting Countries, 64% Source: National sources Largest

8 Distribution of FDI Inflows in 2012 by sub-region Least Developed Countries, 9% Diversified Economies, 27% Major Oil Exporting Countries, 64% Source: National sources Largest recipients in Lebanon, 8% 2. United Arab Emirates, 20% 1. Saudi Arabia, 26%

37% 6000 4000 2000 2798 0-2000 2007 2008 2009 2010 2011 2012 Source: Central Bank of Egypt FDI Inflows to Egypt witnessed sharp

9 Sectoral Distribution of FDI Inflows to Egypt, 2012 Agriculture, 0.01 % Finance, 3.11% Other sectors, 15.13% FDI Inflows to Egypt In millions of US$ Real Estate, 0.66% Manufacturing, 6.72% Oil, 74.37% Source: Central Bank of Egypt FDI Inflows to Egypt witnessed sharp decline between 2007 and Rebounded in 2012, driven by large investments from European countries. Oil sector attracts the largest share of FDI inflows

4 Transport, Storage and Communications, 7.2 Computer and related activities, 5.

10 Sectoral Distribution of FDI Inflows to Saudi Arabia, 2010 Trade, 5.6 Other activities, 28.3 Mining and Petrochemicals, 13.8 Contracting, 20.9 Other Industries, 6.7 Saudi Arabia adopted a consistent reform program and was ranked 12 globally in Ease of doing business Real Estate, 12.4 Transport, Storage and Communications, 7.2 Computer and related activities, 5.1 Source: Saudi Arabian General Investment Authority (SAGIA) Contracting, Oil and Real estate sectors were the main recipients of FDI inflows. The sources of these inflows were diverse: 34% from European countries,16% from other Arab countries; 15% from USA and 7% from China

Morocco originated from European Countries. Telecommunications sector is the largest recipient.

11 Sectoral Distribution of FDI Inflows to Morocco, 2010 Other Services, 3% Other Sectors, 8% Industry, 10% Tourism, 10% Telecommunica tions, 32% Real Estate, 23% Banking, 13% Source: Moroccan Foreign Exchange Office More than 75% of FDI Inflows to Morocco originated from European Countries. Telecommunications sector is the largest recipient. Morocco was the most active Arab country in implementing regulatory reforms in 2010/2011, improving its global ranking in ease of doing business from 115 in 2011 to 94 in 2012.

12 Main characteristics of FDI inflows to Arab Countries Majority of Arab countries have taken serious steps in upgrading the investment climate as one of the crucial factors attracting foreign investors. Oil and gas industries and related manufacturing are the major recipient of FDI; Telecommunications, real estate and financial services sectors are increasing their share of FDI inflows; Investments from developing countries, in particular India and China, have increased in the recent years; A large part of FDI inflows is profit-seeking, and not necessarily employment-generating. The region still faces high rates of unemployment; There is also little technology transfer, given that most of the FDI is directed towards the mining or real estate sectors, with low levels invested in the manufacturing sector;

13 Main characteristics of FDI inflows to Arab Countries (continued) Sudan saw an increase in FDI inflows between 2009 and 2012 due to large investments, mainly from China and India, in the exploration and exploitation of natural resources. The agriculture sector, where the country has a comparative advantage, received only about 3% Libya witnessed a large FDI inflows in 2012, driven mainly by investments in petroleum sector. In Lebanon, FDI inflow was mainly driven by investments in financial services and real estate sectors. In Iraq, FDI inflows witnessed 3 years of consecutive increase ( ) driven by large investments in infrastructure and petroleum sectors.

14 Main challenges facing Arab countries Despite the fact that some countries performed well in attracting FDI in 2009, the global financial crisis proved that these inflows are vulnerable. While the relevance of these challenges varies significantly from country to another, the Arab region in general suffers from: weak and inconsistent enforcement of regulations, high levels of bureaucracy and corruption, dominant public sector and slow implementation of privatizations programs.

15 Recommendations Arab countries need to exercise more efforts to increase their share of global FDI inflows and to enhance the positive impact of these inflows by: Further improving the institutional environment, both in terms of enhancing efficiency and transparency; Enhancing the business environment: Investing in both transportation and communication infrastructure to improve the overall competitiveness of Arab countries as investment destinations; Investing in education in order to enhance human capital which would promote innovation, increase productivity and would ultimately attract domestic and foreign capital. Ensuring that legislation has a clear and unique interpretation.

16 Recommendations (continued) Combating bureaucracy, corruption and red tape, including the establishment of an independent supervisory authority. Supporting the private sector and national investments, as it is an indicator of the investment climate. Enhancing macroeconomic stability. Adopting appropriate policies that direct investments towards the most productive sectors.

17 Thank you Souraya Zein Economic Development and Globalization Division UN-ESCWA

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