Gulf suffers significant fall in foreign direct investment

15 February 2009
Inflow of funds from overseas plummets on the back of the falling oil price.

Foreign direct investment (FDI) in the Middle East fell by 21 per cent in 2008, according to statistics released exclusively to MEED by the UN Conference on Trade & Development (Unctad).

The study reveals that multi-national companies invested $56.3bn in the Middle East in 2008, compared with record FDI of $71.5bn in 2007.

Foreign direct investment in the Middle East -

Source: Unctad

“Towards the end of 2008, FDI started to decline, especially in the energy sector,” says Masataka Fujita, an analyst at Unctad. “We see [investment in] the Middle East countries down for the year.”

Unctad’s figures for the Middle East region include the six GCC states, as well as Iraq, Jordan, Lebanon, Syria, Turkey, the West Bank & Gaza, and Yemen.

The value of investments from merger and acquisition deals was stable at $30bn, the same figure as in 2007, meaning that the fall in the overall figure came as a result of fewer investments in new businesses, particularly in the oil and gas sectors.

“When the oil price fell in July, there were immediate reductions in oil and gas investments,” says Angus Blair, head of research at Egyptian investment bank Beltone Financial. “We have had almost half a year of falling investment during 2008.”

GCC states have been particularly hard hit as most of them require foreign investors to give majority control of the businesses they set up to a local partner, says Blair. This means that foreign investors typically need to make higher returns on their investments to break even.

Consequently, when oil prices fell, projects became far less attractive. “The reason for the fall in the Middle East’s FDI is that a lot of the Gulf markets are quite restricted; you can only have joint ventures,” Blair explains.

Unctad has yet to finalise its FDI estimates for individual GCC countries, but has produced initial numbers for Jordan and Lebanon.

Lebanon has been badly affected by declining interest from international investors over the past year. It was the fourth-largest recipient of FDI in the region in 2007, with $2.8bn in new investment. However, in 2008 its FDI fell by 21 per cent to just $2.2bn.

Jordan overtook Lebanon as a foreign investment destination in 2008, with FDI increasing by 31 per cent to $2.4bn. The kingdom received $1.8bn in new investment in 2007.

Unctad’s figures also show that North Africa has suffered far less than the Gulf and the Levant. FDI into the six largest North African countries fell by a modest 5.2 per cent in 2008. Multinationals invested $21.3bn in the region, compared with $22.4bn in 2007.

Unctad declined to disclose the level of investment into Egypt, which was by far the largest destination for FDI in North Africa in 2007. However, according to the Central Bank of Egypt, multinationals invested $13.2bn in Egypt over the financial year ending 30 June 2008. Beltone forecasts that investment into the country will fall to $7bn for the year to the end of June 2009.

Unctad will publicise its final calculations for FDI in its World Investment Report in September.

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