A cursory glance at the flows of foreign direct investment (FDI) into the Middle East and North Africa (Mena) economies over the past two decades provides ample evidence that markets have been transformed by a rising tide of cross-border capital, as investors turned their focus towards emerging markets.

In 2000, the Mena region (including Pakistan and Afghanistan) saw inward investment flows of just $6.6bn, according to UN Conference on Trade & Development (Unctad) figures. About 12 years later, that sum had increased nearly ten-fold to $61bn of FDI.

The mid-2000 boom years coincided with a pronounced spike in investment flows to the region. FDI trebled between 2004 and 2006, rising from $29bn to nearly $90bn. In 2008, the peak year for investment, the region pulled in $116bn in FDI, on the back of oil-fuelled economic expansion programmes, aided by the steady dismantling of obstacles to foreign investment.

Gulf contribution

The GCC accounted for a hefty chunk of this investment – Saudi Arabia saw FDI rise from just under $2bn in 2004 to nearly $40bn in 2008; the Gulf states as a whole accounted for nearly 80 per cent of Mena FDI between 2003 and 2011. But the emergence of reform-minded governments in countries such as Egypt and Tunisia into the orbit of global investors saw these countries make equally impressive progress.

Egypt’s liberalisation efforts, along with the development of a series of free zones, helped to refashion the country as a regional services hub. This proved to be a magnet to foreign investors as the FDI statistics reveal; as late as 2003, before the reforms of former president Hosni Mubarak’s government fully kicked in, Cairo attracted just $237m in FDI; by 2007, this had grown to $11.6bn.

“The UAE attracted $9.6bn in foreign direct investment in 2012, about $2bn more than the previous year”

Overall, the mid-2000s proved a boon for Mena-bound FDI. The confluence of higher oil prices, bolstering economic growth dynamics, against the backdrop of a vibrant global economy in which corporates with healthy balance sheets were desperate to plough investment capital into untapped resource-rich economies, proved an enticing proposition. Moreover, it provided hard evidence that smoothing bureaucratic processes could yield material rewards in terms of investment dollars. 

Over the past decade, countries such as Saudi Arabia took the lead in cutting red tape. According to the Washington-based World Bank’s Doing Business 2012 survey, the kingdom ranked as the 12th most business-friendly nation out of 183 economies worldwide – a situation few could have envisaged in the 1990s, when large tracts of its economy were off-limits to outsiders.  

This does not mean the Mena states are in the vanguard of FDI league tables, however. According to a January 2013 report from UK consultancy EY and the Moscow School of Management, the average FDI growth rate of the past 10 years has been 4.7 per cent, which, while higher than the 2 per cent growth rate of the matured OECD countries, was still well below the 8.1 per cent average of the BRIC economies (Brazil, Russia, India and China). 

The region remains a small player in world terms. In 2010, global FDI reached about $1.3 trillion, with the Mena region recording $76.7bn of inward FDI. Only in the peak of 2008 did the region account for a sizeable 14.4 per cent of inflows to developing countries.

The beginning of the global financial crisis at the end of that year exerted an overall dampening effect on FDI flows to the Mena region. FDI decreased by 12 per cent in 2009, according to the EY/Moscow School of Management estimates.

Since then, the region’s FDI performance has suffered as a result of the civil unrest that broke out in early 2011. The Arab uprisings have served to reduce the overall flow of investment to the region, although some countries, such as the UAE, have been able to market themselves as a safe haven from the turmoil. 

Unrest effect

Egypt’s experience here is instructive. In 2005-08, Cairo attracted on average $9bn of FDI a year, and in 2010 – the last full year before the overthrow of Mubarak – it received a still respectable $6.4bn. But in 2011, that figure had turned into a deficit of $483m, and despite a recovery in 2012 to $2.8bn, investment is well down on the past 10 years.

The percentage of FDI in Egypt in fixed capital formation – in effect, a measure of the contribution of FDI to economic growth – has fallen precipitately. According to Unctad, in the 2005-07 period, it averaged 42.8 per cent; by 2012, it had been reduced to just 7 per cent.

Egypt has clearly suffered, but it would be a mistake to over-generalise. Not all states hit by the Arab unrest experienced as sharp a decline in FDI as Egypt. Tunisia, the cradle of the regional uprisings, has seen only a minimal decline in inward investment levels. In 2011, FDI fell by less than $400m to $1.2bn, and by 2012, this had recovered to $1.9bn – the same as the 2005-07 average. Although Tunis has been buffeted by political shocks in 2013, its transition after the ousting of President Zine el-Abidine Ben Ali was notably smoother than its neighbours Egypt and Libya. This may go some way to explaining the robust FDI performance of the past two years. 

Taking a longer-term view of investment trends, the flow of FDI into the Mena region reveals how concentrated the flood of investment remains, with the big Gulf economies taking the lead. In 2010, more than 83 per cent of FDI inflows into the Mena region was concentrated in 7 countries: Saudi Arabia; Egypt; Qatar; Lebanon; the UAE; Libya; and Iran. That imbalance is likely to be further accentuated in coming years, given the safe haven effect that the Gulf states, such as the UAE and Qatar, have been able to capitalise on, as well as the recent rebound in their real estate and construction markets. The UAE attracted $9.6bn in FDI in 2012, about $2bn more than the previous year. Since 2009, it has doubled its FDI inflows.

Saudi decline

In contrast, Saudi Arabia’s performance in the past few years has been much less impressive, with successive declines in the flow of inward FDI. In 2009, the kingdom attracted $36.5bn in FDI. This more than halved in 2011 to $16.3bn. Despite a recovering economy, FDI declined further in 2012 to just over $12bn.

These year-on-year falls in investment indicate the Saudi authorities have lost some of their former appetite for foreign investment. The suggestion is that the government has shifted its strategic focus away from a scattergun approach to attract as much FDI as it can, in favour of a more nuanced approach in which it is only seeking investment in areas perceived as providing most value to the country.

Such an approach makes a certain amount of sense. With a sizeable fiscal surplus due to successive years of high oil revenues, the kingdom simply has less need for foreign capital than in the early 2000s, when its economy was in bad shape. Although FDI as a percentage of gross fixed capital formation has declined from its pre-crisis annual average of 28.3 per cent to just 10 per cent in 2012, this has not markedly affected Riyadh’s economic growth potential.

The big challenge facing Mena governments is to ensure they do not get left behind if global FDI flows start to pick up to pre-financial crisis levels. Unctad has noted the structural flaws that continue to undermine the region’s investment potential, highlighting deficient regulatory frameworks; a poor business environment; weak FDI policies and incentives; poor institutional frameworks; limited market access; unfavorable comparative costs; and a lack of political stability.

FDI outlook

The challenging political environment suggests there will be less impetus in much of the region to ramp up reforms that favour foreign investors.

The UAE, which is plotting new measures to improve its investment climate, looks set to attract a larger proportion of Mena-bound FDI, while politically stable outposts such as Morocco should also perform well.

The rest are likely to vary. Despite continued terrorist attacks, Iraq looks set to become a significant location for FDI, including increasing volumes from the Gulf states. But Lebanon, Syria and Jordan – all affected by Syria’s ongoing civil war – look to be the main causalities of regional instability. While Syria’s war persists, even those investors with bold risk appetites will likely look elsewhere. Likewise, a lack of a resolution to Egypt’s political problems will continue to deter investors.