Magazine article The Middle East

Global Crunch Presents Stiff Challenges to FDI despite New Incentives; the Developed and Emerging Regions Will Have Their Work Cut out to Attract Direct Investment Amidst the Global Economic Downturn. Researched and Written by International Economic Analyst Moin Siddiqi

Magazine article The Middle East

Global Crunch Presents Stiff Challenges to FDI despite New Incentives; the Developed and Emerging Regions Will Have Their Work Cut out to Attract Direct Investment Amidst the Global Economic Downturn. Researched and Written by International Economic Analyst Moin Siddiqi

Article excerpt

IN ALL PROBABILITY, when the final figures are presented, they will show that inward foreign direct investment (FDI) into the Middle East and North Africa (MENA) region of 19 nations continued to increase in 2005, buoyed by economic growth, high oil prices, a favourable business climate and new investment opportunities. Ballooning revenues in the first half of 2008 led core regional oil-producers, led by Saudi Arabia, to spend heavily on infrastructure, often in collaboration with private investors, including foreigners, in the form of public-private partnerships (PPPs), mostly in water/power industries and services. Meanwhile, export-oriented projects benefited from robust demand in Asia.

The FDI framework in MENA countries is one of greater openness, with few exceptions. The Supreme Economic Council in Saudi Arabia allowed external participation in the largely 'untapped' mining sector, transportation (both air and railways), satellite-transmission services, wholesale/distribution, as well as retail trade and commercial agencies (except franchise rights). The kingdom also relaxed conditions for visas for foreign business travellers.

Whereas a new federal company law in the UAE allows 100% foreign ownership in some sectors (compared to the previous 49% ceiling) outside the free trade zone. Even Syria is opening its borders to inward investment. A new law enables foreign investors to lease or own land or property to establish ventures and to repatriate profits and capital six months after forming a business. It also provides for new tax exemptions to foreign firms.

At the international level, Oman and Qatar concluded five new Bilateral Investment Treaties (BITs), while Jordan and Bahrain concluded four and three new BITs respectively. Saudi Arabia signed five new Double Taxation Treaties (DTTs), followed by Qatar with three. In April 2008, the Gulf Cooperation Council (GCC) bloc successfully finalised negotiations on a Free Trade Area (FTA) with the European Free Trade Association (EFTA). The Accord includes provisions on investment, services, state monopolies and subsidies, protection of intellectual property, capital movements and, most importantly, government procurement. FTA negotiations are under way between some Middle Eastern capitals and Australia, China, India and Japan.

All these factors, namely better policy environments and improved market access have underpinned direct investment to the region. The latest published figures (for 2007) from the Geneva-based United Nations Conference on Trade and Development (UNCTAD) show FDI to the MENA economies rose by 10%, to reach $92.23bn--yet another record--making the fifth consecutive year of growth (see Table 1). Saudi Arabia, Turkey and the UAE were the top three destinations within the region, accounting for two thirds of aggregate inflows or $59.6bn. However, Egypt ($11,578m), Lebanon ($2,845m) and Morocco ($2,577m) also received sizeable regional inflows. The top 10 recipients attracted 92% of total FDI (see Table 2).

Inflows to the six GCC member states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) surged by one fifth in 2007 to $43bn. During 2005-07, FDI inflows ($106bn) were nearly 40% higher than their accumulated figure over the previous 15 years. Saudi Arabia and the UAE have received large amounts of FDI, mainly in energy and construction projects. In 2007, Qatar recorded a 'seven-fold' increase to $1,138m compared with $159m in 2006. But inflows to Kuwait remained paltry at $122m and $123m, respectively during the 2006-07 period.

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Inflows to Iraq, albeit still low, reached $448m in 2007, helped by oil and petrochemical projects. In Damascus, the authorities have taken steps to revive FDI, which totalled $885m in 2007, up from $500m in 2005. The Syrian Investment Agency was created to expedite the implementation of national FDI policies and streamline the procedures for foreign investors. …

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