March 30, 2011 5:27 pm

Arab unrest takes toll on foreign investment

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Egyptians celebrate the news of the resignation of President Hosni Mubarak

Egyptians celebrated Mubarak’s fall, but they face an uncertain political and economic future

The Middle East may be blessed with many of the world’s hydrocarbon resources, and as a result many of its countries are significant exporters of capital, but foreign investment remains vital to most economies in the region.

The oil-importing north African and Levantine states need investment to fuel economic growth and ease chronic unemployment, particularly among the young. The oil-rich Gulf states have also targeted foreign direct investment, but primarily to diversify their economies away from hydrocarbons and to create more private-sector jobs.

However, analysts say the continuing unrest across the Arab world is likely to depress regional FDI as international companies cancel or delay investments and projects until the political outlook becomes clearer.

The decline in FDI will be particularly apparent in the strife-wracked north African Arab states, which need it the most. Yet there are signs that investments in the prosperous and for the most part relatively stable Gulf could also be reduced.

“The events have been so sweeping, broad and unexpected that the sensitivity to political risks is going to be high,” says Simon Williams, chief Middle East economist at HSBC.

“It won’t bring FDI to a halt, but many people will wait and see until the dust has settled and order is restored, particularly in north Africa and the Levant, but even in the Gulf,” he adds.

Flows of shorter-term capital are an indication of foreign sentiment, and international investors have markedly reduced their holdings of Middle East securities this year.

Even after a sharp rally in March, driven partially by government pension funds in Saudi Arabia, the Dow Jones MENA index has shed almost 10 per cent since mid-January.

The yield of the HSBC-Nasdaq regional bond index has climbed from 5.1 per cent to about 5.7 per cent over the same period, and only one significant international bond has been successfully sold this year – a multi-tranche $4.4bn issue by International Petroleum Investment Company, an Abu Dhabi sovereign wealth fund.

FDI is usually much “stickier” than the more volatile portfolio flows of international asset managers, and thus far $18.1bn has been committed to the Middle East and north Africa this year, according to FDI Markets, a sister company of the Financial Times.

This compares relatively well to the $46.3bn invested last year, but is significantly lower than the $83.7bn pledged in 2009, and the record $153bn of 2008. Moreover, some of the investments promised this year are unlikely to materialise soon, given the political turmoil, analysts say.

Even among cash-rich, ambitious Gulf companies from stable countries the appetite for large, longer-term investments is waning. Etisalat, the United Arab Emirates-controlled telephone company, recently dropped a $12bn bid for Zain, a Kuwaiti rival – in part citing the unrest.

Qatar Electricity & Water, the third-largest publicly traded utility in the Middle East by revenue, withdrew from bidding on a power-plant project in Saudi Arabia after AES, its international partner, pulled out at the last minute.

Fahad al-Mohannadi, general manager of Qatar Electricity, also said the company was evaluating the situation in Syria before proceeding with plans to build a plant there.

While the region’s economic growth is forecast to remain healthy – in large part thanks to higher oil prices, which have boosted government spending – any drop-off in FDI will still have other indirect, negative effects.

“Almost as important as the direct economic growth effect a drop could have, is the importance of FDI in diversifying economies, boosting the private sector, and technology and knowledge transfer,” says Said Hirsh of Capital Economics.

Nonetheless, analysts stress that Gulf states are not dependent on FDI, given their ample financial resources, and that the more populous states of north Africa remain more dependent on domestic consumption and tourism than bulky foreign investments.

Economists say other countries may even benefit from the turmoil, particularly Qatar, Abu Dhabi and Dubai. All three states are politically stable; Abu Dhabi and Qatar are enjoying buoyant hydrocarbon revenue; and Dubai benefits from its status as the region’s haven.

“There is a risk that investors adopt a one-size-fits-all approach, and don’t differentiate between markets,” says Marios Maratheftis, regional head of research at Standard Chartered Bank. “Some countries will be affected by the unrest, but some countries could actually emerge stronger.”

Even Egypt may not be as badly hit as some analysts had feared. Although the Arab world’s most populous country faces an uncertain political future, the Egyptian bourse has bounced back, at least initially, after slumping when it reopened last week.

Electrolux, the Swedish appliance maker, has also resumed talks on buying Egypt’s Olympic Group, which were halted when the country was engulfed by protests that eventually swept former president Hosni Mubarak from power.

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