Gulf oil producers are going through a foreign investment boom reminiscent of their first oil boom as they started to realise the benefits of capital to their economies, according to a Saudi investment company.
While Gulf Cooperation Council (GCC) countries have played a key part in triggering the capital boom, their strong economies and resilience to global shocks have also tempted foreign investors, said NCB Capital, an affiliate of National Commercial Bank, Saudi Arabia’s largest bank.
“The foreign direct investment boom in the Gulf is a relatively recent phenomenon that has grown at an accelerating pace during the past decade. This success has been largely the result of deliberate policy choices, even the influx of foreign capital was also stimulated by the oil boom since,” it said.
“The pro-FDI policies stem from recognition of the undeniable economic benefits of foreign investment. Foreign capital in many cases involves a strategic long-term commitment and hence tends to be sticky. It hence provides an attractive alternative to historically dominant bank credit which is often not readily available on favorable terms for long-term investments.”
In a study, NCBC said FDI is also seen as an important source of new jobs and policy initiatives have been used to deliberately channel it into more labor-intensive sectors, thereby reducing the historical role of public sector jobs.
“Its ability to attract growing quantities of foreign direct investment has during the past decades emerged as one of the most impressive success stories of the Gulf region and a sign of its growing integration in the global economy,” it said.
“While the region has by no means been immune to the blows dealt by the global crisis to overall FDI flows, its relative resilience highlights the progress made in improving the business climate and its favorable macroeconomic fundamentals and prospects…..regional governments are persisting with their efforts to woo foreign investors with a number of new regulatory initiatives as well as image building. In practice, however, the regulatory environment facing foreign investors remains uneven and sometimes further marred by easily avoidable frustrations.”
According to the study, FDI projects in Saudi Arabia employ 375,000 people, 27 per cent of them Saudis, and generate salaries of $7.8 billion.
FDI is also rightly recognized as an important contributor to the region’s increasingly urgent diversification efforts, it said.
“Access to know-how, experience, and pre-existing solutions can serve as an effective means of kick-starting development in new areas and accelerating the catch-up process in sectors that are lagging behind aspirations or their true potential. Lastly, foreign investment can serve as an important source of competition…..by exposing local companies to established foreign rivals forces them to improve their governance and strategy but also to learn from others.”
NCBC said the main challenge for the Gulf region in crafting an FDI strategy has been its status as one of the world’s leading repositories of capital.
It said this has contributed to a perception that the region, which controls nearly 45 per cent of the world’s oil wealth, does not need foreign capital and greater popular expectations for public sector, rather than external, capital.
“As a result, efforts to attract foreign capital have not always been broad-based on consistent. Rather, policy-makers have often targeted particular types of investors and prioritized certain sectors while others have remains to varying degree off-limits…. 49 per cent still remains the typical foreign ownership cap in the region, although numerous exceptions exist, it said.
“At the same time, a desire to address to concerns about the business climate has resulted in efforts to isolate – to varying degrees – the foreign investor from the rest of the economy. A good case in point are the economic free zones and financial centers which tend to outside the jurisdiction of national courts and operate under their own set of investor-friendly rules.”
The report showed Saudi Arabia, the world’s largest oil exporter, has in recent years clearly established itself as the main recipient of FDI in the region and became the global number eight last year.
The Kingdom has a total FDI stock of $147.1 billion, followed by $73.4 billion to the UAE. Kuwait is the regional laggard with a stock of only $986 million. By contrast, the UAE has been the regional leader in investing abroad, having placed $53.5 billion in foreign markets.
Citing UN statistics, the report showed Saudi Arabia has exported some $40.3 billion worth of capital. Qatar is now the region’s third largest foreign direct investor with total outflows of $16 billion.
According to NCBC, the global economic crisis has had a “pronounced” adverse impact of outward investment which in aggregate global terms has declined by 44 per cent from $1.98 trillion in 2007 to $1.11 trillion in 2009.
Following six years of increases, FDI inflows to the West Asia region, as defined by UNCTAD, fell by 24 per cent to $68bn in 2009.
“The Gulf region’s loss of FDI last year reflects the weakness of foreign investors but also a decline in investment opportunities with some large projects canceled or delayed. Nonetheless, the region’s underlying strength is due attractive convergence story in many sectors along with the unequivocal government commitment to diversification through massive investments in areas such as education, health care, and infrastructure,” NCBC said.
“But the FDI story also reflects increasing regional integration given the globally attractive opportunities in the GCC. While the US with $5.8 billion was the main source of FDI into Saudi Arabia in 2009, it was followed by the regional neighbors Kuwait and the UAE with $4.3 billion and $3.8 billion, respectively.”
NCBC forecast what it described as a favorable outlook for FDI in the GCC given its attractive demographic, strategic location, and favorable economic prospects.
Moreover, the regional economies have by and large succeeded in turning the crisis into an opportunity by demonstrating their internationally favorable fundamentals and resilience and by upgrading their regulatory framework.
“Some regional economies have taken deliberate steps to further improve the conditions facing foreign investors while also investing in information dissemination and publicity through campaigns,” the study said.
“Recent policy initiatives range from regulatory reforms to tax cuts. In spite of the impressive progress, the room for improvement remains considerable. Foreign investors still face an uneven regulatory environment and a number of practical challenges created by bureaucratic hurdles.”