Gulf FDI inflows to regain pace

The 2008 global fiscal distress sharply depressed foreign capital into Gulf oil producers last year but investments are expected to rebound in the next years thanks to the region's large economic potential, a Kuwaiti bank has said.

After sustained growth for nine years, foreign direct investment (FDI) flow into the six-nation Gulf Cooperation Council (GCC) dipped by about 15 per cent in 2009 and the UAE recorded the largest fall, the National Bank of Kuwait (NBK) said.

"The GCC as a destination for FDI is not only reflective of the recently adopted liberalising measures but also of an increasing appreciation of the region's demographic and economic potential," it said in a study.

"Backed by the expectation of sustained oil revenue surpluses and considerable domestic economy restructuring, investors and transnational corporations are keen to tap into the region's dynamic market. Having weathered the worldwide economic downturn relatively well, the GCC countries' ability to attract FDI should improve over the medium term."

But the report stressed that much of that ability would depend on the revival of demand for overseas investment projects, access to finance, and sustained efforts on the part of FDI recipient countries in the GCC to "make good on their determination to diversify, develop and improve their competitiveness."

It said ambitious infrastructure development plans, coupled with private sector reforms, liberalisation measures and regulatory framework enhancements, would thus help pave the way for "significant FDI engagement."

Figures by the United Nations Conference on Trade and Development (Unctad) showed FDI into the GCC, which controls nearly 45 per cent of the world's proven oil wealth, shrank by nearly 15 per cent to $50.8 billion in 2009 after peaking at around $60bn in 2008.

The UAE, historically the region's second largest recipient of FDI behind Saudi Arabia, experienced the largest decline in FDI by nearly 70 per cent.

Saudi Arabia recorded a decrease of about 6.9 per cent but it continued to attract the largest volume of FDI in the GCC with $35.5bn.

Bucking the negative trend in 2009 were Qatar and Kuwait, which were among the few countries in the GCC and wider Mena region to register FDI increases during 2009. Qatar, with $8.7bn in FDI received, and Kuwait, with a mere $145 million, saw growth of 112 and 145 per cent respectively.

"Qatar's LNG projects and associated industrial plans - due to come on-line in the coming year - were a significant beneficiary of investment flows," NBK said.

In the context of international FDI flows, the GCC's 15 per cent decline compared favorably with the decreases registered by other emerging markets during the economic recession, according to the study.

It showed that the Middle East and North Africa region (Mena) attracted 30 per cent less FDI in 2009, falling to $33bn.

As a result, the GCC's overall share of total Mena FDI inflows has steadily increased over the last few years from 52 per cent in 2007 to 60 per cent in 2009.

FDI flows to developing economies experienced significant declines, tumbling by around 17.5 per cent in Asia and 36.4 per cent in Latin America. FDI flow into South East Europe/CIS plummeted by 42.9 per cent.

Consequently, the GCC's share of total emerging market FDI flows rose from 5.8 per cent in 2007 to 7.7 per cent in 2009.

"The GCC region's less dramatic decline in FDI can be explained by tracing its recent, pre-crisis trajectory.

Prior to the full onset of the financial crisis and its deleterious effects on credit, consumer spending and risk appetite, the GCC region, in line with many emerging markets, had enjoyed unprecedented levels of investment inflows," NBK said.

Turning to outward FDI, the report said capital flows from the GCC plunged by nearly 35 per cent last year to $22.1bn from $34bn in 2008 because of the crisis.

This compares with a total Mena (excluding GCC) drop of outward FDI of approx 67.9 per cent to $5.6bn .

"Indeed, the GCC carries a disproportionate share of total Mena outflows, accounting for 79.7 per cent of the region's outward investment in 2009, up from 66.1 per cent in 2008.... this disparity is, of course, a reflection of the hydrocarbon economies' substantial investment capabilities," it said.

"While the GCC countries are not expected to drastically curtail their historical bias of spreading their risk away from their local economies to mature and emerging markets through their sovereign wealth fund vehicles, the global financial crisis and its effects on capital markets in western economies in particular, has remodeled the investment landscape."

NBK said it expected GCC investors to seek out "more balanced" portfolios, both in geography and in asset allocation.

"Moreover, GCC economies harboring extensive infrastructure plans but negatively impacted by a dearth of liquidity as a result of the financial crisis, may have to rely further on their own SWFs."

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