The global financial turmoil will likely depress capital flow into the Arab World in 2009 for the first time in many years despite a surge of more than 26 per cent in 2008, according to a key Arab League organisation.

Foreign Direct Investment (FDI) pumped into 17 Arab nations that have provided data soared by 26.9 per cent to about $89.2 billion in 2008 from nearly $70.3bn (Dh327.3bn) in 2007, said the Inter-Arab Investment Guarantee Corporation (IAIGC).

FDI flow was much higher in 2008 despite a sharp slowdown in the second half of the year and it followed several years of steady growth in capital flow into many Arab countries because of high oil prices, a surge in regional projects and improvement in investment laws, said IAGIC.

"As for 2009, FDI flow into the Arab region is expected to decline due to several factors, including the slowdown or contraction in the economies of industrial nations, which have constituted a major source of FDI for Arab states over the past few years," said IAIGC in a new report on the Arab investment climate.

"Another factor is the possible continuation of turbulence in Arab and global markets as this will contribute to increasing uncertainty regarding investment decisions in the medium and long terms and to shelving of more projects in the region in infrastructure, hydrocarbon, and real estate sectors."

The report said a sharp fall in oil export earnings of Gulf nations would also adversely affect their capital flow into other Arab League members, adding that inter-Arab investments are key components of FDI flow into regional states.

It also expected a decline in foreign investment flow into oil and gas projects in some Arab countries in case of a prolonged global crisis.

"This will naturally lead to a decline in investment projects, particularly those that had been planned to expand the crude output capacity… many of such projects could be put on hold because of weak crude prices and the slackening global demand as a result of the crisis."

The report showed the bulk of the increase in FDI flow into the region last year was in inter-Arab investments, which surged by about 64 per cent.

The growth in capital inflow boosted the share of Arab states in global FDI to 5.3 per cent in 2008 from about 3.9 per cent in 2007 and 0.4 per cent in 2000.

The sharp rise in inter-Arab investments was the main factor in the FDI growth in the region, as they jumped to $34bn in 2008 from about $21bn in 2007.

"Gulf countries have remained the main source of inter-Arab investments, while new players emerged on the arena in 2008, including Egypt and Lebanon," said IAIGC. "Between 1995 and 2008, Saudi Arabia, Sudan and Lebanon were the largest beneficiaries of inter-Arab investments as they attracted $95bn, nearly 70 per cent of the total inter-Arab FDI of $135bn."

A breakdown showed Saudi Arabia, the world's largest oil exporter, topped the list of Arab FDI recipients in 2008, with around $29.6bn. The UAE was the second-largest beneficiary, receiving about $13.7bn.

The report said the increase in inter-Arab investment and FDI in general was a result of better capital laws and a push by most Arab countries to attract investments given their importance in growth in the absence of other major financial sources in some regional nations. It said the investment climate and infrastructure in most Arab countries had largely improved over the past few years but added more work needs to be done.

Arab states have often been urged to reform their financial and investment laws to attract capital needed to stimulate their economies and reverse a steady capital flight from the region.

Despite the relative improvement in the investment environment, inter-Arab capital flow has remained a fraction of the total Arab investments abroad.

Between 1995 and 2007, the inter-Arab investment was $100bn, less than five per cent of the foreign assets.

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