Arab investors should give priority to local markets in their future business activities after many of them suffered from massive losses abroad because of the current global financial crisis, according to officials.
Despite a surge in inter-Arab capital and foreign direct investment (FDI) flow into the region over the past two years, the level has remained negligible compared to the total worldwide investments, they said.
"Arab banks need to intensify their investment activities in the Arab world before they think of investing abroad," said Hamoud bin Sengour Al Zedjali, Executive President of the Central Bank of Oman.
"They should be more careful now when they decide to invest in foreign countries to make sure their money is safe and is not exposed to possible losses… I believe investment in the Arab region is safe and secure as most institutions are not vulnerable or exposed to foreign market volatility… the improvement in the investment climate in the region should also prompt our banks to invest at home," he told the Union of Arab Banks magazine.
But Zedjali also warned regional banks not to exceed the limit of 10 per cent of their real estate credits to total loans to avert any bad debt problem. "The banks should make sure they obtain sufficient guarantees to regain both the principal loan and interest in case there is a default by debtors."
Another Arab official urged banks and the region's sovereign wealth funds (SWFs) to consider regional markets in their investment strategies, citing the recent Western uproar about SWF activities in those countries.
"Arab SWFs need to diversify their investment portfolios to lessen risks following the financial turbulence in the US and the growing Western pressure against them," said Jassim Al Manai, Chairman of the Abu Dhabi-based Arab Monetary Fund (AMF), a key Arab League institution.
"Local markets have become attractive although more work is needed to be done… concerning the Arab investments abroad, the losses suffered by those investments as a result of the crisis could push the region to revise its policies and strategies… the effect could be on the sort of invested assets, the sectors, or even their geographical location."
According to the state-run Emirates Industrial Bank (EIB), the six-nation Gulf Cooperation Council (GCC) has amassed nearly $2 trillion (Dh7.3rn) in overseas assets and the funds are projected to sharply grow by the end of 2008.
The bulk of the investments are controlled by the Abu Dhabi Investment Authority and other GCC SWFs while massive funds are also invested by other Arab asset owners in bank deposits, securities and real estate.
Despite the relative improvement in the investment environment in the region, inter-Arab capital flow has remained a fraction of the total Arab investments abroad. Between 1995 and 2007, the cumulative inter-Arab investment stood at around $95 billion, less than five per cent of the overseas Arab assets.
EIB said the investments abroad have remained largely unstable over the past two decades because of persistent financial crises in global markets, unstable US dollar and sharp fluctuations in oil prices.
In its recent economic bulletin, EIB urged Gulf investors to turn to local markets to achieve a balance between their internal and external investments, concentrated mainly in the West.
"The GCC's assets have sharply fluctuated over the past two decades because of low oil prices and the fluctuating value of the US dollar as a large part of them are in dollar… but the assets began to rapidly increase three years ago due to a surge in oil prices and this allowed regional funds to play a key role in the international financial system," EIB said.
"They also allowed the GCC nations to net high revenues that exceeded in some years their oil earnings, especially when oil prices dipped to very low levels…it is time for the GCC countries to ensure a sort of balance between their foreign assets and local investments following the steep decline in the US dollar and the global financial crisis, which has adversely affected them."
In another report, the Kuwaiti-based Inter-Arab Investment Guarantee Corporation (IAIGC), a key Arab League establishment, reported a surge in capital flow into Arab states in 2007 as a result of improved investment laws, strong economic performance and other factors.
The report showed foreign direct investment jumped by nearly 20.5 per cent to around $75 billion last year from $62.4 billion in 2006.
It said several factors contributed to the surge in FDI last year, including high growth, reforms in many Arab countries, relaxation of curbs on foreign capital in some sectors and higher return from investment in the Arab region.
"This increase in the Arab countries' share of FDI is attributable to both internal and external factors... internal factors include the fact that regulatory frameworks are becoming more relaxed in several countries of the region, particularly in the area of financial, construction, communication and tourism services. In addition, privatisation of the state-owned enterprises and liberalisation of most service sectors in some member states have also attracted more FDI by Trans-national corporations," it said.
Despite the surge, capital flow into Arab states remained a fraction of the global FDI, standing at only 4.8 per cent of the $1.53trn in 2006. But compared to other developing nations, there was a big improvement as it accounted for nearly 17 per cent of their total FDI of $438bn.
"We urge Arab banks to improve their practices, mainly in the fields of risk and liquidity management, transparency and scrutiny of the funds in which they invest in," said Adnan Yousuf, Chairman of the Beirut-based UAB.
"Our banks need to increase their support of the private sector to push it out of the bottleneck due to the new pessimistic outlook about the global economy…Arab banks are called upon to take individual or collective measures to protect the banking and economic system in their countries…this can be done through giving priority to investing in their region."