UAE and Saudi Arabia among best Arab investment destinations

UAE, alongwith Qatar and Kuwait, stands second only to Saudi Arabia as the most attractive investment destination in the region despite the economic slowdown, an official report said yesterday.

Although optimism about global economic recovery has largely increased since the the crisis began in September 2008, the general investment climate in the Arab world still faces an uncertain outlook, said the report by the Saudi-based Arab Petroleum Investment Corporation (Apicorp), an offshoot of the 10-nation Organisation of Arab Petroleum Exporting Countries (Oapec). In addition to a deteriorating geopolitical environment, the Arab region continues to feel the effect of the global financial crisis, Apicorp said in a three-page study sent to Emirates Business.

It said the impact of the financial crisis, which has caused a marked slowdown of growth and investment, has worked mainly through external channels.

According to the report, the credit crunch has reduced capital inflows, while the global recession has led to a drastic fall of petroleum-related export volumes and prices. In this context, funding counter-cyclical fiscal programmes and maintaining liquidity in the domestic financial sector would not have been possible without some governments repatriating a significant portion of their net savings, the report added, referring to the Gulf's massive overseas assets.

These macroeconomic policy responses may, however, prove unsustainable should the global recovery falter, it warned. "One country, Saudi Arabia, continues to occupy a unique position in the most appealing quadrant. In addition to its huge petroleum investment potential, Saudi Arabia is increasingly viewed as being a prime investment destination," Apicorp said.

"It has moved nearer to the 'ideal point' as a result of a better response to the financial crisis and macroeconomic significant strides in supporting the banking sector and encouraging the private sector," it said.

"Next is the cluster formed by Qatar, the UAE and Kuwait. Their investment potential, though important is lower than that of Saudi Arabia but they are perceived as having each a low country risk and a strong enabling environment. However, this cluster, which used to be tightly bound, now appears loosely scattered as a result of uneven pace of implementation of policy responses," said Apicorp.

The next cluster is composed of Bahrain, Oman and Tunisia, which the report said is perceived as having relatively low country risk, a strong enough enabling environment for business, but a low investment potential for a lack of sufficient hydrocarbon resources.

A further cluster, composed of Algeria, Libya and Egypt, has a greater investment potential, but is perceived as having a higher, though moderate, country risk and a somewhat weaker enabling environment. The report said this cluster could be extended to include Syria, notwithstanding its low investment potential. Overall, the respective positioning of these two clusters has barely been affected, it said.

The last cluster, which is composed of Sudan, Yemen, and Mauritania, is perceived as occupying the least desirable position: modest to low investment potential, much higher country risk, and a somewhat deficient enabling environment, the report said, adding this group has clearly regressed.

Finally, Iraq, which ranks fourth in terms of investment potential, has greatly improved its position compared to previous scorings, Apicorp said.

But it added that Iraq still stands in a singular position, very far from the ideal point, noting that the conflict-battered nation needs to improve further the perception of both country risk and the enabling environment for business.

"Our perceptual mapping has provided a unique pre- and post-financial crisis snapshot of the energy investment climate of the 15 Arab petroleum-producing countries. "The changes captured in this way range from Saudi Arabia getting nearer to the 'ideal point' benchmark, to a significant deterioration of the positioning of Sudan, Mauritania and Yemen. In between, the remaining countries are in three groups in contrasting situations," Apicorp said.

It noted that while maintaining their strong positions, Qatar, the UAE and Kuwait have moved apart from each other, with Qatar widening its lead.

"Our approach is, however, not without limitations. First, and as noted in the introduction, no causal relationship could be assumed for the above changes of positions. Indeed, these changes cannot be solely attributed to policy responses, or lack of responses to the crisis," it said.

"Conversely, the extent to which a number of issues highlighted by the financial crisis have affected our perceptual mapping remains imprecise. This is the case of the impact on country risk of generally shallow macro-economic measures, except for the few countries in the GCC that committed to a case of the stimulus programme," the study said.

"Within this region, it is also the impact of the vulnerability of a highly leveraged domestic private sector on the enabling environment for business.

"A large section of this sector, which is dominated by family-owned conglomerates with poor governance and transparency record, has failed to address properly the rapid deterioration of its balance sheet. What ultimate impact that is going to have on other GCC countries and beyond remains to be determined," said Apicorp.

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