The Arab countries are expected to attract around $13.1 billion in private capital flows this year, and a further $14.7 billion next year, with the bulk in the form of direct equity channeled to gas related projects in Saudi Arabia and other Gulf states. Countries implementing clear strategy of privatization and opening up of their economies (e.g. Jordan, Tunisia, Egypt) will also attract international capital. Lebanon will continue to tap the international bond market in order to meet its budgetary requirements. However, the share of Arab world in total emerging market capital inflows is still below 9.2 percent and is expected to drop to 7.6 percent next year.
According to the Institute of International Finance (IIF), net private capital flows to emerging market economies are projected to fall to $140 billion this year, down from $168 billion last year. This would reduce private flows to their lowest level since 1992.
The expected fall in private flows is, however, entirely due to the direct impact of an expected outflow of private capital from Turkey and much weaker net flows to Argentina. To date, concerns over Argentina and Turkey and the global slowdown appear to have had only a limited impact on net flows to other emerging market economies. Excluding Argentina and Turkey, net private flows are projected to be resilient, picking up to $153 billion this year, compared with 147 billion last year. This is the case, despite a likely decline in G-7 growth from 3.5 percent last year to 1.5 percent this year, a high degree of financial market volatility, and increased risk aversion worldwide.
Net commercial bank lending is expected to remain negative this year with a projected flow of $19 billion due to the substantial net repayment by Argentina and Turkey. Issuance of bonds is projected to fall to about $11 billion from $24 billion last year due mainly to substantial net repayment by the two countries flows to other emerging economies is likely to rise. Direct equity investment is expected to be slightly higher this year at $141 billion, compared with $133 billion in 2000, and will more than account for the entirety of net flows. Weaker investment in Brazil and Argentina, in particular, is likely to be partly offset by stronger investment in china and Mexico, as the latter is boosted by the Citigroup acquisition of Banacci.
Portfolio equity investment is projected to be just $8 billion this year, down from $15 billion last year. Emerging equity markets have shown mixed performance this year, after sharp falls last year. The correlation with industrial country technology stocks appears to have weakened recently.
If a major setback to investor confidence can be avoided, a significant recovery in private flows to over $190 billion is possible next year. As global activity starts to recover, and the crisis-based compression in flow to Turkey and Argentina runs its course, investors will become less averse to risk. Net private credit flows could reach $37 billion next year, their highest level since 1997. In addition to a swing back from large outflows in Turkey and Argentina, credit flows to other economies may increase to over $30 billion from $12 billion last year, as bank retrenchment in Asia is finally completed.
Net equity investment in the Arab region (including direct and portfolio investment) is forecast to rise by 6.3 percent this year to $10.1 billion from $9.5 billion in 2000. Foreign direct investment (FDI) to the Arab countries is expected to increase by almost 5.5 percent this year to $9.5 billion with $4 billion going to gas projects in Saudi Arabia and $1 billion to Egypt. However, FDI flows to the Arab world still constitute a small share of the global total at 7.2 percent. Recent initiative by several Gulf countries to open up their energy sectors to foreign participation, alongside economic reform and liberalization policies across the region and a stronger privatization drive in some Arab countries will help boost the Arab world’s share of global FDI flows over the coming few years. FDI flows to the Arab region are expected to rise by a further 10.5 percent to $11.5 billion in 2001. Portfolio equity investment is also expected to show an improvement this year, increasing to a positive volume of $600 million compared to negative net investment of $200 billion in 1999.
In line with global trends, net private credit flows (including bank loans and bond issuance) to the Arab countries are expected to improve this year to about $2.9 billion, from $2.1 billion in 2000. Bank credits to the region this year are expected at $400 million, bond issuance in the international market by Arab governments and corporates are forecast to increase to $2.5 billion in 2001, up from to $1.8 billion in 2000. Most of the bonds issued this year came from Lebanon and Egypt at a net increase of $1.5 billion. Bond issuance in the Arab world is expected to pick up further in 2002 to $2.6 billion while net bank credit is forecast at $600.
With the global economy experiencing a downturn of economic activity in all major regions, the emerging Arab economies are facing a very challenging external environment. Export growth is likely to slow, and in consequence the aggregate current account position of the Arab economies is expected to weaken somewhat, despite a reduction in the burden of interest payments on floating rate debt.
Some weakening in commodity prices may also intensify the difficulties of certain Arab economies. This means Arab countries have to put in place the right macroeconomic policies, introduce the required structural reforms and expedite their privatization drive in order to attract the required net capital flows to their countries.