Foreign direct investment has been one of the great success stories of the GCC region in recent years.
All the regional governments to varying degrees took steps to attract more foreign companies through a combination of de-regulation and sometimes direct incentives.
Most countries now have properly resourced, dedicated government agencies to foster investment.
The case for the GCC in the eyes of foreign investors was — and remains — compelling.
The region’s rapidly growing and increasingly prosperous population is hungry for more goods and services and devoted to many international brands.
The rapid economic growth and the diversification agenda mean a range of investment opportunities virtually across the spectrum of different sectors.
But the case for FDI is strong also from the GCC perspective, even though the region taken as a whole has a wealth of domestic capital.
Diversifying funding sources makes sense for any economy. It is likely to boost economic development and resilience.
Attracting new companies to the market will increase competition, which should have positive implications for efficiency and prices.
Finally, and perhaps most importantly, foreign investors can bring valuable new technology, know-how, and skills to the market.
They play an important role in transmitting new ideas, best practices, and organizational culture to local employees.
From that perspective, they among other things represent an investment in the human capital of the GCC.
But FDI inflows into the GCC have been hit sharply in recent years.
The UAE was the first one of the regional economies to take a major hit when the Dubai housing bubble imploded.
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FDI inflows plummeted from $ 13.7 billion in 2008 to $ 4.0 billion in 2009. Bahrain saw FDI drop from $ 1.8 bn in 2008 to less than $ 0.3 billion in 2009. It is subsequently estimated to have doubled from its 2010 trough of $ 155.7 million but clearly remains far below its peak. Even the hitherto fairly resilient Saudi market now appears to have been caught in the whirlwind.
According to the latest SAMA data, FDI flows into Saudi Arabia dropped to an estimated $ 16.4 billion in 2011, down sharply on $ 29.2 billion in 2010 and 36.5 billion in 2009. The peak was reached with $ 39.5 billion in 2008. Qatar was the only one of the regional economies to defy the downward trend with an increase from $ 4.1 billion in 2008 to $ 8.7 billion in 2009. However, the final stages of the gas investment boom make the country something of an exceptional case.
These negative trends are in large part due to international developments. The UNCTAD data shows global FDI inflows fell by 16 percent in 2008 and by a further 37 percent in 2009. While the market subsequently bottomed out, the recovery has been slow and the situation is far from ‘normalizing’ to the pre-crisis levels.
As a result, FDI almost everywhere is down as investors retrench in a much more challenging economic environment.
Capital is less plentiful and confidence and risk tolerance have been tested by the persistent economic woes of especially the Western economies.
The Western brands that led the influx of investment into the region have generally retreated.
Although emerging market names have picked up some of the slack, they are less well positioned to do so because of their less advanced strategies and plans, in large part due to their traditional home bias in rapidly growing domestic markets.
But it is clear that the recent pressures also have regional causes.
While there is relatively little consistent FDI data available on 2011, the Arab Spring was a story that dominated the headlines and would have left many potential investors even more cautious than usual.
The overall investor reserve is highlighted by the performance of the regional stock market which, while by no means directly comparable to the dynamics of FDI flows, highlights the elevated levels of risk aversion until the closing months of the year when something of a rebound took root in a belated recognition of the region’s strong fundamentals and the economic stimulus measures adopted by most governments.
Additional investor concern anecdotally appears to have been linked to new restrictions in the labor market and the perceived lack of new reform initiatives to foster investment.
The FDI data in general highlights the fact that capital in today’s uncertain world is scarcer than it used to be.
Competition for FDI is likely to remain more intense for some time than it has been.
But the case for it remains strong as ever, which would justify renewed initiatives in this area.
In particular, much untapped potential remains in terms of developing investment ties with other emerging markets, whether in the broader Middle East region, Asia, or elsewhere.
— Dr. Jarmo T. Kotilaine is chief economist at The National Commercial Bank, Jeddah.
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