Taking paths of least resistance [Gulf, The (Bahrain)]
(Gulf, The (Bahrain) Via Acquire Media NewsEdge) In its 2013 Global Economic Prospects report the World Bank predicts a rebound year for inward investments into the Middle East.
Despite the global financial turmoil and political and social upheaval closer to home, the Middle East and North Africa (MENA) economies are, overall, growing.
Gross domestic product (GDP) is estimated to have risen 3.8 per cent last year, against a 2.4 per cent contraction the previous year. There are notable bright spots in former conflict zones which nevertheless still pose significant security risks – rising oil production has boosted Libya's GDP by an estimated 108 per cent, while Iraq is projected to enjoy GDP growth of 13.5 per cent this year.
Despite the opportunities such growth represents, on paper at least, experts believe investment flows will continue to take the path of least resistance, with the rapidly expanding Saudi and Qatari economies expected to be the main beneficiaries in a region where the UAE alone has received an estimated Dhs30 billion ($8.1 billion) in funds diverted from regional trouble spots.
Speaking at an investor conference in Bahrain last month Amin el Kholy, the managing director of Dubai-based investment bank Arqaam Capital, reckoned the oil-rich Gulf would remain the apple of investors' eyes.
"It really comes down to the GCC and within that Saudi Arabia, Qatar and to some extent the UAE, which have the greatest potential," he explained.
On the face of it, an increasingly youthful Saudi Arabia appears to have many things going for it. Structural and social reforms are underway, women are being encouraged to work and the private sector has greater opportunity in sectors previously under exclusive government control.
"Foreign exchange, unlike other emerging markets, has been stable for over 25 years in Saudi Arabia and the political system has been stable for over 60 years," Tarek Sakka, the chief executive of kingdom-based Ajeej Capital, told the conference.
"There is a compelling argument that Saudi Arabia offers a very unique and attractive proposition, from an economic point of view and given there have been significant reform initiatives."
He singled out the petrochemicals sector, which until 10 years ago was in the effective control of Saudi Basic Industries Corporation (Sabic), the majority government-owned petrochemical and industrial giant. Today there are around 10 players in the petrochemical sector, an important contributor to national GDP.
The telecoms sector, previously dominated by state-owned Saudi Telecom Company (STC), is also being opened. Mobily, a unit of the UAE's Etisalat, recently reported stronger-than-expected profits in the kingdom while STC's market share suffered.
Mohammed al Shabbasi, investment management head at Riyadh-based NCB Capital, meanwhile, pointed out at the conference that the amount of liquidity in the kingdom differentiated it from other emerging or frontier markets.
There was a philosophical take on regional conflict and its impact on investment flows. Speaking to The Gulf, security expert Anthony Tesar said the region had battled crises "for centuries" and would continue to remain economically resilient.
"It is cyclical. A crisis will be resolved, there will a period of calm and another crisis will happen," said the chief executive of Le Beck International, a British security firm with a regional office in Bahrain.
"Products need to be sold, services need to be delivered and business will continue, in one form or another and it will grow," he predicted.
However, Anthony Mallis, chief executive of Securities and Investment Company (SICO), based in Bahrain, was less confident, arguing that fundamental regional geo-strategic issues need to be resolved before greater capital inflows take place.
"We still have the same issues we had last year, such as the so-called Arab Spring. The issue of Iran will also pop up sometime this year," he predicted. "Just as importantly, we are also seeing a lot of institutional investors in the region losing or having a declining interest in regional bonds. They are following in the footsteps of global investors who don't necessarily see the returns in this region as attractive as elsewhere."
With emerging and frontier markets of Asia and Africa luring investors, the feeling among some delegates was that the Middle East will have to try harder to attract inward investment.
"For investors considering investment in the Middle East, one of the major challenges is their own lack of in-depth understanding of the region and its unique nature of operation," said Sadarshan Malpani, managing director of Swiss asset manager Sarasin-Alpen and Partners' Bahrain office.
"Somehow, the risk perception of the region is higher than several other regions, despite their other larger inherent problems," he told The Gulf in an e-mail interview. Other challenges facing the region, he noted, include restrictions on investing in certain markets or stocks. Illiquidity of the equity markets is also a deterrent.
"Most markets have only a few liquid stocks and this restricts the investment opportunity set," Malpani noted.
"This also restricts the derivative and access products that several international banks create on stocks listed across the world. Thus, the indirect investment which comes as a result of these widely distributed derivative products is very restricted," he explained.
International custody and clearing in hard currencies will also help investors access the markets easily while holding these investments in their existing international account, he added.
Despite the constraints, some participants pointed to the position of the Middle East as an investment destination relative to the slowing BRIC [Brazil, Russia, India, China] economies.
As Middle East economies grew over the last year, Brazil's GDP growth rate declined to just under one per cent from 2.7 per cent in 2011. China, meanwhile, saw its double-digit growth slow to 7.9 per cent last year, while India is yet to fully open its economy to foreign direct investment.
"As the BRIC economies cool off on their growth trajectory, the Middle East will see more interest and more fund allocations," says Malpani. He thinks the retail, banking, real estate and construction, transport and logistics as well as telecommunications sectors will likely see the greatest regional growth potential, he added.
"While the pace of investments will continue to grow in 2013, one can only expect to see a dramatic surge in foreign investments into the region starting three to four years from now," says Malpani.
"This means that those investing earlier will make very attractive returns from their Middle Eastern portfolios."
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