Foreign direct investment into ME & MENA regions soar by over 50%: the Arab world stretching from Morocco to Oman is becoming more integrated into the global economy and is competing for a larger share of foreign investment by multinational corporations. This trend will have a favourable impact on economic growth and job creation, especially in countries lacking natural resources. Researched and written by investment analyst MOIN SIDDIQI

Middle East, The, Dec, 2007 by Moin Siddiqi

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IN 2006, FOREIGN direct investment (FDI) flows to the Middle East and North Africa or MENA region of 19 economies (including the crisis-hit Palestinian Territory) grew by 51%, to an unprecedented $79,685m, making the fourth consecutive year of growth and a significant rise over the previous two years, according to the World Investment Report 2007 issued by the Geneva-based United Nations Conference on Trade and Development (UNCTAD).

Buoyant regional economies, business-friendly environments, diversification strategies and the privatisations of state-owned enterprises contributed to the increase. Sustained high oil prices and strong regional growth predicted at 5.5% this year by the International Monetary Fund (IMF), should reflect in a further surge in FDI inflows to the MENA region during 2007.

As in previous years, inflows remained unevenly distributed, with five countries (notably Turkey, Saudi Arabia, Egypt, the UAE and Tunisia in that order) receiving three quarters of the total (see Table 2). The region's share in total FDI flows to the developing world rose to 21% in 2006, compared with a paltry 1.3% in 2000, whilst the top five holders of FDI inward stock in 2006 were Turkey ($79,075m); Saudi Arabia ($51,828m); Egypt ($38,925m); the UAE ($37,098m); and Morocco ($29,795m). These five recipients held 68% of aggregate FDI stock. The six-member Gulf Cooperation Council (GCC)--Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE--together accounted for two-fifths of total inflows to the region. Saudi Arabia was the biggest recipient in the GCC, with inflows of $18,293m, 51% more than in 2005. Some 93 Greenfield projects were recorded in the kingdom, with over 10 in the booming construction sector.

Several factors underpinned higher investments in recent years. Regulatory frameworks for FDI have improved in several countries, especially in services, led by banking/finance, telecoms and real estate. Out of 14 policy changes in 2006,12 made the host country environment more favourable to global investors. For instance, offshore banks in Bahrain are now covered by a "wholesale banking" licence, which allows foreign banks to participate in the domestic market for the first time. In Turkey, new legislation on insurance was passed in early 2007. Non-Omani nationals have the right to own residential property and land in "integrated tourism complexes". Turkey and Egypt, the leading FDI recipients, reduced corporate income taxes and expanded their promotional efforts. Kuwait also plans to cut corporation tax from 55% to 25% in order to attract more FDI into the non-oil sector.

In the extractive sector, Qatar unveiled changes in contractual/ tender conditions, in order to facilitate the process of bidding for and securing contracts managed by Qatar Petroleum (QP), the main vehicle for energy exploration and development. These changes, when implemented, should have a major impact on FDI within the context of Qatar's gas expansion drive. Mega schemes in the pipeline include the 'Pearl Project'--51% and 49% owned by QP and Royal Dutch Shell. It will be the world's largest gas-to-liquid plant costing $18,000m and due onstream by 2011. But few countries permit foreign participation in the upstream oil sector, which explains modest inward FDI into primary industry, despite huge reserves. The MENA region holds two-thirds of global proved oil reserves, equivalent to 801bn barrels. Others (notably Iran) impose stringent conditions on foreign energy companies, whilst in Algeria the state-owned Sonatrach must hold a minimum 51% stake in all hydrocarbons projects. Nevertheless, Saudi Arabia has allowed Shell and France's Total to invest in natural gas exploration projects in the Rub Al Khali desert (Empty Quarter).

Soaring energy prices encouraged manufacturing FDI, primarily in downstream oil refining and petrochemicals. The most important cross-border acquisition last year took place in Turkey, where Austria's OMV paid $1,100m for a 34% stake in Petrol Ofisi AS (Turkey). In the UAE, manufacturing now constitutes about one-fifth of GDP and 95% of total FDI inflows were channelled into manufacturing. Turkey's automotive sector, which is a major beneficiary of outsourcing by the European motor vehicle industry, also received sizeable investment. In 2006, Doktas Docum Sanayi ve Ticaret, an automobile parts/component firm was acquired by Finland's Componenta Oyj for $110m.

FDI in services was clearly noticeable in the region, thanks to cross-border mergers and acquisitions (M&As) and privatisations. Moreover, liberalisation policies in most countries have spurred foreign investment into telecoms, banking (including Islamic finance) and real estate. In June 2006, Bahrain's Batelco acquired Umniah Mobile Communications, a major Jordanian cellular operator, for $415m and the government sold its remaining 41.5% stake in Jordan Telecom to France Telecom for $183m. The UK's Vodafone acquired TELSIM Mobil Telekomunikasyon of Turkey for $4,600m. The value of cross-border M&As in the Middle East (excluding North Africa) in 2006 increased by 26% over the previous year. M&As by transnational corporations (TNCs) from developed countries surged nearly fivefold from $3,265m to $15,112m. Greece, the UK, Belgium and the US were the main home countries of those TNCs, accounting for 85% of total M&As. By contrast, the value of cross-border M&As by developing countries' firms fell steeply to $2,723m from $9,276m in 2005, according to the UNCTAD database. Consequently, developing countries' share of total M&A sales ($17,857m) was only 15%.