MENA Economy, Investments and the Specter of the Arab Spring

MENA Economy, Investments and the Specter of the Arab Spring

  • The obstinate political instability has weakened the macroeconomic fundamentals of the MENA region.
  • Investor confidence has been severely impacted resulting in a decline in the FDI received by the MENA region.
  • There is an urgent need for structural business and regulatory reforms, infrastructure development, and improvement of the education system, for the region to recover from the Arab Spring and regain its position as an attractive investment destination.

In this article we try and assess the repercussions of the Arab Spring on the MENA region’s macroeconomic and investment climate. In the first half, we discuss the trend of declining GDP growth (5.6% in 2012 to 2.8% in 2013) – a trend which is more pronounced in developing oil exporting countries – and the challenges faced by the region to recover to its historic average growth rate of 4%. We then focus on the falling FDI received by the region in wake of dented investor confidence, and how non-oil manufacturing and services sectors have been impacted more than their resource-rich counterparts, thereby creating a case for structural reforms if the region has to regain its position an attractive investment destination.

  • The unrest created by the Arab Spring is not limited to the political and social spheres only; rather, the persistent political instability has weakened the macroeconomic fundamentals of the MENA region.  An October 2013 report by the World Bank – “MENA: Investing in Turbulent Times” – tracks the on-going political turmoil, and its effect on the economy and the attractiveness of the region as an investment destination.  As per the report, despite the recovery in global macroeconomic conditions, MENA region’s GDP growth is expected to come down from 5.6 percent in 2012 to 2.8 percent in 2013.  The effect of unfavorable political and social conditions is starker in case of the developing oil exporting countries (like Libya, Iran, Syria) experience greater turbulence; as a result, their GDP growth will decline from 9 percent in 2012 to -0.4 percent in 2013.  GCC oil exporters’ efforts to increase oil production will help them outperform the region’s growth in 2013, but their growth will also be lower on y/y basis, as oil production is currently at capacity in both Kuwait and the United Arab Emirates, and Qatar’s growth continues to decline due to the winding-up of its natural gas program and the fall in crude oil prices.

MENA Economy, Investments 1

                                                                        Source: World Bank 

  • Per the report, MENA may revert to its average growth rate (of the past four decades) of 4 percent in 2014, in the event of greater political stability and improved policy measures.  However, we believe that achieving the 4 percent mark will be challenging, especially in the wake of lower credit ratings, rising inflation, weaker currencies, falling exports, inflated current account deficits, and declining tourism receipts in the region.
  • The spill-over effects of the instability also include dented foreign investor confidence, which has resulted in a decline in the FDI received by the region.  It is well known that political stability and favourable policy are among the key drivers of FDI into emerging markets. Therefore, it is not surprising that the onset of the Arab Spring coincides with a decline in FDI inflows into the MENA region.  A comparison of FDI inflows (see chart below) shows that while other developing countries were able to maintain FDI inflows post the financial crisis, MENA countries – developed as well as developing – experienced a huge drop in FDI inflows starting 2011-2012. This period coincides with the phase of extreme political and social turmoil in the region, where governments were overthrown in Egypt, Tunisia, Libya, and Yemen; civil wars erupted in Libya and Syria; and major protests were staged in Bahrain, Jordan, and Lebanon.

MENA Economy, Investments 2

                                                                        Source: World Bank

  • Finally, while FDI inflow into resource rich sectors remains unaffected by the political situation, FDI into non-oil manufacturing and services sectors declined to the political-instability and unfavourable policies. As per FDI Markets data cited by the report, resources & oil manufacturing and non-tradable sectors were recipients of Greenfield FDI worth USD 540 billion from 2003-12, which is ~50 percent higher than the amount received by non-oil manufacturing and commercial services sectors in the same time frame. One of the key reasons for this difference is the lack of democratic accountability, government instability, unstable business environment, and conflicts in the region, which matter more to foreign investors looking at the non-resource tradable and services sectors. Therefore, it is not surprising that while FDI investments focused on resource-rich sectors remained largely unaffected by the political situation, and the already low FDI to manufacturing and services sectors declined further due to the crisis, thereby depriving the region of efficiency seeking investments, which are necessary for job creation, technology enhancement, and sustainable growth of the region.

We believe that the facts above clearly highlight that finding solutions to the political situation should be a priority for MENA leaders.  However, we also believe that the need for structural business and regulatory reforms, law enforcement, infrastructure development, and improvement of the education system is higher than ever now, for the region to recover from the Arab Spring and regain its position as an attractive investment destination.

The article is written by Faisal Hasan for Arab Business Review

To read more thought-leadership stuff by leaders from Arab Region, please visit Arab Business Review

 

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