Health Tourism in the UAE

Health Tourism in the UAE

  • Some Arab countries have all the factors required for a successful health tourism industry and Government support can help these countries become popular health tourism destinations
  • The U.A.E. is positioning itself to become a hub for global medical tourism and a preferred destination for domestic and foreign patients seeking high quality and cost effective procedures and treatment
  • While Dubai has many things going for it which make it an excellent health tourism destination, there are some challenges it faces such as competition from some South Asian countries and availability of affordable medicine

Health Tourism is increasingly becoming a successful investment strategy in the west and far-east countries. Governments have supported this sector primarily for its anticipated contribution to the development of the economy through generation of revenues and for its potential impact on improved quality of healthcare services. However, some of the Arab countries are also in a position to make this sector a very successful industry as they do have all the factors that can make it happen. Some of these factors are; natural hot spring and mineral waters and state of the art medical centers as well as the abundant resources for investing in cutting edge healthcare services. The GCC spends an approximately USD 30 billion on overseas treatment yearly. Therefore, there has to be some strategies to shift the burden from the Government, one way of doing that is by promoting health tourism in the GCC through developing this sector and support it with all required legislations and policies that are conducive to creating a favorable environment for its growth.

The U.A.E. is positioning itself to become a hub for global medical tourism and a preferred destination for domestic and foreign patients seeking high quality and cost effective procedures and treatment. The U.A.E. is already home to a number of high-profile partnerships which seek to bring Western technology, practices, and standards to the U.A.E. in an efficient and culturally relevant manner. The Cleveland Clinic Abu Dhabi and Mubadala—is scheduled to open its 360-bed multi-specialty tertiary care hospital in 2015 , The Johns Hopkins University Medical School works in partnership with Tawam Hospital, a 466-bed facility in Al Ain. The Dubai Healthcare City; consists of two free zones—a medical cluster and a wellness cluster—on a total of 23.2 million square feet of land and has attracted a number of top U.S companies and institutions as its key partners.

The U.A.E. has positioned itself as an attractive investment prospect for U.S. companies seeking to expand their footprint in the Gulf region. The country presents a substantial growth opportunity within the framework of strong regulatory oversight and ambitious plans to expand and improve healthcare coverage for its growing population. Through strong partnerships and direct investment opportunities. As per business monitor international report its expected that the health spending in the UAE will reach 11Billions US Dollars by 2015. Therefore, health tourism was consider as a sector which can contribute to the economic growth of the country.

Dubai has taken the initiative of promoting the city in the medical tourism hub in the 2012. Dubai is the most diversified economy in the GCC. Currently over 2 million residents from over 150 different nationalities lives in Dubai. It has its own Independent regulatory body established to ensure international standards in patient safety and quality of care. The health outcomes compare well to international benchmarks and clinical guidelines have been introduced. There are Over 4,750 doctors/ physicians speaking over 40 languages and centers of Excellence offering treatment for a wide range of specialties. This is to ensure that our community and our health tourism receive the best of care and feel safe. Geographically Dubai is only four hour flight from one third of the world’s population and within 12 hours for the remaining two thirds. As a health tourism it save on average between 30 to 60% on the cost of treatments when compared to the US. The high standard of living helps in attracting and retaining physicians and nursing staff compared to the other countries in the Middle East. And above all, the growing tourism sector and the expanding airlines networks (The Emirates and Al-Itihad airlines) make an excellent opportunity for promoting a travel driven medical tourism hub in the UAE.

Despite these forth mentioned favorable conditions, however looking at the market, there are challenges that Dubai will face and could be hard to change without a comprehensive plan, these include;

  • Competitive prices for treatment in the region; offered by India, Thailand and Singapore.
  • Nationals still seek health care in competitive countries.
  • Availability of world class, quality medicines at affordable prices.

The article is written by Laila Al Jassmi for Arab Business Review

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

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Opening-up of Saudi Stock Exchange to Foreign Investors

Opening-up of Saudi Stock Exchange to Foreign Investors

  • The decision of the Saudi Capital Market Authority (CMA) to open the Saudi stock exchange to foreign investors has induced a lot of excitement and optimism in the market. In this article, we discuss what the change is all about, why it is important, how it is likely to be implemented, and what will be its impact on various stakeholders.

What? Why? How?

So what exactly is going to happen? On July 22, 2014, the Saudi government announced that the Tadawul All Shares Index (TASI) will be open to direct foreign institutional investment from the first half of 2015. This would mark a welcome departure from the current state of affairs, where foreigners can purchase Saudi stocks only via trades conducted through international banks and by making a small number of costly and time-consuming exchange-traded funds (ETFs). As a result of these restrictions, foreign investors currently own less than five percent of the Saudi market, and account for a meagre one percent of the volumes traded on the TASI, which is dominated completely by local retail investors. But once these restrictions are eased in 2015, foreign investors will be able to participate much more freely in the Saudi market, and own and trade stocks of public companies in the kingdom.

Why is the change important? With a capitalization of $530 billion, the Saudi capital market is much bigger than its regional peers (Dubai and Abu Dhabi combined have a market cap of about $235 billion, Qatari listed companies are worth $196 billion and Egypt’s market is about $69 billion), and also boasts of superior liquidity – the daily average turnover at TASI is $2 billion, which is once again much ahead of the trading volume in other Arab nations. And to add to these points is the fact that the Tadawul is home to the some of the largest companies & IPOs in the region, belonging to diverse sectors ranging from petrochemicals to banking to telecommunications to retail and real estate. Therefore, from an investor standpoint, the TASI is one the biggest market which is currently closed to foreign money; therefore, its proposed opening to foreign investors is perhaps the most significant investor-friendly step taken by a Middle East or GCC nation in many years.

However, the Saudi government is not taking this step simply to appease investors. Instead, this move is a part of the kingdom’s long-term strategy to reduce dependence on oil revenues, and strengthen the non-oil sector of the largest economy in the Middle East. The decision also comes close on the heels of Qatar and the UAE getting included in the MSCI emerging market index, and Saudi authorities surely don’t want to be left behind on this front, so an indirect aim would be to get the TASI listed on the MSCI frontier or emerging market index.

The importance attached by the market to this move can be gauged from the fact that the TASI jumped 2.8 percent to a six-year high on the day the announcement was made. Also, the IMF boosted its 2015 GDP growth forecast for KSA from 4.1% to 4.6%, based on expectations of strong private sector performance.

How will the change be implemented? The CMA is yet to come out with a definite plan, but it is obvious that the roll-out to foreign investors will a slow and gradual process to avoid volatility in the market, and also to test waters in a phased-out manner.

One of the reasons that this change has taken so long to come is that Saudi authorities have been very protective of the companies in the kingdom, and have been averse to foreign investors taking control of key listed companies. Therefore, we can expect the CMA to impose caps on the amount being invested. While official numbers are yet to be announced, the market expects that foreign institutions will not be allowed to own more than 10% of the Saudi market and more than 20% of a Saudi company.

Further, to start with, a limited number of investment licenses are likely to be granted to qualified investors only, in order to avoid a sudden influx of foreign money into the Saudi companies. Such investors likely to be chosen based on the size of their assets under management (AUM) and global investment management experience, with most expectations pointing to an AUM bar of at least $5 billion. Retail investors are unlikely to be given licenses for buying and trading in the first phase of the roll-out.

Finally, most experts believe that the KSA is likely to follow the route adopted by emerging markets like China and Taiwan, where a free and open market is regulated by government officials. Also, oil and gas companies may be kept out of the purview of the initial roll-out to ensure that the Saudi government retains control over firms currently generating majority of the national revenue.

What are the implications of opening-up of the market to foreign investors?

  • On the KSA economy: Saudi Arabia’s economy is likely to get a double boost from this move. First, the influx of foreign capital will boost the overall GDP, and push along the diversification to non-oil revenues that will ensure sustenance of growth. Secondly, a well-diversified and growing economy will help tackle the high level of unemployment, especially among the youth, in the country. As cited earlier, the IMF has already increased its 2015 growth forecast from 4.1% to 4.6%, expecting economic diversification to drive growth.
  • On the Tadawul Index (TASI) and the overall capital market in the kingdom: The index will become the gateway to foreign fund inflow worth ~$50 billion into the country, strengthening its case for inclusion into MSCI’s emerging market index. Even though such an inclusion unlikely to take place before 2016, the TASI will account for three to five percent of the index, when eventually included. The move will also boost trading and IPO activity on the TASI, and will also result in production of higher quality equity research in the region.
  • On Saudi Companies: Most large Saudi companies are cash rich, so obtaining additional funding will not be the biggest gain for them. Instead, such companies will benefit from shareholder activism and improved corporate governance and accounting standards that are likely to be implemented to meet the high standards expected by foreign investors. These companies will also benefit from receiving guidance and expertise from globally experienced investors, on operational as well as strategic issues. For medium-sized companies, influx of foreign capital will lead to lower financing costs and improved valuation. Further, working with global investors will allow companies in the KSA to think global, and will help them execute their international expansion plans (regional or global) in a better manner.
  • On Investors: The move will give investors much awaited access to the largest economy in the GCC and in the Middle East. Huge foreign reserves, a low-risk sovereign credit quality, and an emerging-market like growth potential make the KSA an especially attractive destination for foreign investors.  Additionally, through the TASI, it will give them access to leading firms across industries, such as Samba Bank, Saudi Basic Industries, Saudi Industrial Investment Group, and Yanbu National Petrochemical Company. Not only do these companies have a huge “upside” potential, most Saudi companies also have better corporate governance standards as compared their peers in the Middle East.
  • On Other Asset Classes: The current move is aimed at opening-up of the equity market. However, if the move is successful, it could prompt the government to open even the bond (or Sukuk) market to such investors. Even though such a follow-up move will take a long time before being implemented, the opening-up of the local Sukuk market would give foreign investors access to companies that sold 42 billion riyals ($11.2 billion) through a dozen sales in the past year, according to Bloomberg.

Overall, if implemented well, this move has huge positive implications not just for the KSA, but also for all other countries in the GCC and the Middle East, as discussed above. However, investors are keeping a close eye on the announcement since policymakers in the kingdom have put off such plans in the past. Therefore, it is important that the CMA comes out with a well-defined roll-out plan with actual dates and timelines to alleviate investor concerns, and implement what will be a landmark change in the way capital markets operate in the Arab World.

The article was originally published at: Arab Business Review

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

Workplace Wellness: An investment well worth it

Workplace Wellness-An investment well worth it

  • Approximately 20% of the UAE population are living with Type II Diabetes, ranking the UAE in the top 20 worldwide.
  • There is also a link between obesity and productivity levels at work and studies have shown, workers who are overweight are less productive.
  • Since many employees spend more than half of their waking hours at work, companies are slowly starting to realize the important role of Wellness Programs.
  • However, employers need to start thinking about wellness as a long term valuable asset to their employees, who will in turn work better for them.

Healthy employees are the key behind every successful business. Since many employees spend more than half of their waking hours at work, companies are slowly starting to realize the important role of Wellness Programs. Such programs are designed to help:

  • Reduce medical costs
  • Reduce absenteeism and presenteeism
  • Increase employee morale and job satisfaction
  • Reduce staff turnover
  • Increase productivity levels
  • Increase organizational effectiveness
  • Decrease employee turnover

It’s no secret that the UAE is not the healthiest country. Approximately 20% of the UAE population are living with Type II Diabetes, ranking the UAE in the top 20 worldwide. Research and statistics report on diabetes across the UAE suggest that the disease will cost an estimated Dhs 10 billion by year 2020 if the condition is not treated. Workplace wellness programs can improve dietary habits through education and a supportive work environment where employees can work together to reach personal goals.

There is also a link between obesity and productivity levels at work. Studies have shown, workers who are overweight are less productive at a value of over 42 billion US dollars. When compared to the productivity levels of workers who were at a healthy weight, employers could save approximately 11 billion US dollars by investing in programs that educate their employees on overall health and wellbeing.

Stressed employees do not work at their maximum potential. The UAE is not an easy place to work and jobs in this region can bring about longer working hours, higher demands, and increased pressure. Thus, there is a need for workplace wellness programs to help employees carry out their daily tasks with higher productivity levels to avoid increased stress levels (which can also lead to other health and performance concerns). A stress-free employee will perform better when carrying out daily tasks and thus have higher productivity levels.

What’s in it for the employer?

Employers may see workplace wellness as low priority, as it is a long term investment, where results may not be seen right away. In fact, workplace wellness is a service that is not tangible at all, so what’s the point? Similar to diets, workplace wellness will not work if you don’t commit to changing an entire work environment. A healthier workplace can’t happen overnight and it can’t happen with one “health day”. Employers need to start thinking about wellness as a long term valuable asset to their employees, who will in turn work better for them (see below diagram).

Workplace Wellness-An investment well worth it-1

Companies like Johnson & Johnson have seen the benefits of investing in employee wellness programs. In specific, from 2002 to 2008, they estimated a cumulative savings of $250 million  US dollars. This calculated to be a return on investment (ROI) of $2.71 (US) for every dollar that was spent.

Sources:

– Gulf News: http://gulfnews.com/news/gulf/uae/health/diabetes-likely-to-cost-uae-dh1…

– Ricci, J. & Chee, E. Lost productive time associated with excess weight in the US workforce, Journal of Occupational and Environmental Medicine, 47 (10), 1227-1234, 2005 

– Berry, L.L., Mirabito, A.M., & Baun, W.B. What’s the Hard Return on Employee Wellness Programs? Harvard Business Review, 2010

– Berry, L.L., & Mirabito, A.M.  Partnering for Prevention With Workplace Health Promotion Programs. Mayo Clin Proc ;86(4):335-337, 2011.

The article is written by Alison McLaughlin for Arab Business Review

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

A Banker’s Primer to Saudi Arabian Family Offices

A Banker’s Primer

 

  • Major global banks have established a presence in the Kingdom, only a few years ago, though with an almost exclusive focus on corporate and private banking.
  • The predominant banking business model involves a partnership between a local bank with an International partner, where critical areas such as risk and asset management are under the purview of International partner.
  • At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families.
  • There are several type of family offices in Saudi Arabia, and they are constantly evolving due to the influence of the Western world.

The Kingdom of Saudi Arabia was never a banking hub for the GCC in the tradition of Bahrain, and later Dubai. That is, foreign banks were never historically established in Riyadh, Jeddah and Dammam with active mandates in servicing the local economy or with the intent to be utilized as a springboard for access to other nations in the GCC. Instead, the commercial linkages between the seat of Islam’s holiest sites and the rest of the world were first based on the general trade in goods, and later—the defining moment in the nation’s history—the discovery of crude oil occurred in the early twentieth century. In the wake of oil’s discovery was the founding of the energy behemoth Saudi Aramco (the Saudi Arabian Oil Company), having begun operations in 1933 as the California-Arabian Standard Oil Company.  With the technological advances and labor-intensive expertise required to extract and manage the world’s most precious tradable commodity came legions of skilled workers from the United States and other nations, critical in establishing what was once considered the consummate American outpost in the Middle East.

The Aramco camps in Eastern province were akin to transplanted Midwestern US cities.  Based on this model in the utilization of crude oil and the reliance on its financial dividends for economic development and later growth, no absolute national consensus was ever formulated on the internationalization and broad-based opening of the Kingdom’s market to foreign banks with the aim of establishing bricks-and-mortar presence.  It is only in the last several years that a few of major global banks established a presence in the Kingdom, with an almost exclusive focus on corporate and private banking.

Historically, the predominant banking business model in Saudi Arabia has been for local banks to include a non-Saudi partner institution, typically with a stake of 40 percent. Critical areas of bank management, including, heads of finance, risk management, asset management—just to name a few—were within the purview of the banking partner by contract. Over time, wealthy Saudi clients have become accustomed to dealing with their local banks for corporate loans and regional brokerage and investment services. When it comes to sophisticated investments, packaged as funds for example, the reliance continues to be on US and European private banks—many of which have been reliant on the “briefcase banker” approach. This entails flying bankers to the Kingdom for a few days of marathon one-on-one client meetings to introduce a product and collect a tidy sum of money—with the hope that the fees generated from client investments will ultimately cover the banker’s costs.

At the apex of the wealthy client pyramid are Family Offices, vehicles established to formally manage the day-to-day investment affairs of the richest families. In Saudi Arabia there are several types of these entities and it is worth our while to outline them.

The Mega Family Office:

The minute a foreign banker lands at an airport in the Kingdom, these family offices are the first few stops to make as they represent the wealthiest fifty families in the Kingdom. By their very nature, they were established decades ago and have highly sophisticated departmental structures, for example splitting managerial investment functions among Equity, Fixed Income and Private Equity teams. There is a formal investment committee process in which new proposals are discussed on voted on and IT expenditure to support detailed reports and investment analysis are standard. In a few cases, these billionaire families have offices in Dubai, Europe (primarily London and Geneva) and the US to complement their Saudi presence. The logic behind this is approach is to remain closer to their investments abroad while vetting ideas from the source. But also from a practical standpoint, many senior investment staff members are precluded from leaving their families due to personal obligations in their home countries.

Multi-Generational Office:

This structure supports various owners from many branches of the family. In the Kingdom Due to the participants in this office structure, the internal challenge is to accommodate various points of view regarding investments (type, time horizon and risk). These types of offices at times allow other families, generally maternal relatives, to participate while functioning as a multi-family office to increase the purchasing power of the owning family group. In effect, multi-generational offices reflect the current state of Saudi Arabian family businesses with young sons and daughters, typically freshly minted university graduates, being brought into the family business in the hope of an inter-generational succession proceeding smoothly one day.

The Corporate Group:

This type of entity supports the shareholders of operating business. The primary role is to maintain business control through effective wealth transfer, providing strategies for internal stock transactions among shareholders or leverage as needed to generate liquidity for owners. The office also supports owners’ financial needs for income, diversification of assets, and risk management.   A head of finance for these groups will typically handle both the company’s day-to-day affairs as well as individual investment management for the Chairman and associated family members.

The Single Provider Office:

In the last few years, some families have decided to stop granting bankers calling for an appointment to hold sales meetings, as a matter of policy. Instead, they have relied on an internal staff member to vet various product providers and settle on a single institution to manage the office’s affairs. It then becomes the mandate of the bank advisory professional handling the relationship to suggest investments from third party banks or investment houses. This “gatekeeper” approach has a major benefit for the families involved as there is a simplification of the process and reporting is handled by the hired bank, an ostensible cost savings.

Philanthropy/Foundation Office:

The Kingdom has an immense number of philanthropic institutions that families have established apart for their corporate alms-giving that is compulsory in Islam. Many of these offices are distinct from the family’s investment arm and, as would be expected, their investment universe is typically more limited. When it comes to the plethora of foundations which dot the Arabian landscape, the majority that bankers deal with are affiliated with religious or university funds. Bankers visiting Saudi Arabia are frequently surprised by the risk-return profile of these investors, with many delving into products that are far more esoteric than one would expect. Of course Sharia-compliance remains of paramount importance.

The Royal Family Office:

The trend today within these offices is launching new businesses and offering value-added projects for the benefit of Saudi society. Most of the initiatives undertaken by these investors will target a particular rate of return on a project or a feeder fund to a project, instead of seeking an income-generating fund investment—for example. The due diligence on the banker at the beginning of an introductory meeting is critical and being asked for a return visit is not assured. Knowledge of local market deal flow is key in these relationships.

The evolution of the family office unit, much like business itself, relies on constant change. There are trends in Europe and the US that are having an impact both on the vision and operational aspects of establishing, managing and growing a family office. Despite the influence of corporate practices and financial institutions on the most sophisticated investors in the Kingdom, most of them continue to hold sacred one slogan: “Made in Saudi Arabia.”

 

[1] (Source:  https://www.familyoffice.com/understanding-family-office/types-family-offices)

 

The article is written by Ragheed Moghrabi for Arab Business Review

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

Needed: A Strong Patent System & An Innovation Friendly Culture in the Arab World

Needed_A Strong Patent System1

  • The on-going transition from oil to non-oil based economy has heightened the pace of patent development in the Arab World, with Saudi Arabia leading the region.
  • However, patent development activity in the region pales in comparison to other countries worldwide, and is reflective of a lack of innovation friendly culture in the Arab world.
  • The pace of innovation and patent development needs to increase rather quickly in order to protect new technology being developed by Arab countries, and also to attract more foreign investments.

The on-going transition from oil to non-oil based economy has heightened the pace of patent development in the Arab World. In the past 3-4 decades, most of the economic output in the MENA region was generated from the hydrocarbon sector, and other sectors were undeveloped leading to low levels of innovation and patent development. However, the trend has started to change in recent years as MENA nations (especially GCC) look to diversify their revenue base by increasing focus on non-oil sectors like technology, hospitality, tourism, infrastructure development, etc. This has led to increased patent filing in the region, which has gone up from 41 in 2003 to 403 in 2013, a jump of nearly 10 times, as per a recent report by Orient Planet and MADAR Research & Development.

Saudi Arabia has consistently led the region in patent filings and continued its dominance in 2013 as well with 237 patents. The kingdom is currently home to ~50% of the patents in the Arab world, followed by Kuwait and Egypt with 272 and 212 patents respectively. UAE, which has the most vibrant non-oil sector in the region, stands fourth with 120 patents. Comparing the number of patents issued per million of a country’s population makes the above numbers more significant and drives home the dominance of GCC nations. In 2013, Kuwait had 21.24 patents per million, while Saudi Arabia followed with 7.79 patents per million and UAE was placed third with 1.90 patents per million. Qatar, which is gearing-up to host the 2022 FIFA World Cup, currently has 3.42 patents per million, and this number is likely to go-up as it plans to invest USD 200 billion on infrastructure development over the course of next 8-10 years.

Utility Patents by Country and Year

Needed_A Strong Patent System2

Source: USPTO, Orient Planet, MADAR Research & Development

Now the above numbers may seem impressive on a standalone basis, but pale in comparison to the patent development activity in other countries worldwide, and are reflective of a lack of innovation friendly culture in the Arab world. The US alone has 133,593 patents, ~75 times the 1,818 patents in all Arab countries combined. Therefore, it is not surprising that most of the next generation technology development happens to take place in the US, leading to birth of disruptive business models and companies. The US is followed by Japan, Germany and South Korea as shown below. Saudi Arabia is the only Arab country in the top 30, indicative of a lack of innovation friendly culture in the region.

Number of Utility Patents Granted – 2013

Needed_A Strong Patent System3

Source: USPTO, Orient Planet, MADAR Research & Development

The pace of innovation and patent development needs to increase rather quickly in order to protect new technology being developed by Arab countries, and also to attract more foreign investments. Arab nations are currently undertaking massive projects that will require new technology development and it is imperative that these technologies are patented to ensure competitiveness of Arab nations and companies at a global scale. Some of these include Saudi Arabia’s King Fahd City, UAE’s Dubiotech research park, Masdar City Project in Abu Dhabi, and multiple infrastructure projects (special economic cities, carbon neutral climate technology, railway, metro, airport, power plant, hotels, etc.) being developed in Qatar and Dubai in the build to World Cup 2022 and Dubai Expo 2020, respectively.

Also, patented technology is essential to attract foreign investment. As per the latest UNCTAD 2014 World Investment Report, FDI inflows to West Asia have declined from USD 71.9 billion in 2009 to USD 44.3 billion in 2013. While part of the decline can be attributed to global recessionary conditions and geo-political volatility in MENA nations, slow pace of innovation and high dependence on oil revenues is also a key contributing factor that is keeping foreign investors at bay, thereby reducing the growth prospects of companies in the Arab world.

Therefore, it is imperative that Arab countries learn from other leading nations to develop a strong patent system and nurture an innovation friendly culture. Till they do it, opportunities in the Arab region will remain unused leading to a loss of billions of dollars.

The article was originally published at: Arab Business Review

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

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