Bahrain records 95% rise in capital investments
Launched to coincide with the Growing Beyond Summit 2012 in Qatar, Ernst & Young’s inaugural Middle East Attractiveness Survey is a detailed analysis of how foreign direct investment (FDI) into the region has evolved in the last decade. The report combines annual FDI analysis since 2003 with a survey of 355 global and regional executives on their views about how and where investment across the Middle East will take place in the next decade.
In terms of FDI movements, the Kingdom of Bahrain saw a 22.8% increase in the number of deals and a 95.2% rise in capital investment in 2011. This was largely on account of many substantial projects, in terms of size, directed toward the country, particularly in the chemicals, plastics, M&M and RHC sectors. Positive factors for foreign investors in Bahrain include a stable institutional framework, a liberal business environment and a highly skilled workforce.
“Bahrain continues to hold its position as a regional center for trade and finance. We see some fundamental shifts in the regional market place. Arab economies have emerged as key players in the bigger scheme of things and will continue to grow,” Essa Al-Jowder, Office Managing Partner, Ernst & Young Bahrain said.
The region has seen the number of annual FDI projects increase from 362 in 2003 to a peak of 1,070 in 2008. Project numbers fell in 2009 and 2010 as the global and regional economies took a step backwards but recovered again in 2011 with an increase of 8% to 928. The value of the investments in 2011 remained low compared to 2008 but again showed a modest recovery on 2010. Initial findings for the first six months of 2012 demonstrated a similar picture with investment project numbers and value flat or below that of the comparable period in 2011.
Despite the size of the projects declining as investors take a more cautious approach to large- scale projects given the recent political challenges, the region still has many positives as the long-term investment outlook from executives confirmed.
“The Middle East has many of the qualities that companies look for in an FDI destination: solid investment fundamentals, strong demographic trends and vast natural resources,” Jay Nibbe, Ernst & Young Markets Area Managing Partner for Europe, Middle East, India and Africa (EMEIA), said.
“Since 2003 the majority of investment in the Middle East – 79% of FDI projects, 62% by value and 65% of jobs created – has gone to the GCC (Gulf Cooperation Council) countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE. The bulk of this has gone to the GCC ‘trio’ of UAE, Saudi Arabia and Qatar, with Egypt the highest placed non-GCC country with 16% of investments by value. Saudi Arabia was the big regional winner in 2011 with 161 investments worth US$14.7bn establishing the kingdom as the largest recipient of FDI by value. Other markets that outperformed the previous year in 2011 included Bahrain, Iraq and Oman,” the report said.
Although Western Europe and North America have historically brought the most projects by number to the Middle East, with 59% of the total between 2003 and 2011, investment by value has become increasingly concentrated on intra-regional investment. Initial analysis of the 2012 data shows the number of projects originating from Middle East investors exceeding that from Western markets for the first time.
However, the United States, the UK and France were still amongst the top five investors in 2011 with 180, 100 and 61 projects respectively. India was also in the top five with 76 projects, an increase of 12% from last year.
Early data from 2012 suggests that the GCC “trio” again attracted the most investment projects with UAE leading Saudi Arabia in terms of project numbers and value. There was also a welcome return of investment into Egypt.
Despite traditionally being seen as a region famous for its vast natural resources, the GCC countries have used the surplus cash to diversify into other sectors. The first half of 2012 continued to see increased diversity in the sectors attracting FDI in the Middle East. Retail and consumer products attracted over 20% of projects in the first half of 2012 and – along with business services, real estate, hospitality and construction – became a top choice for investors. The retail sector is capitalizing on the region’s rich and expanding consumer base.
Real estate has seen a revival in 2012 and attracted the most capital investment. Most regional governments are recognizing their citizen’s social infrastructure needs. In addition to massive outlays to respond to this — and the announcement of ambitious projects like the 2022 FIFA World Cup — the prospect for the infrastructure sector seems promising.
The business services sector is also becoming increasingly popular among investors and ranked second in terms of projects (16% of the total) and third in terms of value. This sector draws strength from the presence of free trade zones.
The perceptions of those already doing business in the Middle East are vastly different to those who are not in the region. Forty percent of those who are not in the region highlighted the current political environment as the key area of improvement needed, however, this dropped to 25% for the investors who are already there. Those already present highlight education and skills development (27%) as a priority followed by the need for increasing political stability, investing in major infrastructure and urban projects (24%) and support in high-tech industries and innovation (22%).
Unsurprisingly, a quarter of the surveyed investors think that the energy sector will be the main driver of FDI growth in the Middle East over the next two years. However, this varies distinctly between those already present in the region and those who are not. Forty percent of respondents who are not present in the Middle East consider energy as the main sector, compared to only 19% among investors who are already there.
Established investors see real estate and construction as the most promising growth sector for the future. More opportunities are also emerging in the private and business services sector, real estate, hospitality and construction, information and communications technology, and life sciences sectors.
Seventy-five percent of respondents are optimistic about the Middle East’s future attractiveness in the medium-term. This is relatively high compared to most regions, particularly Europe and Russia where only 38% and 57%, respectively, were positive about their attractiveness in the medium-term.
The immediate investment plans of many foreign companies appear to be affected not only by the uncertain global economic outlook but also by the recent unrest in some Middle Eastern countries – with 26% of respondents giving that as the reason for the deterioration of the region’s image. However, 43% of the survey respondents said that they have plans to establish or increase operations in the region next year.
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