“The economic situation is worse than anyone imagines,” a tearful Kamal el-Ganzouri, Egypt’s third interim prime minister since Husni Mubarak’s downfall, told reporters this week as he took the helm of an economy reeling from swindling foreign reserves, inflation and unemployment.
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As the Arab Spring approaches its first anniversary, the economic costs of toppling autocrats is now growing for countries like Egypt, Tunisia, Libya and Syria. But foreign direct investment (FDI), one important remedy for economic revival, looks like an increasingly distant prospect amid the continuing political turmoil.
“The return of foreign investment depends on a number of factors the most important of which is the return of a stable security environment. The way things are now investors will be reluctant to make investments where they don’t know what will be happening in the space of weeks,” said Joseph Lee, Middle East and North Africa analyst at London-based Business Monitor International.
“The other problem is policy,” Lee told The Media Line. “Right now, it’s a clean slate. There are political parties that have stated that they will have market- friendly policies, but who knows to what extent they will be enacted.”
He pointed to Tunisia, where the Islamist party Ennahda has spelled out policy prescriptions that should encourage investors while its two junior coalition partners have adopted more social-democratic platforms.
The World Bank forecasts declining FDI – the kind of investment used to build factories, infrastructure and homes and buy companies – for the Middle East and North Africa this year and next, with growth resuming in 2013. A survey of 316 senior executives from multinational companies investing in developing countries by the bank’s Multilateral Investment Guarantee Agency, published in a report
last week, shows how immense the challenges of luring them back will be.
The poll showed that investors have two tough preconditions before they are prepared to return to the region with their capital – a year of “stability” and a “democratic government.” Those two conditions being met, more than half said they would invest in the Middle East and North Africa.
But among the Arab Spring economies, Egypt remains wracked by strikes, demonstrations and disorder even as it has begun the first of a series of democratic elections. In Syria, violence is growing worse, with the United Nations estimating on Monday that a government crackdown on the opposition has taken 5,000 lives. In Libya, transitional leaders are struggling to disarm militant groups and are expected to delay big investment projects until a permanent government takes power.
The World Bank survey found that instability even under a democratic
government would cause more businesses to decrease their investments
than increase them. Non-democratic governments would deter investment,
no matter what the political and security situation is, the poll found.
The World Bank’s estimates are confirmed by the Kuwait-based Arab
Investment & Export Credit Guarantee Corp., which in October said
the flow of FDI to the Arab world would slump by about a fifth this year
to $55.1 billion, compared with $66.2 billion in 2010. It said Egypt
would suffer the biggest drop, a 92% plunge to just $500 million in
Seven of the 21 Arab countries covered by its report are expected to see
FDI increase this year, with Saudi Arabia edging up to $29 billion from
$28.1 billion in 2010. Iraq is expected to see investment inflows more
than double to $3.5 billion this year.
The rise of Islamist parties in Tunisia and Egypt, the first two Arab
Spring countries to hold elections, has given some investors the
jitters. But Geoff D. Porter of North Africa Risk Consulting, which
advises investors about conditions in much of North Africa, said
Islamist leaders have signaled they want to keep their countries foreign
investor-friendly and fight corruption, one of the region’s most
“Foreign investors have historically been wary of Islamist politics,
but I think following the elections some of their concerns have been
mollified. They feel they can work with Islamist regimes because they
feel Islamists will focus on social issues rather than economic ones,”
Porter told The Media Line.
Sanctions and a European economy threatened with recession are likely to hurt FDI flows even more.
Three MENA countries – Egypt, Tunisia and especially Morocco – are
highly reliant on European capital, but the euro debt crisis may cause
the currency zone to slip into recession. On Tuesday, Fitch ratings
slashed its 2012 economic growth forecast for the region to 0.4% from
0.8% last quarter.
Meanwhile, sanctions are taking their toll on the Syrian and Iranian
economies. Royal Dutch Shell announced in early December that it would
“cease” activities in Syria after the European Union blacklisted three
Syrian state-owned oil companies. This week, the Chinese
state-controlled Sinochem, and Britain’s Gulfsands Petroleum shut down
Iran has to cope with a new round of tighter sanctions imposed by the
Western powers November 21 after a United Nations report highlighted
Tehran’s progress toward developing nuclear weapons. Iran needs to
invest up to $50 billion annually in its oil industry to maintain its
position as a leading crude exporter and boost natural gas production,
Oil Minister Rostam Qasemi said November 23.
Experts are, nevertheless confident that if political stability can
return to the Middle East and North Africa, foreigners will come back as
well. Besides substantial energy reserves still waiting to be
exploited, the region boasts a consumer market of 450 million, a fifth
of whom are between the age of 15 and 25, the World Bank notes. Many
industries and services are undeveloped and awaiting new entrants.
Indeed, a report
by the auditing firm Grant Thornton found that foreign
companies remain keen on doing business in the Middle East and North
Africa despite the upheavals of the past year. A survey of some 2,900
business taken earlier this year found only 10% said they are “less
likely” to do business in the region as a result.
In Tunisia, which staged elections in October and formed a
democratically elected transitional government this week, anger over
poverty and unemployment has sparked rioting and clashes with security
forces. But Porter said the country is moving in the right direction and
that his clients are putting out feelers about investing there.
“We’ve had a handful on queries about Tunisia, in particular around
private equity opportunities and some interest in the oil and gas
sector, others in consumer goods,” he said. “It seems that Tunisia is
starting to rebound.”