Foreign investors return to Middle East, but cautiously

Businesses and governments are raising cash again, but most of money coming in is repatriated capital by Persian Gulf governments' funds.

November 4, 2010 19:30
4 minute read.

Dubai. (photo credit: Courtesy)


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Less than a year after Dubai World holding company shocked global investors by asking to delay repayment of its debt, money from abroad is flowing back to the Middle East.

But the region still has a long way to go before returns to the boom years that spawned real estate projects constructed on palm-shaped islands and Abu Dhabi’s $22 billion zero-carbon footprint city.


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Governments and companies around the Arab Middle East are raising cash in the debt and equity markets as economic growth returns, oil prices climb and Dubai moves forward in settling its debt woes. The Arab Investment & Export Credit Guarantee Corp. predicts that foreign direct investment (FDI) will grow 12% this year to $88.8 billion from a depressed 2009.

But foreign investment remains below its pre-crisis levels and much of the capital reaching the region is cash held abroad by Gulf governments that is being repatriated to fund local development projects, Simon Kitchen, strategist for EFG-Hermes in Cairo, told The Media Line.

“In the Gulf, you have governments with big foreign financial assets, which they have been selling to invest in real assets in their own economies. Strictly speaking, that’s not foreign investment, but it contributes to the figures,” Kitchen said. “Still, we’ve seen a recovery in Egypt and other countries of the region.”

Foreign investment is crucial for the Middle East, which needs to stoke economic growth to create jobs for a burgeoning population. Oil-poor countries, like Egypt and Morocco, don’t have the capital to build homes, factories and infrastructure, while richer ones need know-how from overseas, which usually comes in the form of joint ventures involving infusions of cash and technology by the foreign partner.

The Middle East wasn’t as badly shaken by the global financial crisis as Europe and the United States. But Dubai’s debt woes not only underscored the emirate’s dangerous degree of leveraging but also the absence of financial transparency throughout the region. FDI dropped 18% in 2009, with the United Arab Emirates (UAE), to which Dubai belongs, plunging 77%.

The International Monetary Fund forecasts a 4.2% increase in gross domestic project this year for the region stretching from Morocco to Pakistan, a figure slightly below the pace for emerging markets around the world but almost double the 2009 level. The price of oil, which drives the key economies of the Gulf, hovered between $70 and $80 most of this year before reaching a new short-term high last month. On Thursday, Brent crude was trading at a six-month high of $87.40 a barrel.

Meanwhile, some measure of investor confidence has returned to the region. Dubai World said October 27th it reached terms with the last of its creditors to covert some of its $23 billion debt to equity.  On November 2nd, Moody’s upgraded the debt outlook for Dubai-based DP World, one of the world's biggest port operators, to “positive,” citing the company’s debt reduction plans. In September, Dubai itself returned to the debt markets for the first time since the Dubai World crisis, selling $1.25 billion in bonds.

On Wednesday, the UAE telecoms group Etisalat, the Gulf's No. 2 telecoms group, set terms to buy a stake in Kuwait's Zain in a $12 billion deal. Zain is the Gulf Arab region's third-biggest telecoms firm. In the third quarter, mergers and acquisitions activity in the Middle East reached a record $15 billion, according to Thomson Reuters.

Still, not all is rosy. Foreign direct investment remains well below pre-crisis levels, and other investment flows are negative, particularly for the UAE and Kuwait, the Washington-based Institute for International Finance said in an October 27th report.

Meanwhile, financial investors still worry about debt troubles at the network of state-affiliated companies known as Dubai Inc. Not long after Dubai World came to terms with its creditors, Dubai Holding requested another delay in repaying a $555 million loan. All told, Dubai’s government and its companies are sitting on about $100 billion in debt.

“The fundamental issues are not yet resolved, like real estate and the banking sector, which are still a drag on the economy and a disincentive for people to invest. We’ll get through these issues and, when we do, people will start to invest,” Paul Cooper, managing director of Sarasin-Alpen & Partners, told The Media Line.

Low interest rates and excess liquidity in the developed world have lured foreign investors into higher-paying but riskier investments such as Dubai bonds, said Kitchen of EFG-Hermes. But the region still suffers from problems such as poor corporate governance and low levels of transparency that gives investors cold feet, analysts said.

Investors are also deterred by the fact that the Gulf’s markets aren’t represented in the leading global benchmark indexes, such as MSCI’s, which are used by institutional investors to allocate their portfolios, said Cooper. Standard & Poor’s recently added UAE stocks to its secondary emerging markets index, but the big break won’t come until  MSCI does the same, he said. Qatar, Kuwait and UAE have all taken steps in that direction, he added.

“It’s probably premature to say there is a real recovery,” said Cooper. There may be one on the way, but “that’s a story for 2011.”

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