Saturday, Jan 19, 2008

The Gulf oil boom is sending ripples across the Arab world as capital from the oil-rich states increasingly flows into less developed parts of the region.

From Cairo to Casablanca, Gulf investment, in sectors ranging from real estate to financial services and telecommunications, has been attracted by a liberalisation of the economies and is helping drive faster growth rates.

Gulf companies that have matured at home have been scouting for acquisitions outside their markets.

Pointing to EmaarEmaar, the Dubai real estate giant, one leading investor in the region says: "The Gulf private sector is becoming more aggressive and wants to be a global player, so companies are repeating the models they built at home in nearby markets."

The emerging trend was highlighted in a report this week by the Institute for International Finance, which represents global financial institutions. It estimated that Dollars 60bn (Euros 41bn, Pounds 30.7bn), or 11 per cent of the foreign assets in the Gulf Co-operation CouncilGulf Co-operation Council countries, has been invested in other parts of the Middle East and north Africa in the 2002-06 period. The GCCGCC is made up of Saudi Arabia, Kuwait, Qatar, Bahrain, Oman and the United Arab Emirates.

Though far smaller than investments in Europe and the US, the amounts are comparable to Gulf investments in Asia, said the institute. "A greater share of GCCGCC funds is staying in the Middle East and north Africa region, where quickening liberalisation, privatisation and regional integration . . . has lured capital that would have previously headed away from the Arab world," said the IIF report.

Florence Eid, partner at Pantera Capital in London, estimates that Gulf investments in the rest of the Arab world represent 13 per cent of these economies' 2006 gross domestic product.

"The pick-up in intraregional flows has considerable implications when contrasted to the relatively small capacity of these economies to absorb investments," she says. "While it's too early to fully capture the impact, there are clear signs the flows are contributing to a structural transformation in the economies of these countries, which are pushing ahead with reforms."

Egypt boasted record foreign direct investment inflows of Dollars 11.1bn in the financial year ending in June 2007, of which Dollars 5.2bn was invested in new companies and the expansion of existing companies.

Some Dollars 2.5bn of that amount, or 47 per cent, was GCCGCC money, according to investment officials.

The flows also included one-off sales such as the Dollars 2.9bn bid by the UAE's EtisalatEtisalat for Egypt's third mobile licence.

The UAE is by far the largest Gulf investor in Egypt, injecting about Dollars 3bn into the economy last year, followed by Saudi Arabia.

"I think there's a cultural bias (from GCCGCC investors) towards Muslim and developing markets, where they feel their capital is more welcomed, where they feel more secure, and secondly they believe these countries have good growth opportunities and they are more familiar with them," says Philip Khoury, head of research at EFG-Hermes.

Investments in sectors such as telecommunications and construction should create thousands of jobs. But for "the more complex FDI, which tends to be generative of long-term employment opportunities, you do have to look to the west for that, the US and Europe, for example the RenaultRenault investment in Morocco," Mr Khoury says. Long-term job creation is key throughout north Africa to tackle high unemployment.

Egypt's gross domestic product grew by 7.1 per cent in the last financial year, up from 6.9 per cent the previous year, while Morocco's economy has been growing at an average of 4.9 per cent this decade as it enjoy booms in real estate and tourism.

Analysts say not all mega-deals announced for Morocco have translated into actual investments, but the authorities are expecting Gulf inflows, which were at less than 10 per cent of total foreign direct investment in 2006, to accelerate this year.

As much as Dollars 6bn from the Gulf was approved for projects between January and April 2007, more than double the amount during the same period the previous year.

Remittances from the Gulf are also on the increase as Arab workers in the region benefit from the boom. In the past financial year, remittances from the Gulf to Egypt were worth Dollars 3.1bn, compared with Dollars 1.3bn in 2003, while remittances from the US grew from about Dollars 1bn to Dollars 2.1bn over the same period.

However, in spite of the increased investment from Gulf countries, north African states still rely heavily on the west, and GCCGCC investment is unlikely to insulate them from any slowdown in Europe or the US, Mr Khoury says.

"If you look at the destination of exports, both goods and services, from these countries, it's mostly the US and Europe. So definitely if there were to be a slowdown in Europe and the US, you will see it in the external account and eventually the domestic economies in these countries," he said.

By ANDREW ENGLAND and ROULA KHALAF