FDI Flows Drop Despite Economic Recovery, Says UNCTAD

FDI Flows Drop Despite Economic Recovery, Says UNCTAD

While global industrial output and world trade has improved, there was no significant growth in global FDI in 2010. For the first time, developing and transition economies attracted more than half of global FDI flows. However, foreign investors’ confidence has been weakened by the impact of the ‘Arab Spring’.

Global foreign direct investment (FDI) flows rose moderately to $1.24 trillion in 2010, but were still 15% below their pre-crisis average, while global industrial output and world trade are already back to their pre-crisis levels, according to the United Nations Conference on Trade and Development (UNCTAD). In its World Investment Report 2011, UNCTAD estimates that global FDI will recover to its pre-crisis level in 2011, increasing to $1.4-1.6 trillion, and approaching its 2007 peak in 2013. “This positive scenario holds, barring any unexpected global economic shocks that may arise from a number of risk factors still in play,” warns the study. Risk factors include the unpredictability of global economic governance, a possible widespread sovereign debt crisis and fiscal and financial sector imbalances in some developed countries, as well as rising inflation and signs of overheating in major emerging market economies.

Developing and transition economies together attracted more than half of global FDI flows for the first time. Outward FDI from those economies also reached record highs, with most of their investment directed towards other countries in the South, said UNCTAD. In contrast, FDI inflows to developed countries continued to decline. Similarly, some of the poorest regions continued to see declines in FDI flows. “Flows to Africa, least developed countries, landlocked developing countries and small island developing states all fell, as did flows to South Asia,” said the report. At the same time, major emerging regions, such as East and Southeast Asia and Latin America experienced strong growth in FDI inflows.

Projects’ Halt Affects FDI Drop In West Asia

FDI flows to West Asia in 2010 continued to be affected by the global economic crisis, decreasing by 12% to $58bn, despite the steady economic recovery registered in 2010 in most economies of the region. The suspension by some of the West Asian countries of some huge projects, which were expected to attract foreign investments, also affected the FDI flows in and from the region. Moreover, concerns about political instability are likely to dampen the recovery expected in 2011. “FDI inflows are now expected to bottom out, as cross-border mergers and acquisitions (M&As) have risen fivefold during the first five months of 2011 from the low value registered during the corresponding period of 2010, due to a large acquisition in Turkey, and greenfield investments increased by 9% in the first four months of 2011 over the corresponding period of 2010,” said the report.

Trends in FDI inflows in West Asia varied from country to country (see table on page 6). In Oman they increased from $1.471bn in 2009 to $2.045bn in 2010, as they did in Lebanon from $4.804bn in 2009 to $4.955bn in 2010. Saudi Arabia ranked first with foreign investments in 2010 amounting to $28.105bn. However, they dropped by 12% compared to 2009, as foreign partners withdrew from a number of flagship ‘mega-projects’ in the petrochemical industry, involving joint ventures between the state-owned Saudi Aramco and foreign transnational corporations (TNCs). Other projects were temporarily frozen, or failed to attract enough foreign investment, and became domestic operations fully funded by Saudi Aramco. FDI inflows fell by 32% in Qatar, as the last of four LNG Qatargas plants that had bolstered FDI in 2009 was completed in 2010. In the UAE, flows stayed at the same low level as in 2009, when they plummeted to $4bn due to the economic crisis. In Yemen, FDI inflows significantly dropped from $129mn in 2009 to a negative $329mn in 2010. According to the UNCTAD’s definition, FDI flows with a negative sign are instances of reverse investment or disinvestment, where at least one of the three components of FDI (equity capital, reinvested earnings or intra-company loans) is negative and not offset by positive amounts of the remaining components.

Political Unrest Concerns Foreign Investors

Inflows to North Africa, which account for roughly one third of the total in Africa, fell for the second consecutive year, although the rate of decline was much reduced and the picture uneven, noted the study. The trend is likely to continue due to the uncertain political situation in the region. In 2010, Egypt was still the largest recipient of FDI, with $6.386bn. FDI inflows to Libya rose over 40% in 2010 from $2.674bn in 2009 to an estimated figure of $3.833bn.

“The Arab Spring led to a blossoming of democratic expression in the sub-region, but it has dampened investor confidence in the short term,” said UNCTAD. The available data for the first few months of 2011 indicate that FDI inflows, as shown by greenfield investments and cross-border M&As to the sub-region, declined substantially. The drop in FDI in Yemen and Egypt, for example, continued in the first few months of 2011 because of the political and security turmoil prevailing in these two countries. In Egypt, where greenfield investments fell by 80% in the first four months of 2011 compared to the corresponding period of 2010, the most important investor country is the US, which reportedly accounted for about $9bn out of $11.1bn of foreign investment (both FDI and portfolio) in the country. “It could take months before confidence among investors in those countries is restored,” warned the report. In addition to international support, the government has approved measures to simplify the procedure for approving new industrial projects and to ease the restrictions on setting up franchises. However, “the impact of investment incentives might be limited in the current climate of political transition, and the return of investor confidence is likely to depend on the overall political settlement and the geopolitical situation surrounding the country,” added UNCTAD. In the long term, democratization should result in better governance and thus lead to a more sustainable growth of economic activities, including FDI.

In June, in an attempt to ensure that development gains are not lost and to encourage further improvement, the Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, announced that it will mobilize $1bn in insurance capacity for the Middle East and North Africa to retain and encourage foreign direct investment in the region. The agency also said it is stepping up efforts “to reach out to investors, lenders, and governments around the world to make it clear that the agency is open for business in the region and to share its global experience of managing political risks.” MIGA’s political risk insurance can be an important risk mitigation instrument to investors who may be nervous about maintaining existing investments or have plans to invest in the region.

FDI Flows In MENA Region, 2005-10 ($Mn)

Region/ Economy	FDI Inflows						FDI Outflows
Region/ Economy	2005	2005	2007	2008	2009	2010	2005	2005	2007	2008	2009	2010
Saudi Arabia	12,097	17,140	22,821	38,151	32,100	28,105	-350	-39	-135	3,498	2,177	3,907
Egypt	5,376	10,043	11,578	9,495	6,712	6,386	92	148	665	1,920	571	1,176
Qatar	2,500^a	3,500^a	4,700^a	3,779	8,125	5,534^a	352^a	127^a	5,160^a	6,029^a	11,584^a	1,863^a
Lebanon	3,321	3,132	3,376	4,333	4,804	4,955	715	875	848	987	1,126	574
UAE	10,900	12,806	14,187	13,724	4,003	3,948	3,750	10,892	14,568	15,820	2,723	2,015
Libya	1,038	2,013	4,689	4,111	2,674	3,833^a	128	-534	3,933	5,888	1165	1,282^a
Algeria	1,081	1,795	1,662	2,594	2,761	2,291	-20	35	295	318	215	226
Oman	1,538	1,588	3,431	2,528	1,471	2,045	234	263	70	481	66	317
Jordan	1,984	3,544	2,622	2,829	2,430	1,704	163	-138	48	13	72	28
Sudan	2,305	3,534	2,426	2,601	2,682^a	1,600^a	-	7	11	98	45a	51^a
Tunisia	783	3,308	1,616	2,758	1,688	1,513	13	33	20	42	77	74
Syria	583	659	1,242	1,467	1,434	1,381^a	80	-11	2	2	-3	0^a
Iraq	515	383	972	1,856	1,452	1,426	89	305	8	34	116	52
Morocco	1,654	2,449	2,805	2,487	1,952	1,304^a	75	445	622	485	470	576^a
Bahrain	1,049	2,915	1,756	1,794	257	156	1,135	980	1,669	1,620	-1,791	334
Palestinian T.	47	19	28	52	265	115^a	13	125	-8	-8	-15	-11^a
Kuwait	234	121	112	-6	1,114	81	5,142	8,211	9,784	9,091	8,636	2,069
Yemen	-302	1,121	917	1,555	129	-329^a	65^a	56^a	54^a	66^a	66^a	70^a

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics).

Note: a = Estimates.

FDI Outflows From West Asia Fell By 51%

Unrest is also affecting outward investment by putting pressure on governments and government-controlled entities to direct more investment into their own economies and to finance higher social spending to pre-empt or respond to popular discontent, commented UNCTAD. However, the governments of these countries have pursued a twofold economic diversification strategy: investing in other Arab countries to bolster their small domestic economies; and also investing in developed countries to seek strategic assets for the development and diversification of the industrial capabilities back at home.

West Asia: Cross-Border M&A Purchases And Greenfield Outward FDI Projects, Cumulative 2004-10 ($Bn)

	Net Cross-Border M&A Purchases				Greenfield FDI Projects ^a
			Total				Total
	State Owned ^b	Private Owned	Value	Percent	State Owned ^b	Private Owned	Value	Percent
Bahrain	0.3	4.0	4.3	3	41.1	35.9	76.9	13
Iraq	-	-	-	-	-	0.1	0.1	-
Jordan	-	0.3	0.3	-	0.2	4.4	4.6	1
Kuwait	-6.5	6.6	0.1	-	18.0	38.0	56.0	10
Lebanon	-	1.1	1.1	1	-	9.7	9.7	2
Oman	0.3	0.8	1.1	1	2.4	1.0	3.4	1
Palestinian T.	-	-	-	-	-	0.3	0.3	-
Qatar	21.8	1.5	23.2	18	24.5	5.2	29.7	5
Saudi Arabia	20.8	9.1	29.9	23	13.2	28.0	41.2	7
Syria	-	-	-	-	-	0.4	0.4	-
Turkey	-	2.7	2.7	2	-	21.8	21.8	4
UAE	56.5	8.7	65.2	51	169.6	157.5	327.1	57
Yemen	-	-	-	-	-	0.1	0.1	-
Total	93.1	34.7	127.8	100	268.9	302.4	571.3	100
Total (%)	73	27	100	-	47	53	100	-

Source: UNCTAD, based on UNCTAD cross-border M&A database and information from Financial Times Ltd, fDi Markets (www.fdimarkets.com).

Notes: a = Estimated amounts of capital investment; b = TNCs in which the state has a controlling stake.

FDI outflows from West Asian economies declined significantly by 51% in 2010 due to divestments by West Asian firms, reaching $13bn. The drop was exacerbated by a decrease in Kuwaiti flows from $8.6bn to $2.1bn following Zain’s sale of its African business, excluding its operations in Morocco and Sudan. Gulf Cooperation Council (GCC) countries accounted for 79% of the total, led by the UAE and Saudi Arabia which together accounted for 45% of the region’s total outward FDI flow. According to the report, this surge of outward FDI from rich Arab countries can be explained by several factors, including: the accumulation of considerable surpluses, thanks to the surge in oil prices; low interest rates and high volatility of equity markets, which diverted part of these surpluses from purely financial investment; and the adoption of a policy of economic diversification that includes investing abroad.

Long term prospects for outward investment are positive on the whole, said UNCTAD, as expected high oil prices suggest that funds available for investment abroad will continue to rise. “It is important, however, that governments of the region assess the performance and effectiveness of all aspects of their outward FDI strategies as an instrument for economic diversification and development,” noted the study.

FDI Outward Investments Led By State-Owned Companies

The outward FDI boom was largely driven by state-owned enterprises. These companies accounted for 73% of the amount of cross-border acquisitions by West Asian firms and for 47% of the region’s greenfield outward FDI projects during the period 2004-10. Of these companies, only three undertake specific activities; the others are holding groups or investment companies, said the report. UAE state-owned companies were the most active investors abroad, followed by Qatar, Saudi Arabia, Bahrain and Kuwait. “Thanks to access to increasing funding derived from high commodity prices, and with higher levels of managerial skill, they have become increasingly active in direct acquisitions and greenfield FDI projects that entail a long term relationship and involvement in management,” commented UNCTAD.

These state-owned investors aim not only at achieving revenue maximization and diversification, but also at building international partnerships and strategic alliances that generally support economic and political objectives. “It is also common that the state-owned entities use foreign alliances and partnerships built through outward FDI as a tool to attract FDI and enhance its impact on the host economy,” added the report, citing the examples of the Qatar Investment Authority (QIA) and Abu Dhabi’s Mubadala.

Given the high levels of their foreign exchange reserves and the relatively small sizes of their respective economies, GCC countries can afford to spend large amounts of foreign currency on overseas investments, the report observed.

Top 10 West Asian Companies By Total Value Of Cross-Border M&A Purchases, Cumulative 2004-10 ($Mn)

Company name	Home Country	Cross-Border M&A Purchases ^a	Activity	Creation Date	Ownership
Dubai World	United Arab Emirates	18,282	Holding company	2006	State-owned
Qatar Investment Authority (QIA)	Qatar	14,293	SWF	2005	State-owned
SABIC	Saudi Arabia	12,411	Petrochemical company	1976	State-owned
International Petroleum Investment Company IPIC	United Arab Emirates	12,255	Energy investment fund	1984	State-owned
Dubai Holding	United Arab Emirates	10,754	Holding company	2004	State-owned
Arcapita	Bahrain	10,163	Islamic Investment Bank	2005	Private
TAQA	United Arab Emirates	9,848	Energy investment company	2005	State-owned
Mubadala	United Arab Emirates	7,808	Investment Company	2002	State-owned
STC	Saudi Arabia	5,900	Telecom company	1998	State-owned
Saudi Oger	Saudi Arabia	4,215	Construction and infrastructure	1978	Private