Gulf investment in MENA: Obstacles and opportunities

Arab investment funds have faced scrutiny over a relative lack of investment in their home region for decades, with the sovereign wealth funds of oil-rich states preferring global capital markets to more local options.

Ewan White

Obstacles persist in the region amid conflicts, corruption, and uncertainty, but bright spots show how to attract foreign direct investment, including in Morocco and Egypt.

Gulf investment in MENA: Obstacles and opportunities

Amer Ziab Al-Tamimi

last update on 13 Jan 2024

Such funds have substantial international assets – estimated at around $3tn – in a range of markets, from stocks to debt holdings and real estate, and over a range of maturities. The destinations found by this capital tend to feature transparent criteria and clearly established rules and regulations governing the investments.

For alternatives in the Arab world to fully compete, similar governance standards are needed. Reform in the region could help bring that about. In this article, Al Majalla explains how that could happen after a look at how sovereign wealth funds began and then developed in the Middle East.

Oil money on international markets

Oil-producing countries in the Gulf began establishing their sovereign wealth funds in 1953 when the Kuwaiti government decided to open an investment office in London.

Other Gulf countries followed over the next decades, including Saudi Arabia, the United Arab Emirates, Qatar, Oman, and Bahrain. The oil shock of 1974 accelerated the trend.

WAS — The Saudi Public Investment Fund and Hyundai Motor Company sign a joint venture agreement to establish a new automobile factory in the Kingdom.

Back then, it was impossible to invest surplus funds in some national economies. There was limited capacity, a lack of promising investment opportunities, and an absence of transparent financial markets that could help the investing nations calculate risk, measure liquidity and properly measure the prospects for securing favourable returns.

There were lingering problems in Arab countries that were candidates for investment.

Alongside a lack of regulation and legal oversight to provide security for incoming capital, currency volatility from unstable exchange rates made it even more difficult to get a clear sense of the costs and risks involved, meaning the price of deploying capital there was unclear.

Arab investment funds have faced scrutiny over a relative lack of investment in their home region for decades, with the sovereign wealth funds of oil-rich states preferring global capital markets to more local options.

Specialist funds for Middle East investment

Since the early days of international investment, Kuwait, Saudi Arabia, and the UAE have established funds specialising in Arab countries despite challenging political situations and strained economies.

They made direct investments in a range of sectors, including real estate, manufacturing industries, hotels, tourist resorts, and agriculture. Kuwait began its journey of direct investment in Arab countries in 1975, following the first oil shock, at the initiative of the late Finance Minister Abdul Rahman Saleh Al-Ateeqi.

Kuwait acquired real estate assets and stakes in industrial and hotel companies through a government-owned company. It also backed the SUMED Pipeline Company transporting oil from Suez to Alexandria.

During the same period, Kuwait and Saudi Arabia invested in Sudan's $750mn Kenana Sugar Company. It is one of the largest integrated producers of its kind in the world, with operations from agriculture to manufacturing, marketing, and export.

Reform – and its limits

Arab countries like Sudan, Morocco, Tunisia, and Syria have amended investment laws and introduced other reforms to help attract investors, outline company formation procedures, and ease their dealings with government administrations. The process to grant corporate loans to businesses in local currencies was streamlined, as were the rules over land ownership.

Nonetheless, the wider economic conditions in these countries continued to undermine the investment cases they offered. Persistent currency market factors were a problem, with volatile foreign exchange markets frequently eroding the dollar value of the investments or diluting the capital in terms of its value in its original Gulf currencies.

Furthermore, investment in Arab countries faced numerous complications, including issues related to fund management and project supervision governing the ethical and competent use of funds.

Investors requested management rights and the ability to hire personnel without the intervention of local authorities, but these requests were often turned down.

Adept management was key to achieving positive results, and investors and their counterparts in Arab countries began quarrelling over the right to appoint board chairpersons or managing directors.

Investors also struggled with issues related to identifying and evaluating investment zones and lands on which projects were intended to be built. There were also issues with bureaucracy and inadequate infrastructure holding back investment projects.

Some Arab countries have amended investment laws and introduced other reforms to help attract investors, but wider economic conditions in these countries continued to undermine the investment cases they offered.

Early problems

An official in the Kuwaiti economic administration recalls that when the government decided in the mid-1970s to establish a specialised company in real estate and hotel investment, delegations were sent to Egypt, Syria, Tunisia, Morocco, and Yemen. At that time, they offered to invest hundreds of millions of dollars.

Kuwait asked host countries to provide land suitable for real estate investment to spur economic development. In exchange, it offered to pay for the construction of affordable housing for people with medium or limited incomes, which these countries struggled to provide.

However, the strategy has struggled since its inception. Broader economic challenges in the countries persisted, with falling exchange rates undermining the value of the investments made.

This experience can help inform ways to establish a more suitable environment for investment.

Establishing fully effective financial markets will improve these countries' economic and developmental conditions, opening the way for the kind of investment and development that can transform nations. Distinguished Asian nations, including South Korea, Taiwan, Singapore and Malaysia, have taken such a path. Currently, similar changes are underway in Vietnam.

Progress chased by conflict

Recent research shows progress is also being made in the Arab world. A report issued by the Inter-Arab Investment Guarantee Corporation identified that foreign direct investment in Arab countries was still growing in 2023. The United Arab Emirates and Egypt received a significant share of the incoming funds. Broader indices measured governance and economic freedom.

Reuters — The New Administrative Capital, East Cairo, Egypt January 15, 2023.

Nonetheless, it also highlighted a decline in the region's global rankings for some indicators used to define suitability for international investment, including those covering the legislative and regulatory environment. And perceptions of corruption and e-government indicators were lower than the global average. Indices of production factors, sustainable competitiveness and knowledge remained unchanged.

Overall, the number of projects identified by investors in Arab countries increased by 28% year-on-year in the first quarter of 2023, with their value up 70% to $74bn.

Demand from oil-rich countries to invest in the Arab world will remain, and a significant share of the overall 2023 investment came from the Gulf Cooperation Council.

As foreign investors – whether Arabs or not – look for suitable destinations for their capital, one of the factors that will attract them will be the ability and willingness of local investors to do the same. That will help encourage the development of local investment markets.

Ensuring domestic investors are protected as they go about their business at home will help draw in international investors and also help open up immediate reform — not least over tax levels relating to profits.

Even so, questions remain over whether the investment projects already underway will be completed and if their costs will increase amid complex local, Arab, and global political and security situations.

There are ongoing conflicts in Sudan, Yemen, and Syria, a lack of security in Iraq, the tragedy of the Gaza war and the knock-on effects of war in Ukraine. It creates a complex picture for global investors, considering the turbulent region.

Ensuring domestic investors are protected as they go about their business at home will help draw in international investors and also help open up immediate reform.

Egypt's economic liberalisation

Egypt has been keen to attract global investors since 1974, when President Anwar Sadat launched economic reforms designed for that purpose.

Despite all the significant changes since then, the state still controls a substantial portion of the national economy's assets. The issue of state ownership and its economic role – as well as its dominance over economic life – shadows the investment case in the country to this day. It is raised during every financing negotiation with the International Monetary Fund (IMF).

In recent years, the IMF has stressed the importance of further liberalising the economy and expanding privatisation in various sectors, from tourism to manufacturing and essential utilities. The Egyptian government appears to be more responsive to these demands, as it faces external debt obligations in excess of $160bn.

Attracting investors from Gulf countries and others via the sale of state-owned assets may prove vital to acquiring the necessary funds to service Egypt's national debt. But there are also hopes that the new approach amounts to a new economic philosophy for structural reform and a total commitment to increasing Arab and wider international investment in the country.

Egypt may have made significant progress in liberalising its economy and attracted investment in vital sectors.

The pace of change has been slower among other nations in the Arab world. Among them, Syria is grappling with civil war, as is Sudan. Reform and development projects have faltered in Tunisia and Algeria.

Bright spots

But there are other bright spots, including Morocco. Data from the FDI Intelligence platform, named after the foreign direct investment it tracks, shows that the North African nation had attracted $34bn in 2023 as of October of that year.

Morocco has entered sophisticated industries with global partners, including China, involving electric vehicle production, renewable energy, chemicals, and tourism projects.

AFP — Tangier car assembly plant in Malloussa, east of the coastal city of Tangier.

These achievements underscore the significant role played by Morocco's leadership in reforming the national economy over the past two decades. Morocco has outperformed countries with an established record of attracting direct investment, including Malaysia, Israel, and Finland.

It shows how attracting capital depends on conscious political will, positive legal reforms, providing suitable infrastructure, and developing the educational and vocational system to enhance the skills of the national workforce.

To boost the attractiveness of a national economy to foreign domestic investment, it is crucial to develop a clear policy vision for reform and to promote the appeal of the private sector.

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