LONDON – The economic pundits and the statistics point to a coming year in 2013 fraught with economic and financial difficulties and continued belt-tightening and austerity measures. No region of the world is spared the contagion effect even for oil exporting countries if world commodity prices, especially for oil and gas, continue on an upward trend. In one particular vital area – financial flows especially private and foreign direct investment (FDI) – the immediate impact has been telling and nowhere so as in the Middle East and North Africa (MENA) region, dogged still by the effects of the so-called Arab Spring. “The ongoing sovereign debt crisis and recession in the Eurozone, curtailed bank lending and domestic leveraging, fluctuating but elevated commodity prices, and the ongoing political turmoil in the Middle East and North Africa have slowed the initial rebound that followed the 2008 global financial crisis,” warned Izumi Kobayashi, Executive Vice President of the Multilateral Investment Guarantee Agency (MIGA), the political risk insurance agency of the World Bank Group. “This slow progress has had an impact on developing countries, which initially fared well in terms of rebounding GDP growth rates, private capital flows, and foreign direct investment (FDI),” he said. Indeed, MIGA's latest “World Investment and Political Risk Report 2012” released in London earlier this month confirms that global economic growth estimates and forecasts for 2012 and 2013 indicate a continuing fragile global recovery. However, a MIGA-EIU (Economist Intelligence Unit) Political Risk Survey 2012, which was conducted concurrently with the writing and compilation of the World Investment and Political Risk Report 2012, reveals surprising investor perceptions about investing in the MENA region contrary to the usual reasons. The impact on FDI flows has generally been marked with the MENA region also badly affected. Global FDI inflows, according to MIGA, declined from US$1.9 trillion in 2011 to US$1.7 trillion in 2012. Any rebound in 2013 will depend on the pace of the global recovery, albeit there is evidence of greater South-South FDI flows (that is between developing countries), and the lessening of political risk whether through greater stability or a decline in expropriation of assets by some governments. In the MENA region, according to Conor Healy, Senior Risk management Officer at MIGA, there has been a decline in FDI flows in 2012 to an estimated $14.3 billion compared to $15.4 billion in 2011. The Arab Spring countries were the most affected, with FDI flows into Tunisia declining by 14 percent in 2011, while Egypt experienced a net outflow of $483 million of FDI. However, these figures do not necessarily reflect the true nature of the FDI process and dynamics with regard to the Middle East and North Africa (MENA) region. The MIGA-EIU Political Risk Survey 2012 maintained that “the ongoing weakness and instability in the global economy remain a top constraint for foreign investors' plans to expand in developing countries in the short term. Nevertheless, cognizant of stronger economic growth in developing countries, the survey also finds that foreign investors remain relatively optimistic in their intentions to invest in developing countries in the short term.” FDI flows into the MENA region have been affected adversely by the political instability and risk due to the Arab Spring events. Indeed investor concerns over political risk in the MENA region remain elevated across a range of risks including civil disturbance, political violence and breach of contract. In the MENA region specifically, according to the MIGA-EIU Political Risk Survey 2012, the fear of expropriation, breach of contract, transfer and convertibility restrictions, and non-honoring of sovereign obligations were the main concerns of existing and future investors. The findings of the MIGA-EIU Political Risk Survey 2012 are quite revealing. Asked what were the primary reasons for investing more, or reinvesting, in the MENA region, almost 40 percent of respondents said that the main reason was increased market opportunities over the medium term. While most of them wanted to see at least one year of political and macro-economic stability, other reasons were well down the list, including increased access to financing – whether conventional or Islamic. Risk mitigation strategies are reflected in increased political risk and investment insurance over the last two years especially for the MENA countries and the use of joint ventures and an alliance with a solid local partner. Indeed there are already signs that in Arab Spring countries where political stability is starting to return, FDI concomitantly has started to increase. In Tunisia for the first five months of 2012, for instance, FDI inflows have increased by 41 percent compared with the same period in 2011. The Central Bank of Tunisia has projected FDI to total $2 billion in 2012. But the general conclusion remains that for the MENA region overall, FDI flows are projected to stay largely flat in 2013 and begin to rebound only in 2014. This applies to both Arab Spring and other countries because of the contagion effect as underscored in the political risk perceptions of foreign investors. As with all FDI, economic factors will also play the most important role in foreign investor re-engagement in the MENA countries. The World Bank Group' estimates and forecast for real GDP growth for MENA specifically are sober and worrisome. At an estimated average of 0.5 percent real GDP growth for 2012, the figure is the lowest of all the regional groupings of the Developing countries and the high income countries. This is in contrast to 7.2 percent for East Asia; 6.3 percent for South Asia; and 4.8 percent for Sub-Saharan Africa. It is also way below the 1.3 percent estimate for the industrialized economies. This trend continues for the forecast for 2013 and 2014 when the MENA region economies are projected to grow at an annual average of 1.9 percent and 3.4 percent respectively – still way behind the above peer regions except the industrialized economies which will continue to lag at 1.5 percent and 2.2 percent respectively. Similarly, the World Bank World Economic Outlook 2013 published in October 2012 projects real GDP growth for MENA oil exporting countries of 10.2 percent for Iraq; 6.3 percent for Kuwait and Qatar; and 6 percent for Saudi Arabia. The projections for 2013 decline sharply save that for Iraq which is expected to grow at a staggering 14.7 percent, perhaps reflecting the low base and the catch-up the Iraqi economy is experiencing. Real GDP growth in Qatar is downgraded to 4.9 percent; 1.9 percent for Kuwait; and 4.2 percent for Saudi Arabia. Of the oil importing countries, in 2012, Jordan is expected to fare the best with a 3 percent real GDP growth rate, followed by Morocco with 2.9 percent and Tunisia with 2.7 percent. In 2013, however, Morocco's economy is projected to take off with a robust 5.5 percent real GDP growth rate, way ahead of Jordan's 3.5 percent. Tunisia would post 3.3 percent GDP growth rate and Egypt seen at 3 percent.
