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August 26, 2014
Instability in Middle East Dampens Investment
    by Robert Kropp

A white paper from Business Monitor International analyzes foreign direct investment in the Middle East and North Africa and concludes that political instability has led to declines in several countries.

In 2012, for the first time, emerging markets made up more than half of the global gross domestic product (GDP) for the first time. That growth, along with the low returns and volatility prevailing in developed markets in the years following the financial crisis, made emerging markets an increasingly attractive investment strategy.

Much of the focus of the analyses by sustainable investors has focused on the quality of corporate sustainability disclosures in emerging markets. Reports by EIRIS and the Emerging Markets Disclosure Project (EMDP) of US SIF: The Forum for Sustainable and Responsible Investment indicated that investment in some emerging markets such as South Africa and Brazil have increased in part due to to sustainability mandates by stock exchanges.

Another significant impact to emerging market economies, particularly in the Middle East and North Africa (MENA) nations, has been political instability. In its most recent annual report, for example, Calvert's Emerging Markets Equity Fund recorded significant decreases in the value of investments in Egypt and Turkey, due, the firm reported, to “increased political instability and fears of QE (quantitative easing) tapering.”

QE tapering by the Federal Reserve Bank in the US has led to a decrease in investment capital in MENA countries.

A new white paper from Business Monitor International dives more deeply into the impact of political instability in MENA countries. In 2013, the paper reports, foreign direct investment (FDI) in MENA countries decreased to $55.6 billion, the lowest amount since 2005. In 2008, FDI in the region exceeded $100 billion.

“We expect continued political upheaval in large parts of the Middle East and North Africa (MENA) to remain an impediment to foreign direct investment inflows over the coming years,” the paper states, “weighing heavily on investor sentiment towards the region as a whole.”

On a country-to-country basis, the picture is more nuanced. While investment in the six countries of the Gulf Cooperation Council (GCC) decreased for the fifth year in a row, they still account for 43% of investment in the region. Investment in Israel accounted for another 21%.

The major risks to regional stability are Iraq and Syria, but the paper also forecasts weak outlooks for Libya, Lebanon, Yemen, and Bahrain. Business Monitor's risk rating for the region “has generally been on a downward trend since the onset of the Arab Spring,” the paper reports.

Business Monitor regards “Morocco, Saudi Arabia, and Egypt as the three economies most likely to defy the regional trend and see a sharp uptick in FDI inflows,” while Iraq and Algeria are most likely to fall further behind.

According to a survey by Ernst & Young, 53% of MENA executives consider political instability to be the most significant economic risk to their businesses, a higher percentage than is found elsewhere in the world.

Overall, “given the scale of the region's socio-political troubles, a broad based recovery in FDI flows is unlikely for the time being,” the paper concludes.


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