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
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
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
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.