FDI outflows by West Asian sovereign wealth funds may gain importance in 2009; inward investment to the region may fall

Geneva, 17 September 2009 - Development projects across West Asia have been hit hard by tightening global credit markets and the worldwide recession, particularly since the third quarter of 2008, reports UNCTAD´s annual review of investment trends.

The World Investment Report 2009 : Transnational Corporations, Agricultural Production and Development(1), was released today by UNCTAD.

The number of international banks able or willing to lend to projects in West Asia has shrunk sharply, the report says. As a result, some major oil and gas, industrial, and infrastructure projects have been cancelled or postponed, which is likely to cause a decline in FDI inflows to the region in 2009.

This downward trend brings to an end six consecutive years of growth in FDI inflows to West Asia: in 2008, incoming FDI rose by 16% to US$90 billion. This was largely the result of a significant 57% rise in inflows to Saudi Arabia, which received a total of $38 billion for the year. That consolidated the country´s position as the region´s top recipient. By contrast, FDI growth turned negative in the other two major recipient countries of the region: Turkey and the United Arab Emirates. In Turkey, inflows fell by 17% to $18 billion, after reaching an exceptionally high level in 2007, when a number of large cross-border mergers and acquisitions (M&As) took place in the financial sector. In the United Arab Emirates, a 3% decline in inflows was mainly due to the adverse effects of the global economic and financial crisis on Dubai´s tourism, real estate, and banks.

Other countries in the region that saw sizeable increases in inflows were Qatar with a 43% rise, mainly in liquefied natural gas, power and water, and telecommunications; Lebanon, with a 32% increase mainly driven by real estate; and a 70% rise in the Syrian Arab Republic, attributable to growing business opportunities resulting from that country´s increasing economic openness and improving international relations. FDI inflows rose only slightly in Bahrain, Iraq, and the Palestinian territory. Inflows maintained their 2007 level in Jordan and fell in Kuwait, Yemen and Oman.

In terms of sectoral distribution of inward FDI, the main drivers were real estate, petrochemicals, refining, construction, and trade in Saudi Arabia and Turkey, the two leading recipient countries in the region, which together attracted 63% of total inward FDI to the region in 2008.

FDI outflows from West Asia slumped in 2008 by 30% to US$34 billion, largely due to a significant decline (-45%) in the value of net cross-border M&A purchases by West Asian transnational corporations (TNCs). The strongest decreases occurred in FDI emanating from Saudi Arabia (from US$13 billion to $1 billion) and Qatar (from $5.3 billion to $2.4 billion). Outward investors, reeling from large losses sustained in the global crisis, have become more risk averse.

On the other hand, the fall in global equity markets offers new investment opportunities for Sovereign Wealth Funds (SWFs) and other government-controlled entities. Indeed, some funds, such as those controlled by the Government of Abu Dhabi, have already begun to make foreign acquisitions in support of their national economic development objectives. This could contribute to an increase in FDI outflows from the region in 2009.

A trend towards more liberal FDI-related policies continued in 2008 in a number of countries. For example, in Kuwait, the Parliament passed a law to cut the rate of tax levied on foreign companies to 15% from 55%. In Turkey, the privatization process continued with the sale of a number of State-owned enterprises. In the Syrian Arab Republic, the government took a number of steps to liberalize the exchange-rate regime and to improve investors´ access to financing.