Based on recently released figures, Arab investors have been paying more attention to business in neighboring countries, while looking less at “traditional” Western markets. The size of inter-Arab direct investment inflows grew 64 percent in 2008, with Saudi Arabia receiving the largest share of investments and the United Arab Emirates being the top investor in other Arab states, according to the Investment Climate in Arab Countries 2008 report.
The report, released by the Kuwait-based public Arab Investment and Export Credit Guarantee Corporation (better known as Dhaman), notes that the total volume of inter-Arab investments reached $34 billion in 2008, up 64 percent from 2007. This is a remarkable jump, and may have a lot to do with the sorry state of Western economies last year, which put off Arab investors and made them look to less risky business closer to home.
Saudi Arabia received the largest share with 38 percent of Arab investments in 2008, reaching $13 billion, according to Dhaman. The kingdom was followed by Algeria which attracted 17 percent of total Arab investments or $5.7 billion last year, then Sudan, accounting for 14 percent or $4.8 billion of the total. Lebanon was fourth in terms of attracting Arab inflows, receiving 8 percent or $2.7 billion worth of investments, much of them in the tourism sector, which is currently booming with the influx of Gulf visitors.
Of the dozen Arab economies covered by the survey, most saw an increase in investment inflows; only a handful of countries, including Lebanon and Jordan, received a smaller share of investments in 2008 compared to the previous year. The shortfall of money flowing into Beirut was the result of the drawn-out government crisis there that culminated in street battles during May of last year, but the trend in 2009 seems to be up. Jordan, on the other hand, is a different story: the latest figures show that foreign direct investment from all sources — Arab or otherwise — fell sharply to less than $220 million during the first quarter of this year, compared to $920 million in the same period of 2008.
The UAE was the top regional investor in Arab countries in 2008, with its direct investment outflows reaching $10.7 billion or 32 percent of the inter-Arab total. UAE investments went primarily to the Saudi market, which received $5.8 billion of the Emirates’ outflow. UAE and other inter-Arab investments were concentrated in the services sector, which made up 62 percent of total investments, including to tourism, transport, telecommunications and finance, among others.
Yet, in many other areas, investment from the UAE and other Arab states continues to flow to the West, which remains attractive for certain types of business, particularly high tech. An interesting example of this came in July, when Aabar, an Abu Dhabi investment fund, paid around $280 million to buy nearly a third of commercial space-travel startup Virgin Galactic. In exchange, the state-controlled fund will acquire exclusive regional rights to eventually launch Virgin Galactic tourism and scientific research spaceflights from the UAE capital. Aabar’s buy-in boosts Virgin’s space tourism venture at a time when many Western funding sources have dried up. (Read more about this transaction on page 112.) This also gives Abu Dhabi a chance to broaden its economy beyond oil, in line with the emirate’s plans to embed technology, research, and science in the economy. It also complements the aim of being an international tourism magnet.
Whether in outer space or back down on Earth, Aabar has emerged as an active investment fund. Among other recent deals, it bought 9 percent of Mercedes-Benz maker Daimler in March, and in August signed a vehicle production deal with the Algerian government to develop a network of vehicle and engine manufacturing plants in conjunction with five German companies (including Daimler). Up to 10,000 cars and trucks will be assembled each year with operations expected to start in 2010, following the modernization or development of plants; products identified for potential manufacturing include four-wheel drive vehicles and engines.
With automotive manufacturing taking off in neighboring Morocco and elsewhere in the region, I predict that cars and trucks will be the latest sunset industries to move out of the developed world and into Arab economies (among other developing ones), just as lower-end clothing production made an exodus from Western Europe and America in the late 20th century.
Now that the Dubai bubble has burst, and with economies slowing down in most of the region, the short-run continuation of this Arab-to-Arab investment trend might seem in doubt; but in the long-term, investments by regional players inside the region are probably going to accelerate, no matter what happens to the West’s faltering investment climate.
RIAD EL-KHOURI is senior associate consultant at the William Davidson Institute of the University of Michigan in Ann Arbor, and dean of the Business School at the Lebanese French University in Erbil