IBDE

By Khalid Almezaini: Rsearch fellow at the Department of Middle Eastern and Asian Studies, University of Cambridge

EXCHANGE: The Magazine for International Business and Diplomacy    No. 3 March 2011

WE ARE WITNESSING a critical juncture in the history of the Middle East. Popular revolutions are toppling the totalitarian regimes that have been ruling for decades. Fifty years ago states in the region were in a process of formation and state building. This formation was designed, to a great extent, by leaders as much as by people themselves. Today, after fifty years there is a process of reformation.  This process of reform stems from the people themselves only. The popular revolutionaries are redrawing the politics of this region in an attempt to not only create democratic systems, but also in the hope for an emergence of strong economies that would bring social stability.

However, not all political systems in the region are prone to this change. The Gulf countries will be the least affected in the Middle East due to great number of factors, mainly due to their strong economies, strong popular regime loyalty and domestic realities, such as demographic imbalance. Still, the unrest spreading throughout the Middle East will have significant economic implications on the Gulf States. This varies greatly from one country to another, depending on the degree of integration into the regional and international economies. My focus here will be only on the implications of this unrest on the Foreign Direct Investment (FDI) in the United Arab Emirates (UAE).

The UAE federal system remains strongly intact despite the political unrest in the region. These popular revolutions across the Arab world led the UAE government to make moderate changes by increasing the number of voters in the next Federal National Council’s (FNC) elections. This was followed by strengthening the inter-emirates relations, when Abu Dhabi’s Crown prince paid several visits in the past weeks and have made announcement to support the infrastructures of the Northern Emirates. This is not only to strengthen the economies and encourage local and foreign investment in Ras Al-Khaima, Fujirah, Um Al-Quwain and Ajman, but also to gain further loyalty from the people of those emirates.

FDI in the UAE constitute a significant contribution to the country’s GDP. The value of FDI has reached $70 billion according to the UAE Minister of Economy, Sultan Al-Mansouri. Between 2003 and 2008 the UAE was the third largest recipient of FDI in West Asia, behind Saudi Arabia and Turkey. It attracted an inflow of around Dh 51.4 (USD 13.9) billion in 2008, but declined by nearly 71 per cent in 2009 due to the global financial crisis. However, according to A.T. Kearney’s 2010 FDI Confidence index, the UAE is seen as the most attractive investment destination the Middle East in the next three years and ranks 11th worldwide.

The Gulf countries in general, and the UAE in particular, are not immune to the effects of the regional unrest. Therefore, the implications could be immediate, and FDI could be the second most affected industry after tourism. In 2010 official and non-official reports have predicted 2011 will see increase in FDI in the UAE. However, since the beginning of the popular revolts in the region, projects in the UAE or other Gulf countries have been interrupted and postponed, but not abandoned. This signals that further unrest in Bahrain in particular could spread fear among foreign investors in the UAE. Although the UAE, and Qatar, are the only two countries in the Gulf that will not see regime change, FDI will have both positive and negative implications.

On the positive side, FDI in the region will shift towards more politically and economically stable countries, mainly the UAE and Qatar. This is because symptoms of sociopolitical instability such as riots, demonstrations or protests have appeared in all other Gulf countries with exception to these two states. For instance, when protests broke out in Egypt tourists diverted their holidays to the main safe destinations in the region Dubai, Greece and Turkey. This reemphasizes the stability of the UAE not only for tourists, but also for foreign investors. Therefore, the UAE’s FDI gains will be higher than any other country in the Arab Middle East, despite Qatar’s rapid growth as a destination for FDI. In addition, this will enhance the position of the UAE as both market-seeking and efficiency-seeking FDI. In October 2010, the UAE government announced drafting new foreign investment law, which is aimed at protecting foreign investors, along with systematic incentives, according to Sultan Al-Man-souri, Minister of Economy. The country’s economic growth is now forecast to reach 4 per cent in 2011 and 6 per cent in 2012.

In contrast to this gain, there is high risk, as well as negative implications.  While the UAE, particularly Dubai, began to recover from the financial crises, the upheavals in the Middle East will send two main shocks. First, the UAE being the second top FDI market in the region might lose this position. As political stability is achieved and regime change occurs in other Arab countries, mainly in Northern African. Egypt and Tunisia, and eventually Algeria, are likely to attract foreign investors, particularly Europeans. This is due to the fact that these countries will have new emerging and competitive economies. In fact, democratic countries attract relatively more FDI than other non-democratic political systems. In addition, those Arab Mediterranean countries have already been witnessing a relative increase in FDI in the past years. The regime change, therefore, will allow reform in investment laws, transparency and accountability to take effect, which will encourage foreign investors.

Second, regional and international investors will postpone major projects since there are no signs that this political unrest will stop in the short term. On the one hand, if popular revolt in Bahrain succeeds in changing the regime, people in other Gulf countries -- Oman, Kuwait and Saudi Arabia -- might press on their demands, as similarities between these countries are greater than other Arab countries.  On the other hand, the region in general remains in turmoil with a variety of  unrest and with conflicts  unsolved, such as in Sudan, Lebanon, Iraq, Arab-Israeli conflict, Iran-Arab relations, Western Sahara, Yemen, conflicts between Shia and Sunnis…etc. This instability has, for many years, been the main obstacle for FDI in the region.  In other words, the region remains prone to further conflicts. Although the UAE has been politically stable for many years, regional instability deters investors.

The UAE outflow FDI have been hard hit, particularly FDI in Egypt. Arab official figures show that the UAE is the largest Arab investor in Egypt with FDI reaching $5.1 billion at the end of 2009, almost half the total of Arab FDI in Egypt.  The UAE–based companies have large investments, and are likely to suffer in the short term. This is due to the fact that foreign investors in the UAE are based in the government supported and tax-exempt free-zones, where they use the UAE as a base to operate at the regional level. Many of these companies depend on the regional market.

While events in the region are evolving so rapidly, the implications could change overnight. There is uncertainty for foreign investors in the UAE; therefore, the government will have to give reassurance for investors. This is because foreign investors are getting jitters, as turmoil in Bahrain is accelerating and reaching neighboring countries - Oman, Saudi Arabia and Iran.