Open Season

Frederic Sicre has witnessed the transformation of the Middle East from both ends of the spectrum-as a former director of the World Economic Forum (WEF) who participated in the 1994 Oslo peace process and in his current role as an executive director of Abraaj Capital, a Dubai-based private equity firm that is leveraging the region's wealth to help stimulate economic growth and development. While the Oslo peace process may have foundered, Sicre and others are hopeful that the road to peace in the region will come through economic liberalization, which will create jobs for the 15% to 30% of young people unemployed in the Arab world.

The publication of the first "Arab World Competitiveness Report" in 2002 was a wake-up call to the Middle East. With young people making up 60% of the Arab population, it determined that 100 million jobs would be needed by 2017 just to maintain the same levels of employment that exist today. Since the report's publication, the region has been racing to close the gap.

Although the region's natural resources have attracted foreign companies since the 1940s, FDI across other industry sectors was not encouraged, leaving the region dependent on oil and gas for its economic growth. At the same time, much of the Middle East has remained closed to foreign investment, with restrictions on business travel and foreign participation in local companies, and a less-than-Cransparent legal, financial and regulatory system. Countries such as Saudi Arabia, Bahrain and the UAE, which received $1.8 billion, $865 million and $840 million respectively, were among the largest recipients of FDI inflows in the region in 2004, according to UNCTAD. But when compared with China, which saw $60.6 billion flood in, and Brazil, which received $18 billion, these amounts are minuscule.

Reform Efforts Find Broad Support

Sicre says there has been a fundamental change in terms of the willingness to embrace economic reforms. "In the past, Arab business leaders asked for more protection," he says. "Now they are wanting to open up trade barriers and their economies to create more competition." Mohammad Al Gergawi, CEO of Dubai Holding, believes the potential for economic reform will strengthen. "Some see 100 million unemployed workers; I see 100 million potential opportunities," he stated at the WEF meeting in Jordan last May.

Dubai is aggressively promoting itself as the new investor-friendly face of the Middle East, or what Arif Naqvi, vice chairman and CEO of Abraaj Capital, describes as "an oasis of calm in a turbulent sea." Established in 2003, the Dubai International Financial Centre (DIFC), a self-regulating financial "free zone" permitting 100% foreign ownership of companies and zero tax, is one of the most ambitious undertakings in the region. Also, last September the Dubai International Financial Exchange (DIFX) opened its doors, aiming to provide companies and investors from within the enlarged SAMENA (South Asia, Middle East, North Africa) region the opportunity to list and raise capital within their own time zones.

Well before Dubai was a twinkle in foreign investors' eyes, markets such as Jordan and Bahrain had instituted macroeconomic reforms. Bahrain, a small country that is not resource-rich like some of its neighbors, has liberalized its economy, opened up the telecommunications sector to privatization and introduced labor market reforms. "Bahrain believes it is the natural financial center for the Middle East," says James Lawday, director general of the Middle East Association in London.

Another country vying to be a major investment center in the region is Jordan, which has established free trade agreements with the US and Europe. In 2000 it established the Aqaba Special Economic Zone, a low-tax, duty-free regional trading hub and manufacturing base where 100% foreign ownership of businesses is permitted.

Saudi Arabia is also trying to transform its image, introducing a Foreign Investment Law permitting 100% ownership of companies and eliminating the need for local partners. Business visas can also be more easily obtained, and there are incentives for investing in lessdeveloped parts of the economy.

Other markets are also eager to change foreign investors' perceptions. Kuwait recently instituted a new law opening up the domestic banking sector to competition. Similarly, in Qatar, foreign investment in banking and insurance industries as well as residential property is now permitted, and Oman issued a royal decree allowing up to 100% foreign participation in privatization projects. Lawday says Egypt is also an attractive market for investors, given its large and well-educated workforce. It has already attracted investors such as BP, British Gas,Vodafone and Unilever.

Significant Challenges Remain

Despite their best efforts, transparency and bureaucracy in some of these markets remains a challenge for investors. Saudi Arabia still ranks 70th out of 154 countries in terms of information blockage, for example. At its second annual meeting in Bahrain last November, the Arab Business Council (ABC) urged Arab governments to increase transparency, accountability and the rule of law, and eliminate corruption. "We will persist in asking governments to engage in the reform of public institutions and the judiciary," ABC chairman Shafik Gabr stated.

A common perception of the Middle East among foreign investors is that there is too much capital chasing too few opportunities. Aref Kooheji, executive vice president, investment and corporate banking, at Dubai Islamic Bank, says he may have agreed with that sentiment in the past, but he is encouraged by the development of industrial clusters such as Dubai Internet City and Dubai Health Care City. With the development of the DIFX, he also believes that family-owned companies will be more willing to launch IPOs as a means of raising capital.

Private equity firms such as Abraaj are keen to dispel the perception that there are not enough investment opportunities in the region, pointing to a "robust privatization pipeline" encompassing a range of industries-telecom, media, oil and gas, tourism-from countries such as Egypt, the UAE, Saudi Arabia and Kuwait. Naqvi believes local companies are ready to take to the international stage. "We have seen the transition from first-generation entrepreneur," he says. "Now we are seeing their sons and grandsons operating these businesses. They are overseas educated, and they know the system. There is a change in mindset taking place, as happened in Italy, Germany and Spain 15 years ago, when we saw massive inflows of private money."

But is it enough to attract significant levels of foreign investment to the region? According to Peter Brabeck-Lemathe, chairman and CEO of Nestl and co-chair of the WEF, the question is not whether the region is changing, but whether it is changing fast enough to keep up with its competitors elsewhere in the world.

© 2006 Global Finance Media Inc. Provided by ProQuest LLC. All Rights Reserved.