The global economic crisis may have begun to subside, but trials and tribulations still abound across the Arab world—complex political transitions, conflict in Syria and an all too familiar return to violence in Iraq and Gaza making for a volatile landscape. The statistics tell a different tale; the latest regional report from the International Monetary Fund (IMF) points to growth of around 3.25% for the Middle East, North Africa, Afghanistan and Pakistan in 2014, but prospective investors would do well to keep their enthusiasm in check. With the GCC counting as the obvious exception, as weak confidence and large public deficits dampen the outlook for parts of the region, investor sentiment is struggling to turn the corner.
That doesn’t mean that MENA’s investment scene is at a standstill. Foreign direct investment (FDI) increased by 24.27% in 2013 compared to 2012 across the Middle East and Africa (MEA) according to the global insight wing of the Financial Times, fDi Intelligence. Meanwhile, outbound FDI from within MEA rose 21.81% year-on-year to $48.02 billion, led by the UAE, with Kuwait also counting amongst the most significant investors, channeling $10.73 billion out of the country
Making a rare headline appearance, Jordan also recorded significant FDI growth last year, thanks to a $10 billion nuclear power plant developed by Russia’s Rosatom.
Adding to the tales stories of FDI success, Iraq, too, posted strong foreign investment results for 2013—$14.96 billion up from 2012’s figure of $0.96 billion according to fDi Intelligence. But the events of recent weeks suggest that change—and not for the better—could be afoot for the investment scene. The rise of Sunni fundamentalist group, The Islamic State, has placed national, regional and global powers on high alert, with investors recoiling as tensions and uncertainty mount.
The situation in Egypt does little to lighten the mood; FDI in the country dropped 69.65% year-on-year to $2.93 billion in 2013. Glints of a silver lining are appearing though, with an announcement made in June that Saudi dairy giant, Almarai, and PepsiCo will invest $345 million in the country over the next five years through International Company for Agro-Industrial Projects—an Egyptian enterprise jointly owned by the Saudi and US firms.
While the outlook may be improving for Egypt and parts of MENA, fDi Intelligence warns that although investment in 2013 increased region-wide, projects in the MEA region actually decreased by 8.59% during the same period, with job creation falling—this time by 12.98%—as a result.
Shaking investor nerves even further, an unemployed populous doesn’t just point to sluggish economic activity; out of work means on the streets, increasing the likelihood of social discontent and unpredictability—an investor’s nightmare. And while IMF forecasts of increased growth can only be a good thing, they fall short of requirements. “Overall growth prospects in the region remain considerably below what is needed to make a dent in the high unemployment, particularly among youth,” says IMF Middle East Department Director, Masood Ahmed.
Preliminary estimates from the International Labour Organisation, place the unemployment rate in the Middle East at 10.9% for 2013, rising to 12.2% in North Africa. Compared to an estimate of 6% worldwide, the severity of the problem requires little explanation.
In Egypt, a country which has witnessed its population grow from 80.4 million three years ago to an estimated 85.8 million, to say that unemployment is troubling is an understatement. The rate for 2014 is higher than it was back in 2011 at an estimated 11.9% and is expected to rise.
But while the country may still be grappling with political and social grievances made all the worse by a 78% hike in petrol prices and a proposed $6 billion cut in the country’s energy subsidy bill—moves which President Abdel Fattah Al Sisi is vehemently defending as we speak—there is some cause for optimism. Egypt’s GDP based on constant prices is forecast to exceed $86.91 billion (EGP 623.2 billion) this year, up from $84.94 billion (EGP 609.4 billion) in 2013 according to the IMF. But, like a rollercoaster, falling as quickly as it rises, optimism is once again dampened in the face of rising inflation, a current account balance which is running a severe deficit and imports that continue to outweigh exports.
However, for Amr Seif, Head of Asset Management at EFG Hermes, the situation isn’t as bleak as it might seem for his beleaguered home country. “I expect growth in Egypt to be stronger in 2014-2015—not just because I am hopeful for an improved executive branch of government and better execution, but because it's coming from a very low base.”
While growth may be skewed by a reemergence from revolutionary strife, there is an unwavering, though admittedly intangible, force at play; Egypt’s “grey” economy. “If you are guided by only numbers and saw those of 2011 onwards, your expectations would be far worse than what has been seen in reality and in people’s daily lives over the past three years,” explains Seif, adding that even in the midst of civil unrest, lower output, choking subsidy burdens and rising deficit, daily routines have remained largely intact—albeit in a stranger environment.
Unsurprisingly, it’s near impossible to place a figure on Egypt’s sprawling informal economy, but according to Shantayanan Devarajan, Chief Economist of the Middle East and North Africa Region at the World Bank, 75% of Egyptians are either self-employed or working in the informal sector—or indeed both. As a result, the shadow economy is no doubt responsible, at least in part, for keeping daily life ticking over.
At first glance, this might appear to be of little relevance to the investment community, but Seif begs to differ. “If you factor this in, you will always have a positive surprise to any economic data,” adds the EFG Hermes expert; good news, then, for investors.
The informal economy, of course, does little to address Egypt’s capital account woes, energy concerns and the subsidiary burden—of Egypt’s expenditure (roughly $110.3 billion this year) around 28% is accounted for by subsidiaries.
To address these issues, Seif highlights the need for solid management at the executive level and influential political leadership. “If these are both fulfilled then I think we have no problem; Egypt is going to shock the world with [its] growth,” he asserts. The asset management head admits that these are big ‘ifs’, but he is confident; “I maintain that I was impressed with the decision making recently and believe it could be a beginning of effective economic revival, if economic and political balance is struck.”
For Egypt, the proof, ultimately, is in the pudding, and the same can be said for the Middle East and North Africa at large. As the region continues to grapple with an unstable environment, nothing can be taken for granted. Even the GCC states—the economic stalwarts of the Arab world—are not immune to the effects of the volatility, conflict and uncertainty that plague many of its neighbors. And, if nation states are displaying ambivalence what hope is there for investors? From crisis emerges opportunity—the world knows this well—but as long as unpredictability reigns, foreign investors enter at their own risk.