GCC moving in the right direction, but challenges persist in attracting FDI
While the business environment in the GCC has improved, limitations to foreign ownership still poses challenges to attracting FDI
April 6, 2014 2:35 by Sidra Tariq
While the business environment in the GCC region has improved in recent years, limitations to foreign ownership, ‘poor’ investor protections and ‘punitive’ bankruptcy laws still poses challenges to attracting foreign direct investment (FDI), according to a report on the ease of doing business that was released on Monday, March 31).
The Business Environment in Gulf Co-operation Council Countries report looks at strategies for improving the GCC region’s business environment to attract FDI, the role foreign companies are allowed to play in each country and how it is balanced against the needs of the region’s local population.
The report, commissioned by pharmaceutical company Merck Serono and prepared by the Economist Intelligence Unit (EIU) – a subsidiary of The Economist Group – states that, on one hand, GCC countries are moving in the right direction. “We are looking at an average growth rate of more than four per cent this year,” says Trevor McFarlane, contributing editor for Europe, the Middle East region and Africa at The Economist Group, who also worked on the report.
“We have the political stability (broadly speaking), high real GDP growth rates – especially when you compare them with developing economies – and fast non-oil growth, which is even more important because it’s the biggest employer in the economy. Moreover, we have private sector activity… and tolerable inflation. So, we are in the sweet spot at the moment, where the economy has grown at nice robust rates and inflation [has been] relatively low. This means the GCC region is getting a lot of attention from MNCs and investors.”
On the other hand, “there are challenges to overcome as well, particularly around investor protection and punitive bankruptcy laws, which impede foreign direct investment,” he adds. In addition, many GCC countries have laws that require companies to be majority owned by local partners. While some governments are allowing full foreign ownership in certain circumstances, there are still restrictions that are difficult to eradicate, according to the report.
“[For instance,] Saudi Arabia allows 100 per cent foreign ownership,” says McFarlance. “However, you have to go through the Saudi Arabian General investment Authority (SAGIA) and, through SAGIA, it is very much based on a case-by-case basis. There are restrictions on where you can invest. In Oman, we’ve got the free zone system as well, but [aside from that] companies are allowed to own 70 per cent of the capital. You have to go through Oman’s Ministry of Commerce and Industry [for that]. In Qatar, there are restrictions and it typically allows 100 per cent [foreign] ownership in very strategic sectors but, even then, it is limited in terms of what [the companies] are allowed to do.”
In the UAE, local partners must own 51 per cent of most onshore commercial businesses, but foreigners can set up a professional company with 100 per cent ownership. Free zones also grant 100 per cent ownership for foreign parties.
According to the report, GCC governments’ efforts towards regulatory reforms have helped in improving the perception of the region’s business environment. “When you couple the [GCC region’s growth rate] with the low-tax environment and improvements that are being made on different procedures – [such as] access to construction permits, which is an important area for MNCs, and the registration of real estate and property – [the market becomes more attractive],” he adds.
In his opinion, the GCC region is the “second best-performing region in the world for MNCs”, after the Asia-Pacific region, which, he says, has an economic growth rate of 6.7 per cent. “You have Sub-Saharan Africa growing at 5.6 per cent but, in my view, it would be next to the GCC region. When you look at the growth levels in Sub-Saharan Africa, a lot of these are spiking due to big projects coming online – the likes in Sierra Leone, Chad and Sudan. This actually distorts the picture.”
According to the report, the GCC region maintained its stability throughout the financial crisis that began in 2008 and the Arab Spring through heavy spending. However, “this raises questions about the
economic viability of this strategy and increases pressures to create more diverse, self-sustaining economies,” the report adds.
Another finding of the study was that GCC governments will continue to boost nationalisation efforts to create employment opportunities for citizens. Moreover, they will be taking a strong look at their comparative advantages: “Experts predict divergent reactions in the region, with some states pursuing a more laissez-faire approach to diversification, while others opt for state-driven capitalism to create new industries. This suggests a possible future split in economic policies within the region, presenting distinct challenges for investors,” the report states.