BrazilShifting GCC’s approach to attracting foreign direct investment
Government-backed effort to increase foreign direct investment (FDI) across GCC economies remain limited in their effectiveness – further hindered by a global investment dip since Covid-19. A new Oliver Wyman study suggests a change of approach.
GCC economies are among the most active globally when it comes to promoting FDI. Saudi Arabia Vision 2030, UAE Economic Vision 2030, and other similar programmes that have popped up in the last decade are all aimed at breaking a historical economic reliance on oil and natural resources.
The premise: promoting local entrepreneurship, inviting foreign backers and competing with global players will create new revenue stream – beyond an oil sector heavily affected by global energy transitions. In a new study, the World Government Summit and Oliver Wyman have checked in on these efforts – amid wider economic shifts and a global pandemic.
The results are underwhelming. A look at GCC’s FDI inflows since 2011 reveals a wavering graph – one that was initially suppressed by external geopolitical conditions and later hit by plummeting oil prices in 2014.
No question of resilience: the region still managed to attract healthy funding – boosted by economic reforms across Saudi Arabia and UAE since 2019. Promisingly, much of the increased inflows in the last couple of years have been focused on non-oil sectors. That said, the researchers found several factors that keep the region’s FDI performance below par.
One is a strong domestic capital reserve. “Domestic funds have proven sufficient to maintain generous public spending levels and active government intervention in the economy,” explained Mathieu De Clercq, Oliver Wyman’s Dubai-based partner specialised in MEA economic development and government.
“The large size of the public sector in GCC countries still limits the region’s appeal to external investors, especially given the strong presence of state- owned enterprises in several economic sectors,” he added.
Even multilateral financing bodies such as Asian Development Bank and International Bank for Reconstruction Development – among others – are focused on countries with low capital. Top this off with wider geopolitical factors – instability, conflict, falling oil prices, etc. – and the barriers to FDI become clear.
The result is that many GCC economies fall below FDI benchmarks set by financial hubs such as Singapore and Hong Kong – where FDI makes up between 15% and 30% of the GDP. The highest ratio in GCC is held by Oman at 4.5%, while the UAE and Bahrain report around 3% and 2% respectively. Saudi Arabia and Kuwait fail to clear 1%, while Qatar’s heavy reliance on domestic capital takes its ratio below zero.
And this scenario will get worse if left unchecked. Global FDI flows plummeted by more than 40% as a result of the pandemic-induced economic crisis last year – falling from $1.5 trillion in 2019 to $859 billion in 2020. The researchers expect persistent uncertainty, supply chain localisation and growing economic internalisation to keep FDI flows suppressed through the near future.
This doesn’t bode well for GCC economies, which are already struggling to realise their FDI potential. So far, governments in the region have taken broad-based initiatives to mitigate investor concerns – via political stabilisation, regulatory concessions, infrastructure investment and skill development, among other efforts. And these are crucial.
New approach
That said, De Clercq highlights how the time has come for a more focused approach. “Policies to attract FDI in specific sectors – or even subsectors – of the global economy are likely to produce the greatest additional value for GCC countries.”
“Instead of offering identical terms to investment in all industries, GCC governments should target high-value-add sectors that are likely to have the greatest effect on domestic growth. These include rapidly expanding new economic activities, such as advanced battery manufacturing, as well as long- established sectors that are expected to continue to grow strongly, such as sustainable mass transit.”
“GCC countries can optimise their sectoral targeting by focusing on emerging sectors – such as advanced e-commerce, agri-tech, and renewable energy – which are still developing their global value chains,” he concluded.
