The World Investment Report, published in June 2014 by the United Nations Conference on Trade and Development (UNCTAD), came as no surprise to the Middle East. Most of the countries there have not sustainably regained the pace of growth in their foreign direct investment (FDI) and failed to recover for the fifth consecutive year. This is due to political tensions all across the region and the fog they create over the investment environment, holding back investors.
One of the causes of the regression, despite the global upward trend, is the lack of economic integration among Middle Eastern countries and the persistence of trade and tariff barriers.
FDI into Western Asia decreased by 9% in 2013, even though it increased in countries like Iraq and the United Arab Emirates by 20% and 9% respectively. This is not surprising since the UAE has been recovering quickly after its 2009 debt crisis. Iraq had, until the beginning of this year, attracted a significant amount of investment, especially in the country’s private oil sector. In addition, all the indexes of expected growth and oil production helped boost investors’ confidence.
One unpleasant surprise was the severe shrinking of Lebanon’s FDI by 23%. Lebanon, like the rest of the countries in the Middle East and North Africa, was one of the biggest attractors of global foreign investment between 2006 and 2012. This was mainly due to its free economic system, tax climate, the durability and quality of its banking system and the fact that it kept attracting investment despite political instability. For example, in 2012 investments increased by 8.5% in spite of the political crisis that blocked broader economic growth. The country benefited from two further attractive factors. The first was that before the Syrian crisis, let alone the whole Arab Spring revolution, Lebanon took advantage of the opportunity to create a safe haven for Arab investment. The second factor was that international oil companies turned their attention toward Lebanon after verifying that its sea holds a wealth of oil and gas. More than 30 companies, including ExxonMobil, Rosneft and Mubadala Petroleum, expressed interest in exploratory drilling early last year.
However, the Syrian crisis and its repercussions on Lebanon, especially on the security level, seem to have overshadowed everything else. According to the UNCTAD report, investment in Lebanon decreased by $831 billion, settling at $2.83 billion annually after setting a record $4.96 billion in 2012 before the crisis.
This regression is due to a reduction in investment by the Gulf in the real estate sector, which accounts for the bulk of FDI inflows. The real bad news is that green field investment for 2013 did not surpass $104 million (0.2% of GDP), compared to 5% in 2009. This indicates Lebanon's challenge in channelling the investments in productive and nonspeculative areas of the economy. When interviewed by Al-Monitor, Nehmat Frem, former president of the Association of Lebanese Industrialists, insisted, “The type of FDI we need today are the ones that create jobs.”
So, the question is: How can Lebanon stop the regression, reverse the trend and attract investments that boost growth?
The return of security stability and getting Lebanon's political life back on track by electing a president are major priorities, but they are not enough. There are plenty of long-awaited structural reforms that are necessary to attract capital and properly direct it into areas that serve the stability of the country and create sustainable development. Wael Siniora, a Lebanese investment banker, told Al-Monitor about the challenges standing in the way of the return of the capital flow to Lebanon.
“We should create a conducive environment for these investments,” Siniora said. “This requires reforming the business legal framework, starting with reducing the registration time for establishing a new business or to close an old one. A new set of laws is also needed to force companies to abide by good governance.”
Creating such an environment requires also modernizing the financial markets. Most of the companies operating in Lebanon are still family businesses, which forms an obstacle for both investment and growth. Most of them need to institutionalize to open up their capital for foreign investment, which strengthens them as engines of growth. This also reduces their relatively high debt and contributes in lowering the overall rate of risk. It is true that some of these companies have modernized themselves and applied international standards for administration and governance, prompted by competition or directives from supervising institutions such as the banking sector or insurance companies. Major banks, like Bank Audi, have Arab investors in their shareholder structure.
On the other hand, the size of the Beirut Stock Exchange (BSE) is still smaller than that of the Lebanese economy. Incentives are needed to push companies to utilize the BSE and not only to banks to increase their capital. The main driver to increase the volume of trading on the BSE is to accelerate privatization, mainly in telecommunications and electricity. For a decade, successive governments set this as a priority, but none succeeded in getting it done.
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