Foreign investment: Can raising ownership limits catalyse diversification?
A strong outlook despite the VAT rollout
GCC raises ownership limits to catalyse diversification
The UAE’s economy has long been divided into three parts.
This report completes our first year of the Middle East Economy Watch report. A lot has happened in the region over that time, politically and economically.
The OPEC oil cuts were extended twice and there were major reforms and initiatives in Saudi Arabia’s implementation of its National Transformation Strategy. A number of major news stories in recent weeks (Iran nuclear deal, and KSA-Russian dialogue) have moved the price of oil around sharply. But it is also interesting to remember Bahrain's discovery of large oil resources. If they prove cost-effective to exploit, then this could transform the region’s weakest economy.
This edition gives an overview of the major macroeconomic developments. This includes a strong final quarter of 2017 but some short-term weaknesses in early 2018, partly because of the rollout of VAT in the UAE and Saudi Arabia.
In the first of our series of brief country focus articles, we look at the UAE where Abu Dhabi’s oil sector is rebounding and the groundwork has been laid for its next phase of expansion. Meanwhile, Dubai is preparing for Expo 2020 but also leading the way for the whole federation to embrace new technologies to drive long term growth, ranging from fintech to artificial intelligence (something which has potential for the whole region, as highlighted in our chart of the quarter on page 4). Our in-depth article this quarter focuses on trends in foreign investment in the Gulf, which is of increasing importance as the region looks to catalyse diversification into productive non-oil sectors.
Foreign direct investment is down sharply from its 2008 peak, but we expect that 2017 data, which should soon be available, will show signs of recovery. There is also good potential for growth in FDI in the coming years owning to reforms in foreign ownership rules, as well as broader improvements in the business environment (as discussed in our last edition).
There is a similarly encouraging story for portfolio investment, which has already benefited from market reforms and if, as expected, MSCI decides in May to add Saudi Arabia to its benchmark Emerging Markets Index, then this could sharply increase inflows into the region as a whole.