For decades foreign direct investment (FDI) in the region has been limited to 49% stakes, in most countries and sectors, with even greater restrictions in equity markets and real estate. Minimum capital, local production rules and licencing processes also serve as barriers. The restrictions protected state-owned enterprises and merchant families, who have built large conglomerates by serving as the partners or sole distributors for foreign firms. Foreign investors came despite the limitations, given the appeal of rapidly growing economies, particularly during the oil boom years, and affluent consumers. However, lower oil prices since 2014 have led most Gulf countries to rethink the role of foreign investors as they look to ease fiscal burdens and restructure their economies for the twilight of the oil era. There is good evidence of positive links between FDI and growth in economies with similarities to the Gulf states, and their governments are particularly keen to leverage FDI to develop technology-intensive sectors. This is leading to a series of new investment and companies laws, updating decades-old legislation, as well as changes to capital market rules. We expect these reforms will lead to a pick up in both FDI, which in 2016 was barely a third of its 2008 peak, and also portfolio inflows.
Bahrain is the economy most dependent on FDI, with a stock of about 90% of GDP and has long permitted full onshore foreign ownership in many sectors, expanding it further in 2016 to tourism and mining, with remining restrictions only in a few areas such as media and workforce agencies.
Kuwait is at the other end of the spectrum, with just 12% of GDP in FDI, given its less diversified economy and weaker business environment. However, it has been an early mover in investment liberalisation, offering licences for 100% investment in many sectors such as infrastructure, tourism, IT and housing under a 2014 law; firms granted licences include giants such as IBM and GE.
Oman has permitted 100% ownership for US firms since 2009 under a bilateral agreement, but limits other investors to 49%-70%, depending on sectors. However, a new draft law would permit any nationality to own 100%.
Qatar’s cabinet approved a similar law in January, which had been in development since 2016 but may have gained fresh impetus in response to the regional boycott. FDI in Qatar peaked in 2009 at $8bn, during the country’s gas-industrialisation, but averaged just $1bn/year in 2014-16.
The UAE is the region’s largest destination for FDI, with annual inflows steady at around $9bn a year, much of this is directed into the federation’s many free zones, such as Jebel Ali. His Highness Sheikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai recently announced key changes to the country’s residency programme, including foreign investors in the country to be offered a 10 year residency visa, as well as 100 per cent business ownership. This move aims to boost FDI by up to 15%.
FDI in Saudi Arabia is mediated by SAGIA, which issues licences and determines ownership rules. It has been expanding the range of sectors where 100% ownership is permitted, adding retail and wholesale trade to the list in 2016 and engineering in 2017, as part of efforts towards the Saudi Vision 2030; in other approved sectors, only 75% is permitted. This relative openness, and the size of the Saudi economy, explain why it ranks second in the region for FDI penetration. It has also seen flows remain relatively strong in recent years.
Restrictions on foreign portfolio are also changing rapidly as Gulf countries look to attract capital into their markets to finance privatisations (such as Aramco) and help local champions to develop into multinationals. Saudi Arabia has been the laggard, opening up in stages, only permitting non-resident institutional investors to invest directly since 2015, and only then providing they meet strict qualification requirements, although they are steadily being eased. These and other market reforms caused FTSE Russell to decide in March to reclassify it as an emerging market, with the larger MSCI index expected to follow suit in May. Inclusion should drive sizable inflows, as happened in UAE and Qatar in 2014.
Foreign investors collectively are generally limited to holding 49% of listed equity, with individual companies sometimes having more stringent requirements (Abu Dhabi Islamic Bank, for example, does not permit foreign ownership). In March, large state-controlled firms in Qatar, such as QNB and Industries Qatar, announced plans to raise their foreign ownership limits to 49%, from 25%, sparking double-digit rallies in their stock price. This was despite the fact that their existing foreign ownership levels are modest.
Total foreign ownership of GCC equities stood at about $60bn at end-March 2018, about 6% of market capitalisation. In addition, other GCC nationals, not categorised as foreigners, are major investors, owning nearly 7% of the Abu Dhabi market, for example. The upgrade of the Saudi market may push it into the lead, a large part of existing foreign ownership is in historic strategic partnerships in various banking and industrial firms (e.g. HSBC’s 40% stake in Saudi British Bank).
Middle East Senior Partner, PwC Middle East
Tel: +971 4 304 3100
Middle East Strategy and Markets Leader, PwC Middle East
Tel: +971 4 304 3100
Middle East Senior Economist, PwC Middle East
Tel: +971 4 304 3100