United Nations Economic And Social Commission For Western

United Nations Economic And Social Commission For Western Asia (ESCWA) International Labour Organization Regional High-Level Consultative Forum on the Impacts of the International Financial Crisis on the ESCWA Member Countries: the Way Forward “The impact of the crisis on the inflows of FDI to West Asia” Ms. Nicole Moussa, UNCTAD Division on Investment and Enterprise (DIAE) Dedeman Hotel, Damascus

The end of a growth cycle in world FDI inflows (Billions of dollars) Source: UNCTAD (1) Preliminary estimates

“The impact of the crisis on FDI inflows to West Asia” Nicole Moussa Division on Investment and Enterprise Development UNCTAD

Factors affecting FDI inflows • The capability to invest has been reduced by a fall in access to financial resources due to: – Lower availability and higher cost of finance. – Decline in corporate profits. • The propensity to invest has been affected negatively by: – Poor economic prospects. – Very high level of risk perception.

The impact of the crisis on FDI is different, depending on regions Value ($ billions) Growth Rate (%) 2007 2008 1941 1659 37 -15 Developed economies 1342 1002 41 -25 Developing economies 512 549 22 7 54 72 21 35 127 139 37 9 331 338 18 2 72 61 14 -14 South, East and South East Asia 259 275 19 6 Transition economies 87 108 65 24 World Africa Latin America and the Caribbean Asia and Oceania West Asia Source: UNCTAD a Preliminary estimates

FDI inflows to West Asia declined in 2008 (Billions of dollars) Source: UNCTAD (1) Preliminary data

Factors affecting FDI inflows to West Asia • Tighter credit environment affects the capability of foreign investors to invest in: – Cross-border mergers and acquisitions (M&As) – Greenfield FDI • Changing economic outlook affects the propensity to invest: reappraisals and delays of big development projects. • « Turning inward » : the need to secure funds to finance their own economy has affected intra-regional investments.

West Asia: cross-border M&As sales (Billions of dollars) Source: UNCTAD

Greenfield FDI affected by project finance market drought • The Middle East has emerged in recent years as the world's biggest project finance market: – In the first nine months of 2006, nearly $40 billion of project finance debt, compared to $32 billion in Western Europe and $29 billion in North America. – The project finance debt raised in the Middle East in 2006 equated to over 5% of the region's GDP compared to less than 0. 25% in Western Europe. • Previous to the ongoing crisis, international banks were rushing to provide credit. • With the crisis, the number of foreign banks willing to lend to Gulf projects decreased dramatically: – Only 12 banks were actively seeking project finance deals in the Gulf at the end of 2008, down from 45 two years ago.

Developers are reappraising their projects’ costs and prospects in light of: – The new demand market outlook. ↓ – The new credit market outlook. ↓ – The drop in the cost of inputs (like steel, copper, etc). ↑ – The alleviation of equipment shortages. ↑ – The easier recruitment of qualified personnel. ↑ – The dollar appreciation since mid-2008. ↑

Examples of delayed projects Saudi Arabia: • The aluminium smelter joint venture project between the Saudi Maaden and Rio Tinto Alcan (Canada) ($10 billion). • The refinery joint venture project at Yanbu between Saudi Aramco and Conoco. Phillips (United States) ($10 billion). • The refinery joint venture project between Saudi Aramco and Total (France) ($10 billion). • The Ras al-Zour water and power project ($5. 5 billion), developed by the Sumitomoled consortium. The phase five and six expansions of a power plant at Yanbu Kuwait • Abyaar Real Estate Development Company had postponed plans for a $1 billion sukuk issue to fund further expansion. United Arab Emirates: • The Worlds of Discovery theme park collection project between the Dubai property developer Nakheel, and the United States-based Busch Entertainment Corporation. • The Shuweihat 2 power generation and water desalination joint venture project between the Abu Dhabi Water and Electricity Authority (ADWEA) and France's GDF Suez ($2 billion). Bahrain: • The Al Dur power and water joint venture project between Kuwait's Gulf Investment Corporation and France's GDF Suez ($2. 2 billion).

Intraregional FDI has also been affected by the crisis. • The increase of intraregional FDI contributed to the surge of FDI inflows to West Asia in the last years. • Intra-regional FDI has been part of diversification effort of Arab Gulf counties away from an oil- and gas-based economy. • The crisis is leading government-owned enterprises and SWFs to reduce purchases of foreign assets, and even to liquidate assets abroad, in order to secure funds for local economies.

Governments are mobilising local liquidity For example, the Saudi Arabian Government has already taken step to compensate for the drought of financing available from the international banks: – It has significantly loosened its monetary policy, by cutting both the repurchase rate and reserve requirements for banks. – It has awarded in 2009 railroad contracts financed through the state-owned Public Investment Fund to consortia led by local groups. – The $2. 5 billion Rabigh power project, developed by South Korea's state-run electricity company KEPCO, has come back on track with the financial backing of two local institutions.

Medium-term global FDI prospects are difficult to assess Some favorable factors for FDI growth are still at work, some of which are even a consequence of the crisis itself. Driving forces such as: – Investment opportunities triggered by cheap asset prices and industry restructuring. – Large amounts of financial resources available in emerging countries. – Quick expansion of new activities such as new energies and environment-related industries. However, their impact on FDI growth depends on a series of uncertain factors such as: – – The speed of economic and financial recovery The efficiency of public policy in addressing the causes of the present crisis. The evolution of investment climate. The return of investor confidence Concerning West Asia, recent experience has shown that the performance of West Asian economies and their attractiveness for FDI is determined to a large extent by the level of oil prices.