UAE posts strong FDI growth in ’06

DUBAI — Led by a big surge in the foreign direct investment into the UAE, the GCC region is expected to record more than 40 per cent growth in FDI flow as the global FDI flows grew for the third consecutive year to reach $1.2 trillion last year.

By Issac John (Chief Business Reporter)

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Published: Mon 12 Feb 2007, 9:26 AM

Last updated: Sat 4 Apr 2015, 9:54 PM

Based on the United Nations Conference on Trade and Development's (Unctad) first estimate for the year 2006, FDI to the GCC region, traditionally accounting for 60 per cent of the Middle East FDI flow of $43.3 billion, could exceed $26 billion last year. According to conservative estimates, the UAE, which accounted for more than 60 per cent of the total FDI flow into the GCC in 2005, should have received more than $16 billion in 2006. This represents a growth of 34 per cent compared to $12 billion it received in 2005, analysts said.

Although the global FDI flows in 2006 represent a 34 per cent increase from 2005, it is still short of the record of $1.4 trillion set in 2000. FDI flows to developed countries in 2006 rose by 48 per cent, well over the levels of the previous two years, and reached $800 billion. FDI flows to developing countries and economies in transition (comprising South-East Europe and the Commonwealth of Independent States) rose by 10 per cent and 56 per cent, respectively, in 2006, reaching record levels for both groups of economies.

In 2005, FDI flows in the Middle East achieved record highs in both inward $34 billion and outward $16 billion directions in 2005, according to Unctad’s World Investment Report 2006.

Strong economic growth, global oil demand and an improved investment environment played crucial roles in the historic surge of FDI inflows. Oil-rich countries contributed to the growth in FDI outflows from the region and at the intra-regional level. In 2005, FDI inflows to the Middle East rose by 85 per cent — the highest growth rate in the developing world. They increased in 12 countries out of 14 in the region.

"The UAE attracted the largest amount ($12 billion), followed by Turkey ($9.7 billion) and Saudi Arabia ($4.6 billion). Those three economies accounted for over three quarters of the region's inflows. FDI is taking place increasingly at the intra-regional level, particularly in the services sector (for example, in telecommunications and finance), reaching $14 billion in 2005 in cross-border mergers and acquisitions alone, as compared to $0.6 billion in 2004."

Bahrain had the fourth highest volume of FDI outflows in the region in 2005, with more than $1 billion being outwardly invested. Only the UAE, Kuwait and Saudi Arabia recorded higher values of outward FDI, with Turkey ranked in fifth place. Each of these nations showed a year-on-year increase in outward FDI, in keeping with regional trends.

"Increased levels of FDI have positive impacts on economies, reflecting increased transparency, stability, and creating a more dynamic and diverse workforce. Growth in FDI, both inward and outward, is viewed by economists and investors as a marker for the ‘good health’ of an economy, and provides a strong indicator of capacity for growth and development."

The Unctad report said although Gulf countries are traditionally active in portfolio investments abroad, they are now allocating more petrodollars to FDI, and are investing widely not only at the intra-regional level but in developing Asia and Africa and in the developed world. Significant recipient industries include energy, tourism, and telecommunications. State-owned companies are active investors.

These trends partly reflect a progressively relaxed regulatory framework for FDI. Most countries in the region have liberalised regulations, in particular for non-energy industries such as finance, real estate and telecommunications. These industries consequently attracted much of the region's FDI in 2005. If there are continued efforts towards economic reform and further improvements to the business climate, supported by promising economic growth and high oil prices, further increases in FDI flows — both inward and outward — are likely. However, given continuing geopolitical uncertainty, these flows may be unevenly spread in the region.

In December 2006, the UAE announced its move to draft a foreign investment law that will make the emirates — currently ranked among the top 15 global locations for foreign direct investment — a more attractive destination for FDI.

The Minister of Economy, Shaikha Lubna Al Qasimi said a Foreign Investment Law, which is to be drafted by the Ministry of Economy as per the mandate given by the Cabinet, will seek to regulate incoming foreign investments into the UAE, introduce best practice elements, and provide investors with a "one-stop" legal reference point for foreign investors.

Stressing the need to draft a unified investment law, she said the Ministry of Economy is currently championing the National Investment Reform Agendas (NIRA) initiative alongside the Ministry of Finance and Industry, the Central Bank, Abu Dhabi Investment Authority, Dubai Investment Group, the Securities and Commodities Authority, and other stakeholders.

Shaikha Lubna pointed out that the UAE has made significant strides in FDI performance over the last decade. "We have moved up from the 90th position, worldwide, in the period 1993-1995, to the 15th position in the period 2003- 2005. In a decade, we have achieved the largest FDI figure in the region in terms of magnitude. As a ratio to GDP, we are only preceded by Lebanon."

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