Investors see oasis in Arab desert

While international money took fright and fled the Middle East in the wake of recent political turmoil, less risk-adverse investors are noticing the region could be fertile ground for returns.

Speaking from a tour of Australia this week, former Lebanon Trade Minister and central banker, Dr Nasser Saidi (pictured), says the spike in the oil price since the political unrest has bolstered the GDP outlook for oil-exporting Gulf states.

Saidi is the chief economist at the Dubai International Financial Center Authority – a standalone financial hub and capital market in one Dubai’s financial free-zones – and he sees the investment climate in the region improving on a number of fronts.

GDP is expected to grow by 6.5 per cent across the Gulf Cooperation Council states this year, according to a report by the Institute of International Finance released earlier this month.

The IIF highlights oil exporters Qatar and Iraq, which are expected to grow at a robust 18 and 11 per cent respectively.

But in an indication of the challenges still facing the region the IFF notes that oil-importing countries such as Egypt, Lebanon, Morocco, Syria and Tunisia are forecast to contract in 2011.

Chastened by its sharp global financial downturn and subsequent debt wobbles, Dubai is also showing signs of rediscovering some of its former economic mojo.

The Wall Streeters and private equity managers are back in town and Saidi says Dubai is again picking up speed as world trade recovers.

Along with the fast money, Saidi says longer term investors are seeing the merits in Dubai as a staging point for accessing markets in the Middle East and North Africa and Central and Southern Asia.

This rejuvenation has meant oil-exporting governments that now sit on healthy fiscal surpluses are kick-starting infrastructure projects mothballed after the financial crisis.

“There is an emphasis across the region on accelerating infrastructure projects,” Saidi said.

“There is well in excess of $2 trillion worth of infrastructure projects across the gulf region either being worked on or planned over the next 10 years, so it is very substantial. Core infrastructure goes all the way from roads to transport, power, water and desalination to ports and airports.”

While the risk profile of investing in the region has not whetted the appetite of more established investors in the West, money is flowing from the East.

China, Korea and Japanese money as well as resurgent Turkish interest are forging strong links with regional governments increasingly looking to public-private partnerships to fund projects, says Saidi.

Funds in Malaysia and Indonesia have also shown a strong interest in investing both in infrastructure and in sharia-compliant debt from the region.

“They need to tap the market, it is an undeveloped market but a market that is the source of 60 per cent of the world’s energy at a time where both commodities and energy are on an upward trend,” he says.

Rapid population growth across the Middle East is a key driver for infrastructure demand.

The booming birthrates have meant that youth under the age of 24 now make up between 50 and 65 per cent of the population across the region.

Providing health care, education and finding jobs for these large cohorts of young people is a constant concern for governments across the region sitting on a potential tinder box of social unrest.

A pivotal moment for the region comes in June when the MSCI is expected to decide whether Qatar and the UAE’s bourses will qualify to be reclassified from frontier markets to emerging.

Saidi said the hope is that the reclassification brings in long-term money into a region that has a financial system that is still embryonic.

“The regional bond market is severely underdeveloped and only represents 7 to 10 per cent of all finance,” Saidi said.

Central banks in the region deleveraged after the financial crisis, and governments as well as companies are turning to the markets for funding.

“I am expecting resurgence in the sukuk (sharia-compliant) bond market now world conditions are stabilised,” he said.

But the region still faces a number of obstacles to attracting investment and one of the most intractable is its notoriously murky corporate governance.

It is something Saidi is tackling head on.

Saidi is credited with inventing the word for corporate governance in Arabic, “hawkamah”.

It later became the title of a corporate governance institute Saidi co-founded.

In February Standard and Poor’s partnered with Hawkamah to build a composite stock index of 11 Middle Eastern markets that takes into consideration environmental, social and corporate governance issues.

The S&P/Hawkamah ESG Pan Arab index, tracks the performance of around 50 companies with a combined market capitalisation of $176 billion.

Saidi says the companies selected for the index are the top performers from a pool of 150 companies measured on more than 200 criteria, including financial reporting and auditing, board independence, carbon emissions and workplace safety.

The index is calculated and published daily and focuses on big, liquid securities.

“We are now are reaching out to all the stock markets of the region so each of the companies can get scored and try to improve their scores,” he says.

“So I am positive that companies do understand that international investors are looking at ESG criteria.”

While the political unrest across the Middle East has been a source of consternation in investment markets, Saidi sees a long-term payoff for countries that have ousted corrupt regimes.

In Egypt a spotlight has been shone on some of the shady links between companies and the Mubarak regime and Saidi hopes it might be the sign of change in corporate governance.

“Generally what is happening (political change) should be welcomed by investors because it has been long awaited and I think expected,” he says.

“Although there is a transitional period…. This will be an occasion to improve corporate governance and a possibility for more transparency and better disclosure.”

While many commentators have focused on the political instability in the region, Saidi says reforms to finance and banking sectors are as important as political change.

He points out that fewer than 10 per cent of households in the region have access to a bank account, leaving them excluded from fully participating in rapidly developing economies.

“Financial repression is as important as political repression,” he says.

“It can kill economies and making that financial transformation is going to be as important in my mind as the political transformation.”