FDI flows to west asia decreased in 2013 by 9% to 44 billion, the fifth consecutive decline since 2009 and return to the level they had in 2005. Persistent tensions in the region continued to hold off foreign direct investors in 2013. Since 2009, FDI flows to Saudi Arabia and Qatar have maintained a downward trend. During this period, flows to a number of other countries have started to recover, although that recovery has been bumpy in some cases. Flows have remained well below the levels reached some years ago, except in Kuwait and Iraq where they reached record levels in 2012 and 2013 respectively.
Turkey remained west asia’s main FDI recipient in 2013 although flows decreased slightly, remaining at almost the same level as in the previous year – close to 13 billion (Fig A). This occurred against a background of low cross border M&A sales which dropped by 68% to 867 million, their lowest level since 2004. While inflows to the manufacturing sector more than halved, dropping to 2 billion and accounting for only 16% of the total, they increased in electricity, gas and water supply (176% to 2.6 billion), finance (79% to 3.7 billion), and real estate (16% to 3 billion). Together these three industries represented almost three quarters of total FDI to the country.
FDI flows to the United Arab Emirates continued their recovery : After the sharp decline registered in 2009, increasing in 2013 for the fourth consecutive year and positioning this country as the second largest recipient of FDI after Turkey. Flows increased by 9% to 10.5 billion, remaining however well below their level in 2007 (14.2 billion). This FDI recovery coincided with the economy rebounding from the 2009 debt crisis, driven by both oil and non oil activities. Among the latter, the manufacturing sector expanded, led by heavy industries such as aluminium and petrochemicals; tourism and transport benefited from the addition of more routes and capacity by two local airlines; and the property market recovered, thanks to the willingness of banks to resume loans to real estate projects, which brought new life to the construction business, the industry that suffered most from the financial crisis and has taken the longest to recover. That industry got further impetus in November 2013, when Dubai gained the right to host the World Expo 2020.
Flows to the Saudi Arabia registered their fifth consecutive year of decline : Decreasing by 24% to 9.3 billion, and moving the country from the second to the third largest host economy in the region. This decline has taken place despite the large capital projects under way in infrastructure and in downstream oil and gas mainly refineries and petrochemicals. However, the Government remains the largest investor in strategically important sectors, and the activities of many private firms (Including foreign ones) depend on government contracts (Non-equity mode) or on joint ventures with state owned companies. The departure in 2013 of over 1 million expatriate workers has exacerbated the mismatch of demand and supply in the private job market that has challenged private businesses since 2011 launch of the policy of “Saudization” .
Flows to Iraq reached new highs : Despite high levels of instability in Iraq, affecting mainly the central area around Baghdad, FDI flows are estimated to have increased by about 20% in 2013, to 2.9 billion. The country’s economic resurgence has been underpinned by its vast hydrocarbon wealth. Economic growth has been aided by substantial increases in government spending to compensate for decades of war, sanctions and underinvestment in infrastructure and basic services. In addition, work on several large oilfields has gathered speed since the award of the largest fields to foreign oil TNCs. A significant development for the industry in 2013 was the start of operations of the first stage of a long delayed gas capture project run by Basra Gas Company (State owned south gas company 51%), Shell (44%) and Mitsubishi (5%). The project captures associated gas that was being flared from three oil fields in southern Iraq and processes it for liquefield petroleum gas (LPG), natural gas liquids and condensate for domestic markets.
FDI flows to Kuwait are estimated to have decreased by 41% in 2013. After having reached record highs in 2012 owing to a one-off acquisition deal worth 1.8 billion (See WIR 13). FDI to Jordan increased by 20% to 1.8 billion, despite regional unrest and sluggish economic growth because of the country’s geostrategic position, countries and foreign entities have been extending considerable new funding in the form of aid, grants, guarantees easy credit and investment. FDI to Lebanon is estimated to have fallen by 23% with most of the flows still focused on the real estate market, which registered a significant decrease in investments from the Gulf cooperation council (GCC) countries.
Prospects for the region’s inward FDI remain bleak : As rising political uncertainties are a strong deterrent to FDI even in countries not directly affected by unrest and in those registering robust economic growth. The modest recovery in FDI flows recorded recently in some countries would have been much more substantial in the absence of political turmoil, given the region’s vast hydrocarbon wealth.
FDI outflows from West Asia soared : 64% to 31 billion in 2013, boosted by rising flows from the GCC countries, which enjoy a high level of foreign exchange reserves derived from their accumulation of surpluses from export earnings. Although each of these countries augmented its investment abroad, the quadrupling of outflows from Qatar and the 159% growth in flows from Kuwait explain most of the increase. Given the high levels of their foreign exchange reserves and the relatively small sizes of their economies. GCC countries are likely to continue to increase their direct investment abroad.
New challenges faced by the GCC petrochemicals industry : With the goal of diversifying their economies by leveraging their abundant oil and gas and their capital to develop industrial capabilities and create jobs where they enjoy competitive advantages, GCC governments have embarked since the mid 2000s on the development of large scale petrochemicals projects in joint ventures with international oil companies (See WIR 12). These efforts have significantly expanded the region’s petrochemicals capacities and they continue to do so, with a long list of plants under development, including seven megaprojects distributed between Saudi Arabia, the United Arab Emirates, Qatar and Oman (Table 11.2). The industry has been facing new challenges, deriving among others from the shale gas production under way in north America which has affected the global strategy of petrochemicals TNCs.
TNC focus on the United States : The shale gas revolution in north America combined with gas shortages in the GCC region, has reduced the cost advantage of the GCC petrochemicals players and introduced new competition. By driving down gas prices in the unites states, the shale revolution is reviving that country’s petrochemicals sector. Some companies have been looking again to the united states, which offers a huge consumer base and the opportunity to spread companies business risks. Global petrochemicals players that have engaged in several multibillion dollar megaprojects in GCC countries in the last 10 yrs – including chevron Phillips chemical dow chemical and exxonmobil chemical – have been considering major projects in the united states for e.g. chevron Phillips is planning to build a large scale ethane cracker and two polyethelene units in texas. Dow chemical has restarted its idled saint Charles plant in Louisiana and is undertaking a major polyethylene and ethylene expansion in its plant in texas. As of March 2014 the united states chemical industry had announced investment projects valued at about 70 billion and linked to the plentiful and affordable natural gas from domestic shale formations. About half of the announced investment is by firms based outside the united states.
Shale technology is being transferred through cross border M&As to asian TNCs : United states technology has been transferred to asian countries rich in shale gas through M&A deals, which should eventually help make these regions more competitive producers and exporters for chemicals. Government backed Chinese and Indian companies have been aggressively luring or acquiring partners in the united states and Canada together the required production techniques, with a view to develop their own domestic resources.
GCC petrochemicals and energy enterprises have also invested in North America : The north American shale gas boom has also attracted investment from west asian petrochemicals companies : NOVA chemicals (Fully owned by abu dhabi’s state owned international petroleum investment co.) is among the first to build a plan to exploit low cost north American ethylene. SABIC (Saudi Arabia) is also moving to harness the shale boom in the united states. The company – which already has a presence in the united states through SABIC Americas a chemicals and a fertilizer producer and a petrochemicals research center is looking to seal a deal to invest in a petrochemicals project as well. The boom has also pushed state owned Qatar petroleum (QP) to establish small footholds in north america’s upstream sector, because QP is heavily dependent on qatar’s north field, it has invested to diversify risk geographically. In April 2013, its affiliate, Qatar petroleum international (QPI), signed a memorandum of understanding with exxonmobil for future joint investment in unconventional gas and natural gas liquids in the united states, which suggests a strategy of strengthening ties with TNCs that invest in projects in qatar and reflects joint interest in expanding the partnership both domestically and internationally. QPI also announced a one billion deal with cantrica (United kingdom) to purchase oil and gas assets and exploration acreage in Alberta from oil sands producer suncor energy (Canada). However, new evidence suggests that the outlook for the shale gas industry may be less bright than was thought.
Petrochemicals producers in the middle east should nonetheless build on this experience : To develop a strategy of gaining access to key growth markets beyond their diminishing feedstock advantage. Rather than focusing on expanding capacity, they need to leverage their partnership with petrochemicals TNCs to strengthen their knowledge and skills base in terms of technology, research and efficient operations and to establish linkages with the global manufacturing TNCs that use their products. Efforts towards that end have been undertaken for example by SABIC, which has opened R&D centers in Saudi Arabia, china and India and is developing a strategy to market its chemicals to international manufacturing giants.