Bridging the Investment Gap in the Middle East and North Africa
March 1, 2012—For years, development experts and academics, among others, have been pointing to one of the greatest development challenges facing the Middle East and North Africa (MENA) region: the need to generate employment opportunities for a rapidly growing population. In 2009, the World Bank noted that close to 40 million new private sector jobs had to be created over the next decade to provide opportunities for a growing, young, and increasingly educated workforce. This pressing need for jobs and the desire for political and economic change came into sharp relief with the events known as the "Arab Spring."
While the need for investment that creates jobs and opportunity in MENA has been clear for some time, the region has continued to lag in its ability to attract foreign direct investment (FDI) outside of the oil and gas sector. With the civil unrest that unfolded last year, the region’s prospects for attracting sorely needed investment suffered a serious setback. Compounding the problem, many countries in MENA have traditionally relied on investment from Europe, which is grappling with its own financial challenges.
In June 2011, MIGA announced its initiative to encourage FDI into MENA. The agency has mobilized up to $1 billion of capacity for new guarantees for cross-border investments in the region and held several events bringing investors together to share knowledge and experience in managing political risk. The most recent of these events was held in Dubai in January 2012 . Co-hosted by MIGA, the Dubai International Financial Centre, and the Islamic Corporation for Insurance of Investments and Export Credits, the event brought together more than one hundred development and investment experts from leading regional and international companies, who discussed the impact of the global turbulence on investment in the region and the future development of MENA.
Underpinning these efforts was research conducted for MIGA’s 2011 World Investment and Political Risk Report, which surveyed investors doing business in the region. The survey found that the turmoil did have a significant impact on corporate investors' investment intentions into MENA: about a quarter of investors put their plans on hold, while others reconsidered, canceled, or withdrew existing investments. Only just below a third did not alter their investment plans. The risk of political violence—especially civil disturbance—was a persistent concern for surveyed investors. They were also concerned about governments' abilities to honor their sovereign financial obligations in light of increased sovereign risk, rising sovereign credit default risk spreads, and foreign currency sovereign debt rating downgrades.
Despite this serious setback, the research also found that investors plan to return fairly quickly once stability returns, given the vast opportunities in the region. The prospect of more predictability regarding rule of law, property rights, and regulatory regimes could also help address historical underperformance of the private sector in the region. As a result there is long-term optimism that if political stability takes hold, the ongoing transition in the region could ultimately increase FDI and spur greater economic development. More broadly, emerging markets hold the greatest prospects for economic growth and the MENA region’s large and young population is likely to attract investors seeking new markets.
To address this, MIGA is actively reaching out to these potential investors to raise their awareness of the political-risk mitigation tools that MIGA and other insurers offer. This has been helped in part by the recent establishment of the agency's European Hub in Paris. The hub’s mandate is to reach out to companies that are mostly headquartered in Europe investing primarily in Eastern and Central Europe, MENA, and sub-Saharan Africa. Through these and other efforts, an active pipeline of MIGA-supported projects is being developed, with a particular focus on infrastructure, manufacturing, and services.
In Tunisia, for example, MIGA is supporting the construction of a passenger-car ferry through $200 million in sovereign obligor default cover to project lenders BNP Paribas and Société Générale of France. MIGA is also supporting a portfolio of investment projects held by Spanish private equity fund Fons Mediterrània Capital, F.C.R. de Régimen Simplificado (FMC) of Spain. The agency’s support to these existing investments is providing assurance to FMC’s investors during a time of transition in the region, allowing continuity of important job-generating enterprises. MIGA has also ramped up its efforts to support investment into the West Bank and Gaza through the MIGA-administered West Bank and Gaza Investment Guarantee Trust Fund. The agency appointed a full time representative in the West Bank and has supported two investments there in the past year.
Importantly, for intra-regional investment—particularly crucial in light of diminishing investment flows from Europe—MIGA is able to support Islamic finance transactions, further broadening the scope of risk-mitigation options the agency can provide. Examples of this support include the Doraleh Container Terminal in Djibouti and PT Natrindo Telepon Seluler (Axis) in Indonesia.
These efforts come at a critical time for the region. Investors looking for new prospects or existing investors concerned about growing political instability in countries once viewed as stable and predictable will be looking to mitigate their risks. As a development agency, MIGA is often able to step in to environments where private insurers may be unwilling to go alone – or unable to offer the longer tenors requested. With MIGA’s backing, investors can more confidently enter high-risk environments providing a powerful demonstration effect for others to follow.