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By David Rosenberg
"The economic situation is worse than anyone imagines," a tearful Kamal el-Ganzouri, Egypt's third interim prime minister since Husni Mubarak's downfall, told reporters this week as he took the helm of an economy reeling from dwindling foreign reserves, inflation and unemployment.
As the Arab Spring approaches its first anniversary, the economic costs of toppling autocrats is now growing for countries such as Egypt, Tunisia, Libya and Syria. But foreign direct investment (FDI), one important remedy for economic revival, looks like an increasingly distant prospect amid the continuing political turmoil.
"The return of foreign investment depends on a number of factors, the most important of which is the return of a stable security environment. The way things are now investors will be reluctant to make investments where they don't know what will be happening in the space of weeks," said Joseph Lee, Middle East and North Africa analyst at London-based Business Monitor International.
"The other problem is policy," Lee told The Media Line. "Right now, it's a clean slate. There are political parties that have stated that they will have market-friendly policies, but who knows to what extent they will be enacted."
He pointed to Tunisia, where the Islamist party Ennahda has spelled out policy prescriptions that should encourage investors while its two junior coalition partners have adopted more social-democratic platforms.
The World Bank forecasts declining FDI - the kind of investment used to build factories, infrastructure and homes and buy companies - for the Middle East and North Africa this year and next, with growth resuming in 2013. A survey of 316 senior executives from multinational companies investing in developing countries by the bank's Multilateral Investment Guarantee Agency, published in a report last week, shows how immense the challenges of luring them back will be.
The poll showed that investors have two tough preconditions before they are prepared to return to the region with their capital - a year of "stability" and a "democratic government." Those two conditions being met, more than half said they would invest in the Middle East and North Africa.
But among the Arab Spring economies, Egypt remains wracked by strikes, demonstrations and disorder even as it has begun the first of a series of democratic elections. In Syria, violence is growing worse, with the United Nations estimating on Monday that a government crackdown on the opposition has taken 5,000 lives. In Libya, transitional leaders are struggling to disarm militant groups and are expected to delay big investment projects until a permanent government takes power.
The World Bank survey found that instability even under a democratic government would cause more businesses to decrease their investments than increase them. Non-democratic governments would deter investment, no matter what the political and security situation is, the poll found.
The World Bank's estimates are confirmed by the Kuwait-based Arab Investment & Export Credit Guarantee Corp., which in October said the flow of FDI to the Arab world would slump by about a fifth this year to $55.1 billion, compared with $66.2 billion in 2010. It said Egypt would suffer the biggest drop, a 92 percent plunge to just $500 million in 2011.
Seven of the 21 Arab countries covered by its report are expected to see FDI increase this year, with Saudi Arabia edging up to $29 billion from $28.1 billion in 2010. Iraq is expected to see investment inflows more than double to $3.5 billion this year.
The rise of Islamist parties in Tunisia and Egypt, the first two Arab Spring countries to hold elections, has given some investors the jitters. But Geoff D. Porter of North Africa Risk Consulting, which advises investors about conditions in much of North Africa, said Islamist leaders have signaled they want to keep their countries foreign investor-friendly and fight corruption, one of the region's most serious problems.
"Foreign investors have historically been wary of Islamist politics, but I think following the elections some of their concerns have been mollified. They feel they can work with Islamist regimes because they feel Islamists will focus on social issues rather than economic ones," Porter told The Media Line.
Sanctions and a European economy threatened with recession are likely to hurt FDI flows even more.
Three MENA countries - Egypt, Tunisia and especially Morocco - are highly reliant on European capital, but the euro debt crisis may cause the currency zone to slip into recession. On Tuesday, Fitch ratings slashed its 2012 economic growth forecast for the region to 0.4 percent from 0.8 percent last quarter.
Meanwhile, sanctions are taking their toll on the Syrian and Iranian economies. Royal Dutch Shell announced in early December that it would "cease" activities in Syria after the European Union blacklisted three Syrian state-owned oil companies. This week, the Chinese state-controlled Sinochem and Britain's Gulfsands Petroleum shut down production too.
Iran has to cope with a new round of tighter sanctions imposed by the Western powers Nov. 21 after a United Nations report highlighted Tehran's progress toward developing nuclear weapons. Iran needs to invest up to $50 billion annually in its oil industry to maintain its position as a leading crude exporter and boost natural gas production, Oil Minister Rostam Qasemi said Nov. 23.
Experts are nevertheless confident that if political stability can return to the Middle East and North Africa, foreigners will come back as well. Besides substantial energy reserves still waiting to be exploited, the region boasts a consumer market of 450 million, a fifth of whom are between the age of 15 and 25, the World Bank notes. Many industries and services are undeveloped and awaiting new entrants.
Indeed, a report by the auditing firm Grant Thornton found that foreign companies remain keen on doing business in the Middle East and North Africa despite the upheavals of the past year. A survey of some 2,900 business taken earlier this year found only 10 percent said they are "less likely" to do business in the region as a result.
In Tunisia, which staged elections in October and formed a democratically elected transitional government this week, anger over poverty and unemployment has sparked rioting and clashes with security forces. But Porter said the country is moving in the right direction and that his clients are putting out feelers about investing there.
"We've had a handful of queries about Tunisia, in particular around private equity opportunities and some interest in the oil and gas sector, others in consumer goods," he said. "It seems that Tunisia is starting to rebound."
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Foreign Investment Outlook Dims as Arab Spring Continues to Stir | Global Viewpoint