There has been plenty of discussion about the impact of the persistent low oil price on economic performance, employment, and political stability. Less discussed has been its impact on foreign direct investment (FDI), particularly in the Middle East and North Africa (MENA). The collapse in the price of oil has taken a serious toll on investor confidence throughout the region. Once such confidence has been stripped away, it takes a long time to return - much longer than it will take for the price of oil to rebound. This may be the biggest battle oil producing countries face in the longer term.
In A.T. Kearney's Foreign Direct Confidence Index for 2015 , not a single country from MENA was in the top 25 most desirable places to invest. When survey participants were asked whether their view of a given region had changed from the previous year, only 24% indicated they felt more optimistic about the Middle East; the remaining 76% felt either the same or more pessimistic than in 2014. Herein lies a key problem: if the region's countries cannot attract foreign investment, their chances of pulling themselves out of this oil-induced tail spin can only decline.
According to the OECD, real GDP growth rates in MENA and the Gulf Cooperation Council countries (GCC) declined dramatically following the Great Recession, reached a plateau, and never recovered. Real GDP growth in the GCC reached a high of approximately 9% between 2006 and 2008; since 2009, it has remained just over 4%. The situation in the MENA region differs significantly from that of other developing regions, where FDI inflows resumed beginning in 2010. In Latin America and the Caribbean, for example, inflows increased by 54% between 2010 and 2013, while in Sub-Saharan Africa they rose by 40% over the same time period. In contrast, the MENA region experienced a 30% decrease in FDI inflows in those same years.
So, MENA and the GCC already had an FDI problem before the oil price crisis. Now that the sustained dramatic drop in the price of oil has forced the regions' countries to begin to deplete their foreign exchange reserves, the need for FDI is greater than ever, yet the likelihood that these countries will be successful in attracting the amount of FDI necessary to restore and sustain growth appears to be remote. The implications could be dire.
According to the World Bank's Doing Business Rankings for 189 countries in 2016, the only country in the 20-nation MENA region to have an overall ranking in the top third is the United Arab Emirates. Eleven regional countries score in the second third, nine score in the bottom third, and four countries score in the bottom 10% (Djibouti, Libya, Syria and Yemen). Given that there are 196 countries in the world, investors have a plethora of options. It is increasingly the case that MENA is not counted among them.
Beyond conventional economic determinants of FDI flows (such as trade openness, inflation rate and foreign exchange rate), MENA suffers from a 'perception deficit' that has hindered, and will continue to hinder, the growth of FDI for the foreseeable future. The Arab Awakening certainly did not help to transcend the perception that MENA can be a particularly difficult region in which to do business. Neither does the widely held perception that the region is the epicenter of global terrorism, upheaval and uncertainty.
These perceptions are only likely to get worse before getting better - and that is very likely decades in the making. Even if the price of oil were to stage a dramatic recovery in the coming months, the likelihood of a coming global recession (which is now overdue) implies that it would be either short-lived and/or unsustainable. China's economic 'funk' will surely continue in the short-term and global consumption of oil can only drop in the current environment. As such, the MENA countries must focus on changing perceptions, and rankings, if they are to win back a meaningful percentage of global FDI. Regrettably, that seems as unlikely as a rising oil price for the foreseeable future.
*Daniel Wagner is CEO of Country Risk Solutions and co-author of the forthcoming book "Global Risk Agility and Decision Making" (Macmillan, May 2016).