Arab countries are expected to attract around $13.1 billion in private
capital flows this year, and a further $14.7 billion next year, with
the bulk in the form of direct equity channeled to gas related
projects in Saudi Arabia and other Gulf states. Countries implementing
clear strategy of privatization and opening up of their economies
(e.g. Jordan, Tunisia, Egypt) will also attract international capital.
Lebanon will continue to tap the international bond market in order to
meet its budgetary requirements. However, the share of Arab world in
total emerging market capital inflows is still below 9.2 percent and
is expected to drop to 7.6 percent next year.
According to the
Institute of International Finance (IIF), net private capital flows to
emerging market economies are projected to fall to $140 billion this
year, down from $168 billion last year. This would reduce private
flows to their lowest level since 1992.
The expected fall
in private flows is, however, entirely due to the direct impact of an
expected outflow of private capital from Turkey and much weaker net
flows to Argentina. To date, concerns over Argentina and Turkey and
the global slowdown appear to have had only a limited impact on net
flows to other emerging market economies. Excluding Argentina and
Turkey, net private flows are projected to be resilient, picking up to
$153 billion this year, compared with 147 billion last year. This is
the case, despite a likely decline in G-7 growth from 3.5 percent last
year to 1.5 percent this year, a high degree of financial market
volatility, and increased risk aversion worldwide.
Net commercial bank
lending is expected to remain negative this year with a projected flow
of $19 billion due to the substantial net repayment by Argentina and
Turkey. Issuance of bonds is projected to fall to about $11 billion
from $24 billion last year due mainly to substantial net repayment by
the two countries flows to other emerging economies is likely to rise.
Direct equity investment is expected to be slightly higher this year
at $141 billion, compared with $133 billion in 2000, and will more
than account for the entirety of net flows. Weaker investment in
Brazil and Argentina, in particular, is likely to be partly offset by
stronger investment in china and Mexico, as the latter is boosted by
the Citigroup acquisition of Banacci.
investment is projected to be just $8 billion this year, down from $15
billion last year. Emerging equity markets have shown mixed
performance this year, after sharp falls last year. The correlation
with industrial country technology stocks appears to have weakened
If a major setback
to investor confidence can be avoided, a significant recovery in
private flows to over $190 billion is possible next year. As global
activity starts to recover, and the crisis-based compression in flow
to Turkey and Argentina runs its course, investors will become less
averse to risk. Net private credit flows could reach $37 billion next
year, their highest level since 1997. In addition to a swing back from
large outflows in Turkey and Argentina, credit flows to other
economies may increase to over $30 billion from $12 billion last year,
as bank retrenchment in Asia is finally completed.
investment in the Arab region (including direct and portfolio
investment) is forecast to rise by 6.3 percent this year to $10.1
billion from $9.5 billion in 2000. Foreign direct investment (FDI) to
the Arab countries is expected to increase by almost 5.5 percent this
year to $9.5 billion with $4 billion going to gas projects in Saudi
Arabia and $1 billion to Egypt. However, FDI flows to the Arab world
still constitute a small share of the global total at 7.2 percent.
Recent initiative by several Gulf countries to open up their energy
sectors to foreign participation, alongside economic reform and
liberalization policies across the region and a stronger privatization
drive in some Arab countries will help boost the Arab world’s share
of global FDI flows over the coming few years. FDI flows to the Arab
region are expected to rise by a further 10.5 percent to $11.5 billion
in 2001. Portfolio equity investment is also expected to show an
improvement this year, increasing to a positive volume of $600 million
compared to negative net investment of $200 billion in 1999.
In line with global
trends, net private credit flows (including bank loans and bond
issuance) to the Arab countries are expected to improve this year to
about $2.9 billion, from $2.1 billion in 2000. Bank credits to the
region this year are expected at $400 million, bond issuance in the
international market by Arab governments and corporates are forecast
to increase to $2.5 billion in 2001, up from to $1.8 billion in 2000.
Most of the bonds issued this year came from Lebanon and Egypt at a
net increase of $1.5 billion. Bond issuance in the Arab world is
expected to pick up further in 2002 to $2.6 billion while net bank
credit is forecast at $600.
With the global
economy experiencing a downturn of economic activity in all major
regions, the emerging Arab economies are facing a very challenging
external environment. Export growth is likely to slow, and in
consequence the aggregate current account position of the Arab
economies is expected to weaken somewhat, despite a reduction in the
burden of interest payments on floating rate debt.
Some weakening in
commodity prices may also intensify the difficulties of certain Arab
economies. This means Arab countries have to put in place the right
macroeconomic policies, introduce the required structural reforms and
expedite their privatization drive in order to attract the required
net capital flows to their countries.