Egypt expects abuilding boomThe real estatesector has provedits resiliencePage 6

FT SPECIAL REPORT

Investing in the Arab WorldTuesday March 31 2015 www.ft.com/reports | @ftreports

Amoving fiscal landscapeOil price slide, political turmoil and limited economic reformhave put an end to the boomyears, Page 2

Inside

Years of plentycome to an endThe oil price plungeand rising instabilitydo not augur wellPage 2

Cheap solar poweroffers solaceAlternative energysources are set togrow in importancePage 4

Balancing the booksproves difficultExporters struggleto adjust tocheaper oilPage 6

Guest columnMotivating theyouth of the Gulfcountries is vital foreconomic growthPage 8

Zones of conflictBorzou Daragahilists the rules ofengagement for asuccessful businessPage 4

2 | FTReports FINANCIAL TIMES Tuesday 31 March 2015 FINANCIAL TIMES Tuesday 31 March 2015 FTReports | 3

Investing in the Arab World Investing in the Arab World

T he dual challenges ofrising terrorism and fall-ing oil prices hover overthe Middle East andnorth Africa, dashing

hopes of a sustained focus on eco-nomicgrowththisyear.

As the recurring theme of politicalupheaval weighs heavier on theregion, the sharp decline in oil priceshas started to slam the brakes on theGulf’spowerfulgrowthmomentum.

Political tumult has spread, withthe jihadi threat to Iraq and Syriareproducing itself in the civil conflictof oil-exporting Libya. Violence hasalso marred the post-Arab springtransition in emerging democracyTunisia.

Geopolitics has dominated discus-sion as Saudi Arabia leads a coalitionof Sunni states seeking to check theinfluence of the powerful pan-ArabIslamist Muslim Brotherhood move-ment and constrain what they regardas unwanted interference in theirbackyardfromregionalrival Iran.

The region’s cold war with the ShiaIslamic republic has boiled over inYemen, where Zaydi Shia rebelseffectively ousted the governmentfrom the capital, prompting SaudiArabia in late March to intervene mil-itarily as the impoverished stateslides into civil war. Even within therelative oasis of stability of the Gulfstates, Bahrain, despite strong finan-cial and political backing from itsneighbours, is struggling to revive itseconomyasunrestsimmers.

“Since the mid-1980s, politicalevents have been a rare occurrence indriving credit ratings,” says ThomasByrne, sovereign analyst at ratingagency Moody’s. “Since the Arabspring, they are now part of the back-groundandaredrivingeventrisk.”

Egypt’sratingfell sixnotchesontherevolution of 2011 and the subse-quent military coup of 2013. Tunisiahas declined four notches since itsown Jasmine revolution. Jordan,under pressure from regional insta-bility,hasdroppedanotch.

Egypt, the vital pivot in the Arabworld’s political scene, faces massive

economic shortfalls as it seeks toregain political stability and fiscalcertainty after years of street protestsand a low-level jihadi campaign in thetourist-friendlySinaipeninsula.

The Gulf states, shielded by finan-cial cushions created during several years of sky-high oil revenues, havestepped into the breach, interveningmilitarily in countries such as Yemen,Syria and Libya, while stumping upbillions of dollars of economic aid toEgypt. The United Arab Emirates(UAE) alone is donating up to $18bnto the Egyptian economy, while alsotaking a hands-on investmentapproach.

At a recent high-profile Egyptianinvestmentconference,SaudiArabia,the UAE and Kuwait pledged another$12bn between them in aid andinvestments.Privateequity firmsandthe energy sector have led interest inthe Egyptian economy as a sem-blance of stability emerges under thenew military-backed government.Ibrahim Mahlab, the prime minister,says Egypt attracted firm investment

pledges of $36bn at the conference.Sultan al-Jaber, a minister of statewho handles the UAE’s Egypt policy,comments: “Our decisive action tohelp stabilise Egypt’s economy andcontinued investment in building thecountry’s human capital demon-strates a deeply held belief that astrong Egypt is central to the prosper-ityof theentireMiddleEast.”

He adds: “Now is the time forEgypt’s international partners simi-larly to demonstrate their genuinecommitment to support Egypt withbothwordsanddeeds.”

Oil prices have more than halved insix months, from $115 dollars a barrel

in June 2014 to about $55 in March2015, before prices rose again asSaudi ledairstrikesagainstYemen.

On one hand, the decline has pro-vided an instant stimulus to the Arabworld’s emerging non-oil economiesin north Africa and the Levant, whereJordan, Lebanon and Tunisia arestruggling with strained governmentfinances thanks to regional anddomesticpoliticalpressures.

For the hydrocarbon-rich Gulfstates, however, the oil slide has radi-cally altered the fiscal landscape, per-haps for years to come, placing theGulf’s past decade of almost uninter-ruptedboominjeopardy.

After years of sustained highs,Moody’s assumes oil prices will aver-age $55 a barrel this year, rising to $65a barrel next year and only slowlymoving up to $77 a barrel by 2019.Saudi Arabia, Bahrain and Oman willall slip into fiscal and current accountdeficit thisyear, saysMoody’s.

“Effectively, we had a decade ofgrowth in state spending, ultimatelydriving the private sector, so if thegovernment pulls back spending,how much effect does that have? Howmuch autonomous growth is there inthe private sector,” asks Paul Gamble,a sovereign analyst with the Fitch rat-ingagency.

In the short term, at least, Gulfstates have the financial firepower tomaintain government spending —albeit itatmorerestrainedlevels thanthe bumper years of late — and feedcontinuedprivatesectorgrowth.

Kuwait, Qatar and the UAE areleast susceptible to the hydrocarbonsplunge, bolstered by large sovereignwealth reserves and partly diversifiedeconomies.

Mohammed Hariri, chairman ofLebanon’s BankMed, says the Gulfeconomies have enough momentumfrom the past decade of high oilprices. “Prices went down and stabi-lised, we still have the volume ofprojects in the Gulf region, but at amore conservative level. They won’tdrop drastically; investment oppor-tunitieswill continue,”hesays.

“Gulf states are vigilant and clear

Political turmoil andeconomic slowdownend boom years

The plunge in the oil price and a deteriorating security situation in theregion have radically altered the fiscal landscape, reports Simeon Kerr

‘For direct investors. . . therewill be fewerprojects, and the termswill probably be tighter’

ContributorsSimeon KerrGulf correspondent

Borzou DaragahiMiddle East and North Africa correspondent

Heba SalehCairo correspondent

Siona JenkinsMiddle East and Africa news editor

Gavin JenkinsStatistics journalist

Alexander TuerpitzPartner and managing directorBoston Consulting Group

Leila HoteitPartner and managing directorBoston Consulting Group

Tara GallyFreelance writer

Leyla BoultonAban ContractorCommissioning editorsSteven BirdDesignerAndy MearsPicture editorChris CampbellGraphic artist

For advertising details, contactMark Carwardine on +44 (0)20 7873 4880,or mark.carwardine@ft.com orLarry Kenney on +44 (0)20 7873 4835 orlarry.kenney@ft.com

All editorial content in this report is produced bythe FT. Our advertisers have no influence over orprior sight of the articles.

about economic stability, and we cansee that with current projects, in edu-cation and health, especially in SaudiArabia.”

Bankers agree that maintainingsocial peace in countries threatenedby domestic unrest will come at thecost of sustained domestic handoutsandinfrastructure investment.

Limited economic reforms to boostinvestment and constrain growth insubsidies can also be expected. Butthe reality of plunging governmentrevenue will nonetheless feedthroughintotheoveralleconomy.

Growth is forecast to moderate inspite of states dipping into reserves orborrowingtomaintainspending.

Saudi Arabia, where growth aver-aged 6.5 per cent between 2011-13,will see its economy grow by just 2.8per cent this year. “These states havethe ability to run countercyclical poli-cies, as they have ample buffers. But astructural shift in the oil price for anextended period will challenge fiscalpolicy,”saysMrByrneatMoody’s.

For all the billions of dollars inwealth accumulated over the pastdecade, the six-country GulfCooperation Council has failed toquit its oil addiction.

With the exception of the UnitedArab Emirates (UAE), whose GDP isless reliant on hydrocarbons thanSaudi Arabia and other GCCmembers, the region that producesabout a fifth of the world’s crudemay have missed the chance togenerate the private-sector-driven,non-oil-dependent growth, neededto guarantee long-term economicprosperity and stability.

The fall in the price of crude isset to pose significant challenges,as governments work to diversifywhile guaranteeing job creation andcontending with the threat ofdeepening geopolitical instability,

Simon Williams, chief economistfor the Middle East at HSBC inLondon, says: “The Gulf has had adecade of abundance when it couldhave introduced structural reformsslowly and from a position ofstrength. Now, oil prices have fallen,

the pressure for change has risen,but the required reforms aredifficult and painful to implementquickly.”

The IMF predicts the nations willincur up to $300bn of losses fromoil export revenue this yearbecause of the Brent decline.

A Bank of America Merrill Lynchreport says that, given current“spending trends and sensitivities”,Saudi Arabia, the region’s largesteconomy, may see a fiscal deficit of9 to 20 per cent of GDP in 2015.

That would put a dent in a regioncushioned by gross internationalreserves exceeding $906bn andsovereign wealth funds of $2.4tn.

Economic growth in the Gulf ispoised to slow from 3.7 per cent in2014 to 3.4 per cent this year andcurrent account surpluses areforecast to fall to 1.6 per cent ofGDP.

Rulers also need to contend withthe threat of instability from Isisand Iran. With smaller revenues,they will not be able to resort tohandouts and boosting spending in

the event of local political turmoil.While the GCC nations have all

diversified to some degree bystrengthening the overall businessenvironment, boostinginfrastructure spending anddeveloping the entrepreneurship,education and transport sectors,their reliance on oil has limitedgrowth. The oil price has fallen 54per cent in the past year to about$46 a barrel in New York.

Jason Tuvey, of London-basedCapital Economics, says Dubai mayhave been the GCC’s only successstory — up to a point. Even thoughgovernment spending allowed theemirate to become the MiddleEast’s business and tourism hub,the UAE still relies on business fromits neighbours.

Mr Williams says: “The next 18months will give us a clear sense ofwhich Gulf states are capable ofoverhauling their economies, andwhich are set to remain trapped intheir dependence on muchdiminished oil receipts.”Tara Gally

Oil addiction The failure to diversify hurts long-term growth

Riyadh is forecast to run a 10 percent budget deficit this year, whileOman and Bahrain will run largerdeficits. Even in the more comforta-bly off Gulf states the UAE, Qatar andKuwait, bankers expect a tailing off ofbusiness confidence after a decade-long boom. Already, real estate pricesin the regional commercial hub ofDubaiarecooling.

Some sectors are enjoying contin-ued growth, such as retail, providinginvestors with opportunities. More-over, core infrastructure such astransport will continue to receivestrong government support. Butsome large projects are likely to bereappraised and deals put on holduntiloilmarketsstabilise.

“There are cutbacks in capitalexpenditure — that’s going to be thefirst thing to go,” says Mr Gamble.“For direct investors, depending onthe sector, there will be fewer pro-jects, and the terms will probably betighter as governments will want tolock infavourablecoststructures.”

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Investing in the Arab World Investing in the Arab World

Armand Phares had just grad-uated from Paris’s Insead busi-ness school and was dreamingof a career in internationalcommerce when he visited hishomeinLebanonatthestartofthecountry’scivilwar.

The family pharmaceuticalbusiness was in turmoil, rap-idly losing money. Despite theentreaties of his father toescape, the young man in 1977took over the business, brav-ing checkpoints and gunfire tocross back and forth betweenwarring east and west Beirut,as he turned the companyround and developed it into asuccessful international com-pany with operations acrosstheArabworld.

“When your business entersa zone of conflict, you don’thave many choices,” he says.“If your premises are de-stroyed it’s difficult to start

again. If they’re not, survivalis thenameof thegame.”

With the Middle East andnorth Africa now engulfed inmultiple wars, businessesand investors are having toreadapt, retool and reassess,providing a business schoolcase study on managing in acrisis.

Experts on investing andcommerce inconflictandpost-conflict situations offer guide-lines for anyone seeking tokeep business and capitalflowingat timesofdistress.

The right stuffA war zone may not be condu-cive to perfume or luxury carsales, but certain market seg-ments such as foodstuffs orpharmaceuticals are essential.Security services remain alucrative field in post-conflictzones.

“If you want to sell jewelleryit’s difficult,” says Mr Phares.“But people need food, medi-cine, transportation, mainte-nance, water. And when yourbusiness has a social impact, itis rewarding. It’s not just anoccasion to make additionalprofit.”

PoliticsUnderstanding the conflict isessential, especially in placessuch as Iraq, Libya or Syria,where rival powers claim stateauthority. A contract ap-proved by one administrationmay not be recognised — ormay be deemed downrighttreacherous—byanother.

International bodies, gov-ernments and banks may haverestrictions on money or cer-tain goods flowing into conflictzones, raising potential entan-glements that could risk dam-age to reputations, fines or jailsentences.

“You’ve got to understandwhat’s going on,” says PhilipStack, an adviser at VeriskMaplecroft, a risk manage-ment consultancy. “It mighthelp to have facilitators orpeopleontheground.”

Look past headlinesIntuition tells us that conflictsare bad for business. But vio-lence and instability do notnecessarily mean commercecomes to a halt, especially inall parts of a country. Forexample, most of Iraq’s oilreserves are located in the

placid south, while the fightingand conflict are taking place inthewestandnorthwest.

The outlook for sales ofPepsi in Baghdad and thesouthern cities of Najaf andKarbala is not in any wayaffected by what is going on inMosul and Ramadi, says Geof-frey Batt, of the $80m Euphra-tesFund,which invests in Iraqi

companies, including a bot-tlingplant.

“Iraq in July and August isone of the hottest places on theplanet. No one in Basra is goingto let what’s happened inMosul stop them drinking aPepsi,”hesays.

Blend inDoing business in a conflictzone can mean having to travelto or near some hotspots, mak-ing it critical to hire trustedsecurity experts or workthrough an intermediary. Itmeans having an escape plan,maintaining contacts withembassies and perhaps keep-inganextractionteamoncall.

All of this raises costs. MrStack says: “Inevitably, in aconflict or as you emerge fromconflict, there is high crime,risk of terror, insurance costs,liability issues, kidnappingthreats.”

But mastering such a cli-mate early gives an edge overcompetitors who come lateandmustcatchup.

Great risks, great profitsEven amid a conflict, the fun-damentals of a market may

merit increased investment.Sansar Capital Manage-

ment, which operates an Iraqifund, says returns are on asteadyupwardtrendafter theybottomedout lastyear.

Many of the companieslisted on the Baghdad stockexchange have done well andhave been paying large divi-dends, with yields of up to 20per cent. Euphrates has uppedits stake in Iraq by $14m in thepast few months. Sanjay Mot-wani, portfolio manager atSansar, says: “The companiesare profiting and they arehandingall theprofitsout.”

Renaissance timePublic services, including tele-coms, might be the most lucra-tive fields in a country emerg-ing from the wreckage of con-flict. Such endeavours oftenrequire the services of outsideconsultants, advisers andexperts, who can charge a pre-mium for working in a high-riskenvironment.“There are opportunities as acountry comes out of instabil-ity,” says Mr Stack. “Growthrates tend to be higher in apost-conflict situation.”

Readapt, retool and reassess to succeedZones of conflict

Borzou Daragahilists the rules ofengagement for asuccessful business

Success: Armand Phares

F or decades, energy in theArab world has been synon-ymous with oil. Plentifulhydrocarbons and heavilysubsidised power and fuel

havebeenabirthright formorethanageneration.

But this is set to change. Investorsand energy experts say that a combi-nation of factors mean the region’sother plentiful energy resource — the

sun — could become an importantcontributorofpower.

The cost of solar panels hasdropped radically over the past fiveyears. Solar photovoltaics (PVs) haveplunged by 75 per cent in price sincethe end of 2009 and, globally, the costof electricity generated by solar PVshas fallen50percentsince2010.

“Only four years ago, solar powerdidn’t make sense, because it was

not competitive” says Paddy Padma-nathan, president and chief executiveof Saudi Arabia’s ACWA Power, one ofthe region’s biggest renewables devel-opers. “But in the past 18 months,therehasbeenabigchange.”

The company, part of a consortiumwith TSK, the Spanish engineeringcompany, in January sealed a land-mark deal with the Dubai Electricityand Water Authority (DEWA) to

finance, build and operate a 100MWPVplant intheemirate.

It set a global benchmark for solarpower generation, with a tariff of 5.85US cents/kWh under a 25-year powerpurchase agreement. To get the sameoutput with conventional powerplants, “the oil price would need to[stay] below $50 per barrel for thenext 20 years”, says Mr Pad-manathan.

With energy demand in the regionpredicted to grow at more than threetimes the global average between2013 and 2019 and the cost of large-scale solar power production now theequivalent of generating with oil at$20 a barrel, it makes economic senseeven for Gulf oil producers to con-serve fossil fuels for export anddevelop renewables for domesticenergyconsumption.

Falling cost of solaroffers solace afterhalving of oil price

Alternative energy Harnessing the sun’s rays is playing an importantrole in the push to develop cheaper power sources, writes Siona Jenkins

In the coming year, solar projectsgenerating 1,800MW, worth $2.7bn,are due to be unveiled in the region,according to a study by the MiddleEast Solar Industry Association. Thiscompares with less than 300MW in2014. Wind power is growing at aslower pace in the Arab world, but isalso becoming cheaper. Modern windturbines produce 15 per cent morepowerthantheir1990equivalent.

Jordan, which plans to obtain10 per cent of its energy from renewa-bles by 2020, is due to complete itsfirst large-scale wind power plant thisyear, al-Tafila, and produce energy atless than half the cost of conventionalgeneration.

With renewables increasingly com-petitive, non-oil producers are alsorushing to adopt the technology.Faced with an energy crisis after four

years of turmoil in the wake of the2011 Arab uprisings, Egypt has setitself the goal of sourcing 20 per centof its electricity from renewables by2020. The government has imple-mented reforms — including cuttingenergy subsidies and establishing afeed-in tariff forrenewableproducers— to make renewables more attrac-tive to the private sector. Cairo hasalso pledged to offer concessionalbank financing to small investors inwindandsolarenergy.

Morocco has the most ambitiousclean energy target in the region andis on track to have 42 per cent of itsinstalledenergycapacitydedicatedtorenewable sources by 2020. Of that,2,000MWwillcomefromsolar.

Over the next five years, Moroccowill rapidly increase its solar genera-tion capacity, primarily through Con-centrated Solar Power (CSP), whichgenerates solar power using mirrorsor lenses to focusthesun’senergy.

The first CSP facility, Nour 1, willbegin operating this year and isexpected to generate 160MW. Con-struction of the next two phases isdue to begin late in the second quar-terof2015.

Part of the programme’s success,say analysts, is high-level politicalcommitment and a well-designedregulatoryframework.

“We had specific objectives andsupport from the highest level of the

state,” says Dayae Oudghiri, a mem-ber of the state-funded MoroccanAgency for Solar Energy (Masen)managementboard.

Analysts predict that as solar andwind power take off, spin-off indus-tries will also grow, providing oppor-tunities for investors and generatingemployment.

Despite the obvious opportunities,the need for political will and well-designedpolicyremainsaconcernformanyinvestor industries.

Ernst & Young’s 2014 Cleantechsurvey of the Middle East and northAfrica showed that business leaderswere concerned that inconsistentgovernment policy was the main hin-drance to renewables growth in theregion. This was illustrated in Janu-ary, when Saudi Arabia’s new govern-ment unexpectedly pushed back itsrenewable targets by eight years,frustrating investors.

“The outlook for solar power [inthe region] is substantial,” saysAdnan Amin, director-general of theInternational Renewable EnergyAgency. But he believes growth has sofarbeendrivenbystrongpublicagen-cies, such as Masen, and predicts thatreplicating this in other countries orother parts of the government energynetworkwillbehard.

“The political will is absolutelythere, but the institutional capacityneedsstrong improvement,”hesays.

Engineeringthe future:Morocco hasthe mostambitiousclean energytarget in theregionAbdelhak Senna/Getty

‘Thepolitical will[for solarpower] isabsolutelythere’

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Egypt from E£18bn ($2.36bn)to E£22.5bn over five years.

The company, which al-ready has several large shop-ping mall projects in the coun-try, has signed a memoran-dum of understanding withthe government for four moremalls. It also says it wants to expand its supermarket net-work — a joint venture withFrenchgroupCarrefour.

Alain Bejjani, Majid Al Fut-taim Holding chief executive,says the company wants to

attract not only consumerswith big disposable incomes toits mall projects, but also the“valueconscious”.

The expansion of the super-markets, with their competi-tive prices, would appeal to awider base of customers thanthose who shop at malls withtheir often branded products.“We have 3,500 people whoare directly employed, but thiswill increase tremendouslybecause of the scale of theinvestment,”MrBejjanisays.

Investing in the Arab World Investing in the Arab World

Real estate in Egypt has shownresilience as political turmoilhas damaged other parts of theeconomy over the past fouryears. A sector seen as “defen-sive” has thrived despite legalchallenges to the land holdingsofsomeof thebigdevelopers.

Now the industry is set foranother boost with the intro-duction of rules allowing thegovernment to contribute landto new developments against ashare — in kind or in cash — oftherevenue.

In a country of more than85m people and some 800,000marriages every year, demandfor housing remains high at allincome levels, say real estate

companies and analysts. Thecountry’s big listed developerstend to cater solely for theupper middle and upperclasses, among whom demandhasremainedstrong,asbuyershave sought security in bricksand mortar during the eco-nomicuncertainty.

Habiba Hegab, constructionand real estate analyst at Bel-tone Financial, a Cairo-basedinvestment bank, says sincethe 2011 uprising the country’sthree biggest listed propertydevelopers — Talaat MoustafaGroup, Sodic and Palm HillsDevelopments — have beenreportingasurge indemand.

“This has been mainlydriven by inflation concerns,the depreciation of thecurrency, stockmarketvolatil-ity and restrictions on foreigncurrencytransactions.”

She says demand is so highthat all the companies stock ofhousing is being sold. Mostof the high-end purchases area s a n i n v e s t m e n t .

Ms Hegab says project

launches have been helped bytheresolutioninrecentmonthsofmostoftheoutstandinglegaldisputesover landbetweenthegovernment and private devel-opers that emerged in thewake of the 2011 revolution,when there were allegationsthat land had been obtained atless thanitsmarketvalue.

In the latest such settlementin February for the flagshipCairo development Madinaty,Talaat Moustafa said it wouldgive the government 3.2msquare metres of completedhomes and pay $380m over 10years. Ms Hegab adds that arecent decision to allow gov-ernment bodies to team upwith developers by contribut-ing land against an agreednumber of housing units or ashare of revenue is helping thesector by reducing costs at atimeofsurginglandprices.

“This is very positive for theindustry,” agrees AhmedBadrawi, Sodic managingdirector. “Essentially, they arebecoming partners with a

Real estate

Developers resolvelegal disputes andform partnershipswith government,reports Heba Saleh

share of the top line. It is a verynew thing. We are now biddingfor 900 acres in two plotsunder [this] new system ofrevenue sharing.” He saysSodic reported its strongestearnings ever in 2014, and issittingona“healthyamountofcashforexpansion”.

In May, Ripplewood, the USprivate equity firm, acquired a9.4 per cent stake in the com-pany, which also offers retailand office space in its develop-mentsineastandwestCairo.

“We think the addressablemarket is still very big,” MrBadrawi says. “We believe withmore financing options andmortgages, it could becomehuge.”

For now, though, theabsence of an efficient mort-gage law hampers investmentin real estate aimed at lowersegments of the market, wherecustomers cannot afford tobuyoff-plan.

In a country where 50 percent of the population areclassed as lower income, a

profitable formula for the pro-vision of low-cost housing isstill lacking and many peopleresort to the thriving informalsector for housing built with-outpermits.

At the top end, gross mar-gins — earnings after the costsof land and construction havebeen deducted — range from35 to 60 per cent, according toMs Hegab, who says listeddevelopers have been spend-ingmoreandoffering launchestocapitaliseonrisingdemand.

She also notes that becauseinflation remains a significantconcern,developersarebreak-ing up projects into phases, sothat when they close one, theycan raise prices for the next.“That has become the newstrategy,”shesays.

Investment in office andcommercial property is alsopicking up, having stalled inthe wake of the revolutionbecauseofmuteddemand.

Some 20 per cent of projectsunder development are allo-cated to office and retail space.Even in Cairo, there has tradi-tionally been a dearth of prop-erty purpose-built for busi-ness, with most companiesoperating from converted resi-dential space.

Majid Al Futtaim, a UnitedArab Emirates developer,announced in March it wouldexpand its investments in

Room to grow: thenew city outside Cairowould be funded byGulf investorsReuters

‘Withmore financingoptions andmortgages, themarket couldbecome huge’

F oreign direct investmentfell by 4 per cent in theMiddle East between 2013and 2014, the sixth consec-utive year-on-year fall,

according to the United Nations Con-ference on Trade and Development(Unctad). Investment into northAfrica fellby17percent.

Says Unctad: “This is due to afurther deterioration of the securitysituation in the region that deterredFDI not only to countries directlyaffected — such as Iraq, Syria andYemen — but also to neighbouringcountriesandregionally.”

Now, with rising security concerns— because of the Islamic State of IraqandtheLevant,knownasIsis,andthesituation in Yemen — and with oilprices sharply lower, attracting FDIwill be more important than ever, asgovernments try to keep their econo-mies balanced while spending rises asrevenuesandexportsdryup.

The $60 fall in the price of a barrelsince the peak in June last year will be

a significant drag on the Arab world’soil exporters — the Middle East hasabout 48 per cent of the world’sprovenoil reserves.

But whether producing nations canadjust to low prices in the long termwill depend on whether their econo-mies can diversify away from hydro-carbons and attract more foreigninvestment. Saudi Arabia, for exam-ple, is looking at labour marketreform and the country’s new king,Salman, in his first televised speech,setoutdiversificationasapriority.

Many of the exporting countriesin the region are able to carry outcountercyclical fiscal policy becauseof large sovereign wealth funds —Kuwait’s is large enough to supportseven years of government spending— and others have low governmentdebt and high deposits in commercialandcentralbanks.

Oil importing countries meanwhilehave benefited from a fall in energybills, enabling them to reduce thefiscal burden of energy subsidy

schemes. Yet Egypt, Jordan, Lebanon,Morocco and Tunisia have all facedratings downgrades, despite projec-tions that low oil prices are a net posi-tive for theireconomies.

Oilexporters

SaudiArabia

The largest producer in the regionand the biggest Arab economy atmarket exchange rates expects itsbudget deficit to widen to 15.3 percent of GDP in 2015, according to themost recent survey from the Econo-mist Intelligence Unit. This reflectsnot just the fall in oil revenues but thegovernment awarding a large publicsector bonus to ease the succession ofa new king. The current account isexpected to move into deficit for thefirst timesince1998.

KuwaitKuwait’s latest budget forecasts an

18 per cent fall in government spend-ingandagovernmentdeficitof20percentofGDP.

QatarQatar’s current account is predictedto fall from a surplus of 17.8 per centofGDPtoadeficitofabout1percent.

BahrainAmong the Gulf economies, the rat-ing agency Moody’s highlights onlyOman and Bahrain as being espe-cially risky. Bahrain already has highgovernment debt for the region —63.5 per cent of GDP, says the Econo-mist Intelligence Unit — and is fore-cast to extend its deficit to 10 per centin2015.

OmanOman’s problem lies in its externalbalance. Oil exports are expected tofall by about 45 per cent in value anditscurrentaccount isexpectedtoturn

from a surplus of 4.9 per cent of GDPtoadeficitof4percent.

IraqAlmost 90 per cent of the govern-ment’s revenues come from oil. And,while Iraq is expected to boost pro-duction and increase the volume ofexports, it also has to fund the mili-tary campaign against Isis. It is con-sidering a $5bn international bondissue.

Oil importersLower oil prices provide an opportu-nity for oil-importing governments tocut popular, but expensive, fuel sub-sidyprograms.

Estimates from the InternationalMonetary Fund suggest that, for theMiddle East and north Africa as awhole, energy subsidies cost $237bnin 2011, and petroleum subsidiesaccountedforroughlyhalfof this.

For Jordan and Lebanon, the bene-fit of declining oil prices is likely to be

Balancing the books proves difficultEconomy Exporters struggle to adjust to cheaper oil but importing countries enjoy some benefits, saysGavin Jackson

MOROCCO

2.4 4.02014 2015

ALGERIA

2.9 2.72014 2015

SUDAN

2.1 2.42014 2015

OMAN

3.4 2.02014 2015

UAE

4.6 3.22014 2015

QATAR

6.0 4.42014 2015

BAHRAIN

4.3 1.82014 2015

KUWAIT

2.3 1.82014 2015

SAUDI ARABIA

3.6 2.32014 2015

YEMEN

1.9 2.82014 2015

EGYPT

2.2 4.02014 2015

LEBANON

2.0 3.02014 2015

JORDAN

3.2 4.22014 2015

SYRIA

0.5 2.02014 2015

IRAQ

0 3.22014 2015

TUNISIA

2.2 2.92014 2015

LIBYA

5.2 6.52014 2015

GDP forecastsAnnual % change

Brent crude oil$ per barrel

2013 14 1540

60

80

100

120KuwaitQatarIraqUAESaudi ArabiaOmanBahrainAlgeriaLibyaYemen

0 20 40 60 80 100 120 140 160

FT graphic Sources: Economist Intelligence Unit; Thomson Reuters Datastream; IMF

Indebtedness The rise and fall of the region’s economic output

Oil price required to balance government budgetFiscal breakeven oil prices, 2015 ($ per barr el)

In Iraq, almost90 per cent ofthe government’srevenues come fromoil

Egypt expects building boomas sector shows its resilience

Egypt unveiled ambitiousplans this month to build anew administrative capitalon the outskirts of Cairo, tobe funded by investorsfrom the Gulf that are keento back the government byspurring economic growth.

The proposed 700 sq kmcity of up to 5m residentswould be developed inphases over 40 years, saysMostapha Madbouly,Egypt’s housing minister.

Ministries would move tothe new city in three to fiveyears to reduce congestionin Cairo.

Capital City Partners, aproperty vehicle foundedby Mohamed Alabbar,chairman of EmaarProperties of Dubai, woulddevelop the master planand source funding. Itwould be joined by otherGulf investors, mainly fromthe United Arab Emirates.

New capital Plans to cut gridlock

outweighed by instability from theSyrian conflict on their borders. Thebigger trouble in north Africa lies inthe balance of payments and govern-ment finances.

EgyptEgypt has slashed the level of energysubsidies by about a third, saving thegovernment about $10bn. It has alsobeen able to cut its debt to interna-tional oil companies from about $7bntoroughly$3bn.

MoroccoMorocco phased out its oil subsidyprogramme completely at the start ofthisyear.

LebanonThe deficit is predicted to narrowonly slightly from 6.9 per cent ofGDP in 2014 to 6.5 per cent in2015.

8 | FTReports FINANCIAL TIMES Tuesday 31 March 2015

Investing in the Arab World

I nrecentyears,GulfCooperationCouncil (GCC)countrieshavefacedhugeyouthunemployment.Forthoseunder25, the joblessrateremainsat25

percent.Youngpeople formthegreatestproportionof theregion’spopulation,makingthisavitalpolicyissue.Yetemployerssaytheyarenotfindingenoughyoung jobseekerswiththeskills theyrequire.

Employersarestrugglingto findcandidateswithpersonality traitssuchasmotivationtopushforresults,andperseverancewhenfacingnewchallenges.Suchskillsareoftendifficult todeveloponthe job—theyare lifeskills thatneedtobe instilledfromchildhood.

Employersandtheeducation

systemneedtoenableyoungpeopletodevelopsuchskills toexcel inaknowledge-basedeconomy.

Wehave identifiedseveralfundamentalcauses thatexplainthealarmingskillsmismatchbetweenGCCjobseekersandtherequirementsofemployers.

First, thedevelopmentof traitssuchaspersistenceandresilience isnotsufficiently integrated intoregionaleducationsystems.Thefocus isondevelopingsubject-basedknowledgeskills, suchasmaths,scienceandhistory.While theseremain important,meaningfulcareerservicesandworkexperiencessuchas internshipsarebeingoverlooked.

Childrenarenotgiventheopportunitytodevelopanappetitefor theworkingworld. If theydodevelopaninterest in it, theyarenotgivensufficientguidance.

Second,wehavefoundthatgovernments intheregionareoverlyreliantonfinancial incentives toinfluencebehaviour,which increasesaperson’sextrinsicmotivationtowork, thusdecreasingtheir intrinsicmotivationtoperform.

Intrinsicmotivation isdirectlylinkedtoperseveranceonanindividual level,andisadecisivefactor foremployerswhenhiring.

Finally,youngpeoplepreferpublicsectoroverprivatesectoremployment.Publicsector jobshavethereputationofbeingwell respectedandfamiliar.Bycontrast, theprivatesector isamystery,andisusuallynotfavouredamongfamilyelders,whocommandhighlevelsofrespect.

It is imperativethatunemploymentlevelsamongGCCyouthdrop,asthisagesegment is thefastestgrowing,risingfrom15min2000toalmost20min2014.Acrosseducationandemployment, therearemanywaysGCCcountriescanalterpolicies,behavioursandsocietalnormstotackleyouthunemployment.

Youngchildrencanbe introducedtoactivitiessuchassports to instilself-disciplineandindependence,allowingthemtoactwith limitedsupervisionandguidance.Primaryschoolcurriculumsshould includegroupactivities toteachperseveranceandresilience,andallowchildrentoexperience

failuresothat they learntorecover.Parentsandcommunity leaders

needtopromotemotivationbyconveyingappreciationofyoungpeople’sachievementsatanearlyage.Suchfiguresareoftentherolemodelsforyoungsters throughouttheirdevelopment.

Furthermore,youngpeopleshouldbeencouragedtosetpersonalgoalsthroughschoolanduniversity,viainternshipsorworkprogrammesand

careercounsellors.Employerscanofferworkexperience, soft skillsdevelopmentandtechnicalknowledge.Theseexperiencesexposestudents toworking lifesotheycansetcareergoalsearlieron.

Thisalsoencouragesadeeperunderstandingofhoweducationalpathscanaffectcareerchoices.

Finally,employersneedtoprovide

opportunities forcareerdevelopmentwithintheirorganisation,basedonstructuredpaths, systematicprocesses forperformanceappraisalandtrainingtodevelopperseveranceandresilience.Thiswill improvestaffretentionbymakingworkers feelinvested intheirvocation.Deservingemployeesshouldalsocontinuetheireducationduringtheircareer.

Additionally,governmentsneedtorethinktheirapproachtosafetynetsandincentives toencouragemotivation. IncentivesshoulddeveloppositivepersonalskillsamongtheGCC’syouth.Raisingyoungpeople’s levelsofmotivationisa jointresponsibility thatneedsaction.Educationandemploymentorganisations,aswellas thepublicandprivatesectors,mustcollaboratetomaximiseyouthemployment.

Bydoingso,wewillencourageyoungpeople toreachtheir fullpotential.Afterall, theyouthof todaywillprovidethe leadersof tomorrow.

ThewritersareDubai-basedpartnersandmanagingdirectorsatTheBostonConsultingGroup

Alittlemotivationwould go a longwayGUEST COLUMN

Leila Hoteit andAlexanderTuerpitz

The youthsegment is thefastest-growingone amongpopulations ofGCC countries