More Capital Attracted to Mideast

At a recent investor conference in Los Angeles, the man who oversees Egypt’s stock markets was touting his country’s battle to tame inflation and boost foreign investment when he was interrupted by a call on his cellular phone.

It was his assistant in Cairo reporting a bombing in the Sinai Peninsula, the second in two weeks.

Hani Sarie-Eldin didn’t miss a beat. “The markets barely moved,” he said, returning to an interview. “Doesn’t that prove my point?”

That incident highlighted a problem facing Middle East officials: how to attract investors to a region plagued by violence and economic volatility. A wave of selling that has hit several of the region’s hottest stock markets -- Saudi Arabia’s market has fallen 38% since February -- has led some to question whether the Mideast is a safe place to invest.

But Middle Eastern experts said the market volatility and violence had overshadowed some significant changes underway in the regional economy. They said leaders were starting to get serious about reform, still unnerved by the 1999 Asian financial crisis and worried about recent tensions with the United States.

Egypt, Jordan and Morocco have privatized lucrative state-owned firms and strengthened their financial markets. Governments in Dubai, Oman and Bahrain are negotiating trade deals, tightening bank regulations and investing in ports, highways and telecommunications systems.

Late last year, Saudi Arabia joined the World Trade Organization after agreeing to further open up its economy to foreigners.

In addition to petrodollars, the money flowing into the region includes a growing amount of overseas funds and repatriated Middle Eastern wealth pulled out of the U.S. and Europe after the 9/11 attacks.

Though still minuscule by Asian standards, the foreign investment into the region is expected to total $24.5 billion this year, nearly six times as large as the 2000 amount, according to the Milken Institute in Santa Monica.

Previous oil spikes have primarily benefited the region’s rulers and a handful of wealthy families. Governments have been slow to open up their markets to trade and investment. Stagnant growth and high inflation have slowed the regional economy, creating unemployment rates that are double the global average.

Some of the largest economies -- Israel, Iran and Libya -- have been hobbled by political boycotts or sanctions.

But to Sarie-Eldin, chairman of Egypt’s Capital Market Authority, the glass looks half full.

“The real challenge is to make this growth sustainable,” he said, pointing out that his government must double foreign investment every year to create enough jobs for its booming population. Last year, foreigners invested $3.9 billion in Egypt, up from $300 million in 2003.

Some investors apparently shared Sarie-Eldin’s enthusiasm. At the Milken Institute’s ninth annual Global Conference, which attracted 2,500 people, the sessions on investing in the Middle East were standing room only.

David Butter, a Mideast editor for the Economist Intelligence Unit, a London-based research organization, said political risks remained high, given the instability in Iraq, rising Islamic fundamentalism in Egypt and the nuclear showdown in Iran. He said the regulation of the financial markets in the Persian Gulf was patchy, leaving them vulnerable to speculation and price spikes.

And some of the investment has a frothy feel: Donald Trump just announced he was building a $600-million residential tower on the world’s largest man-made island off the coast of Dubai, the oil-rich emirate.

But Glenn Yago, Milken’s director of capital markets, said many governments in the Middle East had concluded that economic reform, however painful, was the most effective way to “insulate their economies against terrorism.”

Terrorism exacts a cost, according to a new study by the Milken Institute. It shows that countries suffering terrorist attacks, particularly those aimed at private property, experience a “negative and significant impact on economic growth” because of such things as lost tourism revenue and forgone investment.

Middle East business leaders attending the Milken conference said they welcomed more investment and trade with the United States but worried that politics would halt the flow of American dollars. In the meantime, they said other countries were stepping into the void.

The European Union is forging trade agreements with the Middle East, making it easier for its energy firms and high-tech companies to set up bases in the region. The rise of China and India has given countries in the Middle East an alternative source of capital and markets. After last week’s U.S. visit, Chinese President Hu Jintao stopped in Saudi Arabia, Morocco and Nigeria, where his country has forged major deals on energy and trade.

“The Russians have money, the Arabs have money,” said Robert Bush Jr., managing director of Istithmar, the investment arm of the Dubai government, who said he had visited China eight times in the last year. “This is not a liquidity problem.”

Istithmar, in partnership with foreign firms, has spent billions acquiring assets all over the world, including banks in Oman and Bahrain, a low-cost airline in India and prime real estate in Manhattan.

Bush said his company’s biggest challenge was hiring “world-class” talent and finding foreign partners that are looking for more than a “place to plant a flag” in the Middle East. He said Dubai’s rulers were leery of foreigners looking for quick money and an exit strategy.

“Don’t send your B-team to Dubai,” he warned.

Aided by U.S. securities officials, the Egyptian Capital Market Authority has strengthened its regulation of the capital markets, which are still small by Western standards. Economic reforms also are making it easier for Egyptian firms to expand into new areas, such as real estate financing.

Neveen El Tahri, managing director for ABN Amro Delta Asset Management in Cairo and owner of a brokerage firm, predicted that Egypt would see a boom in the real estate market because the government recently changed its laws to allow the creation of long-term mortgages. She plans to open a company offering mortgage insurance and other real estate services.

“It’s a good time,” she said. “If you have a good idea and just a little efficiency, you can succeed.”

Even governments such as those of Bahrain and Oman recognize that their prosperity could be short-lived unless they are able to reduce their dependence on oil and promote industries that will provide jobs for their youthful populations.

A recent World Bank study estimates that countries will need to double their current rate of job creation to provide the 100 million jobs that will be needed by 2020.

Sheikha Al Farsi, chief executive of the International Research Foundation, an Omani think tank, said her government, which depends on oil for 84% of its revenue, was offering tax breaks and other incentives to businesses in sectors such as tourism and manufacturing that create low-skilled jobs.

Like other Persian Gulf countries, Oman is under pressure to reduce its import of cheap foreign labor from places such as Pakistan, the Philippines and Bangladesh. Farsi said the government had launched a program to “Omanise” the workforce by requiring companies to hire a certain percentage of local people.

Farsi, a strong proponent of free markets, is working on a project with Canada’s Fraser Institute to help people in the Mideast understand how their lives can be improved if their economies are more open to the outside world. They are producing a television program that will feature entrepreneurs from the region.

Farsi doesn’t agree with the belief often espoused in the West that a lack of economic opportunities is to blame for the attacks of 9/11 or the rise of religious fundamentalism.

“These are extremists trying to express their sentiments in a way that gets people’s attention. These issues are political and nothing else,” she said.