Gulf Countries Race for Foreign Capital

To prepare the initial public offering of the Dubai Electricity and Water Authority (DEWA), the ruler of the economic capital of the United Arab Emirates introduced the “road show” in person: “To invest in the DEWA is to invest in the future of Dubai”, Sheikh Mohammed bin Rashid al-Maktoum declared. That display of interest in the stock-market listing of the state-owned company which supplies the 3.4 million inhabitants of the Emirate their water and electricity is the latest indication of an official determination to reinvigorate the Dubai Financial Market (DFM). In the wake of Abu Dhabi and Riyadh, where initial public offerings abound, Dubai is vaunting its stock market as a premier vehicle for attracting foreign capital. The October 2021 IPO of the Saudi energy company ACWA Power illustrates the link, at times somewhat abstract, between the Gulf stock markets and the funding of local enterprises. At the time of that operation, the company raised 1.2 billion dollars by selling a portion of its shares and its main shareholder, the Saudi Public Investment Fund (PIF) took advantage of the opportunity to reduce its participation and to redirect capital towards other projects. The listing of more and more companies on the Gulf stock-markets offers a clear exit strategy for early investors whose presence is of key importance when launching a business venture. This is an opportunity for financiers to invest with a high degree of granularity in the regional economy.

Until now, however, the Gulf stock markets have been operating in a closed circuit, having failed to attract foreign buyers. More than half of the companies listed on the Tadawul, the Abu Dhabi Stock Market and the Dubai Financial Market reported less than 5% foreign participation at the end of 2021. The majority of their shares are held by governmental entities, investors and citizens of the six countries of the Gulf Cooperation Council.

This lack of interest on the part of international investors can be explained partly by the low capacity for innovation and international expansion displayed by most Gulf companies, but also by undiversified stock-market listings which are scarcely representative of the non-hydrocarbon sector of these economies, plus the fact that many of the large family-owned conglomerates dominating the region’s non-hydrocarbon sectors are not listed at all, no more than are the small and medium-sized businesses. “The big names of the petrochemical industry and the banking business account for 60% of the Tadawal stock index” is the analysis offered by Mazen al-Sudairi, head of research for Al Rajhi Capital in Riyadh. The largest state-owned companies, which also constitute the backbone of the Gulf countries’ stock markets, “might be of interest” to passive foreign funds, “but tend not to attract active managers for fear that the interests of the State might often take precedence over those of minority share-holders such as themselves," says Hasnain Malik, who is in charge of strategy regarding “emerging markets and borders” with Tellimer, an agency providing data on emerging markets.

Offering investors an attractive environment

Until such time as managers of international investment funds are prepared to add to their equity portfolios securities listed on Gulf stock exchanges, the countries of the region are doubling down in order to make their economies more attractive to foreign businesses, which are mostly drawn by the prospect of in-kind investments: for example, opening a joint venture or a factory, launching a new product or setting up regional headquarters halfway between their African and Asian markets. In order to improve their image abroad, already regarded as “liberal” by regional standards, and to persuade companies as well as wealthy individuals to take up residence on the shores of the Persian Gulf, the United Arab Emirates undertook a series of social reforms during the Covid 19 crisis. These included the democratisation of long-term residence visas, the decriminalisation of extramarital consensual sex and the establishment of a court to deal with non-Muslim family conflicts.

In neighbouring Saudi Arabia, Crown Prince Mohammed bin Salman is engaged in a contest with the UAE and especially Dubai to see who will be the more attractive to foreigners, trying to make the world forget the ultra-rigid version of Islam promoted by the Kingdom for many decades across the planet, and presenting the world and foreign investors with a new Arabia. The social changes symbolised by giving women the right to drive and by a whole new range of leisure activities decked with the sequins of globalisation mark the beginning of a new era in which the consumer potential of Saudi youth comes first. The Kingdom is also updating its once inflexible business culture. According to the Minister of Investment, Khalid al-Falih, more than half of the 400 rules concerning direct foreign investments have been revised, resulting in a greatly increased interest among foreign investors in the Arab world’s number one economy. For the coming decade, Khalid al-Falih predicts a total of addressable investments amounting to “over 3,000 billion dollars”. An ambitious objective indeed. In Bloomberg’s analysis, however, since the National Transformation Program was launched in 2006, the country “has not only failed to achieve its objectives but has lost ground with respect to its starting point” in terms of foreign investments.

The current flow of foreign capital remains partly constrained by the need for increased efforts to protect intellectual property rights, resolve existing violations and guarantee investors’ access to a judicial system which is both transparent and independent of the powers that be. “Digital transformation, the pursuance of a trading policy focused on exports to improve access to the major markets and the guarantee of a consultative process for regulation reform and rule-making are all necessary steps to boost investment,” says Steve Lutes, vice-president in charge of Middle East business with the US Chamber of Commerce. The fact that foreigners are not allowed to hold 100% of the shares of a business registered in the Gulf countries—with the exception of the UAE which now allows full ownership in many sectors of activity—constitutes another obstacle. “I invested a lot of money, but under the rules of the kafala¹, I am no more than an employee under the mentorship of a Qatari who is the majority stockholder. […] Many entrepreneurs want to invest in the Gulf, but lots of them don’t follow up, they want to do business without being under the authority of a sponsor,” was the comment posted in January 2021 by Sayed Ali Zakir Naqvi, a Pakistani businessman who runs a fleet of taxis in Qatar. Moreover, the countries of the Gulf Cooperation Council refuse to harmonise their commercial practices, thus depriving foreign investors of the economies of scale potentially generated by dealing with the region as a single market of 60 million consumers.

A futuristic city of doubtful profitability

Besides the efforts undertaken on a national scale to create suitable conditions for the development of a social and economic environment likely to attract foreign investors, several countries in the region—and especially Saudi Arabia—are relying on an array of state-financed turn-key megaprojects. NEOM, a futuristic city which for the moment exists only in Power Point, is presented as a place where 500 billion dollars could be invested. However, critics have doubts about the profitability of the project and describe it as megalomanic, with reference to the failed experiment of King Abdullah Economic City, an example of a state-financed megaproject which sank without a trace before even getting under way. In order to interest prospective investors in such megaprojects, Riyadh makes a point of greening them in hopes of attracting the flow of capital allotted to projects in line with environmental, social and corporate governance concerns (ESG).

However, because investors are still dragging their heels, the Kingdom has had to accept the evidence: the diversification of the local economy will involve, first of all, the deployment of Saudi capital. Thus Crown Prince Mohammed bin Salman declares that the programme called Sarek (Partner) has brought together twenty-four private sector companies, including the petroleum giant Saudi Aramco and the petrochemical firm SABIC. The idea is to take a share of the dividends paid to stockholders and use it to inject into the Saudi economy 1,300 billion dollars during the next decade. According to Scott Livermore, chief economist at Oxford Economics Middle East, this turn to the domestic economy could also “lessen the risk involved in the implementation of certain Vision 2030 objectives which will no longer depend on direct foreign investments.” This participation is claimed to be voluntary, but in view of past experience, it is suspected that these companies will be forced to invest in megaprojects having no direct connection with their core activity. The initiative is part of a vast investment plan of 3,200 billion dollars involving the Public Investment Fund. This sovereign fund is pledged to inject 40 billion dollars into the Saudi economy every year until 2025. This in spite of the fact that the rate of return on locally deployed capital has until now been lower than the rates available for international stock—market or real estate investments. A paradox which is not lost on foreign investors who have doubts about the real profitability of the projects launched by the Saudi Crown Prince.

At the same time as they resign themselves to staking their own capital, the Gulf countries agree to gamble on their trump card, their oil companies, to convince foreign investors. These companies, and especially Saudi Aramco and the UAE national oil company in Abu Dhabi, are in a position to produce the last drops of petroleum that will be consumed across the world, and are thus well suited to attract foreign investors. In 2021, the energy companies around the Gulf borrowed 30.5 billion dollars, the highest figure in at least 25 years, a figure which constitutes a violent reminder that the Arab economies of the Gulf continue to be associated in the eyes of foreign investors with the long-term potential offered by their energy sectors and the high profitability of capital invested in their national oil companies.