Global FDI inflows down 1.6% to $1.75 trln

After increasing post a three-year downturn in 2015, global FDI inflows once again declined in 2016, albeit marginally by 1.6% to reach $1.75 trillion highlighting weak economic growth and significant policy risks. The decline was mainly due to a steep decline of 14.1% in Developing Economies, primarily inflows in Asia which witnessed its first decline in five years of close to 15.5%. This decline was primarily on the back of the biggest year-on-year decline in FDI inflows towards China (including Hong Kong). FDI inflows to Europe also declined by 5.8% in 2016 after more than doubling in 2015.

Investment inflows in Developed economies continued to grow during 2016, although at a much slower pace of 4.9% to reach $1.03 trillion as compared to a growth of 75% in 2015. The growth was led by 9% higher FDI flows to North America (solely on the back of flows to US that increased by 12.3% as compared to a decline of 18.8% in Canada) that more than offset the aforementioned decline in FDI inflows to Europe. Meanwhile, after declining for the past seven consecutive years, FDI inflows to the GCC saw slight improvement in 2016 after seeing an increase of 21% to reach $17.9 bn.

On the other hand, global FDI outflows witnessed a drop of 8.9% in 2016 after increasing by more than a quarter in 2015. The decline was led by drop in outflows from almost all major regions globally, except for Asia and the GCC. The global decline was due to 11% drop in flow emanating from Developed Economies, primarily from European Multi National Enterprises (MNEs) that recorded a drop of 22.7% during 2016. On the other hand, FDI outflows from the Asia Pacific region reached the highest level since 2008. This was primarily on the back of a surge in outflows from China which stood at $183 bn in 2016, making in the second biggest overseas investor after US. Corporate M&As and individual property investments emanating from developing countries has led to this increase. Outflows from the GCC dropped 17.2% during 2016 to reach $26.7 bn.

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The GCC region continues to account for a miniscule portion of total global FDI inflows. The share of GCC in terms of FDI inflows increased slightly to 1.0% in 2016 from a 13-year low level of 0.8% in 2015. This increase reflected the 21% year-onyear increase in FDI inflows to the region reaching $17.9 bn in 2016. This increase comes after seven straight years of decline during which inward FDI reached the lowest level in eleven years, since 2005. Nevertheless, the progress in 2016 is a welcome sign as, all the individual countries in the region recorded positive investment flows during the year. UAE continued to attract the bulk of the FDI, accounting for half of the recorded flows, followed by Saudi Arabia at 41.6%. The rest of the GCC countries accounted for 8.2% of the flows to the region.

Low oil prices continues to be one of the key reasons for the continued low inflow of FDIs into the region. This is particularly true in the case of major oil exporters, including Saudi Arabia, whose FDI flows declined to 12-year low level of $7.5 bn in 2016. On the other hand, diversification efforts in countries like UAE has resulted in elevated level of FDI despite weakness in oil prices and the related slowdown in the economy. In addition, political and geopolitical uncertainty in the overall West Asia region continue to affect the region’s overall attractiveness to foreign capital.

In terms of individual country contribution, UAE was the only country in the GCC that recorded a growth in FDI during 2016 to the tune of $191 mn, while Oman and Bahrain recorded positive FDI’s of $142 mn and $282 mn in 2016, respectively, after divestments by MNEs during 2015 that resulted in negative inflows for the year.

In terms of FDI outflows, the share of GCC dropped from 2.0% in 2015 to 1.8% in 2016. Total FDI outflows during 2016 stood at $26.7 bn, a decline of 17% as compared to $32.3 bn during the previous year. The year-on-year drop was primarily due to divestments by Kuwait that resulted in negative FDI outflows of $6.3 bn. Qatar, on the other hand, contributed the most during the year and recorded an increase of almost $3.9 bn to reach total outflows of $7.9 bn followed by Saudi Arabia, which recorded an increase of $3.0 Bn to reach a new high of $8.4 bn. These increases were primarily related to the diversification efforts by these countries.

In terms of FDI inward stock in the GCC, Saudi Arabia continues to top the chart with a total stock of $231 Bn, an increase of 3.3% as compared to 2015, followed by UAE at $117.9 bn. On the other hand, UAE is the biggest GCC investor abroad with the highest FDI outward stock of $113 bn, an increase of 30% from 2015, followed by Saudi Arabia at $80.4 bn and Qatar at $51.2 bn. UAE tops overseas M&A purchases Total cross-border M&A transactions in the GCC continued to rise in 2016 with net sale transactions pegged at $3.6 bn, almost double of the value in 2015, while value of net cross-border purchase transactions increased by 9% to $18.7 bn in 2016, as compared to $17.1 bn in 2015. Nevertheless, despite the increase, GCC’s share in total global M&A transactions continues to be at one of the lowest historical levels. In terms of GCC as a seller in the transaction, the region’s share in total global value stood at a marginal 0.4%, while as a purchaser, the region’s share stood at 2.2%. Moreover, despite an increase in GCC purchases as mentioned above, the region’s global share was the lowest in five years.

UAE took the crown from Qatar as the top GCC purchaser in 2016 with total M&A purchases worth $11.6 Bn followed by Qatar at $6.6 bn. UAE also witnessed the biggest year-on-year increase in 2016, thereby offsetting a decline recorded by other GCC economies. On the other hand, as a seller, Kuwait topped the chart with annual total sale transactions worth $2.8 bn in 2016, an increase of almost $2 bn during the year that more than offset decline in other regions in the GCC. Saudi tops greenfield FDIs Total value of greenfield FDI projects abroad by GCC countries declined by 21% in 2016 to reach $35.7 bn after almost doubling in the year before. The decline comes as the year-on-year increase in investment by Oman, UAE and Qatar ($2.7 bn, $1.9 bn and $29 mn, respectively) was more than offset by steep decline recorded in the rest of the GCC economies. The biggest decline was recorded in Saudi Arabia at $7.1 bn followed by $4.1 bn in Bahrain, while Oman recorded the biggest jump with an almost five-fold increase in investments in overseas greenfield FDI projects.

On the other hand, external investment in greenfield FDI projects in the GCC increased by more than 50% in 2016 to reach $30.8 bn. The increase was primarily on the back of 90% increase in investment in Saudi Arabia totaling $11.8 bn followed by $2.2 bn in Oman and $1.1 bn in Kuwait. Qatar was the only country in the GCC that recorded a year-on-year decline during 2016. Optimistic outlook for 2017 Global investment is expected to see modest growth in 2017 and is estimated to reach $1.8 trillion followed by $1.85 trillion in 2018. Growth in 2017 is expected to be driven by higher expected economic growth in key global economies further supported by a resumption of growth in trade and a recovery in corporate profits. Investment in developing economies is expected to increase by 10% in 2017, primarily in developing Asia, while developed economies are expected to hold steady.

Investment in the MENA region is forecasted to remain flat as the positive effect of the increase in oil prices is offset by political and geopolitical uncertainty. Nevertheless, KAMCO Research expects positive investment growth in the GCC in the near term as the region makes a dedicated effort to open the economy to foreign investors. We believe that new regulations, well laid out strategic plans as well as an urgent need for diversification makes a positive case for an increase in investment in the region.

Slight improvement in the GCC