DUBAI, United Arab Emirates – Despite improvements in regulations and moves to diversify Arab economies away from natural resources, global investors remain wary of doing business in Gulf countries because of regional upheaval and other potentially destabilizing factors, according to a report by The Economist Intelligence Unit released Monday.
The report found that investors are also "moving cautiously" in the region because of concerns over government transparency, foreign ownership restrictions and difficulties in enforcing commercial laws.
However, successful bids by Dubai to host the World Expo in 2020 and by Qatar to host the FIFA World Cup in 2022 have helped put a spotlight on investment opportunities in the Gulf, said the report, which was sponsored by Merck Serono, the biopharmaceutical division of Merck.
Experts quoted in the report said that Arab Spring protests have scared investors, even though the Gulf region did not experience the kind of upheavals seen in Yemen, Egypt, Syria and Libya. Protests by Shiites in the tiny island-nation of Bahrain threatened to spill over into Saudi Arabia's eastern region, where the kingdom's minority Shiites mostly reside.
"The Arab Spring has had a negative impact on perceived stability. Even where you haven't had a major event, political risk is more on investors' minds than before," chief economist for the Middle East at Citi Group, Farouk Soussa, said.
He said in some cases capital has flocked from the wider Middle East to Gulf countries seen as stable, like the United Arab Emirates. The Arab Spring has also opened opportunities for wealthy Gulf governments to reinforce ties and influence with countries like Egypt, where billions of dollars have been invested and given in aid.
With rising unemployment and a population of which nearly half is under the age of 25, Saudi officials have promised more than $100 billion in state jobs and other handouts. The kingdom's Gulf neighbors have also opened their treasuries to literally buy time and avoid protest demands for wider reform.
The Economist Intelligence Unit says this kind of economic model "tends to crowd out entrepreneurship" by keeping the focus on oil extraction, which is the main source of revenue.
The report says that foreign investment is still less than before the 2008 financial crisis across most of the six-nation Gulf Cooperation Council, comprised of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE. The exception is Kuwait, where as in Bahrain, the majority of foreign investments have come from other GCC countries, according to the latest data provided in the report.