Ongoing economic reforms and incentives in the Middle East and North Africa (MENA) are expected to attract more capital from non-residents to the region, the Institute of International Finance (IIF) said in a recent report.
Capital flows from non-residents to MENA are expected to increase from $165 billion last year to $200 billion in 2019, before thinning to $173 billion in 2020, said the IIF.
“Unlike in other emerging markets where capital flows dynamics have been significantly affected by global monetary easing and trade tensions, the main driving factor behind this year’s foreign capital inflows to MENA has been global benchmark index upgrades in the GCC,” said Garbis Iradian, chief economist for MENA at IIF.
Nearly two-thirds of the additional inflows in 2019 are linked to Saudi Arabia’s upgrade to MSCI’s Emerging Market (EM) Index.
“Most notably, we are projecting inflows to Saudi Arabia to rise to a record $57 billion this year, as investors have increased exposure to Saudi Arabia’s equities as a result of the MSCI EM equity index inclusion,” said Iradian. “Going forward, we expect equity inflows to dissipate somewhat, but remain sizable.”
Meanwhile, equity inflows to the Kingdom are projected to increase to around $23 billion in 2019, and $12 billion in 2020, as a result of Saudi Arabia’s two-phase upgrade to the MSCI EM index in May and August of this year.
Despite the positive outlook for non-capital flows, foreign direct investment (FDI) inflows to MENA remain marginal, as political tensions have heightened and economic fundamentals weakened, the IIF report said.
FDIs are direct investments made by individuals or firms in another country or business.
Reforms in countries such as Saudi Arabia, Bahrain, Jordan, and Kuwait have shown tangible results, the IIF said, but FDI inflows are still subdued and mainly focused on the oil and gas sectors.
For oil exporting countries in MENA, foreign inflows are set to increase, while capital flows to non-GCC oil exporters – namely Algeria, Iraq, and Iran – are expected to remain relatively small at around $12 billion. Half of that amount is set to go to Iraq, in the form of concessional loans to help rebuild the country’s crumbling infrastructure following the war between the government and ISIS militants.
“Against the broad picture of weak flows to emerging markets, we foresee foreign inflows to MENA oil exporters increasing significantly from $115 billion in 2018 to $157 billion this year and tapering off to $133 billion next year,” the IIF added.