Sitting at the intersection of the world’s major trade routes, the Middle East and North Africa (MENA) region offers a range of possibilities to investors and businesses. Aside from their prime geographic placement, the MENA nations boast a youthful work force,1 an emerging middle class of consumers, vast stretches of coastline, almost two-thirds of the world’s oil2 and nearly half of its gas reserves.3
The region isn’t without its challenges, however, and factors such as developing infrastructure, political and social volatility and low rates of competitiveness weigh it down. Taking this into account, where can corporate players find growth opportunities?
“The outlook for US-MENA trade is quite promising, particularly for U.S. exports into the region,” says Sonam Kapadia, J.P. Morgan’s Head of Trade Finance for MENA. “Public sector spending is booming with a focus on infrastructure and development. This could open up significant opportunities for U.S. exporters.”
MENA — for the purposes of this article comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Jordan, Israel, Lebanon, Morocco, Egypt, Algeria, Tunisia and Iraq — has a large population of around 400 million people, but once petroleum exports are taken out of the equation, the region exports about as much as Switzerland.4
The United States’ trade and investment relations with the MENA countries are important from both a commercial and a foreign policy point of view. Today the MENA region accounts for less than 5% of U.S. total trade and 1% of U.S. foreign direct investment (FDI) outflows,5 remaining some distance away from its apparent potential. More than $180 billion in goods traded between the U.S. and MENA in 2012, with U.S. exports making up just over a third of that figure at $65 billion. The top export commodities were machinery ($12.3 billion), vehicles ($10.4 billion) and aircraft ($8.4 billion). Perhaps unsurprisingly, the vast majority of U.S. imports from MENA came from the mineral fuel and oil the region has in abundance ($108.7 billion), trailed by precious stones ($10.3 billion).6
“As a whole, the MENA region lags behind other regions in many economic aspects,” explains Amr El Haddad, J.P. Morgan’s Head of Trade Products for MENA. “In 2011 for example, the MENA region accounted for 5.5% of the world’s population, but disproportionately only 4.4% of the world’s GDP. Moreover, although Qatar enjoys one of the highest per-capita GDPs in the world, and countries like Saudi Arabia have a rich economy and relatively low population, the region’s average per-capita GDP in 2011 was only $7.8K, lower than the $9.7k average in Latin America and $8.4k in East Asia and the Pacific.”
However, ongoing initiatives by the region’s governments to diversify from hydrocarbons are building the foundations for considerable growth — providing opportunities to U.S. exporters and businesses looking to build their businesses.
El Haddad points out that the United States has a variety of free trade agreements with MENA countries, such as with Egypt (signed January 2012), Morocco (signed December 2012) and Jordan (signed January 2013). “However, any expansion of trade between MENA and the United States will be subject to a combination of political, economic, and commercial factors. Egypt is a good example: there used to be good ties with the U.S., but recent developments there resulted in the U.S. reviewing all commercial and military agreements,” he explains. “Now Egypt or any other country in the same situation will need to take two steps instead of one to strengthen their trade ties with the U.S.: the first to improve the political relationship, and the second to find that competitive edge and a product for which there is demand.”
“Today, the entire region has a huge potential to increase and improve its trade integration but it is still trading below potential,” says Brahim Razgallah, J.P. Morgan’s Chief Economist for the region.
Barriers to trade
El Haddad adds that the region’s poorly developed infrastructure lets it down, as does its manufacturing base: the value-added of manufacturing and services relative to GDP in MENA in 2010 was the smallest in the world. He points out that the region depends on exporting raw material, rather than manufactured goods. “The reverse of this coin is that the region, especially the Gulf Cooperation Council (GCC) area, is the most promising in terms of investment opportunities. Countries like the UAE are progressing extensively and have ambitious plans to grow and compete against larger countries, and Saudi Arabia has a fairly large infrastructure development budget and the sort of economic and political stability that attracts investment.”
Most of the MENA countries languish in the bottom half of the World Bank’s “Ease of Doing Business Report”,7 and analysts peg the cost of trade logistics at 10% of the total value of all goods shipped in the region,8 higher than the 8%9 OECD country average. In addition, the Arab Spring, hot on the heels of the global financial crisis, had an unfavorable impact on foreign investment in the region.
“Historically when things are unsettled in MENA, the global community is reluctant to direct significant investment into the region,” says Geoff Brady, Head of Trade Sales for North America. “I think, unfortunately, the deepening of U.S. economic ties will be hindered until there is somewhat more stability.”
More than two years after the beginning of the regional turmoil, it is evident that countries have been affected in different ways. “Some are experiencing a political transition and others remain stable,” says Razgallah. “There is also the difference between oil exporters and oil importers. One of the consequences of the regional turmoil over the last two years or so has been that most countries posted below potential growth, especially Egypt and Tunisia. From here, many countries are still experiencing this difficult and challenging transition and therefore growth will remain below potential for years to come.”
“Egypt and Iraq are the most political right now, and Lebanon continues to have the overhang of the Syria situation,” adds Kapadia. “Understanding and constantly being on top of the market is key. You have to manage the risk properly and work with counterparties to build resilient, long-standing relationships.”
Kapadia adds that compared to the preceding year, political risk has diminished in parts of the region such as Morocco, Oman, Jordan, Algeria, so investments may start there. “Excluding Bahrain, the GCC is stable,” he adds, highlighting Saudi Arabia, which accounts for 55% of the region’s GDP; Qatar, which offers opportunities tied in with government spending and confidence due to the now-clear political succession path; and the UAE, which is led by Dubai’s turnaround.
The U.S. government aims to create closer ties as well. In May 2011, U.S. President Obama announced the MENA “Trade and Investment Partnership Initiative” (MENA-TIP). Its objective is to facilitate trade within the region, promote greater trade and investment with the United States and with other global markets, and “open the door to willing and able MENA partners—particularly those adopting high standards of reform and trade liberalization—to construct a regional trade arrangement.”10 Under this initiative, the United States has engaged primarily with Egypt, Jordan, Morocco, and Tunisia, focusing cooperation initially on investment, trade facilitation, support for small and medium-sized enterprises (SMEs), and regulatory practices and transparency.
From the corporate perspective, improved ties may bring opportunity. “U.S.-MENA trade consists mainly of exchanging a wide variety of U.S. goods for crude oil,” says El Haddad. “The U.S. refineries then re-export the oil in the form of processed and refined products. However, exports from the U.S. to MENA are more diversified and cover a wide spectrum of products, from vehicles, machinery and aircraft which make up around 30% of the total exports, to medical instruments, mineral fuel and plastic which accounts for less than 8%.”
“We see opportunities on the export side for U.S. companies,” says Brady, “particularly as the MENA economies grow their infrastructure.”
Sectors of growth across the region
Public sector spending is booming as governments in the region start to concentrate their resources on infrastructure and development, rapidly aiding job creation, economic and industrial diversification.
There are significant development opportunities for services, especially tourism, which is an important source of employment and revenues, particularly for countries like Lebanon, Jordan, Morocco, Egypt and Bahrain.
With a third of its electricity slated to be generated from renewable sources by 2035, the MENA region is forecast to reach $400 billion in spending in the energy sector, based on policy implementation.11 There is also a growing demand for commodities like iron ore, lead, rice and wheat, for which the region is increasingly being used as a trade route; infrastructure — particularly products used in construction; fertilizers; and electronic products.
Working in a fast-changing environment
Given how fast the economic and political situation can change in the region, those who are attracted to MENA’s massive opportunities need to manage and protect themselves against the risks of doing business there.
“The biggest things that U.S. suppliers need to think through are risk management and financing,” says Kapadia. “In terms of structures, you have the shorter tenor risk mitigation structures such as letters of credit, standby LCs and guarantees. We do see open account trade increasing, although it’s typically covered by a standby letter of credit. There is also a lot of excitement in the region about the Bank Payment Obligation.”
Another important means of mitigating the risks and financing trade flows comes from Export Credit Agencies (ECAs). “When global ECAs backstop banks, and in some cases, fund directly those projects in the region that will create growth, they provide risk mitigation crucial to the flow of trade finance capital,” points out Brady, who adds that “there has been a fair amount of ECA activity of late, particularly around commercial aircraft and commodities into some of the riskier parts of the region.
Authorizations for financing in the region by the U.S. Ex-Im Bank increased from just half a billion dollars in 2011 to $9 billion in 2012. The share of U.S. Ex-Im Bank in the market also grew from around 1% in FY2011 to about 25% in FY2012.12 “The increase in financing for the region was driven in part by large deals in Saudi Arabia, including U.S. exports for power and petrochemical projects which exceeded $5 billion in 2012, and in the UAE, including U.S. exports of commercial aircraft and nuclear power plant components and services which exceeded $3 billion in 2012,” says El Haddad.
Brady adds, “We haven’t seen a large amount of supply chain financing done directly in MENA thus far, but the banks in MENA are active buyers of supply chain paper in the bank market,” suggesting that the local potential for this tool remains untapped.
Positive eye to the future
With all the financing options that are available, the opportunities in the MENA region are not just for U.S.’s multinational, name brand behemoths. In fact, as investment in the region starts to provide new engines of growth and dynamism, opportunities abound for mid-market and SME organizations to take advantage of MENA’s development.
For highlights on the individual countries in the region, click here to continue reading.
1The median age is 25. http://www.oecd.org/mena/49036903.pdf
2http://www.opec.org/opec_web/en/data_graphs/330.htm - “...more than 81% of the world's proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 66% of the OPEC total.” — Figures also taken directly for both oil and gas from Sonam’s presentation for the Exporta conference in June 2013.
6 Office of the United States Trade Representative; UN Comtrade Statistics Database, HS as reported, 2008-2012
7http://www.doingbusiness.org/~/media/GIAWB/Doing Business/Documents/Annual-Reports/English/DB13-full-report.pdf - over half the MENA countries rank below 92nd place