Attractiveness of the Mediterranean, Middle East and Gulf

BaroMed 2017
Attractiveness of the
Mediterranean, Middle East
and Gulf region for foreign
investment
Summary
2
Foreword
3
Key facts and figures
5
An EY approach to the region’s
attractiveness for foreign
investment
6
Despite multiple crises, the region
shows resilience in attracting
foreign investment
7
Why FDI remains alive and well
in the region: long–term market
opportunities, sustained cost
competitiveness and the spread of
technology
10
Who continued to invest between
2011 and 2015: FDI’s “new
normal”
12
Investors name six drivers that will
improve the attractiveness of the
region
16
Stories from the region: the
many faces of FDI in a region of
28 countries and vastly different
business conditions
Foreword
Welcome to the second edition of EY’s BaroMed report, a barometer for foreign direct
investment (FDI) across the “Euromed region.” The 28 countries that we include in this
report as part of the Euromed region share a common history and are bound by mutual
flows of trade, investment and migration.
In a world where falling commodity prices and growing instability have eroded options
in more developing zones, the EU–Mediterranean (EU-Med) countries (France, Spain,
Portugal, Italy, Greece, Cyprus and Malta), with a solid institutional environment and
accelerating growth, continue to appeal to investors.
Donato Iacovone
EY Mediterranean Managing
Partner
Among the business leaders we interviewed, 45% think EU–Med attractiveness will
improve over the next three years. For the rest, however, the Euromed has been hit by
severe shockwaves, the strength of which has differed from one country to another, even
if the impact has been palpable everywhere in the region. In many of the 28 countries,
these “shocks” have turned business, political and social models upside down.
The oil economy, which for decades had provided resources and opportunities for
investment in countries across the Gulf subregion, the Middle East and in North
Africa, saw a reverse of fortune. For members of the Gulf Cooperation Council (GCC),
diversification of economic activities and of fiscal revenues has become more vital than
ever.
Marc Lhermitte
Partner, EY Global
Lead — Attractiveness and
Competitiveness
Since the beginning of the armed conflict in Syria, more than 250,000 people have
been killed. Another 11.3 million have been forced to leave their homes, causing
unprecedented migration flows into Europe. Libya is still struggling to find peace
and stability. Turkey, called by UNCTAD (United Nations Conference on Trade and
Development) as one of the world’s 20 most attractive destinations for foreign direct
investment (FDI) between 2016 and 2018, has been shaken by political unrest and
the fallout of the security crisis at its borders and is now on a quest to retain its
macroeconomic balance.
In spite of these factors, FDI still shows a picture of resilience and (relative) confidence.
The way companies invest in the region has changed, with a shifting from greenfield
to M&A. Between 2011 and 2015, the number of decisions to invest in the region has
actually gone up by 0.5%, enough to keep the region’s share in global flows stable.
The Euromed economy and investments in the region continue to be dominated by
EU–Med countries,1 which account for two–thirds of the region’s GDP and 53% of all
volumes invested, a situation that is unlikely to be reversed in the near future. While
investment did, in fact, plummet in the Gulf countries, which for a long time were
considered the next rapid growth zone, the good news is that North Africa drew in
significantly more investment decisions (52%), thanks to large greenfield manufacturing
projects. Five years after the beginning of the political shake–up, most of North Africa
has regained the attention of investors who are keen to make the most out of the
opportunities it has to offer.
Can this cautious optimism continue to transform into reality? One–third of the
international business leaders we interviewed in October 2016 said they had plans to
invest in the region in the next three years. They want to participate in the overhaul of the
infrastructure of the Euromed countries in order to help them to accelerate growth. These
leaders believe in the potential of the region’s inhabitants as both customers and talents,
and cite manufacturing and technology as the top sectors they would like to invest their
money in.
Yet, in order to shift from intention to investment, investors are asking governments to
improve overall political stability and security for goods and persons. Without these, the
promises made may very well be difficult to keep.
1. EU–Med regroups: Portugal, Spain, France, Italy, Greece, Cyprus and Malta.
2
Key facts and figures
A more positive, but still divided picture
•• In 2015, the Euromed was home to 7.7% of the world’s
population, generated 13.7% of its real GDP and drew 14.4% of
global investment flows.
•• Between 2011 and 2015, the total amount of FDI in the 28
countries of the Euromed region was US$771 billion. The
number of investment projects went up by 0.5% in the same
period. However, they were smaller in size, as the volume of
investment per year decreased by 6% between 2011 and 2015.
•• This shows that long–term prospects were a stronger incentive
than immediate opportunities and brought to light very serious
concerns that foreign investors have over the economic, social
and political crisis throughout the region.
•• There was a distinct correlation between the dynamics of both
types of FDI:
M&A has become the dominant source of FDI in the
region
•• The Euromed’s peak in M&As has been facilitated by access to
cheap money as a result of low interest rates and two
sector–specific trends:
•• Ongoing consolidation was the driving force for M&As
in sectors such as consumer products and retail (15% of
M&As), manufacturing (14%) and financial services (8%). In
these businesses, organic growth opportunities worldwide
have become limited, bringing down company values and
making mergers both attractive and necessary options to
maintain both margins and competitiveness.
•• M&A activity among technology companies (14% of M&As)
is fostered by strategies to access new customers and to get
hold of new technologies and applications.
•• The number of M&A deals increased by 27% and was driven,
in particular, by 39 megadeals, each valued at above US$1
billion.
•• Greenfield projects, however, were down by 14% in 2015
compared with 2011 volumes, reflecting wariness of
investors to engage in new ventures in a troubled region.
Euromed 2015 figures
7.7% of the world’s populationand
produces 13.7% of world’s real GDP.
Euromed is home to
27%
increase in
M&A deals
driven by
39 megadeals
US$771 billion
The Euromed region generated and drew
investment flows.
3
14.4% of global
Total amount of FDI in the
Euromed region
Greenfield is driven by industry but one in eight
investments is in tech
Strict conditions for FDI to become a solution to the
region’s return to better conditions
•• Thirty percent of greenfield projects were industrial between
2011 and 2015. Foreign investors continued to look for
competitive nearshoring close to Europe and market
opportunities in North Africa, the Balkans and Turkey. The
same investors were also receptive of the Gulf countries’ efforts
to diversify their economies and create new infrastructure in
order to become less dependent on oil.
•• Despite uncertainties everywhere, 32% of executives
interviewed said they were considering an investment in
the region within the next three years. All the same, 95% of
companies wanting to invest are already present in the region,
indicating that the Euromed continues to struggle to seduce
new investors.
•• One in eight investments can be considered “tech–intensive” in
sectors such as software, hardware and electronics.
•• EU–based companies represented the largest group of investors
(51% of greenfield FDI), while the US represented the single
largest country of origin (13%).
•• Chinese companies have increasingly invested in the four
subregions outside of the EU–Med, where they accounted for
10% of M&A during the 2011–15 period. Another active group
of companies, Gulf–based investors, is particularly present in
North Africa, where they were involved in 24% of M&A deals
over the same period.
•• For the next three years, international business leaders see
the most opportunities for investment in infrastructure (22%),
real estate and hospitality (19%), and manufacturing (18%).
•• However, they also repeatedly mention three areas where
governments have to take action:
1.Political stability in the region
2.Security of people and goods
3.Quality of education
2016 corporate survey
32%
of executives interviewed
said they were considering
an investment in the region
within the next three years.
Infrastructure
22%
1 in 8
investments can
be considered
“tech–intensive.”
International
business leaders
see the most
opportunities for
investment in:
Real estate
and hospitality
18%
19%
Manufacturing
Six drivers that will improve
the attractiveness of the
region:
1.
Stability and security
2.
Developing talent
3.
Going digital
4.
Investing in infrastructure
5.
Becoming energy efficient
6.
Financing growth
4
An EY approach to the region’s
attractiveness for foreign investment
EY has created this unique study to focus on the attractiveness
of the Euromed as a region made up of 28 countries in Europe,
Africa and the Middle East, immediately adjacent or directly
connected to the Mediterranean Basin. This vast area includes
countries with diverse economic and social situations and have
been regrouped under five subregions as shown in the chart
below.
The overarching purpose of this report is to understand the mood
and actions of foreign investors, as well as their needs, questions
and concerns with relation to a very large range of investment
types (greenfield, expansion, equity, mergers), sectors and
activities.
The report is based on a two–fold approach:
1.An analysis of the volumes and dynamics of foreign investment
over a five–year period (in this report, 2011–15). Main
sources are EY’s Global Investment Monitor and the Dealogic
database, plus reports by the World Bank, UNCTAD and Oxford
Economics. Data on sectors, activities and geographic origin of
investment is only available for 2013 and 2015.
2.Interviews with 124 C–suite executives from multinationals
and mid–sized companies in 24 countries and 17 sectors, all
of whom were asked about their views on the current and
future state of the region’s FDI attractiveness. These telephone
interviews were conducted by CSA between 29 September and
12 October 2016.
Overview of the Euromed region and its five subregions
EU–Med
France, Spain, Portugal, Italy, Greece,
Cyprus and Malta
Population: 196.8 million
GDP: US$6,760 billion
FDI: 10,660 projects (2011–15)
Balkans and Turkey
Turkey, Albania, Croatia, Bosnia and
Herzegovina, Montenegro and Slovenia
Population: 92.3 million
GDP: US$1,052 billion
FDI: 1,887 projects (2011–15)
Middle East
Israel, Jordan, Lebanon and Syrian
Arab Republic
Population: 40.3 million
GDP: US$375 billion
FDI: 663 projects (2011–15)
North Africa
Gulf region
Population: 182.9 million
GDP: US$617 billion
FDI: 1,109 projects (2011–15)
Population: 52.6 million
GDP: US$1,439 billion
FDI: 3,824 projects (2011–15)
Algeria, Egypt, Libya, Morocco and
Tunisia
Sources: World Bank, Oxford Economics, UNCTAD (2011–15).
*GDP in constant 2010 US$.
5
Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and the United Arab Emirates
Despite multiple crises, the region shows
resilience in attracting foreign investment
Overall, the number of FDI projects in the Euromed
area remained stable over the 2011–15 period.
At one of the most difficult times in the Euromed’s history,
investor engagement in the region has remained stable. The
overall number of decisions to invest, i.e., either acquire a
company, create a new one or expand an existing facility, grew by
0.5% between 2011 and 2015. This was unexpected considering
the political and economic instability in the region. However, the
overall value of FDI declined by 6%, suggesting that investors are
focused on slightly more modest projects.
Contrasting situations within apparent FDI
stability
Going up
Altogether, EU–Med countries — the most mature markets for
FDI — attracted 59% of total inward FDI into the region and grew by
16% between 2011 and 2015 (US$406 billion invested over the
period). This performance was primarily driven by an increasing
number of large M&A deals between 2011 and 2015.
North Africa is up 52% drawing in a much higher volume of
investments in 2015 than five years earlier, boosted by an
important increase in greenfield investments (83% in 2015 vs.
2011) in large industrial projects, especially within the automotive
sector.
Sliding
Gulf countries, a traditionally attractive destination in the
Euromed (19% of total inward FDI in the Euromed area), suffered
a 35% decline between 2011 and 2015 due to the sharp drop in
oil prices and a subsequent low number of greenfield investment
projects in the oil industry.
The Balkans and Turkey, representing 12% of total FDI in the
region, were down by 43% (US$92 billion invested over the
2011–15 period) due to uncertainty about the region’s stability
and recent political turmoil in Turkey.
The Middle East has been heavily affected by a loss of confidence
due to the war in Syria, with FDI down by 57% and the region now
only accounting for 5% of total FDI in the Euromed area.
Number of FDI projects
Period 2011–15
M&A
deals
EU–Med
Percentage
in region
Difference
2015 vs.
2011
Difference
2015 vs.
2011
Greenfield
projects
Percentage
in region
5,354
48%
8%
10,660
Total
Total
excluding
EU–Med
Percentage
in region
excluding
EU–Med
Percentage
in region
Difference
2015 vs.
2011
Difference
2015 vs.
2011
59%
19%
–
–
–
5,306
77%
29%
North Africa
228
3%
112%
881
8%
–26%
1,109
6%
–8%
1,109
15%
–8%
Balkans and Turkey
622
9%
12%
1,265
11%
–1%
1,887
10%
3%
1,887
25%
3%
Middle East
300
4%
15%
363
3%
–61%
663
4%
–36%
663
9%
–36%
Gulf countries
450
7%
–3%
3,374
30%
–35%
3,824
21%
–31%
3,824
51%
–31%
6,906
100%
27%
11,237
100%
–14%
18,143
100%
0.45%
7,483
100%
–21%
Percentage
in region
Difference
2015 vs.
2011
Total
excluding
EU–Med
Total
Volume (US$ billion)
Period 2011–15
Percentage
in region
M&A
EU–Med
Difference
2015 vs.
2011
Greenfield
Percentage
in region
Difference
2015 vs.
2011
Total
Percentage
in region
excluding
EU–Med
Difference
2015 vs.
2011
259
86%
20%
147
31%
8%
406
53%
16%
–
–
–
1
0%
–334%
83
18%
83%
85
11%
52%
85
23%
52%
Balkans and Turkey
20
7%
–58%
73
16%
–35%
92
12%
–43%
92
25%
–43%
Middle East
14
5%
–15%
26
6%
–85%
40
5%
–57%
40
11%
–57%
9
3%
69%
139
30%
–39%
148
19%
–35%
148
40%
–35%
303
100%
5%
468
100%
–14%
771
100%
–6%
365
100%
–28%
North Africa
Gulf countries
Total
Source: UNCTAD (2016).
6
Why FDI remains alive
and well in the region:
long–term market
opportunities, sustained
cost competitiveness
and the spread of
technology
Market opportunities
In 2015, the region was home to 7.7% of the world’s population,
and 5% excluding the EU–Med countries. Despite the challenging
and complex situation in the non–EU subregions, the population
grew at an average rate of 2% per year between 2011 and 2015.
Therefore, citizens, businesses and governments in the region
have an appetite for the consumption of goods and services
and a need for infrastructure. All of this drives opportunities for
international investors.
•• Foreign companies that establish sales and marketing offices
to increase their footprint are the most common type of
greenfield FDI: 47% of all projects in the Euromed area, 70%
in the Gulf countries and 60% in the Middle East. Business
services companies increased their presence throughout
the entire region (13% of greenfield projects) to be closer to
their corporate clients and assist them in responding to the
challenges they are facing. In addition to outsourcers, these
included major audit and consulting firms, international
providers of legal services and HR companies.
•• Consumer products and retail are the most attractive sector
for M&A (15% of deals in the whole Euromed area), driven by
increasing consolidation. In this sector, companies are seeking
to enlarge their market shares through the acquisition of
brands and assets.
•• Financial services (8%) also grew their presence, especially in
the non–EU part of the region where access to credit remains
an issue for both corporate and private clients.
7
Why FDI remains alive and well in the region
Cost competitiveness drives
industrial investment
Manufacturing has been the second–largest
driver of greenfield FDI in the region over
the past five years (30% of all investment
projects). The region continues to receive
investment because of its cost–competitive
business conditions. For example, the
monthly minimum wage is €225 in
Morocco, €424 in Turkey and €756 in
Spain, all three representing only a fraction
of average wages in Germany (€1,440) or
France (€1,457).2
•• In combination with a young and
available workforce and improving
logistics infrastructure, countries in
North Africa and, the Balkans and
Turkey have become nearshoring
platforms for the European automotive
and machinery industry. Large assembly
units are often followed by operations
of component suppliers. For instance,
the 2012 opening of Renault’s factory
in Tanger triggered the arrival of their
suppliers and subcontractors.
•• A more flexible labor market and
declining unit labor costs have also
driven Nissan, Volkswagen and their
suppliers to expand their presence
in Spain. Fiat, General Motors and
Volkswagen have also grown their
presence in Italy.
•• Moreover, the Gulf countries have
been pursuing a strategy of economic
diversification, seeking among other
things to increase added value to oil
production. As a result, the chemicals
industry has become the region’s
leading source of industrial greenfield
investment (25% of manufacturing
projects) with sector champions such
as Arkema, Solvay and Dow Chemicals
setting up and expanding activities there
over the past three years.
Manufacturing activity per subregion and its sector breakdown
(percentage of greenfield FDI projects 2013–15)
Percentage of
manufacturing
in greenfield FDI
Subregion
Top three sectors in manufacturing FDI
31%
Automotive assembly (12%)
Food (12%)
Chemicals (9%)
48%
Food (15%)
Automotive (14%)
Machinery and equipment (11%)
51%
Automotive assembly (18%)
Food (9%)
Nonmetallic mineral products, other transport
equipment, pharmaceuticals (8%)
Gulf
countries
12%
Chemicals (25%)
Food (15%)
Machinery and equipment, plastic and rubber
(9%)
Euromed
30%
Food (13%)
Automotive assembly (12%)
Chemicals (11%)
EU–Med
Balkans and
Turkey
North Africa
Source: EY Global Investment Monitor (2013–15)
Note: Middle East is not shown because of limited number of manufacturing projects recorded in the EY GIM.
“We live in an era of accelerated innovation,
with new technologies holding tremendous
potential to empower companies and
individuals alike. In the Mediterranean
region, these can be used not only to
generate growth, but also to address
urgent social needs and drive economic
development.”
Carmine Di Sibio
EY Global Managing Partner – Client Service
2. Source: Eurostat (2015).
8
Why FDI remains alive and well in the region
The region becomes more tech–intensive
three countries distinguish themselves in terms of software
development: Israel, France and Spain. In these countries, public
and private financing for R&D, access to venture capital and
the world–class education have forged digital technologies as a
powerful industry.
Technology was the third‑largest sector of the Euromed in
terms of greenfield projects (12%) and second–largest in M&A
(14%). Companies from the US are the most active in the
sector, representing 40% of investments. While investments
remain mainly concentrated in the EU–Med and the Middle East,
Sector breakdown
of greenfield
FDIin
projects
(average
in FDI projects, 2013-2015)
Sector breakdown of greenfield
FDI projects
(average
FDI projects,
2013–15)
Industries
Automotive
and Transport Infrastructure
Life
sciences
Manufacturing
EU–Med
8%
9%
5%
22%
7%
Balkans
and Turkey
11%
7%
5%
31%
North
Africa
19%
6%
9%
21%
7%
3%
Middle
East
Other
Services
Retail and
Mining and Real Estate consumer
metals
and hospitality products Technology
Business
serv ices
Telecom- Financial
munications services
Other
sectors
Total
8%
15%
12%
5%
3%
100%
9%
10%
7%
9%
7%
3%
100%
11%
6%
6%
10%
8%
100%
14%
33%
100%
14%
13%
100%
8%
6%
100%
4%
4%
3%
15%
11%
Gulf
countries
6%
6%
3%
16%
3%
6%
3%
6%
22%
Euromed
8%
8%
5%
21%
6%
4%
7%
12%
13%
Rank within region and subregion:
Largest share
8%
2%
Second–largest
Third–largest
Sources : EY Global Investment Monitor (2013-2015)
Source: EY Global Investment Monitor (2013–15).
Sector breakdown of cross border M&A projects (average in M&A projects, 2013-2015)
Sector breakdown of cross border M&A projects (average in M&A projects, 2013–15)
Manufacturing
Life sciences
Real estate
Retail and
consumer
products
EU–Med
15%
6%
6%
15%
Balkans
and Turkey
20%
5%
4%
15%
7%
3%
17%
North
Africa
5%
Middle
East
6%
Gulf
countries
8%
Total
14%
18%
2%
7%
2%
6%
14%
8%
2%
5%
10%
Technology
15%
Most attractive sector
Source: EY Global Investment
Monitor
(2013–15).
Sources: EY
Deallogic
(2013- - 2015)
9
Financial services
8%
34%
4%
10%
34%
12%
25%
1%
5%
5%
11%
14%
Other
2%
29%
36%
12%
Oil and gas
4%
Second–most attractive
27%
11%
41%
8%
33%
Third–most attractive
Sources : EY Glo
Who continued to invest
between 2011 and 2015:
FDI’s “new normal”
Investors from the US and Western Europe buy into
the region
Companies from the US and the EU (Germany, France and UK) are
the largest sources of cross–border investments in the Euromed.
The strong presence of companies from the US, the world’s largest
source of FDI (23.5% of outbound FDI), and Germany, Europe’s
industrial powerhouse, is a sign that the Euromed continues to
be well positioned on the radars of the world’s leading investors
despite a challenging economic context.
•• Regarding greenfield investments, American companies
have focused mainly on setting up and expanding operations
in software and business services, while German companies
were mostly active in automotive and other manufacturing
operations. UK companies were strong in business services.
France is the largest source of greenfield investment in North
Africa, with a strong company presence in the automotive
manufacturers and consumer products and retail sectors.
•• In M&A transactions, US companies acquired shares mainly in
the manufacturing, financial services and consumer products
and retail sectors. German acquisitions focused mostly on
manufacturing, while British investors on telecommunications.
10
Who continued to invest between 2011 and 2015
Countries of origin of FDI in the Euromed (2013–15)
Greenfield
# Country
1
2
3
4
5
6
7
8
9
10
United States of America
Germany
United Kingdom
France
Japan
Switzerland
Italy
Spain
Netherlands
Belgium
Other
Total
M&A
Percentage
of projects
21.8%
13.0%
9.1%
5.5%
4.7%
4.3%
3.2%
3.1%
2.7%
2.7%
27.5%
100%
# Country
1
2
3
4
5
6
7
8
9
10
United States of America
United Kingdom
Germany
France
Switzerland
Japan
China
Belgium
Netherlands
Italy
Other
Total
Percentage
Percentage
of projects
of value
22.2%
27.6%
10.5%
6.8%
7.9%
4.0%
6.5%
7.0%
4.5%
10.9%
4.3%
2.3%
3.5%
7.1%
3.1%
0.5%
2.7%
1.7%
2.6%
1.6%
32.1%
30.5%
100%
100%
Sources: EY Global Investment Monitor (2016), Dealogic (2016).
Investment going from east to west is still active but
in lower volumes
Chinese investors focus on acquiring equity in local
companies
Intraregional investment is not limited to flows from north to
south. Before 2011, investors from the Euromed’s East mainly
financed infrastructure and real estate projects. Since then, their
presence and strategies in the region have evolved.
Like elsewhere, Chinese activities in the region have mostly
focused on M&As (10% of M&A of the Euromed area, excluding
EU–Med), while job–creating greenfield projects have been limited
(2% of total greenfield FDI in the Euromed). More than a third of
Chinese investment was in the automotive sector, a fifth went into
oil and gas and 10% into real estate.
Between 2013 and 2015, companies from the Gulf countries were
active in M&A deals in telecommunication, financial services, and
consumer products and retail.
Qatari buyers were the largest cross–border M&A investors within
the GCC area, and the third–largest in North Africa and Turkey.
Investors from the United Arab Emirates account for more than
a quarter of M&A flows into North Africa. In addition, investors
from the GCC have also been opening local branches of banks
and factories in North Africa (6% of greenfield FDI in North Africa
originated in the Gulf countries) and the Balkans and Turkey (2%).
However, as falling oil prices have cut the revenues of public and
private investors in the Gulf countries, their capacity for financing
projects abroad has become narrower. After reaching a peak of
US$38.9 billion in 2013, investment flows from the GCC to the
Euromed declined sharply in 2014 before stabilizing in 2015 at
US$25.6 billion.
11
China has also been engaging in the Middle East and North Africa
through its “One Belt, One Road” strategy. For instance, China has
signed several public and private partnership agreements with
the Egyptian Government for the development of transport and
electricity infrastructures.
Yet, with China’s GDP growth slowing and actions being taken to
mitigate the risks of internal recession, the external investment
strategies may shift away from the Euromed region.
Investors name six
drivers that will improve
the attractiveness of the
region
By 2050, high–growth economies in the region will overtake
some mature countries in terms of GDP, growth, innovation and
adoption of disruptive technologies, with billions of people across
the region becoming sophisticated consumers. Countries will
need to develop infrastructure fast enough to match the rapidly
growing needs of industries and their supply chains. Governments
will need to undertake reforms in education, economic policy and
transparency. And they will need to grasp the benefits brought on
by inward investment.
Companies, too, will be facing a more complex reality. When
preparing a business case for investing in the region, decision–
makers must look at the full picture of both evident and less
visible costs and how they are likely to evolve in the future.
Careful attention needs to be paid to currency volatility, inflation,
taxes and indirect costs (turnover, productivity, bottlenecks
in infrastructure, and shortages of skills and resources). Risk
management will be at the heart of every company’s investment
decisions, prompted by the prevailing climate of uncertainty.
In parallel, the race for talent and creativity gets fiercer every day.
Getting the best out of a talent pool will require shifting to more
flexible business operating models, multicultural approaches or
collaborative partnerships. However, the need to imagine new
forms of outsourcing and co–sourcing of production and service
delivery will bring new opportunities.
12
Investors name six drivers that will
improve the attractiveness of the region
Driver 1
Driver 2
Stability and security
Developing talent
Stability of the political, legal and regulatory environment is
a clear deal breaker for international investors: in EY’s 2015
European attractiveness survey, 46% of 808 business leaders
interviewed selected it as the key criteria when selecting a
location.
Population is the Euromed’s major asset. Today, the region
has 565 million inhabitants and grew on average 2% per year
between 2011 and 2015, and by 2040 the overall population is
expected to reach 750 million.
Ongoing armed conflicts in Syria and Libya, political instability
in Turkey and an overall context of uncertainty will continue to
impact both investors confidence in the entire region and their
willingness to invest. Even as these crises are resolved, their
consequences will take years to be absorbed before business
returns to its usual pace and form.
More than 4 out of 10 investors interviewed for
our survey see improving political stability and
safety as the measure with the highest priority
everywhere in the region, although the perceived
need is strongest in the Middle East (60%) and
in North Africa (50%). Making improvements
visible is equally important, because images of
unrest tend to leave lasting marks in people’s
minds. According to EY’s survey, companies
that are not established in the Balkans and
Turkey or the Gulf countries tend to rate their
instability more severely than companies already
established there.
According to the World Bank, between 2000 and 2010 the
Middle East North Africa region experienced a significant rise in
enrolment in both primary education (86% to 94%) and secondary
education (62% to 70%).3
Human capital opens up two major opportunities for investors: a
growing base of consumers and a largely available and
cost–competitive workforce. All the same, the rise in the number
of students has yet to be met with a shift in quality of curricula
and an offer of corresponding jobs.
The business leaders interviewed by EY urge
governments across the region to continue
improving their educational systems (28% in the
Balkans and Turkey and in the Gulf countries,
33% in the Middle East, and 35% in North Africa).
“Despite political uncertainty, FDI in the Mediterranean has
increased since 2008. To take advantage of this trend, we
need to invest in high tech and develop a new Industry 4.0
policy, without missing out on other opportunities, such as
North African growth in terms of attractiveness for hightech startups and the Gulf countries who are seeking new
investments and moving away from oil to focus on real
estate, tourism and food farming.”
Donato Iacovone
EY Mediterranean Managing Partner
3. Arne Hoel, “Brief: Education in the Middle East and North Africa,” World Bank, 27 January 2014, http://www.worldbank.org/en/region/mena/brief/education-in-mena,
accessed 8 December 2016.
13
Investors name six drivers that will
improve the attractiveness of the region
Driver 3
Driver 4
Going digital
Investing in infrastructure
Improving the quality of education and telecom infrastructure
have helped the region to become more attractive for a growing
number of technology companies.
Governments across the region have been rolling out the red
carpet for international investors to take part in the development
of the infrastructure needed to accommodate projected
demographic growth.
Israel has become the region’s main digital hub, with a vibrant
start up scene and a competitive edge in cybersecurity. In the Gulf
countries, cross–border investment in technology is already on a
par with the real estate and hospitality sector (6% of greenfield
projects). Morocco, Tunisia and Egypt In North Africa have for
a long time been the preferred destinations for IT outsourcing.
A growing engineering workforce will provide opportunities for
investors to move up the value chain.
Whether it’s expanding the electricity network, building housing
or logistics facilities in Egypt, subways in Saudi Arabia and Qatar,
or the railway network in Algeria, foreign investors are welcome
to bring both capital and know–how to help make living conditions
and the transport of persons and goods easier. Public and private
funds from the Gulf countries and China have been eyeing
opportunities in North Africa.
In our survey, investors see infrastructure and
transport as the most attractive sectors for
investment in the Balkans and Turkey, North
Africa and the Middle East. The support and
commitment of public authorities, as well
as a stable and open legal environment, are
prerequisites for converting the intentions of
investors into projects.
One–fifth of the business leaders interviewed
consider technology as one of the region’s most
attractive sectors for the future.
by investors as most attractive (3 options per respondent, total >100%)
SectorsSectors
seen seen
by investors
as most attractive (three options per respondent, total more than 100%)
Real estate,
hospitality and
construction
Retail and
consumer
products
Technology
4%
19%
22%
23%
6%
20%
13%
13%
19%
19%
11%
11%
15%
16%
17%
15%
18%
21%
15%
31%
19%
15%
21%
22%
19%
15%
19%
15%
17%
Financial
services
Infrastructure
Manufacturing
EU–Med
24%
14%
19%
Balkans
and Turkey
11%
23%
22%
North
Africa
11%
26%
23%
Middle
East
15%
25%
Gulf
countries
16%
Euromed
average
15%
Rank within subregion:
Oil and gas
Largest share
Second–largest
Third–largest
Source: EY BaroMed Attractiveness Survey (September 2016) - 124 respondents
Source: EY BaroMed attractiveness survey (September 2016) — 124 respondents.
14
Investors name six drivers that will
improve the attractiveness of the region
Driver 5
Driver 6
Becoming energy efficient
Financing growth
Now that the price per barrel of oil around US$50 seems to be
the new normal, countries in the region are looking for ways
to adapt their fiscal, economic and energy supply strategies.
For instance, the Gulf countries have cut down public spending
and are preparing for the introduction of a value–added tax by
2018.
Easier access to financing is a major challenge for businesses
across the region. According to the World Bank’s Enterprise
survey for North Africa and the Middle East, credit is still difficult
and expensive for small and medium–sized business, and large
parts of the population are still without a bank account: 86% in
Egypt, 44% in Turkey and 30% in Saudi Arabia.
The number of M&A deals in the oil and gas sector across the
Euromed region dropped by 45% between 2011 and 2015.
Governments across the whole region have spoken to investors
in adjacent or new sectors to help diversify the economy and
make the business environment more welcoming to foreign
investors, particularly for infrastructure and real estate, even if
technology and manufacturing are gaining ground.
The market potential for banking and finance is strong. Financial
services are the target of more than 10% of M&A deals in the
Balkans and Turkey, North Africa and the Gulf countries. They
also accounted for 14% of greenfield investment in the Gulf
countries and Middle East.
Renewable energy can also provide at least a part of the answer.
Morocco, for example, launched in 2016 the first part of the
world’s largest solar farm in Ouarzazate.
More than 10% of the business leaders
interviewed said that financial services will
continue to be an attractive target for investment
in the region.
Development of renewables is often impeded by
a complex regulatory and market environment.
The latest edition of EY’s Renewable Energy
Attractiveness Index (RECAI) from October 2016
places only France (8th), Morocco (14th), Egypt
(16th), Turkey (19th) in the top 20, while further
down the ranking are Israel (26th), Spain (28th),
Jordan (32th) and Greece (40th).
Which three measures should countries concentrate
on to improve their competitiveness?
Which three measures should countries concentrate on to improve their competitiveness?
Balkans
and Turkey
Ensure political
stability
Improve
education
systems
Improve the
Improve the
Improve
security of goods
country's
telco and logistics
and individuals
image abroad infrastructure
42%
28%
22%
21%
Other
21%
Simplify
administrative
procedures
North
Africa
50%
Middle
East
60%
35%
30%
19%
Other
33%
31%
23%
22%
44%
28%
30%
20%
22%
Simplify
administrative
procedures
Source:
EY BaroMedsurvey
Attractiveness
Survey,
(September
2016) -124 respondents
Source: EY BaroMed
attractiveness
(September
2016)
— 124 respondents.
15
Second–most wanted
Third–most wanted
25%
Improve
quality of life
Gulf
countries
Most wanted reform
Higher value than in
2015 survey
Lower value than in
2015 survey
Stories from the region: the many faces of
FDI in a region of 28 countries and vastly
different business conditions
Opportunities and resistance in EU–Med countries
How do you believe the attractiveness of the following regions will change over the next three years?
EU–Med
Balkans and Turkey
North Africa
Middle East
23%
39%
25%
Gulf countries
14%
39%
39%
11%
14%
44%
31%
7%
12%
36%
45%
36%
48%
8%
13%
10%
6%
100%
Improve
Neither improve nor diminish
Diminish
Can’t say
Source: EY BaroMed attractiveness survey (September 2016) — 124 respondents.
Source: EY EuroMed Attractiveness Survey (Septemb er 2016)- 124 respondents
In 2015, the EU–Med registered its best inflow of FDI since 2008 thanks to strong M&A
activity and 33 megadeals valued each above US$1 billion.
About one–third of these were in consumer products and retail and telecommunications,
two sectors where companies have undergone concentration to remain competitive.
A mix of market opportunities and the restructuring of assets in the manufacturing sector
(21.8% of M&A volume), telecommunications (17.7%) and consumer products and retail
(12.2%) have driven this positive performance.
In addition, the number of greenfield investments grew by a solid 8% between 2011 and
2015. Falling unit labour costs and labour code reforms have encouraged companies
from the automotive industry to expand their footprint in Spain, Italy and Portugal.
Besides, Portugal has attracted new multilingual back office centres. France’s bet on
technological excellence through education and favourable conditions for innovation have
helped to attract 112 R&D labs between 2013 and 2015 (41% of all R&D projects in the
entire Euromed region).
12%
increase in
M&A in 2015
vs. 2011
45%
of business leaders think EU–Med
attractiveness will improve in
the next three years
16
Stories from the region
The Balkans and Turkey: growth value and less uncertainty
Representing 11% of FDI in the Euromed between 2011 and 2015, the share of the
Balkans and Turkey in total investment flows in the Euromed is on a par with its share in
the region’s output (10%).
Turkey is home to the Euromed’s second–largest population (79 million people) and
provides an attractive pool of talent and consumers, both magnets for foreign businesses.
Automotive and machinery producers and their suppliers have been growing their
manufacturing footprint in the country, creating more than 12,000 jobs over the past
five years. Sectors oriented toward domestic consumption are thriving. Consumer goods
and retail, as well as financial services, have drawn large volumes of M&A and greenfield
investment.
Geographic and cultural proximity to several EU markets (Italy, Germany and Austria)
have helped the Balkans establish themselves as a nearshore manufacturing hub (48% of
all greenfield projects), especially for the automotive, machinery and textile industries. In
parallel, the strong development of business services (25% of greenfield FDI) and financial
services (16%) reflects growing convergence with Western European economies.
Yet, the outlook for the the Balkans and Turkey is marked by strong uncertainty. Only 31%
of investors think their attractiveness will improve in the next three years. This “partly
cloudy” forecast is primarily due to the lack of political stability (42%).
Middle East: a world full of contrasts
The Middle East region continues to be marred by violence and instability. Since 2010,
the number of FDI projects has been declining overall, although countries in the region
have been taking diverging paths.
In Jordan and Lebanon, FDI was cut in half between 2013 and 2015. Still, the sizeable
markets of both countries remain attractive for services, sales and marketing operations.
Israel’s performance is more dynamic, thanks to its high–tech focus. Between 2013 and
2015, the country drew seven out every ten new greenfield projects in the Middle East,
and eight out of every ten M&A deals. Its growing technology cluster has been attracting
both greenfield operations and M&A investment: one–fifth of all technology M&A deals in
the Euromed and six megadeals above US$1 billion.
The mixed performance is not likely to change in the near future. Almost a quarter of
business leaders interviewed think the Middle East’s attractiveness will deteriorate in the
next three years. Six investors out of ten indicated that the unsettled security situation is
the most urgent factor to be addressed.
The leading destination for
manufacturing investment (outside
EU–Med countries) in 2015:
244 projects
between 2013 and 2015
12,000
jobs
created in Turkey, thanks to
manufacturing FDI since 2011
FDI cut in half
between 2013
and 2015 in
Jordan and
Lebanon,
affected
by crises in
neighboring
countries
18%
tech investment drawn by
Israel in the whole Euromed area
(mostly software development
projects)
17
Stories from the region
North Africa: recovery under way
Most of North Africa (except Libya) has regained momentum in terms of FDI. Greenfield
investment recorded double–digit growth between 2013 and 2015, while M&A deals
more than doubled between 2011 and 2015. Still, results vary from country to country.
Morocco and Egypt clearly stand out as leading destinations. Both countries are
champions in promoting FDI strategies. Egypt leverages its vast internal market, while
Morocco has succeeded in positioning itself as an entry hub to sub–Saharan Africa.
6%
increase in
greenfield
projects in 2015
Competitive labor costs and close links to the EU have continued to drive manufacturing
investment, mainly for nearshoring, and to serve local market needs. Industrial
investment accounted for a half of greenfield investment, boosted by several
large–scale projects in the automotive and pharma industries.
Investors from the Gulf countries originated one–fifth of M&A deals in the region,
accounting for a more than one–quarter of the value of acquisitions. They focused
on assets in financial services and the consumer products and retail sector, a sign of
confidence in the potential and maturity of local markets.
Business leaders are optimistic about the subregion’s future: 39% of them think the
region’s attractiveness to foreign companies will increase. More than anywhere else
(35%), they ask governments to improve the quality of education.
Gulf countries: high–speed diversification
The Gulf countries have managed to retain their position as the second most attractive
destination for FDI in the Euromed even if their attractiveness has been declining:
US$25 billion invested in 2015, 35% below the volume of FDI in 2011.
The drop in prices per barrel of oil has eroded the attractiveness of the oil and gas
industry and has made the diversification of the economy more urgent than ever. As
extraction and export of crude oil become less profitable, Gulf countries, especially
Saudi Arabia, have increased their efforts to build up a chemicals transformation
industry to increase the value added. This has also given an impulse to the
manufacturing industry, now the second–largest sector of greenfield investment (12%).
Still, investors were more attracted by the growing appetite of the subregion’s
consumers. Food production has become the second–largest sector of industrial FDI.
Consumer products and retail attract more M&A deals (12%) than any other sector.
Client serving representative offices account for 70% of all greenfield investment in the
Gulf area, with a strong presence of business services and financial intermediation.
The region’s combination of stability and market opportunities inspires confidence.
Close to a half of the business leaders interviewed (48%) think the region’s
attractiveness will continue to improve over the next three years.
39%
foreign investors who believe
that the attractiveness of North
Africa will improve in the next
three years
Second-most
attractive region
within Euromed with
investments totaling US$25
billion in 2015,
driven by ample market
opportunities in the services
sector and economic
diversification strategies, but in
sharp decline when compared
with 2011
Highest confidence rate of the
Euromed area:
48%
foreign investors who believe
that the attractiveness of Gulf
countries will improve over the
next three years
18
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