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GCC is emerging as an attractive investment destination, says Alpen Capital’s latest industry report

All GCC Locations, 5th November, 2013

Alpen Capital today announced the publication of its research paper titled "GCC as an investment destination - Opportunities for Indian companies" exploring the favourable characteristics of the GCC and the opportunities it presents to Indian investors.

India has always had a special significance for GCC, as the economic relations between the two regions dates back to several centuries. The relation between GCC and India has further strengthened over the last decade, with the increasing import of oil and gas, growing trade, investment opportunities and presence of a large Indian diaspora. Also the global economic slowdown and its impact on the developed economies have prompted a ‘Look East’ policy from the GCC nations, which has enhanced the significance of India as a potential investor. Though there has been significant growth in bilateral trade between the two regions, the growth in investment flows has been limited so far. However, India’s growing significance as one of the fastest growing global economic powerhouses, and as a part of their growth initiatives, Indian corporates scout for attractive overseas investment opportunities. GCC’s investor friendly economic environment, geographical proximity and inherent advantages in energy-intensive manufacturing hold tremendous potential for attracting further investments from Indian industries.

"GCC offers strategic advantages, such as availability of cheap energy and feedstock supply, low tax environment, well-developed infrastructure, growing population and increasing income levels, conducive for the development of various industries in the region. All these advantages if properly showcased could attract substantial investment flows from Indian corporates, who are looking to expand their global footprints and scouting for distinctive cost advantages to remain globally competitive.", says Sameena Ahmad, Managing Director, Alpen Capital.

"The GCC is emerging as an attractive investment destination for Indian companies. We as Alpen Capital specialize in the GCC-India corridor and have concluded several transactions in this sphere. There are several opportunities that exist in the GCC for Indian companies and we see a lot of interest from Indian corporates to establish a presence in the GCC. This trend is on the rise and we will continue to work closely with our clients and the respective governments to facilitate these transactions," says Sanjay Vig, Managing Director, Alpen Capital.

Investment prospects in GCC

A variety of catalysts for investment growth exist in GCC. While the oil industry is undeniably a pillar for the GCC economies, the region’s priority is to achieve sustained economic growth through development of non-oil sectors. This can be achieved by increasing private sector participation, strengthening local technological capabilities, developing a skilled workforce, improving the competitiveness of exports in global markets and by attracting substantial overseas investments.

Continued government spending to boost competitiveness, self-reliance and developing local skilled work force would offer potential investment opportunities in sectors such as Petrochemicals, fertilizers, plastics, pharmaceutical, sugar refining, Aluminium & Steel. In addition government support and infrastructure is expected to grow in sectors such as Information & Communication technology (ICT) and Agriculture, Food processing, Education, Financial Services and EPC.

GCC offers distinctive advantages for overseas investors

Advantage of low-cost energy resources: GCC offers substantial cost advantage for industries like petrochemicals, fertilizers, pharmaceuticals and metallurgy among others, as the region boasts of one of the lowest energy costs globally due to abundant availability of resources. Natural gas prices in GCC range between US$ 0.8–1.5 per million British thermal units (mmbtu) compared with the global average of US$ 4.0–6.0 per mmbtu. The availability of low-cost feedstock provides the region with distinctive competitive advantage. Average electricity prices for end users in GCC states are much lower at ~ US$ 3.7cents/kWh compared to countries that enjoys the reputation of being generation powerhouses (US$ 10.5cents/kWh in USA and US$ 9.4cents/kWh in China).

GCC’s twin surplus condition leads to economic stability: GCC’s large fiscal surplus (averaging ~9.2% of GDP over 2007–11) and trade surplus (averaging ~ 16.9% of GDP over 2007–11), low levels of public debt (averaging ~4.5% of GDP over 2007–11), and low external debt translate into a better rating, in terms of macro-economic health, than developed counterparts. On the other hand, economic diversification initiatives, growth in non-hydrocarbon sectors, pegged currencies, large forex reserves, well-developed infrastructure, and a moderate inflation environment provide an overall attractive business environment vis-à-vis emerging economies.

GCC ranks higher than many developed nations in competiveness indicators: Aided by the initiatives undertaken by the GCC governments towards infrastructure development, economic diversification, regulatory reforms and other specific initiatives directed towards attracting foreign investments, the GCC nations have made significant advances in Global Competitiveness and Doing Business indicators. In fact, most GCC nations today have raced ahead of the Eurozone, MENA and emerging Asian economies, emerging as one of the most competitive regions globally. GCC countries have one of the simplest compliance norms and lowest tax rates, which offer lucrative opportunities to establish operations here. Furthermore, growth in Free Trade Zones (FTZs) that provide additional tax benefits makes investment prospects even more attractive. Barring ‘Market Size’, GCC countries surpass their emerging market and OECD counterparts in most parameters for Global Competitiveness.

GCC’s growth as a manufacturing and re-export hub: Driven by these advantages GCC has emerged as a preferred destination to become a manufacturing and re-export hub. This is reflected in the rapid capacity additions in energy-intensive sectors in the region over the past decade (and several other projects in pipeline), which significantly exceed emerging market comparables. The GCC petrochemical sector has registered a CAGR of 26.0% over the period 2006–12 and is expected to continue such robust growth which would increase its share in the global petrochemical sector to about 17.0% in 2018 from 11.0% in 2012. Mirroring this growth, the GCC fertilizer industry expanded at a CAGR of 11.7% to 31.4 million tons during 2007–12, and is expected to reach 50.4 million tons by 2016. On the other hand, GCC region’s share in the global aluminum capacity increased to 9.0% in 2012 from 6.9% in 2006, and is expected to reach nearly 15.0% by the end of 2020. By positioning themselves in the energy-intensive segment of the manufacturing value chains, the GCC economies have created their niche and have been able to benefit meaningfully from the same.

Initiatives taken by GCC states for attracting investments: In order to attract overseas investments the GCC nations have undertaken specific initiatives like formation of trade chambers or institutions for promoting commerce and investments. The likes of which include Dubai FDI , Dubai Chamber of Commerce and Industry, Abu Dhabi Chamber of Commerce & Industry, Saudi Arabian General Investment Authority and the Public Authority for Investment Promotion & Export Development among others. NASDAQ Dubai, a stock exchange inaugurated in 2005, provides several benefits to companies’ listed with it.

Key challenges and barriers to investments

One of the key challenges that the overseas investors may face in setting up businesses in the GCC region is the shortage of skilled local workforce. Also protectionist measures adopted by high-cost European or Asian producers against low-cost GCC based output in certain sectors can discourage foreign investors from setting up manufacturing facilities in GCC. Other investment barriers can be GCC’s adoption of stricter expatriate policies, inadequate disclosures on investment regulations and economic policies, procedural hurdles and economic vulnerabilities due to over reliance on the oil & gas sector.

Recommendations

There are several factors that could help increase the investment opportunities to GCC. Close proximity and regulatory advantage could see the GCC region emerging as the preferred destination for the re-export industries.

GCC governments should actively promote GCC as an attractive investment destination by proactively identifying sectors of growth and invite Indian companies with strong skills and expertise in these sectors to set up in the GCC. Increased delegation visits could encourage bilateral investments and increase economic cooperation. The GCC governments could also take steps to include Indian multinationals in the Public Private Partnerships (PPPs).

Indian downstream players could be encouraged to establish businesses in the GCC region (which has abundant hydrocarbon supply) to develop value-added products that can be re-exported to the Indian market, while the GCC nations could invest in the Indian agriculture and food sectors, which will help them attain food security.

While ensuring political stability and minimization of bureaucratic bottlenecks are essential for attracting investments, the GCC region should also establish competent investment authorities in each country, which can impart transparency and guide investors toward potential investment avenues across the region.

The GCC countries should consider long-term visa schemes for corporates and other investors to promote investments. The GCC nations should also expedite the unified GCC visa implementation and undertake labor reforms to maintain access to qualified workforce. Similarly ownership guidelines could be relaxed for specific projects critical to expansion of GCC’s non-oil sectors.

India has established its presence in the SME business model globally; however, its proficiency still remains underutilized in the GCC as majority of investments have been made by Indian business houses in areas that already have a footprint in the region. Efforts should be made to encourage SME investments on both sides in new areas to leverage on the burgeoning trade.

Please click here to access the research paper online.