The current dispute between Qatar and its GCC neighbors and Egypt has created unintended consequences for all parties concerned, irrespective on which side of the dispute they sit. This relates to international perception of political and economic country risk and to hoped for inward Foreign Direct Investment (FDI).
Foreign investment lays at the heart of some of the more ambitious economic transformation, visions and plans that many of the GCC countries in the dispute, as well as Egypt, are hoping to attract to launch these programs.
The motives may be different, with some trying to attract foreign FDI partners capital to supplement local hard currency reserves, while others see FDI as a tool to attract international technology and management partners.
This is meant to help in the establishment of local joint ventures or wholly owned foreign operations that will add high-level skilled manpower and establish modern industrial and service hubs in the country.
The longer the current Qatar dispute goes on the more hesitant will foreign investors become as uncertainty, rather certainty in long tern planning and free flow of goods and services in the region no longer becomes the norm but the exception.
What the current Qatar dispute has created is a situation where a large element of uncertainty has crept inDr. Mohamed Ramady
The CDS swaps
One indication of market uncertainty is the price assigned to so called Credit Default Swaps (CDS), which the markets price to sovereign borrowing and existing bonds to reflect the likelihood of default and is basically a risk premium over international borrowing benchmarks such as the LIBOR or London Interbank Offered Rate.
The higher the risk premium, the wider the CDS spread. Today, all GCC countries without exception have seen their CDS spreads widen, including that of Egypt, albeit with varying degrees. Saudi Arabian and UAE CDS spreads are still lower than those of Qatar.
The important point is that they are wider today compared to two months ago as a consequence of the Qatar dispute standoff and seeming impasse, although there are some indications that a window of compromise is possible following the reduced number of demands from 13 to 6 by the sanctioning countries.
While CDS swaps might narrow again based on some glimmer of positive news and the mediation of parties wishing to see an amicable and honorable end to the dispute – without it becoming a zero sum game situation of total winners or total losers – the issue of investor perceptions and FDI flows will be more problematic. This is because investors have to answer to their boards and lenders who will want more detailed information and assurances that such investments will not go sour based on future political disputes.
The fact that previous agreements made in 2014 were not ostensibly honored indicates that unless the issues are totally and fully resolved, the same problems could rise again in the future. This will hold back potential FDI investors from making a decision now but either postponing it or moving their operations outside the region and try to deal with their market from locations that are not involved in bilateral disputes.
Of course there are those that will focus on a specific country for their investments and operations and inter-country sanctions will not be of a major concern to them, but board members might also very well ask whether that country could also face similar sanctions in the future that could hurt its investment plans.
The whole point of establishing the GCC is that, like the European Union model, it assured freedom of investment and market penetration between the member states, irrespective which country was initially chosen as their investment entry mode. Jebel Ali is a prime example in the UAE as the multitude of companies operating there did not do so just to serve the UAE market, but the wider GCC market.
Any obstacles in carrying out this function will cause many potential new entrants to reconsider their plans. This will also apply to wholly-owned GCC companies and investors and the quicker and more elegantly the dispute is settled the better, to avoid bitter inter GCC memories to set in where it will become preferable for some GCC companies and investors to deal with others outside the bloc than with those within the bloc.
Like any other family dispute, estranged family members can either forgive and forget and go on to create stronger bonds, or split and move apart.
Corporations, and individual investors, like certainty in their decision making process and what the current Qatar dispute has created is a situation where a large element of uncertainty has crept in, much to the detriment for enhanced FDI flows and foreign partnerships, as the old adage “capital is a coward” is very apt here.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran , Saudi Arabia.