By Santhosh V Perumal
Business Reporter


Qatar and the UAE should not be greatly affected by an expected decline in foreign direct investments (FDI), but the greater Gulf region should enhance and reallocate their own intra-regional FDI towards industrial and labour intensive enterprises, according to Arab Strategy Forum (ASF).
Moreover, the GCC (Gulf Cooperation Council) countries will enjoy better budget balances if there is a reduction or removal of subsidies and/or the implementation of taxes, said a report ‘Global Political and Economic Trends in 2016,’ which ASF made in collaboration with Foreign Affairs magazine.
Lower oil prices, moreover, mean that the most important source of FDI - investments from capital-rich local countries to capital needy local ones will decrease, it said. “The UAE, Qatar, and other Gulf states should not be greatly affected, while the rest of the region will be lucky to attract much investment from China or elsewhere,” the report said, finding 75% probability of diminishing FDI inflows into the Arab region and 50% chances of its impact on the Arab economy.
This would be a good opportunity for the Gulf states to increase and reallocate their own intra-regional FDI toward industrial and labour intensive enterprises and away from mining and services, it said.
Expecting a slowdown of Chinese investments in foreign energy resources in 2016, ASF said the scarcity of good domestic investment opportunities inside China might lead to capital outflows, some of which will presumably end up in the Middle East.
Private overseas Chinese capital may begin to flow to the Middle East as also to other parts of the world, and luxury real estate - both commercial and residential– could be a prime target of these investments.
On the subsidies and budget balance, ASF said the impact of reducing or eliminating subsidies and increasing taxes will depend on whether such policies are indeed to be implemented and on how significant and quick the changes are.
The UAE has successfully implemented some rationalisation of energy prices for the consumer with no difficulties, but it is not yet clear that such progress will spread to other countries, it said.
“Should such policies spread across the region, the results might eventually include better budget balances, but with some difficulties,” it added.
Finding that falling oil prices are leading the GCC countries towards slowing economic growth; it said lower revenues will have twin effects of lesser investment - which tends to have multiplier effects throughout the economy - and a cutback in the public sector as governments try to balance budgets and not bleed through huge reserves.
Low oil prices, persistent failure to diversify economies, civil conflicts and their spillover effects and subpar educational opportunities suggest that the Arab world’s economic problems are going to continue to “fester” in 2016, rather than improve significantly, ASF said.
“The Gulf countries, however, will do better than their neighbours elsewhere in the region,” ASF said, adding over a slightly more extended timeframe, it will depend on the oil prices.
If oil is at, $45 per barrel, the region will be capital-short. If the price tops $70 over an extended period, the energy exporting states will build up a $6tn treasure chest over the next 10-15 years, it said, adding if oil returns to $100 that number goes up to $9tn.