investor watch - august 2015 by g4s risk consulting

Investor Watch: August 2015

Issue date: August 2015

Investor Watch: August 2015

A host of acronyms, from BRICS to CIVETS, MINT or N11, provide guides to potentially high growth economies, which sit

alongside such regional labels as the “Asian Tigers” or the over-used “Africa Rising” to categorise emerging markets for

companies and investors. However, using a methodology based on political economy, there is a grouping of countries, which

span multiple geographies, where seismic political changes combine with market dynamics to offer investors and companies the

long-term prospect of sizeable returns. Cuba, Iran, Egypt, Ethiopia, Côte d’Ivoire, Myanmar (Burma) and Saudi Arabia have

each either recently experienced, or are soon to experience, decisive shifts in their political and commercial environments,

which make them an attractive market of interest for investors with a higher risk appetite.

Each of these markets is comparatively closed, or lacking international engagement, which offers advantages for early movers

to gain competitive advantage, market share and a diverse portfolio. Whilst at the riskiest frontier of investment, operations

and global equities, where substantial risks persist, the upside is significant, and only growing.

Elevated levels of political risk are a common theme across these countries. However, the presence of a reformist politician,

or faction, is accelerating investment reforms. Largely untapped domestic consumer markets are found alongside cheap labour,

with demographic advantages of an increasingly prosperous middle class combined with low levels of private indebtedness.

Sovereign debt is often low and natural resource wealth or entrepreneurial human capital frequently present, with the

potential for strong domestic and capital market growth. The isolation of many of these regimes from the business cycles of

developed economies has inhibited growth and trade, but simultaneously forced diversification and reduced vulnerability to

global shocks.

These are not markets for the risk averse. Considered some of the world’s last untapped markets, these countries have been

left on the fringes of international commerce for reasons ranging from sanctions to self-imposed isolation or conflict. Large

returns and market dominance are on offer, but expectations must be tempered with realism and patience. Governments will

speak of new investment laws with bombast and of enormous untouched sectors waiting to be exploited. However, investors

should enter these markets with their eyes wide open. Long-held views will need to be re-evaluated to engage with the

markets as they exist now and into the future. Investors will neither find the Cuba of the 1950s, nor the Iran of 1979.

Early movers are opening offices and hiring new staff, after deploying fact-finding missions, eager to gain the competitive edge.

However, engagement in these markets is predominantly at the initial stages and many investors and companies will be

watching for trigger points before ramping up involvement. With elevated levels of

political risk, even early engagement with these countries will require strategic advice,

ongoing risk monitoring, new market entry advice and due diligence. Requirements for

partnerships, joint ventures or teaming arrangements will also raise regulatory risk and

political exposure.

Investment will initially suit those with a longer timeframe and already experienced in

frontier or emerging markets. As engagement grows, momentum will build in these

markets. Acting as a pull on further macro- and microeconomic reform, these market

openings will be propelled alongside the development and implementation of new

technology, creating opportunities long expected to outstrip the next decade.

Cuba 3

Côte d’Ivoire 6

Egypt 9

Ethiopia 11

Iran 14

Myanmar (Burma) 18

Saudi Arabia 21


Cuba

Cuba has been locked in a frozen state of autocracy since the 1960s, when the US imposed an escalating series of financial,

commercial and economic sanctions on the revolutionary government of Fidel Castro. Decades of bad blood between the

two countries has seen the solidification of “el bloqueo” and the entrenchment of the Castro regime., most recently under

the stewardship of Raúl, Fidel’s younger brother. US sanctions de facto cut Cuba off from international trade, whilst the

domestic reforms of Castro’s communist agenda saw a programme of nationalisation and expropriation in the shift to a

centrally planned economy, alongside curtailed social and economic freedoms. This restricted, and restrictive, environment

sent Cuba into the trade and investment wilderness.

However, a slowly shifting US policy crystalised in December with the end of diplomatic isolation marking the start of a new

chapter in US-Cuba relations. The US State Department aims to lift restrictions on travel, commerce and financial activities

and new rules in January opened some space. US-issued credit and debit cards can now be used in Cuba and restrictions on

Internet access have been relaxed. Most significantly, on 29 May, Cuba was removed from the US list of state-sponsors of

terrorism, which enables access to Western banks, and on 20 July the two countries opened embassies on the other’s soil

for the first time in 54 years. Both political sentiment and these initial steps go further than the previous loosening of

sanctions in the 1990s.

A limited agreement has been reached on the restoration of diplomatic ties and whilst the economic embargo remains in

place, talks are underway for a further downscaling of the sanctions regime. This new phase of engagement is seeing a steady

stream of visiting business delegations and, accompanied by Cuban investment reform, foreign deals are already in place to

expand Havana’s international airport, as well as successful partnerships emerging in brewing, bottled water, nickel mining,

hotels and offshore oil exploration.

An isolationist regime begins to look outwards

With some of Cuba’s largest bilateral partners, including

Venezuela and Russia, facing their own turmoil, Raúl Castro

recognises the need to build closer trade and investment ties

with the rest of the world. The weight of global public

opinion towards Cuba has long been ahead of US foreign

policy and no specific EU sanctions are in place. However, the

easing of US sanctions is critical for global investment, given

their punitive reach extends out to foreign subsidiaries of US

companies and US courts have not been afraid to use the

principle of extraterritoriality to pursue prosecutions.

Moves have begun to end restrictions on the use of US credit

cards in Cuba, which will make it easier to live, work and do

business on the island. However, this is not universal across

all cards, most private businesses will still not accept them

and, most critically, no US bank has yet said it is willing to

face the exposure of handling such transactions. Several US

airlines have also expressed interest in running direct

commercial flights and delegations have visited from New

York and Texas, among other states. Although the embargo

has been relaxed for the import, travel and

telecommunications industries, which has facilitated a move

into the Cuban market for Netflix, most US companies will

remain blocked for the short-medium term. In the meantime,

gains for non-US firms could be significant.

Recent trade delegations have arrived from the EU, France,

Netherlands, Russia and Italy, whilst cultural ties will continue

to make Spain and Latin America important partners. The EU

is already the island’s second largest trading partner, although

talks on normalisation are not expected to see substantive

results until 2016. Levels of UK-Cuba trade are historically

low, but recent commitments in the agricultural, tourism,

infrastructure and energy sectors have been buoyed by a

trade mission and a December agreement for Havana to

repay its short-term debt to the UK, facilitating the provision

of short-term insurance in support of British exports.

Incremental domestic reform

Progression of sanctions relief should not overshadow Cuba’s

internal developments, hastened by Raúl Castro’s more

commercially-astute outlook. Slow or negligible growth,

coupled with generational shifts as Castro’s revolutionaries

age and begin to step aside, is forcing gradual reforms.

Lineamientos, a forward-looking blend of strategies and values

intended to adapt the island’s communist project to future

market demands, is starting to produce tangible, albeit slow

and incremental, reforms. A new foreign investment law in

early 2014 offers tax cuts to foreign investors and improves

investment security. More than one million state workers

have been made redundant, facilitating a shift into private

sector-led growth. Urban cooperatives have been created,

representing a quasi-privatisation of state enterprises, and

although their regulatory framework remains unclear,

cooperatives are gathering momentum.

However, free-market reforms are still largely cosmetic.

Cuba remains a one-party autocratic state, with a poor

record on human rights and personal freedoms, where Raúl

Castro heads both the government and the Partido Comunista

de Cuba (PCC). The state interferes in all areas of


economic activity, with a risk of arbitrary decision-making and

legal problems as a result of inconsistent and opaque

regulations. Private entrepreneurship is still on a very small

scale and the government controls virtually all of the island’s

business and trade. In the 2015 Index of Economic Freedom,

Cuba ranked 177 out of 178 countries. Only North Korea

ranked lower. Cuba is still not even featured on the World

Bank’s Ease of Doing Business Index.

Foreign investment has arrived, and failed, before. During the

last hint of liberalisation in the 1990s, an ill-prepared state

was unable to cope with a raft of unsuitable investments.

Some 60% of foreign investment projects closed, leaving

behind a sparse corporate record. Neither a member of the

IMF nor the World Bank, Cuba lacks the access to and

resources from the global marketplace to assist with reform.

In the worst cases, assets are confiscated and executives

imprisoned. Whilst foreign-run companies can point to

success in the mining, construction, refining and meat

packaging sectors, those companies which are bucking the

historical trend still face being cut off from US capital markets

and having bans on executives travelling to the US.

Yet, the country is badly in need of capital. Growth

fundamentals for trade and investment are strong and the

impetus for economic development is greater than ever. The

Paris Club has agreed a figure for Cuba’s debt and Raúl

Castro talks confidently of an expected growth rate of more

than 4% in 2015. The state ambitiously says it wants to attract

$2-2.5 billion in FDI each year, with an annual economic

growth target of 7%. A stable political system can also

comfort investors, with Raúl Castro’s commitment to

standing down in 2018 both offering ample time to create a

succession strategy and potentially removing an important

block, the Castro name, in ending the US embargo.

Whilst changes will be phased and incremental, the sentiment

driving these should not be underestimated. Most significant

is Cuba’s shifting psyche. From the complete abolishment of

the private sector in the 1960s, economic reality has forced

the country to tacitly recognise its status quo is not working

and must open to external assistance, investment and trade.

Whilst refusing to compromise on a strong sense of

sovereignty, enthusiasm for a shifting social and economic

model is apparent.

Legislation and projects to attract foreign investment

Law 118 (LFI), Cuba’s new foreign investment law, recognises

that economic productivity requires a boost from a domestic

private sector, which can only be propelled by foreign

investment. Opportunities are available for commercial

contracts with domestic entities and JVs. Ventures 100%

foreign owned are possible, but remain the exception.

Contracts with a degree of Cuban involvement will benefit

the most from a series of incentives, including exemption on

profit taxes for eight years, the halving of profit taxes to 15%

and the abolishment of a 25% labour tax in a bid to attract

new investment. In seeking a more transparent regulatory

framework, Law 118 limits the government’s ability to seize

foreign assets to only under certain conditions, a level

comparable to many other countries. Disputes will be

handled predominantly by arbitration if internal attempts at

resolution fail and companies can select a neutral country

whose laws they wish to apply. These reforms are supporting

a small improvement in trade freedom, fiscal freedom and

freedom from corruption rankings.

The $900 million Mariel Special Development Zone, some 28

miles west of Havana, is a prototype of the more liberal type

of investment and trade regime that Havana is hoping will

attract foreign investors. A partnership with the Brazilian

government, and managed by the Ports of Singapore, the port

and trade zone is expected to be the Caribbean’s first

container terminal facility and offers a preferential tax regime,

including the deferral of a 12% profit tax for 10 years and all

equipment and materials imported duty free. Requests to

locate here are arriving from worldwide and success is likely

to see this model rolled out elsewhere on the island.

Progress held hostage to US political cycle

Whilst the normalisation of relations between the US and Cuba has gained irreversible momentum, the US electoral cycle

poses a potential stumbling block. President Obama can use executive authority to ease certain restrictions, but a

Republican-backed Congress is making it harder to reverse statutes on the sanctions regime. Secondly, as the fight for the

republican presidential nomination intensifies ahead of polls in 2016, Cuba is a subject of political contention. Two of the

frontrunners, Jeb Bush and Marco Rubio, want the embargo to continue or strengthen. Hillary Clinton, the likely Democrat

contender, wants the embargo ended. The speed of sanctions reform or removal will be tied to the vagaries of the US

electoral system and a vocal Cuban diaspora with influence in the presidential nomination battle.


Banking and monetary reform are vital

Access to credit and a balkanised currency system in an

entirely cash-based economy pose significant commercial

challenges. Neither the “soft” national peso (CUP), nor the

“hard” convertible peso (CUC), are traded off the island and

themselves offer different exchange rates. This duel system,

“dia cero”, creates price distortions, offers implicit

government subsidies and complicates market pricing, as well

as creating the space for corruption. A stunted financial

system has no interbank funding mechanism or local public

debt market and lacks robust banking networks. Sanctions

prevent companies from accepting Cuban currency as

payment and Cubans are not allowed to hold foreign bank

accounts, making the payment of goods, both for consumers

and companies, more challenging as foreign investors arrive.

Shallow access to local credit in undeveloped capital markets

will also impede the ability of domestic businesses to offer

the right opportunities for foreign partnership. Whilst plans

are in place to end the dia cero, the government will need to

move quicker to address monetary freedom, banking reform

and the use of a single convertible currency if it is to realise

its economic objectives.

Cuba’s population of more than 11 million offers the most

skilled labour force in Latin America. However, poor

purchasing power and price controls will curtail opportunities

in the consumer market in the short term. Bans on

commercial advertising and marketing make it difficult to

create a competitive market and will require an innovative

approach by communications agencies. However, Internet

restrictions are easing, aiming to increase the rate of only 5%

of Cubans currently able to access Internet from their homes.

Harder to reform will be an institutionalised and multi-

layered bureaucracy, which has proved a stumbling block to

many foreign investors. Foreign firms in joint ventures must

still order raw materials a year ahead of time and a highly

regimented labour market requires businesses to hire

employees through the Cuban government. Whilst

undoubtedly still a challenging market, incremental reforms

are seeing an economy growing in confidence, which will be

needed to inspire a leap of faith by some foreign companies.

Sector opportunities

Pursuing foreign investment on its own terms, Havana has

released a Portfolio of Foreign Investment Opportunities,

identifying interest in tourism, energy, transport,

construction, biotech, mining and sugar production.

Opportunities also exist in agriculture, infrastructure,

technology, manufacturing and building materials. Capital is

starting to be raised for a few private equity funds geared

towards direct investment as restrictions on investing in

small local companies begin to ease.

Already accounting for 42% of inward investment, tourism

is a scalable industry. The easing of US travel restrictions

will propel the expansion of real estate development,

already buoyed by a threefold surge in foreign tourist

numbers in Q1 and an increase in business travel. A skilled

labour force will support a further strengthening of Cuba’s

biotechnology sector nationwide and Havana is seeking

strategic partners for the pharmaceutical industry.

Under-exploited agricultural land benefits from a tropical

climate and strategic location close to markets, producing

tobacco, citrus fruits, coffee, cacao and honey. Whilst land

ownership is de jure in the hands of the state, any produce

is owned by the business entity and 70% of current land is

managed by cooperatives rather than the government.

Agriculture will be one of the first industries to benefit

from an easing of sanctions.

Infrastructure is a core priority for the government, which

recognises the necessity of foreign investment to address

inadequate port, road and air capabilities. The government

is seeking foreign expertise and capital to support the

modernisation of existing plants and technology,

accelerating an industrial sector comprising 10% of the

domestic economy. Mining opportunities are easily

exploitable in open pit mines, whilst renewable energy is a

priority to remove current inefficiencies.

Prepare for a slow burner

More than any other new market highlighted, Cuba should be

considered a slow burner. Progress and retrenchment will

continue. The island is not suited for those looking for

quarterly results and internal rates of return with immediate

exits, but rather for long-term investors building long-term

relationships with patient and flexible capital. This is a tough

negotiating environment, where the Cuban government is

clear on its development priorities and red lines. The

government regularly draws up portfolios of projects in

which it requires foreign assistance – these are most likely to

receive the go-ahead and avoid bureaucratic delays.

Long-standing issues, such as thousands of US expropriation

claims, are intractable and will likely be shunted into the

future as US-Cuba relations continue to develop. However, a

healthy respect for Cuban sovereignty will be key to success

in this market. Foreign companies operational here will need

to consider themselves a Cuban company, playing by Cuban

rules, as the market continues to adapt.

Triggers to Monitor

Pace of thawing of US-Cuba relations

US Congress stance on sanctions

Major bank agreeing to support transactions

Rhetoric of the US presidential campaign

Currency reform

Raúl Castro’s commitment to standing down in

2018 and the identity of his successor


Côte d’Ivoire

Part of West Africa’s Francophonie, for decades Côte d’Ivoire enjoyed a reputation for stability in an otherwise troubled

region. Home to Abidjan, once renowned as the Paris of Africa, the country’s reputation was battered by a 1999 coup and

an ensuing decade of instability and political upheaval. A repressive regime in the south of the country was opposed by a

northern rebellion, which caused capital flight and the undoing of decades of development. Following a disputed presidential

election in 2010 and a brief civil war, Alassane Ouattara, who claimed the loyalty of rebels, secured the presidency. A career

economist, Ouattara is placing economic growth and aggressive private sector development at the heart of his attempts to

reclaim Côte d’Ivoire’s former status.

Today, cautious optimism pervades ahead of the next presidential election in October. This election will take place under

very different circumstances from the chaos of five years ago. Ouattara’s Rassemblement des Républicains (RDR) is expected

to win another five-year term, provided he maintains the support of Rassemblement des Houphouëtistes pour la Démocratie et

la Paix (RHDP), the governing political coalition, ensuring political stability and further pro-market reforms. Whilst

Ouattara’s grip on power is not under serious threat, downside risk will persist in the run-up to the poll. The Front Populaire

Ivoirien (FPI), the party of the former president, Laurent Gbagbo, who is currently awaiting trial at the ICC, is boycotting the

polls, but continues to enjoy support. A new opposition coalition has formed and is expected to be vocal in criticising the

impunity offered to Ouattara’s allies following their part in the post-election violence of 2010-2011 and his failure to

reconcile the country.

Ouattara will need to ensure a peaceful election campaign and post-election reconciliation settlement rooted in a more

inclusive politics. If current pro-market reforms can be buttressed by political stability and the country seeks further

engagement outside of Francophone Africa, Côte d’Ivoire will emerge as a promising new investment destination and “could

be one of the motors of economic growth in Africa again” (Christine Lagarde).

An economy turned around

President Ouattara is on a drive for Côte d’Ivoire to join the

ranks of the emerging market economies by 2020, making the

country a regional business hub and meeting the objectives of

its National Development Plan, which focuses on improving

infrastructure, education and healthcare, as well as reducing

poverty. Since its debt default in 2011 and the exodus of

more than half of foreign companies during the civil war,

Côte d’Ivoire has undergone a revival. Economic growth

rebounded to 9.1% in 2014 and is estimated at 8.5% this year.

The economy has diversified and fundamentals are strong,

with debt to GDP levels at around 35%. Market confidence

was improved by the 2012 resumption of coupon payments

on the country’s first defaulted Eurobond. Buoyed by investor

appetite and a positive outlook from credit rating agencies,

Côte d’Ivoire is making a strong play for the capital markets,

becoming Sub-Saharan Africa’s second largest issuer. In the

last year, the country has issued two Eurobonds – a rate

unprecedented within the developing African markets. The

latest $1 billion Eurobond in February was four times

oversubscribed and still trades well in the secondary markets.

The “Invest in Cote d’Ivoire Forum (ICI) 2014” was designed

to attract new, and departed, foreign investment. Hundreds

of millions of dollars’ worth of investment pledges have been

made to support economic growth fuelled by investment and

trade as a priority. Initially reticent private investors are once

again ready to take the plunge. The African Development

Bank has returned after 10 years of relocation during the civil

strife and Citigroup’s regional office has also returned.

Others companies, such as Standard Bank, are selecting Côte

d’Ivoire for their first foray into West Africa.

The World Bank’s Ease of Doing Business Report of 2015

ranked Côte d’Ivoire as among the countries implementing

the highest number of business reforms, where a new

business can now be established in under 48 hours. In a bid

to improve what can initially seem an intimidating commercial

environment, the private sector is the new focus of reforms.

Investment has been strong in the public sector, but a new

focus on attracting foreign capital for the promotion of SMEs

and venture capital will enable local entrepreneurs to thrive.

Foreign investment already accounts for some 40-45% of

capital in Ivorian firms due to compromised local capital.

Multilateral support is improving the business climate,

including the World’s Bank’s creation of a commercial court

and the establishment of an anti-racketeering unit, as well as

the IFC committing to invest $1 billion over the next 2-3

years, equal to its total investment in Côte d’Ivoire to date.

More wide-ranging reforms required

Whilst the speed of reform is impressive, social infrastructure

and poverty alleviation are failing to keep pace. Corruption

remains an ongoing scourge and despite a public policy of

zero tolerance, rumours of public sector corruption persist.

Much government procurement is awarded via no-bid

contracts and many state-owned companies are slow to pay

their debts, negatively impacting private sector confidence.


Tax collection also needs to be prioritised to reduce the

power of parallel, illegal tax systems and to bind a still divided

society into the state-building project. Whilst considered a

diversified market, Côte d’Ivoire still relies on a relatively

narrow export base, rendering it vulnerable to downturns in

external demand and world commodity prices, particularly

the cocoa price. Further export diversification is required to

reduce a current account deficit which has been temporarily

reduced by lower oil prices, as well as adding value within

national borders.

Regional reorientation

As the second largest economy of ECOWAS, after Nigeria,

Côte d’Ivoire commands regional clout. With the largest

economy within the Francophone bloc of the organisation,

the country is well placed to take a growing regional lead.

Côte d’Ivoire has also avoided the Ebola epidemic seen in its

western neighbours, damaging their trade and labour

markets, and as a net oil importer does not face the same

fiscal crises as its eastern neighbours.

As a member of the West African CFA currency bloc, Côte

d’Ivoire’s exchange rate is fixed with the Euro and on

permanent parity with the CFA. A monetary union with

Benin, Burkina Faso, Guinea-Bissau, Mali, Niger, Senegal and

Togo offers a market of some 150 million people. The IMF

identifies this trade bloc, of which Côte d’Ivoire’s economy

comprises nearly half, to benefit from more intraregional

trade than any other region in Africa. Whilst membership of

the CFA restricts domestic monetary policy-making and links

the bloc to economic travails in Europe or a wider global

downturn, to date this mechanism has provided much needed

macroeconomic stability, as well as improving trade flows

with France and between other member countries.

A wider region of West Africa has in principle agreed to the

introduction of a new shared currency, the Eco, which will

bring together a market of more than 300 million people, as

well as subsuming the current CFA. However, initial hopes

for a full monetary union by 2020 look unlikely. Despite the

benefits of enhanced regional links, a single monetary policy

will be unsuitable for this diverse range of countries, which

will include the enormous oil-exporting economy of Nigeria.

Through several ports and long terrestrial borders, Côte

d’Ivoire is already an entrepôt to the West African market,

straddling a strategic location bordering both Francophone

and Anglophone neighbours. Several ports stretch across a

515km coastline, which is well connected through a network

of roads and rail into the interior of West Africa. Abidjan

port, for example, is the key trade point for mining

companies in Burkina Faso. Confidence is propelling further

investment in critical port infrastructure, which will boost

longer-term growth prospects as well as provide immediate

employment and goods markets. Investment can be seen

along the Abidjan-Lagos corridor as road infrastructure

connects Côte d’Ivoire to Africa’s largest economy, Nigeria.

Further progress is required on corridor management and

the harmonisation of customs procedures, but the ECOWAS

Transport and Transit Programme is working to create joint

border posts to ease the movement of persons and goods,

facilitating regional trade and integration.

An emergent commercial hub around Abidjan

Emerging as a West African commercial hub, Abidjan has

received approval for direct US flights and the national carrier

was re-launched here in 2012, with an Air France holding

stake. The city is home to an estimated 5 million people, with

a diverse mix of consumers from the business district of

Plateau to the industrial area of Yopougon. The capital in all

but name, Abidjan has a prospering financial industry and

plays host to the regional headquarters of several

multinational companies.

Infrastructure development is focused around the booming

coastal city, which is already operating at overcapacity. A

second container terminal port is to be built at Abidjan,

funded by a conglomerate of private interests keen to exploit

the city’s strategic location. The construction of a third

bridge in the city was completed in December to ease

congestion problems and whilst there is a current mismatch

in the supply and demand of property, the government is

providing urban land for further development.

The BRVM, the regional stock exchange for eight West

African countries, is headquartered in Abidjan and reports

ongoing expansion, with an ambition to double its market

capitalisation within the next five years. Whilst the banking

penetration rate is low right across Francophone Africa, this

represent a strong area for growth. In Côte d’Ivoire, more

adults currently have mobile money accounts than traditional

bank accounts, which offers the opportunity for scalable

investment in a low cost and entrepreneurial market.


Nevertheless, foreign capital will again prove decisive given

the domestic market is constrained, with concentrated credit

and weak supervision contributing to a comparatively high

non-performing loan ratio.

French influence remains strong

As the former colonial power, France remains Côte d’Ivoire’s

key partner and most important foreign investor. French

brands have a dominant and visible presence and French

linguistic abilities are still considered essential for doing

business here. However, long-standing French influence on

commercial and political decision-making in Côte d’Ivoire is

coming under increased criticism, including constraining

government decision-making in economic and foreign policy.

The country’s reforms and high growth rate are piquing

interest elsewhere. The Eurodollar market is predominantly

from the US and such oil companies as the UK’s Tullow Oil

and Russia’s Lukoil, as well as South Africa’s Standard Bank,

are increasing their engagement. Chinese interest is

comparatively weak, although India has expressed interest in

oil and mining projects, and as the country stabilises regional

connections with regional Anglophone countries, including

Ghana and Nigeria, are expected to develop.

Sectors

Some of Côte d’Ivoire’s strongest investment opportunities

are found in agribusiness. The country is already the world’s

leading cocoa producer and cashew nut exporter, as well as

the world’s third largest coffee producer, which together

comprise more than half of Côte d’Ivoire’s exports.

Continent-leading rubber production is expected to triple by

2025, with strong production figures also registered for

bananas, tuna, palm oil production and wood. Investment is

welcomed in the form of private investments, public-private

partnerships and increasingly venture capital in SMEs. Several

large-scale projects are already underway, benefitting from

multilateral funding and investment guarantees. This funding

will prove critical in unlocking Côte d’Ivoire’s potential to

become a regional energy hub. Power supply is growing and

capacity forecasts indicate medium- and long-term economic

growth will be supported. Already a regional power exporter,

onshore and offshore resources are available for exploitation,

including renewables, aiming to more than double electricity

generation to 4,000 MW by 2020.

Government infrastructure plans which had been shelved

during years of conflict and political deadlock have been re-

energised, opening a huge demand for capital expenditure,

partly facilitated by the Eurobonds, but also by direct

investment in specific projects. A motorway linking the port

of Abidjan to the administrative capital Yamoussoukro

opened late last year and further highways are a key priority.

The under-explored extractive sector offers longer-term

potential when prices rebound, with the oil ministry signing

18 PSAs in 18 months in 2012-2013. Mining concessions are

also being exploited as gold and manganese output rise as

investors flock to a wider array of opportunities.

Reconciliation must become a political priority

Political risk poses an enduring challenge for any foreign investor in Côte d’Ivoire. Outright conflict has ended, but

skirmishes persist and reconciliation is yet to start in earnest. Those allied with former president Gbagbo are in no position

to return to war, but tension is anticipated to rise ahead of the October presidential poll and the legislative elections next

year, with sporadic skirmishes, particularly in the west of the country. Clean and credible elections, endorsed by the

international community, will be critical to grant legitimacy to Ouattara and his policy agenda.

Whilst Ouattara has largely stabilised the security situation since the civil war, crime levels remain high. Root and branch

reform is required for a heavily politicised security sector, where former commanders of the civil war, with links to

criminality, enjoy positions of power. Some individuals are subject to EU sanctions, with violations alleged against several of

Ouattara’s allies, meaning foreign investors are advised to conduct stringent due diligence. Many former combatants have

not undergone DDR and Gbagbo supporters have been excluded from virtually all power structures. The FPI is boycotting

the political process and with Gbagbo imprisoned in The Hague and his wife in prison in Côte d’Ivoire, millions of his

supporters feel excluded from the political process. Meanwhile, no Ouattara supporters have yet faced justice. As internal

divisions persist, a failure to pursue reconciliation rather than retribution holds the potential for destabilisation.

Ouattara is politically dominant, but question marks persist over longer-term succession planning. Septuagenarians hold both

the presidency and the prime ministership and more than a decade of conflict has hindered the emergence of a new

generation of leaders. Unless a mature political process develops, Côte d’Ivoire faces the prospect of longer-term instability.

Triggers to Monitor Conduct of government and opposition around

October’s election

New programme of national reconciliation

Economic reforms widened

Push for regional dominance

Opening up from French influence

Levels of insecurity and crime


Egypt

One of the first countries to see regime change through the Arab Spring, Egypt has endured a turbulent few years. From the

stable autocracy of Mubarak, to mass protests and the rise and fall of an Islamist president, stability looks to be returning

under President Abdel Fattah al-Sisi. Amid wider turmoil in Africa and the Middle East, Egypt is back in favour with investors,

rebounding after the exodus of capital and investment during the Arab Spring. The government is prioritising foreign

investment as a vehicle for economic growth and implementing reforms to address long-standing structural problems. The

next challenge for a country still grappling with an Islamist insurgency and a restive population with stagnant living standards

is to make the process of reform and growth an inclusive one.

Economic growth is dependent on the arrival of foreign investment, which in the fiscal year 2014-15 was up 32% on the

previous 12 months. In 2014, the Financial Times identified Egypt as Africa’s top capital investment destination, receiving $18

billion, with a 42% increase in the number of foreign investment projects started in the year. Whilst figures remain

significantly lower than before the Arab Spring, the government is capitalising on this rising interest. A high-profile economic

summit was held in Sharm el-Sheikh in March, intended to put Egypt firmly on the investment map. Focused on energy and

real estate initially, the summit secured nearly $60 billion in investment pledges, supported by a new investment law unveiled

just days earlier and several further sector-specific summits. This momentum on reform and foreign investment will need to

be sustained and supported by political commitment and security improvements.

Cautious economic optimism

Egypt has received a series of credit rating upgrades on the

back of gradual economic recovery and its bourse recently

turned positive after Cairo struck a $10 billion deal with

China. Some estimates suggest economic growth rates of

4.3% over 2015-18, with talk of 6.5% by 2020. These

improvements follow a range of fiscal, monetary and

investment policies implemented under Sisi, including lower

interest rates and subsidy cuts which are starting to address

long-awaited energy reforms. The devaluation of the

exchange rate is also whetting the appetite of foreign banks

to return to the Egyptian T-Bill market.

A 2014 raft of reforms in particular has begun to reverse the

capital outflow of the Arab Spring. Reforms are focused on

subsidies and income tax, as well as introducing VAT on

goods and services. A ban on companies transferring money

has also been relaxed, enabling a weaker Pound, and the

government is offering a greater variety of land use models,

providing flexibility and the opportunity to save money on

land capital.

The government is proud of its new investment law, which

reduces bureaucracy and offers incentives to encourage the

funding of labour intensive projects, as well as explicitly

banning price fixing and reducing the vulnerability of

companies to legal or governmental changes. A cumbersome

bureaucracy is to be streamlined by turning the General

Authority for Investment (GAFI) into a “one-stop shop” for

investors, speeding up the process of starting a company in

Egypt, which can currently require applications for permits

from up to 78 government agencies. Whilst bureaucracy can

still be expected, the opportunities for corruption under the

new law are reduced, or at least more easily traced.

However, there is currently no oversight or auditing of GAFI,

which is becoming an increasingly powerful government

agency.

Further reforms are expected within the year and there are

signs the government will respond to feedback in a flexible

and consultative manner. Ministers concede the investment

law was written in haste in time for the Sharm el-Sheikh

summit and recognise some provisions can be reviewed,

whilst the premise of the law itself will endure. Already a 2%

tax on capital gains, originally included as part of Sisi’s reform

agenda, has been frozen following investor criticism, resulting

in an injection of liquidity into the Egyptian bourse. A weekly

cabinet led by the minister of investment will continue to

meet to discuss investment and report to the prime minister

monthly, ensuring reforms stay relevant.

Unofficially, the IMF says these policy reforms are starting to

pay off. At the start of the year, Egypt issued its first

Eurobond since the fall of the Mubarak regime and the fiscal

deficit is expected to stabilise, whilst the government

embraces a selective expansionary and tight fiscal policy.

Difficult economic conditions still prevail

Whilst growth is now on an upward trajectory and ratings

agencies are expressing cautious optimism, Egypt still suffers

from a stubbornly large budget deficit, high debt levels and

low income. With little monetary policy flexibility, the

Egyptian pound remains weak and a scarcity of US dollars and

hard currency can make it difficult to fund business activity.

As a result, an illegal black market proliferates. Investors have

long had difficulty in repatriating funds, although the Central

Bank has made recent progress, covering 50% of the foreign

currency needs of investors seeking to repatriate funds

outside the country.


However, the economy starts from a low base. Sisi is still

grappling with embedded political, economic and judicial

dysfunctionality after generations of political classes have

shunted tough decisions down the line. Yet an increasingly

assertive military is turning into an economic giant itself,

raising the ire of an already disaffected youth. A balance of

payments crisis and perpetual fuel shortages are doing

nothing to improve the economy, combined with an uptick of

attacks by Islamist militants against state infrastructure. Such

factors combine with a historically poor business

environment to stymie economic growth and there will be a

lag before policies have a discernible impact on chronic issues

of inflation, poverty and unemployment. Reforms need to be

balanced by social spending commitments, translating

economic growth into employment opportunities, as well as

support for small- and medium-sized enterprises and a

tangible improvement in living standards.

Bureaucracy and corruption remain deeply engrained

Corruption and opacity have long been a hindrance to

attracting foreign investment to Egypt, as well as a weak

enforcement of property rights and contracts. In an

environment where the government, and therefore the

military, is omnipresent, it will need to learn to step aside,

whilst providing a reassurance of policy stability, if reforms

are to succeed and facilitate a private sector base as well as

state-led growth. However, the government still remains

wedded to the type of mega projects associated with

previous generations of Egyptian leaders, which are more

prone to corruption and often lack the wider impact on

society. A more nuanced approach would open up a greater

variety of employment opportunities, as well as providing a

much-needed boost to small– and medium-sized enterprises.

A strategic market location

In a strategic location bordering both Africa and the Middle

East, as well as a short journey across the Mediterranean

from the European market, Egypt also benefits from

membership of both COMESA and TFTA. Integration is now

stretching further and in recent weeks Egypt became part of

China’s Silk Road Economic Belt trade and investment union.

The Suez Canal expansion project is due for completion in

two years and, with the advent of two-way traffic, will almost

double the current capacity, bringing in further revenue as

well as cementing the country’s strategic value.

A large population, which comprises more than 40% youths,

is growing by around 1% annually. Whilst a huge potential

labour force and consumer group, poverty and a lack of skills

are proving a drag. Reforms are still insufficient to provide

the 700,000 new jobs estimated to be required to keep up

with the current birth rate, without even tackling the backlog

of current unemployment, which is believed to be

considerably higher than the official rate of 12.8%. Although

companies no longer have to meet a cap of 10% of foreign

workers, a lack of skilled labour means this policy reform is

unlikely to help shift high unemployment levels. At least 26%

of the population is now living below the poverty line, which

must start to reverse if a viable consumer market is to

emerge and social instability to be avoided. Institutions and

social stability remain fragile following a turbulent few years

and concerns still persist over the doctrinaire style of Sisi’s

government, including police brutality, restricted freedom of

expression and politically-motivated arrests. If the

government is to effectively counter the upswing in domestic

attacks by Islamist militants, it will need to open up the

monopoly on power held by a largely unaccountable political,

business and military elite and start offering its citizens a

bigger stake in the country.

Insecurity a growing concern

Whilst the days of mass protests have ended under a heavy-

handed crackdown by Sisi, militant attacks are on the rise.

Ansar Beit al-Maqdis, now allied with the Islamic State, is

targeting state institutions, infrastructure and officials in the

Sinai and Cairo and there has been one attempted attack on

tourist sites at Luxor. The Egyptian government responds

robustly to any threat and acts outside of its borders to

reduce potential threats within the region. However, Egypt

will remain a key target for both home-grown and

transnational militants and just one successful attack on

foreign investment or individuals has the potential to derail

current progress.

Mega projects continue to dominate investment

Mega projects, requiring large amounts of capital and with

lengthy lead times, continue to dominate the government’s

investment objectives. A new “super city” to be built east of

the current capital, halfway towards Suez, is attracting


controversy and Coca Cola has committed $500 million of

investment over the next three years, Energy projects

account for a large proportion of the most recent wave of

investment, with foreign companies attracted by improved

commercial incentives and reduced energy subsidies. The

government anticipates an investment of $30 billion in energy

and coal within five years, as well as opportunities in

renewable energy with a new tariff law, incentives and a

budget reduction in fuel allowances.

Other sectors attracting interest include infrastructure, retail

and finance, as well as a recent strong performance in

manufacturing. Service sectors for energy and real estate also

offer opportunities, from carbon capture technology to

building materials and manpower, as well as in education to

upskill the population and in public services and health care

following a recent furore over poor standards. An emerging

culture of start-ups and tech firms looks promising for Egypt’s

large youth population, but still struggles for finance as the

government focuses on mega projects. Funds are stepping in

to bring together public and private providers in this market

and focus on the growth of SMEs, which already employ

nearly 83% of the population.

Strong partnerships with China, the Gulf and the UK

Investment in mega deals has principally come from the Gulf

states and China. Most recently, China has committed to

more than 15 investment projects worth in excess of $10

billion, focusing on the electricity and transport sectors and

including such projects as the construction of a railway from

10th of Ramadan City to Bilbeis in Sharqeya governorate, as

well as the development of a wharf at Alexandria Port and a

power plant to serve the Attaka, Oyoun Moussa, and El-

Hamrawein zone. The strategic partnership between the two

countries is growing stronger, with an estimated 1,195

Chinese companies now working in Egypt. Similarly, Gulf

investors, with cultural and strategic interest in Egypt, are

preparing for a number of significant real estate and retail

projects, with $6 billion invested by Gulf Arab allies as

recently as March.

The UK has a strong investment history in Egypt, providing

nearly 50% of total FDI over the last five years. Investors are

again talking of the opportunities in the market as the UK

selected Egypt as the destination for its largest trade mission

last year, as well as providing the greatest number of

promised investments at the Sharm summit.

Triggers to Monitor

Government ability to mitigate and reduce the

Islamist militant threat

Financing of and growth in the SME market

Progress on reducing unemployment and poverty

rates

Impact of Suez Canal expansion

Cementing foreign pledges of investment

Ethiopia

Ethiopia has emerged as one of Africa’s top performers, with a double-digit growth rate and the continent’s fastest growing

non-oil economy. 2015 is expected to be a record year of foreign investment, reaching $1.5 billion, a 25% increase on 2014,

and there is no indication of a slowing. Coupled with political stability and the latest national elections in May returning the

EPRDF to power, Prime Minister Hailemariam Desalegn now has his own clear mandate to govern and pursue further

reforms.

Ambition is not lacking. Ethiopia aims to achieve middle-income status by 2025 and last year became the poorest country to

issue a Eurobond, which was hugely oversubscribed. The country received its first sovereign credit rating in May and moved

up to be Africa’s eight largest recipient of FDI in 2014. Whilst state-led investment is still dominant, the government is

prioritising infrastructure development and investment zones to facilitate foreign investment. Much growth is predicated off

foreign investment in manufacturing, although a large labour and consumer base offers wider potential. Most deals are still

below the $75 million mark, but the country is attracting private equity companies and interest from institutional investors

with significant capital available. In a commercially astute move, Ethiopia has identified a gap in the African market to carve

out a niche providing cheap energy, which has resulted in a surge in deal-making over the last four years.

A diplomatic hub seeks commercial success

As the diplomatic capital of Africa, Addis Ababa is home to a

range of multilateral institution headquarters, as well as

playing host to peace negotiations and trade deals. A strong

diplomatic community has emerged, which Ethiopia is hoping

to leverage off to attract an already expanding business

community. Ethiopia itself is part of a growing and

increasingly integrated East African market, as well as a

member of COMESA and, more recently, TFTA. State-owned

Ethiopian Airlines has the largest global network of any

African carrier, as well as cheap and reliable transport

between the country’s numerous domestic hubs. As a

diplomatic hub, and growing tourist destination, the country

is well suited for business travel and tourism investment.


A supportive government directing growth

Growth is government mandated, led and supported.

Reforms have improved business registration and regulatory

institutions, whilst business support has improved in quality

and availability, reducing the costs and burden of doing

business. The time required to clear customs for export and

to secure a business licence has now been cut to 15 days and

the country offers additional protection from any threat of

expropriation through membership of multilateral agencies.

The government is tempering a rapid rise in GDP, estimated

by the World Bank to have averaged 10.4% annually over the

last 10 years, with a controlled investment plan. Funds are

directed towards carefully organised programmes, including

diversification, managing urbanisation and creating value-

added activities, in conjunction with the private sector and

the IFC.

Industrial parks are springing up across the country, offering

tax breaks of up to 17 years to domestic and foreign

investors, as well as foreign exporters, and exemptions from

income tax and the payment of customs duty, and the ability

to carry forward losses. The success of these state industrial

parks is now generating private sector alternatives and whilst

still contributing towards a small proportion of Ethiopia’s

growing economy, manufacturing is a priority sector for the

government. China’s Huajian is investing $2 billion to build its

own industrial park in Lebu on the south-western outskirts of

Addis Ababa, with other manufacturers, often in the textiles,

leather or garments industries, seeking to cluster. The

combination of cheap power and a large labour force is

attracting manufacturing industries here in droves,

particularly East Asian factories producing mass consumer

goods. Taiwan’s George Shoe Corp., for example, has opened

plants in an industrial zone in the Bole Lemi district. Ethiopia

is also receiving interest from FMCG companies, especially

multinationals, as well as attracting food and beverage

processing for domestic and international consumption, with

Heineken just opening the largest brewery in the country in

January.

Overt state control in a fledgling economy

Despite soaring levels of growth, Ethiopia remains a poor

country. The economy is still worth just $54.8 billion

according to 2014 estimates, with GDP estimated at less than

$600 per capita. Foreign exchange reserves are sufficient to

cover just 2.2 months’ worth of imports, making it harder to

manage a steadily depreciating exchange rate. Central bank

interventions have slowed the decline, including two

devaluations over the last two years, but foreign exchange

remains in short supply as the government uses it to finance a

massive infrastructure programme.

Banking and telecoms remain off the table for foreign

investors and the level of state involvement within the

transport, infrastructure and retail sectors is high, with

patience required to overcome bureaucratic hurdles. Yet, the

government will have to relinquish some of its tight grip on

the economy if the banking system is to improve and sustain

current levels of growth. International banks are awaiting the

market opening to a tantalisingly large population, the

majority of which is unbanked. Some investors complain of

trying to find deals of a sufficient size here, whilst others gain

market traction through purchasing local brands rather than

trying to instil unfamiliar but international names.

Political stability at the expense of freedoms

Ethiopia’s political stability is anticipated to endure, but has

come at the expense of democracy and political freedoms.

The government jails a large number of journalists, restricts

press freedoms and is regularly criticised for human rights

abuses. The governing EPRDF party won every one of the

546 parliamentary seats in May’s general election and a multi-

party system exists in name only. Significantly, this was the

first election for Desalegn as prime minister since he assumed

the position following the unexpected death of the long-

serving incumbent, Meles Zenawi, in 2012. Now, with his

own mandate to govern, Desalegn is able to pursue further

reforms. A mixture of economic growth and repression is

sufficient to keep a lid on simmering dissent, but the

government will need to address widening social gaps and

show that development is sensitive to, and inclusive of, the

wider population if it is to avoid protests and civil

disturbance.

Insecurity poses a constant threat

As a landlocked country, Ethiopia depends on cordial

relations with its neighbours. Access to ports at Berbera and

Djibouti through roads and railway, respectively, are critical

given fraught relations with Eritrea. Anxious to provide


security along its borders, where a range of unstable regimes

or militant insurgencies are found, Ethiopia’s active military

engagements in the region make it vulnerable to attacks. Al-

Shabaab has identified Ethiopia as a designated target for

terror attacks, particularly Addis Ababa and new national

infrastructure. Whilst effective security forces help to

mitigate this threat, militants remain undeterred, particularly

in the east where incursions may be easier. Bandits also

operate in many border areas, including the Danakil

Depression, where potash and salt mining are found, whilst

the border region with Eritrea is rife with rebel groups and

landmines.

Infrastructure development will underpin sector growth

Ethiopia’s infrastructure spending, at 15% of GDP, is the

highest in Africa and forms the bedrock of its development

objectives in the five-year Growth and Transformation Plan.

A Chinese-built railway is also under construction in a bid to

open up markets overland and improve logistics. A

construction boom of road, rail and dam projects is evident

nationwide, but no more so than in Addis Ababa. A visitor to

the capital will quickly see this is a country on the move. A

construction boom has the government clearing slums to

build low-cost housing, whilst the private sector is focusing

on commercial construction and real estate. In support, the

Nigerian company, Dangote Group, says it will spend $500

million expanding its cement plant in Ethiopia, adding to $600

million already invested.

Often described as the Achilles heel of the African continent,

Ethiopia has managed to carve a lucrative niche in power

generation. The country now offers the cheapest electricity

per kWh in the world and the sector continues to attract

large investment. Hydropower provides some 90% of

Ethiopia’s electricity and the controversial Grand Renaissance

Dam on the Blue Nile will become Africa’s largest

hydropower plant, turning it into a regional power hub.

However, with less than 50% of Ethiopian towns and cities

connected to the national grid, investment is required to

capture and transfer this energy across the regions. The

government is offering incentives to other renewable energy

sources, including free land leases of up to seven years to

biofuels developers, in order to kick-start nascent industries.

Agribusiness accounts for more than 50% of GDP, employs

around 85% of the workforce and is responsible for 60% of

exports. Multiple agro-ecological zones create fertile areas

for the production of coffee, tea, maize, cereals and

floriculture, whilst Ethiopia has the largest livestock

population in Africa. Opportunities exist for improved

productivity, skills and processing and packaging. The

government is keen to bring these value adds within its

borders, potentially tripling the price earned for raw

materials and working towards domestic self-sufficiency and

the reduction of poverty levels.

Ethiopia has avoided being hit by falling commodity prices and

is not dependent on natural resource extraction. However,

oil and gas reserves have been discovered in the country’s

south-west over the last five years. Mining opportunities exist

in gold, tantalum, coal, potash and salt, but extraction is

predominantly either in its early stages or small-scale and

artisanal. The economy has sufficient diversification that, as

long as prices remain low, Ethiopia will not be forced into

premature and low-profit extraction.

An untapped consumer market

A large domestic market of more than 94 million with

comparatively low per capita consumption is anticipated to

triple its purchasing power by 2025 from $1,300 on current

growth trends. A population expected to grow to 120 million

by 2025 also presents a large pool of cheap, youthful labour.

However, the literacy rate remains below 50%, creating a

skills gap that needs to be plugged by more than a returning

diaspora. Inequalities are also on the rise. At least 30% of the

population still live in poverty and the country lacks the

emergent middle class to fill the consumption gap. The

majority of wealth is concentrated around Addis, but with

only 18% of the population urbanised, a dispersed market and

labour force are preventing benefits of economies of scale.

Reliance on Chinese loans and investment

Chinese involvement in Ethiopia is apparent to any visitor to

Ethiopia and it is not unsurprising to encounter large

infrastructure projects in remote parts of the country, fully

owned, staffed and run by Chinese companies. More than $1

billion has been invested by China here in the last year,

predominantly through infrastructure projects. Ethiopia is

heavily reliant on the Chinese market, particularly loans to

finance infrastructure investment, and any market slowdown

in China will have knock-on economic effects here.

Growing recognition of the growth prospects of Ethiopia is

seeing a rise in interest globally, including from such

multinationals as Unilever and GSK. UK and US engagement

is rising, whilst Turkey and India continue to contribute

significant value, with Turkish companies alone responsible

for the investment of $1.2 billion over the last decade.

Triggers to Monitor The invigoration or change of policy by Desalegn

following his re-election

The opening of closed sectors to foreign investors

Success and timeliness of the national

infrastructure programme

Successful militant attack

Economic growth channelled to poverty reduction


Iran

Since the 1979 Iranian Revolution, a vast domestic market of some 80 million people has been isolated from the

international business community by both a self-imposed repudiation of the West and international sanctions. However,

protracted negotiations with the P5+1 countries resulted in the signature of a comprehensive agreement on the nuclear

programme of Iran on 14 July, which will spur the lifting of sanctions and pave the way for greater international engagement.

President Obama has invested considerable political capital in brokering this agreement and Iran’s President Rouhani has

effectively staked his presidency on securing the lifting of sanctions.

Since the first serious breakthrough in talks last year, business interest in Iran has rocketed. More than 600 foreign

companies sent representatives to the Iran Oil Show in Tehran in May, trade delegations have visited from Russia, Malaysia

and Italy, and Eni S.p.A. has recently reopened its office here. Whilst an agreement has been signed and the momentum

appears unstoppable, multiple moving geopolitical interests make the precise trajectory of the implementation of the

agreement difficult to forecast. Victorious rhetoric will be heard from both sides, but investors will need to concentrate on

the detail of the deal and its implementation path, rather than the accompanying bluster. The lifting of sanctions will now be

phased, meaning stringent compliance procedures will be required for some time. Nevertheless, the opening of Iran offers

the type and size of new market that comes around once in a lifetime, with investors already poised to gain strategic

advantage. In anticipation, fact-finding missions are taking place on a virtually weekly basis and early stage funds are being put

together for adventurous investors.

Strong political desire facilitated the nuclear deal

Talks over a nuclear deal were extended beyond several

deadlines due to large gaps in the positions of the opposing

sides over the inspection of nuclear and military sites and the

timetable for lifting sanctions. Strong political will eventually

broke through the impasse to reach a final agreement on 14

July, building on the framework agreement of 2 April 2015. In

return for cuts to its uranium stockpiles and enrichment

activities, as well as allowing inspectors to access nuclear

sites, Iran will receive relief from US, European and UN

nuclear sanctions. However, both the US and Iran will have

tough sells to their domestic constituencies and in the event

of a reneging on any parts of the deal, the UN will

automatically reinstate sanctions.

President Obama needed a deal before his term ends in 2016.

Whilst the President has now given Congress 60 days to

review the Iranian nuclear deal, he retains a veto should they

reject an agreement with less than a two-thirds majority. The

Congressional response will be subject to the vagaries of the

US electoral cycle as Republican contenders, in particular,

position themselves to win the party’s presidential

nomination. Nevertheless, Obama is anticipated to veto any

congressional rejection.

In Iran, the election of the moderate Hassan Rouhani to the

presidency in mid-2013 was instrumental in steering a less

adversarial path with the international community and

accelerating serious talks. The support of Iran’s supreme

leader, Ayatollah Ali Khamenei, has been critical in swinging

support behind Rouhani’s objectives. Khamenei, who has

prevented hardliners from sabotaging the talks, is ill and

preparations are underway for choosing Iran’s next supreme

leader. The Assembly of Experts, responsible for selecting the

Supreme Leader, has just elected Ayatollah Mohammad Yazdi,

a hardliner, as its new chairman and powerful vested interests

rooted in conservatism are pervasive. With legislative

elections due in February 2016 and for the presidency in June

2017, the implementation of the nuclear deal and the lifting of

sanctions are a political battleground for the hardliners and

moderates.

The sanctions regime will not disappear overnight

Iran’s multi-layered and multi-jurisdictional sanctions regime

is a complex process to navigate. Existing sanctions include

asset freezes of key individuals and companies, as well as the

specific targeting of the banking and energy sectors, which

was partially responsible for Iran’s economic contraction.

Whilst US sanctions are the harshest, where virtually all types

of trade have long been banned, some European companies

have been able to do deals in Iran, whilst avoiding all

sanctioned entities. However, several companies have fallen

foul of the sanctions regime, with penalties ranging from

prosecution to fines or being placed under sanction as well.

Credit Suisse, Standard Chartered and Schlumberger have all

been hit by multimillion dollar fines for violations, which often

relate to the transfer of money for sanctioned entities.

Iran’s status as an investor destination is now all about the

implementation of the nuclear deal and the lifting of this

sanctions regime. Sanctions relief worth around $7 billion

under the Joint Plan of Action (JPOA) has been ongoing since

2013 in response to Iran allowing UN inspectors better

access to its nuclear facilities. Whilst this was critical in

returning the domestic economy to growth after two years

of recession, a far more comprehensive lifting of sanctions

will be required for the economy to seriously restart.


However, the nuclear deal is not a silver bullet solution. A

phased sanction lifting can be expected and many sanctions

will remain in place and enforced long after the

implementation of the nuclear deal begins. Qassem Suleimani,

for example, the commander of Iran’s Quds Force, will be

removed from UN sanctions and some EU sanctions, but will

remain on the US sanctions list and other EU sanctions lists

due to his ties with terrorism and the Syrian conflict. Further

sanctions, unrelated to the nuclear deal, can still be imposed

and indeed the US applied new sanctions as recently as May.

This means some Iranian companies, and partners, will

continue to wilfully obscure their ownership structures to

enable sanctions evasion. Any investor will need effective anti

-bribery and corruption policies, as well as due diligence

capabilities, to continue to face the daunting task of sanctions

compliance and navigate the tricky relationship in Iran

between politics and business.

Finance is usually the biggest sanctions hurdle, with Iran’s

banking sector cut off from international flows and systems.

Finance will be one of the first sectors to have its sanctions

lifted and is expected to propel economic growth to some 6-

8%. Nevertheless, regardless of the implementation progress

of the nuclear deal, cross-border payments will continue to

be difficult for the rest of the year, at minimum. An outdated

banking system requiring considerable reform, as well as rife

money-laundering, means that for many companies,

particularly larger entities with subsidiaries and multiple

stakeholders, the risk of sanctions contravention and

reputational risk is still too large.

An improving macroeconomic framework

The macroeconomic outlook is improving as Rouhani moves

away from a populist administration, implementing more

prudent budgets and reforms. A large liquid market now

combines with a high GDP and low public debt, whilst a lifting

of sanctions will support a strengthening of Iran’s sovereign

rating. The government is targeting a sustainable growth rate

over the next five years of 8%. A vast domestic market of

some 80 million people, with nearly 65% under the age of 35,

is awaiting consumer goods to arrive for a growing middle

class. Levels of education are high and most are keen to put

their expertise to use in a country where a poor job market

still sees trained engineers drive taxis rather than work in

industry.

Iran’s $100 billion stock market is severely undervalued,

although its rise and fall has run in close parallel to the

progress of the nuclear talks. Listed companies are worth

around 28% of the country’s GDP, a ratio more appealing

than in many emerging markets, and there is no limit on

foreign investment, with stocks offering high dividends. The

privatisation efforts of some of Iran’s most lucrative sectors,

including natural resources, are driven by the Tehran Stock

Exchange, and combine with the liberalisation of capital

markets to make foreign investment here both easier and

more attractive.

The costs of doing business in Iran are low as a result of a

weak currency, where both labour and products can be

acquired cheaply. However, inflation rates are stubbornly high

and currency stabilisation is required to mitigate risk.

Domestic companies will be important to international

investors as they seek to explore this new market. Having

already proven themselves adaptable and resilient to endure

the sanctions regime, as well as possessing a wealth of local

expertise, these enterprises will have well-developed and

loyal markets available to tap into.

Government is creating the conditions for investment

Despite a traditionally isolationist government, incentives are

available to entice foreign investors. The Foreign Investment

Promotion and Protection Act (FIPPA) provides a 50% full-

term tax reduction on income, loan structure and eligibility of

government funding. The unlimited transfer of profit capital

and dividends is permissible, although caution must still be

exercised in light of the sanctions regime, and property

ownership rights have been enhanced, including to 100%

ownership in certain zones.

The model of free trade and Special Economic Zones that

currently supports domestic industry will be available to

foreign investors. Tax exemptions will be applicable for 20

years, monetary and banking services, as well as employment

regulations, are all more flexible, and companies benefit from

a 100% guarantee on invested capital and profits. The

government has ambitious objectives for these Zones, once

freed from sanctions. Chabahar Free Zone, for example, is a

port in the south-east, which the government hopes to turn

into a mega port and a hub for petrochemical activities, as

well as a tourist destination. Some 2,000 companies are


already in place, but capacity constraints persist. In May, India

signed a multimillion pound MOU to develop the port, partly

for strategic interest, offering access to South Asia that

bypasses Pakistan. Foreign interest in the Zone, as well as

investment, will help to spur the current projects to revamp

the local airport and construct or improve local rail and road

links.

Creaking but expansive infrastructure

A vast territory strategically located at the crossroads of

Eurasia and the Middle East, Iran has a wide network of

infrastructure. Terrestrial connections are good and a long

maritime border offers a gateway to the Indian Ocean, as well

as air travel to the booming Gulf economies and as a trade

outlet for landlocked countries in the interior.

Internally, despite a lack of new parts and maintenance, Iran

has a wide network of infrastructure to connect the vast

country. Airports are found in all major cities, rail links also

exist and roads between the main cities are largely of a high

quality. Internet connectivity levels are high. Some 40 million

people have access to the Internet and around 15% of the

population use the internet on their mobile. As internet

bandwidth grows and telecoms operators roll out further 3G

and 4G networks, a vast class of e-commerce customers will

emerge, as well as offering a springboard for tech-based

venture capitalists. The use of smartphones is widespread and

the emergent tech sector has not experienced stringent

regulation.

Isolationism has brought some benefits

Iran’s international isolation has made it comparatively

immune from the effects of global business cycles, including

downturns. Whilst having the world’s third largest oil

reserves and the second biggest cache of gas renders Iran

vulnerable to falling oil prices, its diversified economy

provides a cushion. Iran’s daily production of crude oil has

dropped in line with prices and another austerity budget is

therefore in place for 2015-16. However, diversification,

forced by sanctions, means that oil production now

Key Sectors

Tourism - domestic tourism is booming, but for international visitors, expense and logistics are problematic. British

visitors, for example, must send their visa applications to Dublin due to the absence of diplomatic relations. There is

a rising demand for religious, medical, eco and business travel and, despite the government offering incentives for

privatisation in this sector, there is a lack of high quality or international hotels nationwide to cater to the rising

demand.

Infrastructure – expansive networks require upgrades and maintenance. Iran Air, for example, which is still under

sanctions, is seeking to purchase 500 new planes to support its extensive, cheap domestic network.

Construction - real estate is one of the few sectors continuing to boom in spite of sanctions, both for residential

and commercial purposes. Accounting for 12% of employment and with an annual turnover of $38.4 billion, real

estate offers a substantial investment destination.

O&G and Services – a potentially lucrative industry is estimated to require at least $200 billion of investment, whilst

the national oil company is looking for investors to complete 67 unfinished O&G projects. Foreign capital and

technology are most in demand, but the sector is particularly sensitive to sanctions. Whilst a conventional PSC

cannot be offered due to constitutional restrictions, the government looks to be offering its most favourable terms in

decades, including shares in a field’s production, with the opportunity to seize market share from the country’s more

volatile neighbour, Iraq.

Automotive - the automotive sector has a long and resilient history in Iran and is already rebounding. Iran Khodro

has held talks on resuming its alliance with Peugeot, whilst Mercedes, Volkswagen and Renault are all said to be

negotiating joint ventures to offer products to both a specialised and large consumer market.

Healthcare - an educated workforce excels in the scientific development sector, offering opportunities across the

technology spectrum and in manufacturing, pharmaceuticals and medicines, where high levels of domestic demand

outstrip supply.

Venture Capital - a young, entrepreneurial and educated population offer attractive opportunities for venture

capital funds and angel or seed investors, keen to utilise the skillsets of those already immersed in the market.


comprises only 23% of GDP, compared to a services sector

accounting for more than half of GDP. Significant

manufacturing and industrial activity is underway and small,

often entrepreneurial, businesses now form the backbone of

the economy.

An opaque regime needs to adapt

Iran’s move towards a market-oriented economy is

hamstrung by opaque vested interests, including the powerful

Revolutionary Guards, who are reluctant to cede control of

vast business empires. Privatisation, as a prevailing economic

objective of the government, is bumping up against a large

public sector and state-run goliaths. Any company looking to

enter Iran will need to fully understand the political

connections of its partners and competitors. Investors in Iran

will encounter onerous and overly bureaucratic regulation,

much of which is still directed towards protecting a domestic

economy rather than seeking foreign involvement. Tax law is

strict and complex and will often be applied arbitrarily. Whilst

the government has lowered some corporation taxes and

aims to simplify the system, uncertainty persists. Investors

will find inadequate legal services and tools for business,

which struggle to assuage concerns over the sanctity of

contracts, nationalisation, repatriation of funds and the

trustworthiness of the regime. Some companies may

therefore prefer to use offshore vehicles for their first dip

into the Iranian market.

Iran still remains a socially conservative Islamic Republic. The

Vali-e-Faqih exercises considerable power over the

government and the Guardian Council approves all legislation

to ensure that it complies with Islamic law. Hardliners are

already railing against the anticipated opening of the country,

particularly to those sectors considered avant garde. Whilst

considered unlikely in the short-medium-term, any change in

Iranian leadership could prove a potential roadblock to the

implementation of the nuclear agreement.

An opening economy does not guarantee political

reforms

Political risk is high and the opening of the economy should

not be assumed to lead to political reform. The domestic

political climate is sensitive, but the Guardian Council retains

effective control. The Majlis, Iran’s parliament, is still

dominated by conservatives, belying the more moderate tone

seen under Rouhani. Factionalism is long-standing and the

battle between hardliners and moderates can spill over into

the regulatory and business environment, as well as affecting

domestic stability.

Political risk is expected to rise ahead of the 2016

parliamentary election and as stakeholders react to the

outcome of the nuclear negotiations. The Majlis has the

power to block the president’s legislative agenda, meaning

Rouhani has had to build a constructive relationship with the

long-term Speaker of Parliament, Ali Larijani, the leader of

the United Fundamentalist Party (UFC), the largest

conservative bloc in the Majlis and a supporter of Ayatollah

Khamenei. Whilst the UFC was anti-Ahmadinejad in the 2012

election, the removal of this polarising figure causes greater

uncertainly over the conservatives’ stance towards Rouhani in

the run-up to 2016, particularly as he tries to push further

liberalising reforms. Political factions will manoeuvre to

protect their interests ahead of the polls and reformists, in

particular, are facing censorship and restrictions. The end of

sanctions offers a further opportunity to break down the

powerful business monopolies of the Revolutionary Guards,

although many reforms and changes will be fiercely resisted

by those with a vested interest. A slow lifting of sanctions will

make Rouhani’s position vulnerable.

Geopolitical adventurism

A prominent military offers a measure of internal security and

stability, albeit with the repression of freedoms. However,

this same military is deployed for regional adventurism, with

Iranian forces operating either directly or by proxy in a range

of conflicts across the Middle East, from Yemen to Syria. The

military has successfully prevented terror attacks within its

borders, but such ventures complicate Iran’s foreign relations

and elevate regional tension, creating a risk of retaliatory

attacks either against Iranian interests or within Iran’s

borders. An unpredictable and unorthodox foreign policy has

some of the greatest potential to derail the implementation of

the nuclear deal.

Sanctions have caused a shift in foreign trade and investment

towards the markets of Asia and the Middle East. Whilst

rebuilding relations with developed markets will be

important, Iran will continue to prioritise engagement with

China, its largest market, as well as Turkey and India. Despite

religious and political differences, for the UAE commercial

instincts prevail, making the Emirates the leading global

supplier to Iran. Dubai stands to benefit further as the

geographic base for those investors in Iran seeking to hedge

against any deterioration in economic or political conditions.

Commercial interest has also been noted from Germany and

Russia, to name a few. However, due to a combination of

inert diplomacy and focus on sanctions, the UK has fallen

behind the competition to enter this strategic market.

Triggers to Monitor Implementation path of the nuclear agreement

Sanctions begin to lift, specifically related to finance

Investment from a large US company or major

multinational

Moderates prevail over the hardliners in

government

Business empires of the Revolutionary Guards

disintegrate, whilst domestic stability continues


New foreign investment law anticipated

Foreign direct investment is Myanmar’s key ingredient for

resilient economic growth, as well as a driver for job creation

and income generation. Rapid growth and development, built

off the country’s rich natural endowment, strategic location

and large labour force, offers prime opportunities. The

World Bank expects growth above 8% until at least 2017,

although predicated on ongoing banking sector reform, and

by some estimates Myanmar is now the world’s 13th fastest-

growing economy. The signs are already visible on the streets

of Yangon. International business delegations regularly rotate

through, the country plays host to business events and

international conferences, and the presence of multinationals

is tangible.

A new foreign investment law is currently in draft, under

public consultation in a promising show of government

inclusivity. The law is anticipated to meld together two

separate investment laws, as well as ending discrimination

against foreign companies and introducing an automatic

approvals process for selected projects and tax incentives for

specific regions and sectors, expected to include labour

intensive industries, infrastructure development and

agriculture. Regulations have been amended to create a more

secure contractual environment, whilst foreign companies will

be permitted to fully own businesses without the need for a

local partner. The United Overseas Bank (UOB) has already

established a Foreign Direct Investment Advisory Unit in

Yangon to share expertise with foreign investors, whilst an

anti-corruption law was pushed through in 2014 to try and

ward off this growing threat.

SEZ regime hopes to attract large-scale investment

The Special Economic Zone (SEZ) Law, established in 2014 as

an adjunct to the Foreign Investment Law, facilitates three

SEZs; Dawei in the south-east, Thilawa near Yangon and

Kyaukphyu in the north-west, as joint projects with Thailand,

Japan and China, respectively. Incentives will be concentrated

here to attract foreign investment and encourage export-

oriented industries. Benefits include an average of 50% tax

relief during the first five years of operations, import duty

relief and partial relief on reinvestment of export profits, as

well as longer-term leases and protections against

nationalisation. Alternative administration bodies also give

each SEZ the freedom to designate its own promotional

zones. However, Thilawa is the only SEZ to have projects

approved or operational, from countries including the US,

France and Singapore. Investor entry for the other two SEZs

is anticipated next year. The solidification of these SEZ

regimes and their full potential will form part of a longer-term

project for the country.

Myanmar (Burma)

Often described as the most exciting frontier market in South-East Asia, Myanmar is emerging from a long period of

international isolation. Shedding long-held political and economic sanctions, the country is expected to receive a record

amount of $8 billion in FDI in 2015.

After more than 50 years of a repressive military junta, which saw opposition leaders imprisoned, the country transitioned

to a quasi-civilian government in 2011. Under President Thein Sein, hundreds of political detainees were released,

censorship rules eased and talks began with the opposition, paving the entry of the revered Aung San Suu Kyi into

parliament. As a result, the majority of sanctions were lifted in 2012 and development aid flooded in. Whilst foreign

investors have long salivated over this resource rich country, investment has been slow to arrive, only after a series of

reforms and economic liberalisation. Myanmar’s current pace of change hinges on its general election due to be held on 8

November 2015 and the direction and pace of reform afterwards.

However, this is still an economy that only opened four years ago. Limited international sanctions persist and US companies

remain banned from dealing with specific entities, including the government and armed groups. A promising growth outlook

is met with rising concern of political risk surrounding November’s election. Whilst President Thein Sein is expected to

stand down, uncertainty persists over the reformist priorities of his as yet unidentified successor and how much more

power the military is willing to cede. Just as civil society grows increasingly assertive over issues ranging from education fees

to racial nationalism and labour rights, domestic decision-making is slowing and foreign investors are again wary of this

underexplored and underdeveloped market. A halt to reforms and further examples of violent ultra-nationalism and

regressive policies will see threats of a return to Western-imposed sanctions, although actual re-imposition remains unlikely.

Similarly, a peaceful election setting the stage for further progressive reform and a cementing of the transition to a market-

based economy, with more predictable policy making and longer-term political stability, could see Myanmar’s remaining

sanctions lifted.


Banking reform will underpin economic growth

The banking sector has undergone much needed reform, with

nine foreign banks now granted licenses to operate in

Myanmar, both enabling the flow of inward investment and

improving domestic banking practices. Further openings in

the banking sector are anticipated, including an easing on

lending and banking regulation, with aspirations of an internal

credit rating system. The Yangon Stock Exchange is due to

debut in October, offering a major development in

Myanmar’s capital markets, and the country’s first sovereign

bond sale is expected within five years. However, financial

infrastructure is still lacking, with a low number of branches

and ATMs nationwide belonging to Myanmar’s four bloated

state-owned institutions. Banking penetration levels are

extremely low in this predominantly cash-based economy and

bank borrowing is virtually non-existent, inhibiting small- and

medium-sized enterprises. European and US banks remain

wary of the Myanmar banking regime and none of their banks

joined the bidding process for licenses in the latest round.

The government will need to push further on reforms and

incentives to attract foreign banks, as well as permitting them

to engage in retail banking if project finance and access to

credit are to be supported for both domestic and foreign

investment.

Labour regime requires reform

Myanmar offers a cheap labour force with a high literacy rate.

Whilst a population of more than 55 million is rushing to

learn English, decades of isolationism have left a dearth of

human and physical capital. Demand for skilled labour is

outstripping supply, particularly in the labour-intensive

manufacturing and retail sectors, and international companies

are already fiercely competing for the small pool of local

nationals with managerial skills. As well as talent acquisition,

labour laws and visa requirements can prove a deterrent.

Labour laws are outdated and often contradictory. Anger

over poor conditions and low wages results in the type of

disruptive strikes seen in the Shwe Pyi Thar Industrial Zone

in February and March 2015. Agreement on a minimum wage

is still contested by unions and workers, although for

corporates a Dispute Settlement Arbitration Council has

been established to avoid formal litigation in the courts. As

the government implements reforms and is forced to respond

to public pressure, not all of the new laws will be market

friendly. The Department of Labour is currently deciding

whether to require prior approval of employment contracts,

placing an additional regulatory burden on employers and

affecting the fluidity of the labour market.

Still a challenging operational environment

Membership of ASEAN has been critical in accelerating the

reform of Myanmar’s commercial environment, which is

anticipated to bring further networked benefits when the

ASEAN Economic Community is launched in December,

enabling the free flow of goods, skills, services and capital

across member states. Nevertheless, Myanmar is ranked 177

out of 189 countries in the World Bank’s Ease of Doing

Business report. Business registration can be cumbersome,

administration and bureaucracy off-putting and slow and real

estate costs high. Many bureaucrats still require face-to-face

dealings in the new capital, Naypyidaw, which is isolated from

the commercial realities and opportunities elsewhere in

Myanmar. Investor protection and criteria around foreign

investment remain ill-defined and a weak rule of law

compounds question marks over the absence of proper

mechanisms for enforcing contracts, property rights and

settling disputes. In the rush for development, much new

legislation has been pushed through in haste or without

expert advice, resulting in poorly drafted legislation littered

with loopholes. Regulation remains poor and there is a

danger that this scattergun approach will place the country

on a non-sustainable growth path. Myanmar would benefit

from a prioritisation of reforms needed to both attract and

retain foreign investors as well as give domestic industry a

boost.


A political opening still has far to go

The opening of the Myanmar market has been enabled by a

preceding political opening. Whilst further progress is still

required, opposition parties no longer operate underground,

with 70 parties registered for November’s election, including

the National League for Democracy (NLD), which boycotted

the 2010 polls. Space has been created for muted public

criticism and an empowered civil society is willing to agitate

for change, whilst the installation of permanent secretaries

hints at a more professional civil service able to enforce

political stability in the event of regime change. However,

Myanmar is still not a free or democratic country. Aung San

Suu Kyi remains barred from running for the presidency.

State media is dominant and sensitive information is withheld

from the public. The current allocation of parliamentary seats

and cabinet posts grants the military effective veto over any

constitutional reform and the military will respond to

protests and provocation with violence. The lack of clarity

over how much further this political opening will go is

clouding the commercial environment. Government decision-

making is stalled until after the election, from new legislation,

to progress on the $50 billion Dawei deep sea port.

Myanmar is coming under growing international pressure for

its treatment of ethnic minorities and ethnic clashes in its

borderlands. The powerful Buddhist group, Ma Ba Tha, taps

into a vein of ultra-nationalism, stoking anti-Rohingya

sentiment, which has caused violent attacks and waves of

refugees attempting to flee from squatter camps already one

million strong. A population control law was passed into law

in May, permitting the government to impose birth control

measures in specific areas of the country, which it is feared

will be used to target the Rohingya minority. Three further

“race and religion protection” bills are on the table, with the

potential to generate violence and tension, particularly if they

pass into law before or around the election. Such ethnic

tension provides a pretext for the type of government

crackdown that could halt political reforms and stall or

reverse foreign investment.

Infrastructure, extractive and services opportunities

Investment in several mega projects is underway, affirming

the commitment of international business to Myanmar’s

future. Infrastructure, manufacturing, construction and power

are some of the first sectors where global companies are

competing for contracts. Further investment is required and

whilst visitors to Naypyidaw will find excellent but deserted

roads, in Yangon many roads still have gaping holes and in

rural areas are simply non-existent, or washed away in the

rainy season. Road journeys can be long, arduous and often

impossible during the four-month long rainy season. Energy is

an opening market, but current electrification rates are some

of the lowest in the world, with an absence of reliable and

efficient power a barrier to economic growth. A wealth of

natural resources are present in Myanmar, including jade,

mineral resources and timber, as well as O&G. Usually

receiving the most investor attention, O&G is vulnerable to

global prices, with Myanmar’s fledgling gas sector taking more

than one third of total FDI currently invested in the country.

The service sector also competes for investment, with

opportunities to provide legal advice for the multitude of new

businesses seeking to understand a complex market and new

legislation. Gaps exist in the education or communication

sectors, as well as a swiftly liberalising healthcare sector,

where the government has pledged to quadruple spending

from a very low base. International support is evident in

some of those sectors considered critical to Myanmar,

including agriculture. The government is working with the

OECD to boost foreign investment in this sector, which has

been slow to date, through the creation of a coherent policy

framework with contract stability.

Chinese power may be waning

According to government’s figures, contracted FDI in

Myanmar at the end of May reached $56.54 billion from 38

countries, invested in 929 projects. China has been

Myanmar’s largest and longest-serving partner, investing

throughout its years of international isolation, particularly in

strategic infrastructure projects and military support.

However, the forcible relocation of local populations,

environmental hazards and violence and border skirmishes

have soured this relationship.

Myanmar now has more options available. Indian engagement

has a long history as a result of its strategic location, as well

as a diaspora of Indians here some one million strong. Asian

companies have been active for some time and a recent UOB

survey found around 25% of Asian businesses plan to expand

in Myanmar in 2015, with particular interest from Hong Kong

and Thailand. Malaysia is already the country’s seventh largest

foreign investor, focusing on the banking, legal, construction

and O&G sectors, including Petronas, whilst Singapore

prefers the O&G and manufacturing sectors. However, many

operations here are still run from Asia Pacific regional offices.

Whilst the EU remains one of Myanmar’s smaller investors,

engagement is progressing, including in search of an

agreement on the promotion and protection of investment.

Triggers to Monitor A peaceful election and advance of further political

reform

Unblocking of political decision-making

Licensing of US or European banks

Lifting of remaining sanctions

Labour law reform

Passage of foreign investment law

Indication of government willingness to act against

ultra-nationalism


Stock market hints at a slowly opening economy

The opening of the $590 billion stock market, the Tadawul,

one of the last major bourses to remain off limits to foreign

investors, provides a deeper equity pool, as well as

diversifying the investor base. At least 168 companies are

currently listed, covering 15 different industries and offering

stable dividends and strong profits from, among others, Saudi

Basic Industries Corp, the world's largest petrochemical

company, as well as banking giants. The partial opening of the

bourse means domestic companies will be exposed to higher

levels of corporate governance, transparency and financial

discipline. As the largest stock market in the Middle East,

stimulating growth in Saudi, with a trading volume of some

$2.4 billion per day, will also act as a wider pull towards the

region and facilitate the integration of Saudi businesses into

international markets.

Whilst the entry of foreign investors into the stock market

has initially been slow and inflows disappointingly small,

foreign equity investment was always expected to be cautious

at the outset. Restrictive regulations require foreign investors

to have at least $5 billion in assets under management and a

five-year investment record to be able to purchase a

maximum of only 10% of the shares of Saudi-listed

companies, hampering the type of smaller, more agile

investor often found in frontier or emerging markets. Many

companies in “sensitive” sectors, including real estate

companies building in Mecca, still remain off limits for foreign

investors and concerns persist over the settlement period of

trades and the level of feedback the bourse is willing to take

on board. However, foreigners already indirectly own some

1.5-2% of the market via P-notes and other swaps. Although

more expensive, these offer exposure whilst avoiding

inclusion in foreign ownership ceilings. As long as P-notes

continue to offer such benefits, many existing investors see

little reason to immediately swap to a restrictive direct equity

investment. The opportunity to invest in IPO funds has also

grown, with eight such funds licensed this year.

However, the partial opening of the Tadawul is a promising

marker for the rest of an economy that has remained largely

closed off from the rest of the world. Tens of billions of

dollars of both passive and active investment is expected in

long-term investment in the coming years as rules are relaxed

and refined and as the market matures. This type of gradualist

approach is exactly in keeping with the Kingdom’s preference

for a slow and managed process.

Spending splurge is not deterring investors

Whilst low oil prices are undeniably weighing on the Saudi

economy, the Kingdom has embarked on a dramatic domestic

fiscal spending programme. Pumping money into increasing

the size of the public sector, particularly the security and

defence forces, has resulted in a massive budget deficit of 20%

expected this year. Growth is projected to stagnate at 3.5%

in 2015, the same as in 2014, with the IMF expecting rates to

slow to 2.7% next year as export and fiscal revenues are hit.

Extensive fiscal buffers mean Saudi Arabia is one of the few

economies able to sustain such high levels of spending, with

its credit rating still unthreatened. The Kingdom remains on

track to be reclassified as an emerging market, which can still

happen only as early as 2017.

Investors will find a stable banking and financial platform,

where banks are well capitalised and benefit from liquidity

and implicit government backing. Nevertheless, an economy

dependent on oil for 90% of government and export revenue

is vulnerable to further oil price shocks, whilst also affecting

geopolitical relations as de facto OPEC leader. Current

spending levels are unlikely to increase further under

prevailing oil price conditions, constraining those businesses

reliant on further state spending.

Saudi Arabia

Characterised by a long period of stability under an aging gerontocracy, the political and commercial environment in this

petro-state is starting to evolve. Gradual change, including stock market reform and moderate social developments, including

allowing women to vote and run in municipal elections, took place in the final years of the late King Abdullah’s reign.

However, the accession of King Salman to the throne early in 2015 has initiated a period of the most profound political

change seen in decades. Salman has removed King Abdullah’s choice for crown prince, promoted his son, Mohammed bin

Salman, to Minister of Defence and replaced the world’s longest-serving foreign minister, marking a generational shift in

power to a group accustomed to growing up with wealth and more liberal environments overseas. The new King both has

the will to make these big decisions and the capability to shift powerbases to ensure he has the political capital to see them

through. Two new, powerful committees have been created to oversee defence and economic policy and an increasingly

assertive foreign policy is also now in effect as the Kingdom engages in regional military operations. Finally, a commercial

boom, supported by an expansionary fiscal policy, is underway, with a small, but significant, concession to foreign investors

when Saudi Arabia’s stock exchange opened to non-residents for the first time on 15 June.


Foreign investment is an explicit target

As well as reshuffling politicians and technocrats, King Salman

has reorganised ministries in a bid to streamline decision-

making and improve government efficiency. A royal decree

has been issued for all government ministries to use spending

initiatives to provide incentives for foreign businesses to

invest and relocate to Saudi. The Saudi Arabian General

Investment Authority (SAIGA) has introduced a fast-track

programme to award investment licences in five days or less

in such key sectors as transportation. Wholly foreign

ownership is now permissible in most sectors and an

attractive tax regime offers no VAT, personal income tax,

sales tax or property tax on investors, as well as a

competitive rate of corporation tax of a maximum of 20%,

except in the oil sector where taxes can reach 85%.

Nevertheless, many investors remain wary of an opaque

regime where policymaking is unpredictable and the clarity of

rules is lacking. Some companies report lengthy delays in

payment and an overly onerous expectation of commitments.

All legislation is also constrained by the need for compatibility

with Islamic law, which can create cultural challenges,

particularly for women. Companies still waiting for others to

test the water will continue to handle Saudi business

remotely from regional offices in Dubai, at least in the short

term.

Whilst Saudi Arabia is seeking diversification from a fragile

revenue source and to add value within its borders, non-oil

growth is slipping. A greater onus will need to be placed on

manufacturing and services, as well as the development of the

private sector through services and utilities. Through a new

Unified Investment Plan (UIP), SAIGA has identified more

than 90 projects in which to explicitly seek foreign

investment, including the transportation and health care

sectors. The government is pointing to billions of dollars’

worth of domestic projects available, as well as a large

regional market estimated at some 300 million people living

within a three-hour flight of Riyadh.

High-value RFPs are being issued for opportunities around

new universities, financial districts, ports and airports as the

government embarks on a comprehensive plan to improve

infrastructure. At least $140 billion will be invested in the

transport sector alone in the next 10 years, across the rail

network, ports and airports. Projects are open to public-

private partnerships in the national expansion plan, covering

five metro and bus projects, including current metro system

construction in Riyadh and Jeddah, as well as thousands of

kilometres of rail network. $90 billion will go on rolling stock,

with another $50 billion spent on operations, including

requirements ranging from communications plans to the

training of staff as the Kingdom seeks to network Riyadh,

Jeddah, Mecca and Medina. Improved infrastructure will

enable the Kingdom to exploit the resilient demand of a $16

billion religious tourism industry, which currently sees nearly

14 million pilgrims flock to the holy cities annually, but rarely

spread their consumption elsewhere. Tourism from GCC

countries is already up 31% in the first five months of 2015

and a massive investment and construction programme is

underway at Mecca to meet growing demand.

A lucrative and abundant oil sector has national restrictions,

but opportunities are available to provide value added in

refining, as well as in the renewable sector, including solar.

Saudi Telecom Company, as the largest mobile company in

the Gulf, is receiving further interest, and whilst government

spending is stimulating the private healthcare sector, medical

insurance take-up is still low for a population facing greater

healthcare challenges, offering significant growth potential for

investors.

A large youthful population is not meeting labour

shortages

More than 50% of Saudi’s population is under 20 years old,

with no indication of growth slowing. Abundant oil and gas

reserves provide considerable wealth and the highest level of

consumption in the Middle East filtering down to a growing

middle class, offering opportunities to a wider range of

consumer goods. However, youth unemployment is high,

squeezed by an influx of cheap unskilled labour, often from

the Subcontinent, and skilled expatriates. Anxious to prevent

this large cohort of youngsters from engaging in political

agitation or excessively liberal pursuits, tackling youth

unemployment is now a priority for the government.

More than 150,000 students are studying abroad, but many

will not return for work in the foreseeable future. Labour law

reforms are intended to encourage Saudis to enter the

workforce, including quotas for local content and additional

training. Opportunities are available here for vocational and

professional training from external providers. However,


those companies operating in Saudi Arabia may still

encounter a skills gap, which combined with difficulties in

gaining visas, can cause shortages in appropriate labour

expertise.

Domestic political changes are shifting foreign policy and

security threats

Under King Salman, political movements have concentrated

power among his close relatives and allies. This year has seen

the appointment of the new Crown Prince, Muhammed bin

Nayef, and the Deputy Crown Prince, Mohammed bin

Salman, as well as the appointment of a commoner to the

usually powerful role of Foreign Minister. Mohammed bin

Salman, as the King’s son, has also received a raft of public

appointments in business and defence, as well as other close

family members. Whilst risking a backlash from the family

branch of the late King Abdullah, Salman is working quickly to

solidify his powerbase.

Military operations against Iran-backed Houthis in Yemen is

distracting from internal political movements and generating a

nationalist support base, although enduring longer than the

Kingdom expected. Other regional adventurism sees Saudi

troops propping up the Sunni-minority government in

Bahrain, funding anti-government rebels in Syria and

supporting the US-led campaign against the Islamic State (IS),

creating a tricky diplomatic balancing act. High spending

levels, economic growth and burgeoning bilateral

relationships have each helped to facilitate these regional

power-plays.

Shoring up the Sunni powerbase in the Middle East makes

Saudi Arabia vulnerable to insecurity. Despite an effective and

capable security force, the last four months has seen a

significant rise in security incidents. Suicide bombers have

targeted Shi’a mosques, whilst gunmen and disgruntled

workers have shot dead foreign contractors in Riyadh, as well

as the south-western border coming under pressure from the

war in Yemen. Security forces are on high alert, mounting

multiple raids and arrests, but will have to remain at this

heightened level of vigilance whilst the Kingdom’s foreign

policy continues its current trajectory. Critically, for now,

foreign investors appear undeterred by the threat of terrorist

incidents, indicative of the high levels of confidence placed in

the Kingdom’s security and stability.

Triggers to Monitor Increased foreign investment in the Tadawul

Shift from P-notes to direct equity stakes in the

Tadawul

Further consolidation of power under King Salman

Reaction to the concentration of power among

King Salman’s close relatives and allies

A shift in momentum or targeting of terrorist

attacks within Saudi Arabian borders

Progress of social reforms alongside economic and

political reforms

Commentary and policy-making of the increasingly

powerful Prince Mohammed bin Salman

A breakthrough in the conflict in Yemen


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