Recent events surrounding the Dubai World debt standstill raise broader questions about the political risks of investing in the Arab World. The good news is that growth and FDI have risen markedly in recent years; yet, risks undoubtedly remain. I researched the issue in depth for a new Perspectives from the Multilateral Investment Guarantee Agency (MIGA) that highlights the diversity of risks within the Arab World.
The Arab World, like other developing regions, provides both potential risks and rewards for international investors. The most important message from the Perspectives piece, though, is that risks vary significantly by country, by sector, and by project. As a result, it’s crucial not to take a one-size-fits-all approach to investing in the region.
Case in point: The Arab World is perceived as being prone to war and civil disturbance. Yet available data from the Berne Union shows no claims for war and civil disturbance in Arab countries. Here we see a considerable gap between perceptions and reality.
Moreover, while most Arab nations hold substantial reserves, lowering the risks associated with the transfer and convertibility of domestic currency, this masks some significant variability. Foreign exchange reserve levels among countries in the region vary from four to 12 months of import cover.
Expropriation events have been rare but high-profile in the Arab World. Notably, since 2005, Berne Union data show eight cases of expropriation—none in the Arab World.
Many investors enter into contracts with host governments, and in these cases breach of contract risks are paramount. The World Bank’s governance indicators reveal a gradation in the quality of governance and access to legal redress in the region; nine Arab countries are above the global mean, 13 are below.
National laws and practices over arbitration also vary considerably. Important regional arbitration centers are in Cairo, Dubai, and Bahrain. New centers are in the process of being established in Saudi Arabia and Qatar, and in the Dubai International Financial Centre. Many, but not all, Arab states subscribe to the key international arbitration agreements, conventions, and organizations.
These are some examples of the Arab World’s great diversity with respect to issues that impact political risk. Again, it’s important to stress that investors should understand the specific political risks they are facing. From there, investors can work to protect against and manage these risks effectively, including through the use of political risk insurance, where appropriate.