Spain Coming Opportunity for Leadership in the Mediterranean
Owing to booming oil revenues and aggressive sovereign wealth funds, rich Gulf countries have been leading the way as foreign investors in North Africa since 2003, as well as in the southern Mediterranean zone, displacing western investors. But the ongoing global economic crisis appears to be reshuffling the cards once again. The southern Med (SoMed) region is also hit by the financial turmoil that started in the US market. As such, foreign direct investments (FDI) moving into SoMed dropped by an estimated 40% in 2008 in value terms to settle at €35.5 billion, according to ANIMA Investment Network.
In the 10 countries covered by the ANIMA survey (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Syria, Tunisia and Turkey) the most hit industries were the real estate and the tourism sectors, areas that have been traditionally favored by Gulf-based investors looking for lease or rent-base revenues. The most resilient sector was oil and gas with a combined FDI of €11.3 billion in the region in 2008, while increases have been recorded in the distribution, chemicals and steel industries.
However, further economic analysis indicates that the overall reduction in FDI in the region cannot be explained solely by the global economic crisis. The year 2008 was characterized by a sharp reduction in privatization initiatives that led to less FDI inflows. In 2007 and prior, global corporations have acquired lucrative local assets, such as steel, telecom companies and financial services institutions. With nothing substantial to sell in 2008, acquisition inflows dropped, reducing the volumes of FDI in the region.
With the withdrawal of Arab investors, the Europeans are now looking at a new opportunity to reengage into the SoMed economic sphere. With €15 billion spent by Europeans in SoMed in 2008, their share of the region’s FDI accounting for 36.8%, enabling them to quickly catch up with their Arab competitors, and providing a fresh opportunity to influence the economic profile of the south. France has been the leading European investor in the region, having committed some €24 billion over a period of six years. The second most notable investor among the Europeans in SoMed is the UK with €18 billion, followed by Italy with €7.2 billion, Spain with €6.8 billion, the Netherlands with €6.1 billion, and Germany with €5.2 billion. While their share of FDI in SoMed topped the 30% share in 2006 and 2007, Gulf and Middle East investors saw their share drop to 17.1% in 2008.
Europe’s renewed attraction to the SoMed region is likely to expand in 2009 and the global crisis is helping. European buyers are seeking to re-channel their purchases away from Southeast Asia and into SoMed, for products and services ranging from television assembly to textiles and call centers. This is part of a wider effort to control the supply chain and inventories through proximity management, essentially benefiting the regions closer to the European markets.
While France remains the biggest contributor to European investment in the region, we expect Spain to lead a new offensive, in particular toward the Maghreb region when it takes over the presidency of the European Union in January 2010. It is uncertain how will leverage its position and while opportunities abound, challenges are equally important. Spanish officials have already made it clear that Spain will seek to transform the whole Mediterranean region into an important hub of economic growth.
For Spain, looking south is a key strategy in getting its economy out of the doldrums. The challenges facing Spain are the results of years of economic success, which shifted into an alarming economic crisis virtually overnight. Speaking recently in Algiers, Spanish economist Jordi Vaquer noted that “while Spain’s GDP per capital has exceeded that of Italy in 2006, Spain now suffers from the current economic crisis with an intensity that surprises us every day. The model we successfully built has turned around. We now have the second trade deficit in the world, at €55 billion in 2008. The real estate bubble is enormous, with 1.3 million unsold houses.”
For Vaquer, there is no doubt that a good deal of future economic growth will come from countries “that will need to be built,” needing Spanish expertise, and the Maghreb region is at the top of the list. He argues that Maghreb nations could play a similar role played by countries like Poland, Romania and more recently Turkey, by offering a new growth platform. But he also noted that Spanish business leaders are still not on board with the idea of supporting economic growth in the SoMed region. There are substantial differences between Maghreb countries, making it difficult to put forward a region-wide economic strategy. While Algeria is far behind Morocco and Tunisia in terms of business legislation and overall economic performance, it is still by far Spain’s biggest economic partner in the southern and eastern Med region thanks to strong energy ties.
For Spain, although opportunities abound in the south, there has to be a substantial amount of convincing to get its business leaders to commit. Despite the enormous success made by Spanish companies at home, often characterized as a miracle, corporate leaders continue to shun the Southern Med region and the Maghreb in particular, despite the advantages of proximity. So Spain will be looking for January 2010 as the opportunity to make the case before its own business community for stronger economic cooperation with the Maghreb. The Spanish presidency of the EU will occur between the presidencies of two Northern European countries, further providing a sense of urgency to put forward an effective SoMed agenda.
But for Spain, the challenges could be major inhibitors to its plan for leadership. Among the most difficult ones it will face is understanding the differences and subtleties that exist between the southern countries in an effort to integrate them further. Vaquer noted that “while we know what Morocco and Tunisia want, which is essentially the status of advanced partner with the EU, Algeria has never managed to articulate clear demands and positions on where it wants to be in the future.”
But officials and business leaders of the south remain somewhat skeptical as to the reality between public speeches and action. Debating Vaquer, an Algerian official and former ambassador to Madrid stated that the partnership for “shared prosperity” that has been promoted by Europe never materialized. “The Algerian market has opened up enormous opportunities, yet European investors did not show up.” Skepticism among the Algerian business elite is rampant. For Nassim Kerdjoudj, the head the CARE think tank (Cercle d’Action et de Réflexion autour de l’Entreprise), which focuses on corporate strategy and business issues, the Spanish government and business will have to adopt a different approach to dealing with their North African counterparts. Kerdjoudj wonders how Spanish authorities would react if Algerian investments were proposed to bail out a Spanish financial institution that has been hit by the global credit crisis. He speculated that both government attitude and public opinion in Spain would be outraged and would stand against such move, underscoring the need for adjustments within Spain first before that country could aspire for a leadership position.
Responding to the hypothetical question, Vaquer reiterated that Spain does not function this way and that the rule of law and those of European Union dominate. “It is not a question of the origin of the company interested in an acquisition in Spain that matters, but the requirement that the rules of European laws are adhered to. It happened that the Russian oil giant Lukoil was denied its request to acquire 30% of Repsol in November 2008 precisely because it did not meet EU regulations requirements.”
These debates, although healthy and necessary, indicate that there is still a long way to go before the North and South in the Med region operate in tandem. There are many differences that both parties recognize and the sooner Spain identifies where the weak points are, the more effective its presidency of the EU could be in regards to the a Mediterranean economic agenda.