Published: January 03, 2012 in Knowledge@Wharton
After toppling long-standing regimes, destabilizing others and grabbing the world’s attention, the Arab Spring’s protestors most likely remain amazed at the far-reaching effects of their actions in early 2011. Although their demands in Tunisia and Egypt were focused squarely on long-term economic and political betterment, they also had an immediate impact on investment prospects in two countries that are geographic bookends of the Middle East — Morocco and Iraq.
Indeed, the near-term beneficiaries of the Arab Spring may be those farthest from the intense protests. Both Morocco and Iraq are attracting fresh foreign investment as countries such as Egypt and Tunisia — the current champions for long-term economic opportunity — see investors flee to countries that formerly took a back seat to their relative dominance.
Already positioned with established, aggressive programs to attract investors, Morocco and Iraq are among the early winners of the Arab Spring. Morocco, whose popular king has reigned for the last 12 years with a record of dramatic reforms targeted at modernizing the economy, seized the opportunity of turmoil elsewhere by embracing a new, stability-inducing constitution that is already paying dividends. In the case of Iraq, which continues to find its political footing and secure rising oil revenues, foreign investors are giving the country a fresh look since the unrest began in January 2011.
While each country’s long-term economic appeal remains to be seen as the region’s political battles are fought, Morocco and Iraq — each distinctly affected by its pre-Arab Spring circumstances — have emerged as early economic winners.
Morocco: A Long Wait in the Corridors
Morocco’s ability to seize the changing tides of the investment landscape in the wake of the Arab Spring is not surprising in light of its track record over the past 10 to 15 years. Under the leadership of the current king, Mohammed VI, the country has aggressively pursued economic liberalization with clear positive outcomes, including a competitive telecom market with three licensed operators following the privatization of the industry in the 1990s, and a thriving Tangier Free Zone that has brought 475 international companies to the country’s main Mediterranean port.
In 2008, automobile manufacturer Renault-Nissan inked a deal to begin construction of a vast industrial complex in the Tangier Free Zone at an estimated cost of nearly €700 million (US$1 billion), one of its largest investments in the African continent. According to Jacques Chauvet, Renault’s head of Europe, Middle East and Africa operations, Morocco’s growing domestic consumer market, its strategic proximity to various European and African countries and its reliable infrastructure with strong labor-cost advantages are what tipped the investment case in its favor. Thus, even prior to the events of the Arab Spring, Morocco was emerging as an attractive destination for foreign direct investment (FDI).
Some observers suggest that revolutionary sentiment in Tunisia and Egypt caused Morocco to redouble its focus on attracting investment. As the early months of the Arab Spring unfolded and despots around the region responded to protests with underwhelming concessions, Morocco stayed ahead of the curve by quickly initiating constitutional reforms and other efforts aimed at quelling revolutionary sentiments. These reforms clearly aided the investment atmosphere by reducing the perception of political instability and attracting new FDI projects during the first quarter of 2011 — a time when countries such as Egypt, Tunisia, Libya and Syria suffered significant investment outflows.
Perhaps anticipating the opportunity to affirm his country as a beacon of stability in the region, King Mohammed VI pushed constitutional reforms that further strengthened Morocco’s attractiveness for investing. On the heels of the peaceful protests of February 20, 2011, the king announced the beginning of a dialogue that would change the country’s constitution. His speech, unprecedented in the region for its clear and significant concessions, had messages for protesting Moroccans and others. Investors received a strong signal from his statement that “we shall continue to press ahead with thorough reforms … in development-related sectors. We shall see to it all institutions and agencies fulfill their mission in an optimal manner, [and] observe good governance standards….” Investors observed the fulfillment of other concessions and were confident that this was definitely not an empty promise.
This and subsequent speeches were well-received by investors monitoring the shifting sands of the Arab Spring. A July 2011 survey by the Economist Intelligence Unit found that an astounding 46% of respondents cited political instability as a top obstacle to doing business in Egypt, compared to just 14% in Morocco. Moreover, the International Monetary Fund, in its July 2011 mission to Morocco, praised the ongoing governmental reforms, saying they “will enhance efforts to strengthen structural reforms and foster medium-term growth.” Indeed, it seems that Morocco has been successful in using political reform as a catalyst for improving investors’ perceptions of the country’s political stability.
These political calculations and years of work positioning Morocco as an appealing investment destination have paid off in terms of economic prospects during the Arab Spring. In one example of a win for the country, Guy Hachey, president and CEO of Bombardier Aerospace, the world’s third-largest airplane manufacturer, announced in May 2011 that Morocco was very likely to win a major industrial investment in competition with other regional players. His pronouncement praised the Moroccan government’s stability and efforts at reform, noting that they allowed Bombardier to invest “with confidence.”
The international law firm Allen & Overy had a similar assessment. After several months of evaluating the best expansion route into Africa, the firm decided to establish an office in Morocco in July 2011. Wim Dejonghe, the managing partner, cited the country’s “exemplary stability” relative to others in the region as a motivator for the decision. Bombardier and Allen & Overy are part of a trend as investors view Morocco with renewed interest compared to its protesting neighbors. The 2011 Global Venture Capital and Private Equity Country Attractiveness Index saw Morocco’s overall attractiveness ranking rise over the first and second quarters of 2011, whereas Egypt’s fell over the same time period.
Most importantly, this upward trend in attractiveness is reflected in the amount of FDI projects entering Morocco, compared to its North African and Middle Eastern counterparts. According to the 2011 first quarter report by the Mediterranean Investment and Partnership Observatory, Morocco was the only country in the Middle East and North Africa regions (excluding Iraq and the Gulf nations) to record a substantial year-over-year increase (61%) in FDI project announcements during the first half of 2011. This compares with devastating decreases of 35% and 43% in Egypt and Tunisia, respectively.
Overall, Morocco has deployed a careful strategy to attract investment over the past decade and has affirmed its ability to capture opportunity during the Arab Spring. Well-designed political reforms have established the country as a center of political stability. Initial reports on FDI note that the country has recorded substantial investment growth in the first quarter of 2011. Of course, the challenge for Morocco will be maintaining this momentum as larger economies, such as Egypt’s, come back refreshed.
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