By Campbell Steedman
The creation of the FDI Law last year is expected to result in increased activity in the capital markets across the UAE
Following the enactment of the UAE Foreign Direct Investment Law last year (Law 19 of 2018 – the FDI Law), there has been considerable commentary on the prospects for foreign direct investment (FDI) in the country. With $30.4bn in FDI in the UAE over the past three years and with the UAE already moving rapidly up the global rankings for attracting FDI, what is the likely impact of the FDI Law on investment flows into the UAE? Will the FDI Law stimulate even greater acceleration of investment into the country?
Until the enactment and introduction of the FDI Law, foreign investment into the UAE had to be effected either with the support of a local sponsor or partner (for onshore investment) or, if local sponsorship was not preferred, directly into one of the numerous free zones which have been established across the UAE. However, in the case of investment through free zones, the ability of foreign investors to operate onshore in the UAE has been considerably restricted. This has impacted the appetite of investors from outside the GCC to commit fully to investment in the UAE.
The FDI Law has changed the need for local sponsorship in certain sectors and provides for 100 percent foreign direct ownership in such sectors. This is possible through the creation of the concept of lists of industries into which FDI can be effected (the positive list) or in which it is restricted (the negative list).
With regards to potential investment into restricted sectors on the negative list, there is likely to be little change in the investment climate for FDI. To the extent that investors are keen to invest into negative list sectors, they will still be able to do so through local sponsor arrangements.
"The initial signs are that the FDI Law is being seen as a significant step forward, and that it should drive up levels of investment in the UAE”
Where an investor may seek control of over 51 percent of a negative list entity, they will be able to apply for approval from the regulator (expected to be either the Foreign Direct Investment Unit or the Foreign Direct Investment Committee) for such control.
However, where there is likely to be a considerable increase in FDI is in investment into positive list sector companies.
While these have yet to be announced, the fact that shareholder and operational control is allowed for onshore businesses in the UAE will be of considerable interest to investors who have previously been reluctant to commit fully to the UAE because of the need for local sponsorship.
This may lead to increased appetite for establishing local manufacturing businesses (rather than rely on agency or distribution arrangements), and the evolution of the UAE as a regional manufacturing hub for the wider GCC, Indian sub-continent and African markets – utilising the UAE’s geographic location at the heart of such a region and its strong transport and logistics networks. This may be through the likes of Emirates and Etihad, or through the major logistics hubs of DP World’s Jebel Ali Port or Abu Dhabi Port’s Khalifa Terminal.
The FDI Law may also lead to increased activity in the capital markets across the UAE, with foreign investors now able to acquire control of positive list sector companies which are listed on any of the UAE stock markets. Previously, this had been an area where foreign investors have been traditionally reluctant to invest, having been unable to acquire a controlling stake due to foreign investment restrictions.
Overall, it is expected that the FDI Law will trigger a further acceleration in FDI in the UAE in positive list sectors. With neighbouring jurisdictions (e.g. Saudi, Bahrain and Oman) all increasing efforts to attract FDI, the ability to allow majority control in certain UAE onshore investments will be an attraction to non-GCC investors in a manner not previously seen.
The key challenge will be for the UAE government to strike a balance between encouraging increased investment and maintaining some control of investment through the negative list, details of which have still to be published. However, the initial signs are that the FDI Law is being seen as a significant step forward, and that it should drive up levels of investment in the UAE.
Global investment is expected to see a modest recovery of 10 percent in 2019. This expectation is based on current forecasts for a number of macroeconomic indicators, United Nations Conference on Trade and Development’s (UNCTAD) econometric forecasting model of FDI inflows and its underlying trend analysis and preliminary 2019 data for cross-border mergers and acquisitions (M&As) and announced greenfield projects. Projections for FDI in 2019 point to a 10 percent increase to almost $1.5 trillion – still below the average of the last 10 years. The main factor driving up expectations is the likely rebound from anomalously low levels of FDI in developed countries in 2018.
Despite these upward-pointing signs, the size of the expected increase in FDI is relatively limited because the long-term underlying FDI trend remains weak. M&A data for the first four months of 2019 confirm the need for caution; the value of cross-border M&As was about $180bn, 10 percent lower than the same period in 2018. The likelihood of an increase in global FDI is further tempered by a series of factors. Geopolitical risks, trade tensions and concerns about a shift towards more protectionist policies could have a negative impact on FDI in 2019. Three economies – the US, China, UK, Germany and France – are considered the most important sources of FDI.