Looking east, looking west

Looking east, looking west

Roshan Madawela – www.riunit.com

Developing countries have emerged as top investors in the region as Malaysia in particular is leading the pack for inbound funds into Sri Lanka for the second consecutive year. According to the latest United Nations Conference on Trade and Development (UNCTD) finance report, the tiger economies of East Asian, China and India have now become the principal investors in developing states, investing billions of dollars in poor countries.

According to the report, Malaysia invested $44 billion in South Asia in 2005, 100 million of which was in Sri Lanka, ousting the US from top investor spot. A BOI official claimed that Malaysia is likely to be Sri Lanka’s largest investor even this year as some $150 million had been invested into Dialog Telekom, according to LBO sources. Sri Lanka’s Dailog is owned by Telkom Malaysia.

During 2005, top place Malaysia was followed by Singapore with $30.6 million, the UK with $26.3 million, India with $17.8 million, Luxembourg with $17.3 million, Hong Kong with $15.3 million and the US with $12.7 million. Data suggests that the developing nations accounted for around 15 per cent of the $117 billion total foreign direct investment (FDI) outflows in 2005.

The region’s two power-house economies, India and China have been pro-actively seeking opportunities offshore in areas like petroleum refinery activities, oil exploration and real estate. China’s total foreign currency reserves for 2005 were estimated at $819 billion, easily making it the largest reserve holder in the world. This year’s holdings are expected to top $1 trillion, way ahead of the US federal reserve holdings. With the growing trend, China is naturally pouring millions into overseas investments under a policy of encouraging the internationalization of Chinese companies.

Whilst Sri Lanka has done well to post a record $340.8 million of FDI during the first eight months of 2006, when viewed in the context of the global investment boom, it fails to impress. The flow of global FDI is on the rise, particularly into the developing world. Last year’s global FDI amounted to an estimated $916 billion representing an increase of 29 per cent. Of this, the developed nations captured $542 billion or 60 per cent of the total and the developing nations managed 36 per cent ($334 billion) which still represents a record figure.

Some $165 billion of the flows ended up in South, East and South East Asia, representing around one fifth of the total. Much of it made its way to China or India. Analyst expect 2006 to witness further growth, both regionally and globally given some level of stability in the oil markets.

When compared to neighboring South Asian economies we are currently fourth on the FDI ratings. After India, Pakistan attracts around $2.2 billion whilst Bangladesh managed to obtain $800 million during 2005.

A number of bottlenecks persist with regard to a destabilized security situation, lack of infrastructure in the key areas of roads, ports, power and industrial parks. Additionally, budget constraints, long drawn-out procurement process, delays in completion of contracts, management inefficiencies, lack of clear policies, and investor unfriendly labor laws are some of the issues that have been raised according to analysts at the Board of Investment. On average, the government expenditure on infrastructure is only some five per cent of GDP per annum, around the same as the defense budget. In 2005 only Rs.90.3 billion was allocated in infrastructure (Central Bank of Sri Lanka Annual Report 2005).

Nevertheless, the island is expected to woo FDI into the key areas of outsourcing, oil exploration, highways, infrastructure, agriculture and fisheries. However, the level of success than can be achieved will, as always, depend on the navigation of appropriate strategy.

In this connection many lessons can be learned from Malaysia. In a recent move, the Malaysian government introduced tax cuts and incentives for its growing Islamic Finance industry that was aimed at wooing a chunk of the estimated $2 trillion of oil wealth from overseas. With a strong sense of intuition and insight of a global investment environment that is current in a state of flux the countries policy makers now expect the latest incentives to further strengthen the inflow of funds from the Gulf region.

Malaysia’s Second Finance Minister said that "as the wealth is accumulated, particularly in the Middle East, and people are talking about US$1 trillion (RM3.68 trillion), US$2 trillion floating around looking for a parking space, part of this money could come here." The niche Islamic Finance sector in Malaysia is popular with both the Muslims and the Chinese due to its ethical value system for investments and no-interest dealings policy.

Moreover, the growth in the sector has taken place in reactions to two major international shocks. The first was the Asian currency crisis in the late 1990’s that resulted in the crashing of the ‘Tiger economy’ financial platforms. The shock led to the build of resentment and distrust of the prevailing financial system and led to a shift towards a more religiously compatible or non-interest based financing facilities in the majority Islamic Malaysia, according to leading analysts.

The second shock was the 9/11 event that led to a US freezing of Arab owned funds in the US and a consequent reaction from the Arab investors, pulling out their assets and re-investing in Europe, the Gulf and Asia. The main point is that the huge repatriation of wealth from the US of the comparatively small nations of the Gulf regions cannot be geographically accommodated within the indigenous shores and have to find ‘parking’; offshore. Europe has been extremely successful in luring much of the billions of dollars into its financial houses by offering ‘Islamic Finance’ windows within their existing -financial institutes that comply with the no-interest, no-alcohol, no-pornography, no-weapons and no-pork investment regime.

Demand for Islamic investments is growing as oil money floods the Persian Gulf. The International Monetary Fund expects oil-producing Arab states, including Saudi Arabia and Kuwait, to earn as much as US$500 billion (RM1.84 trillion) from petroleum sales this year.

Overseas investors may also want to invest in Malaysia's conventional banking industry, as according to the Finance Minister, "We have an Islamic banking system, we have a conventional banking system, both equally sophisticated, both equally comprehensive, both with a large network of branches and instruments."

Sri Lanka is yet to fully realize its true potential in terms of attracting the abundant volume of funds that are looking for profitable ventures from the gulf region. Domestic policy makers also need to realize that compartmentalization of sectors such as FDI and tourism will not work. The lure of Sri Lanka to a foreign investor is its natural attractiveness of beaches, wildlife, and ancient monuments as much as it is the cheap and comparatively well educated labor force. The two cannot be disentangled.

The Research Intelligence Unit is facilitating a Real Estate Conference and Workshop in Jeddah, Saudi Arabia with the London based ICG-Events Group during mid-December 2006 in order to further facilitate the build-up of links between emerging South Asia and the Wealthy Gulf region. More information can be obtained from www.irefme.com.


Copyrights Reserved (RIU 2006). Prepared exclusively for Business Standard.