The capital market and the favorable regulatory environment – Medhat Nafeh

Posted in: Monday, 18 July 2022 – 21:35 | Last update: Monday 18 July 2022 – 21:35

The Global Investment Competitiveness Report issued by the World Bank Group in 2019/2020 set out a number of key findings regarding foreign investment trends and preferences. The report contains a survey conducted among more than 2,400 foreign investors in ten middle-income countries during the period between June and November 2019. The results of the survey revealed that foreign-owned companies have great uncertainty in the trade and facing investment policies, which could adversely affect trading and investment policies in future investment decisions.
The ten countries covered by the survey are Brazil, China, India, Indonesia, Malaysia, Mexico, Nigeria, Thailand, Turkey and Vietnam. The investments of the companies included in the study represent about $ 400 billion (about 10% of the balance of foreign direct investment in the countries surveyed) and employ nearly one million workers, based on conservative estimates.
About two-thirds of investors reported that the uncertainty associated with protectionist economic policies in trade and investment is either “significant” or “very important” in their investment decisions, as investor confidence declines when the direction of policy-making is unclear or unexpected.
Even before the outbreak of the Corona pandemic, many investors delayed their investment expansion plans. According to the survey, just under half of the companies planned to expand their investments over the next three years, and these plans differed from country to country according to the degree of uncertainty in the countries’ policies. In China, 17% of foreign companies revealed plans to expand investment, and in Turkey that percentage was 35%, while this percentage was higher in other countries, such as Nigeria, where four-fifths of foreign companies operating in it have plans spoke out for investment expansion, and India, which has announced plans to expand investment.Two-thirds of the foreign companies operating there have plans to increase investment in it over the next three years.
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The impact of uncertainty in trade and investment policies, macroeconomic fundamentals, political developments and the legal and regulatory environment has been crucial in shaping the investment plans of foreign investors in the countries included in the said survey. According to the report, the three most important factors affecting investment decisions were: political stability, macroeconomic stability and the country’s legal and regulatory environment. Nearly 9 out of 10 companies consider these factors to be “significant” or “very significant.” These factors face financial considerations related to tax rates, labor costs, production inputs, and access to available resources. In addition, large companies (with more than 250 workers) consider the “favorable regulatory environment” as the most important element attractive for investment, and therefore the report concluded that investors facing significant legal and regulatory barriers are more tend to reduce or withdraw their investments. the host country.
As the world has faced additional shocks that would exacerbate the state of insecurity, most notably the consequences of the Corona pandemic and the Russo-Ukrainian war and the consequent reciprocal economic sanctions between the two camps of the conflict, which ‘ cast a shadow over the disruption of supply chains and the movement of trade and intensified protectionist and nationalist tendencies, causing an unprecedented wave of inflation that led to strict monetary policy that was a disaster for the debtor countries closest to the cases of financial failure was. It was necessary to confront these shocks with urgent exceptional measures, not to mention the measures needed to restore confidence in the developing countries receiving foreign investment.
The previous results were supported by a recent survey of the Offshore Direct Investment Confidence Index issued by Kearney, the world leader in management consulting, whose list of the most attractive foreign direct investment firms included only 4 out of 25 firms. Those countries were: China (including Hong Kong), the United Arab Emirates, Brazil and Qatar. The United States, Canada and Germany retained the top three positions of the most attractive countries in the index during the 2021 and 2022 surveys, knowing that this index, developed since 1998, reflects the trends of foreign direct investment for the next three may predict year as it reflects the opinions of investors and their future investment plans in attractive countries.
In Egypt, many workers in the money market traded with the recording of a virtual workshop run by an investment bank, during which a number of foreign investors expressed concern about the regulatory interventions in the stock market’s mechanisms of action, including the cancellation of operations, stopping companies, and the frequency of launching rules … Even one of the investors He told the censor that the Egyptian market is on its way to (according to his description) a “non-investable” market word! Therefore, it is necessary not to be lenient in dealing with investors’ concerns, and to take their opinions as a compass of what should be free markets that are subject to rational regulation, not restriction, alienation or decisions in isolation from the pulse of the market and its needs and documented international experiences.
As the Corona pandemic and the war in Ukraine represent an unprecedented shock to the world economy and multinational corporations, the need for urgent short-term policies to boost investor confidence has become urgent. But in addition to short-term crisis response, governments need to address international and domestic sources of policy uncertainty by reaffirming commitments to global and regional trade and investment regimes, promoting political stability, improving macroeconomic stability, and improving legal and regulatory frameworks for foreign direct investment. . There is no doubt that the creation of a favorable and predictable regulatory environment goes beyond the issue of issuing laws, decisions and regulations, and includes its full and consistent implementation in practice, and not about the machinery of legislation. and overuse arbitrariness in the implementation of penalties.
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The World Investment Competitiveness Report indicates that compliance with international and regional trade and investment agreements will improve the government’s credibility with regard to its commitment to the course of future policies. In the absence of such obligations, foreign-owned companies may hesitate to make investment decisions if they believe that the current rules may not be adhered to in the future. The report also highlights the importance of continued efforts to liberalize trade and investment, through multilateral and regional mechanisms, to improve investor confidence. At the same time, governments must continue to reduce economic distortions through structural reforms. The report highlighted the importance of transparency in communicating the trends of economic and investment policies to potential investors, in order to reduce uncertainties and thus risks.
The report sets out a simplified provision for the removal of administrative barriers to foreign investment, which we summarize in the following points:
• Policymakers must resist the temptation to engage in protectionism and economic nationalism in their markets. This involves removing the restrictions that repel foreign investment, and reducing excessive and subjective discrimination against foreign companies.
• Removing the administrative barriers that hinder: the survey participants and opinion polls emphasize the seriousness of the cumbersome procedures for issuing investment licenses and approvals, as well as the restrictions imposed on prices, technology or products, as they are all constitute obstacles to the flow. of investment.
• Focus on improving the efficiency and quality of law enforcement, including simplifying procedures and balancing effective management with excessive investment constraints.
• Work to avoid overlapping tasks between investment regulators, in order to reduce administrative complexity and hamper bureaucracy. This is, of course, to remove the overlap between the role of regulators in the primary and secondary financial markets, and not to confuse the role of the first-degree watchdog (the stock exchange management) and the second-line watchdog (the Financial Supervisory Authority). ) in making regulatory and supervisory decisions, not to mention avoiding the exchange of accusations between the two regulators!
• Flexibility of political decisions to absorb new shocks, to help foreign companies and institutions adapt to the repercussions of those shocks and not to flee the markets.
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Finally, we should not tolerate the increase in the severity of regulatory risks in multiple markets, and the associated reputational risks that the new investment card may entail, after excluding all countries in which the watchdog and regulator’s tools are excluded from arbitrary activities. is, is excluded. and arbitrarily and without restrictions limits its decisions, and without regard to considerations Competitive investment environment of the country.

Author and economic analyst

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