IFC: "...Syria to benefit from Gulf Arab investors, who are comfortable with the country's political risk profile ... but problems remain..."

Oxford Analytica: Excerpts:

"... The IMF recorded growth in Syria of 4% in 2009, and expects that to increase to 5% this year. Nonetheless, high unemployment underpinned by rapid population growth and falling oil revenues continue to cloud the outlook.  

Foreign investment. The outlook for foreign investment has brightened. The International Finance Corporation (IFC), the World Bank's private-sector lending arm, expects investment in the power sector to act as a precursor to greater private investment in other infrastructure projects. The government is also working to end US sanctions, which have deterred many foreign investments.  In the meantime, Syria will continue to benefit from petrodollar-rich Gulf Arab investors, who are comfortable with the country's political risk profile and look to invest in the Middle East. According to the Ministry of Local Administration, investment in Syria's four industrial cities increased by almost 70% year-on-year to reach 441.7 billion Syrian pounds (9.4 billion dollars) by mid-2010. Of this, almost 25% was from non-Syrian companies. 

Lack of framework. Despite these trends, foreign investors still face problems. The country has yet to establish a coherent framework for foreign investment. The government's attitude is shaped by caution and hesitation, with decisions being made out of necessity and on a case-by-case basis. This was seen most recently with Decree no. 56 issued in July and aimed at regulating the creation and operation of investment banks: 

1.        Necessity. The government was forced into devising a law due to the need of the cement industry -- traditionally under public sector monopoly -- for financial resources. In November 2009, Bank Audi had arranged with syndicates for a 340 million dollar project-finance facility for Lafarge Cement Syria. This provided partial funding for the first private greenfield cement plant in Syria, with a production capacity of 2.75 million tons per annum. It also meant that investment banking activity in the country needed to be regulated. 

2.        Ambivalence. The decree reflects official ambivalence towards foreign investment: The government claims that it will deepen the financial system and attract more investment into the private sector. Yet the decree stipulates that banks have a minimum capital requirement (MCR) of 435 million dollars, far outstripping the requirements of investment banks in neighbouring countries. When licences were initially offered in 1997, MCRs depended on the services being offered, with the highest amount of 6.8 million dollars only required for banks underwriting share rights issues. Yet the new requirement disqualifies Egyptian banks, H.C. Securities and EFG Hermes, both which had been granted licences to set up in Syria....

Damascus seems keen to emulate the Chinese model of financing of allowing a few investment banks to operate as long as they are outnumbered by government-owned banks. Minister of Trade and Economy Lamia Assi called last month for the establishment of a Syrian-Chinese bank to finance infrastructure projects in the country. By limiting the number of banks, it will be easier for the government to monitor activity and to intervene to direct finance. However, Syria does not have the resources of China to follow through a policy of controlled capitalism with bureaucratic intervention. 

Business environment. Syria needs to do more to boost its regional competitiveness: According to the IFC's Ease of Doing Business 2010 report, Syria's world ranking of 143 is the second-lowest in the Middle East and North Africa (MENA) economies, followed only by Iraq. Worse, Syria has slipped down from its previous rank of 138, in contrast to regional competitors Egypt, Morocco, Jordan and Tunisia, which all recorded improved rankings.

Limits to privatisation. Although the government wants to attract investment into some sectors, widespread privatisation is unlikely due to concerns about income inequalities. With around 35% of the total workforce employed by the government, restructuring would mean heavy job losses. 

Evidence from other MENA economies which have pursued privatisation is mixed. According to the Gini index, a standard method of measuring inequalities: Jordan has become significantly more unequal; inequality in Morocco has increased, though less so; while Tunisia has become slightly less unequal....

Lack of skills. Investment will also suffer from the lack of individuals with the necessary technical and motivational skills to build up the private sector, such as the risk management expertise required in the new Syrian investment banks ... Syrian students predominately travel to other Arab countries or mainland Europe to study, rather than the United States, Australia or the United Kingdom. Syria suffers a brain drain as educated people seek greater remuneration and opportunities in other, more meritocratic, economies. Compulsory military service (although there are exemptions) can also deter qualified individuals from returning.

Political context.  For the private sector to flourish, political reform is required, and this the government is unwilling to undertake. A new contract between state and the people would need to be established with greater representation, transparency and debate offered in exchange for taxation. This is still a long way off ..... In addition, apparently nepotistic business practices, such as the ownership of Syriatel by Rami Makhlouf, cousin of President Bashar al-Assad, would need to be curbed so as to open the way fully for greater private sector activity. .."