Ensuring the Benefits of Capital Flows in the Middle East

Since the global financial crisis of 2008, gross capital inflows to the Middle East and North Africa (MENA) have remained high compared to other emerging markets, but their composition has changed significantly. There has been a surge in portfolio flows (equity and bond instruments) and a decline in foreign direct investment. The inflows to the region surged to more than $155 billion over 2016–2018. About two-thirds of the increase can be attributed to a more favorable global risk sentiment. However, with global economic risks now on the rise, MENA countries would be particularly vulnerable if global risk sentiment shifts. Improved policy frameworks are crucial not only in attracting but also in preserving capital flows, while helping mitigate the risk of outflows. Countries will also need to undertake certain key structural reforms, including measures to strengthen financial supervision and regulation.