The Mediterranean, the Key of the Exit Strategy

by Dario Scannapieco

Dario Scannapieco
Vice-Chair of the European Investment Bank

Economic developments.
During the period 2004-2008, the real GDP of southern Mediterranean countries grew by an average annual rate of about 5%. The economic crisis has only partially slowed this growth, based on a favourable economic context and significant structural reforms.
The crisis arose in more mature economies. Emerging countries, including the Mediterranean countries, initially considered themselves immune to the effects of the crisis thanks to their limited exposure to “toxic” financial products and their good macroeconomic foundation. The theory of decoupling - that is, “uncoupling” from global financial markets - failed after the failure of Lehman Brothers in late 2008. The general risk aversion that arose also affected these economies, their financial markets and their currencies. As a consequence, funds became less available on the international capital markets and, on the whole, they were characterized by a shorter maturity structure and higher interest rates. Bank loans reduced and foreign direct investment, the most significant part of capital flows, reduced by 36% in 2009 from 38 billion to 25 billion dollars. However, an increase of 17% (around 29 billion dollars) is expected by the end of the year, thus showing the investor’s interest in this area. In 2009 the overall average growth rate of the region was reduced by only 2.8%, which is a positive result.
A relatively low exposure to the evolution of the financial crisis, a strong position in the sector of renewable energy and an increasingly diversified industrial base helped the countries of the southern shores of the Mediterranean to tackle the crisis. In 2010 an economic recovery is expected, with a growth rate of about 3.6%. The risk, however, is that the recovery is slower than expected and has no effect on unemployment, which is still the most important social challenge for the region, with average unemployment rates exceeding 10%. Indeed, while most regions of the integrated global supply chain (for example the emerging Asian countries) have suffered from a stronger impact of the crisis and will recover quickly, the countries of the Mediterranean - which have not yet reached the same level of integration in the global economic system - will probably register a slower economic recovery. Some remarks on banking. The banking sector has significantly expanded in recent years: the liquidity produced from the sale of energy products and the increasing level of exports have generated a positive impact on the economies of the Mediterranean region and contributed to the growth of deposits and credit system.
However, despite these positive elements, the banking sector still needs to strengthen its role as instrument to channel financial resources to the real economy. Indeed, while the ratio of bank assets and domestic product has increased substantially, loans - which amount to 60% in relation to bank assets – registered a decrease in value in recent years. This distance between banks and real economy affects particularly SMEs. The non-banking financial markets are not yet an effective an alternative channel for businesses to have access to capital. Indeed, while share prices have consistently increased in recent years, the capitalization of the stock exchanges in relation to gross national product has grown from 32% in 2000 to 110% in 2007, the number of new listings has been limited to a few companies, often because of privatization.
Even bond markets and, in particular, corporate bonds are rather contracted and the venture capital remains limited both by the scale of investment and the number of movers.
In short, the role of capital markets as a source of corporate financing is still limited and bank credit is still prevailing. The limited access to credit is a challenge for many countries of the region and a barrier to the private sector investment, the development of new businesses and thus the economic growth.
In this regard, I wish to mention the commitment of Antonio Tajani, Commissioner for Industry and Entrepreneurship, to the Charter of Enterprise. It is an important project, shared by all Mediterranean partner countries, which aims to identify and evaluate the suitable interventions to promote entrepreneurship in the various countries of the region.

What is the EIB doing?
The EIB operates in the countries of the southern shores of the Mediterranean through a specific structure: the FEMIP, the Facility for Euromediterranean Investment and Partnership. The FEMIP has two priorities: 1) To directly support the private sector; 2) To create a favourable context for investment. The EIB finances projects ensuring sustainable development, such as infrastructure, innovation and SMEs.
Over the past seven years the EIB financed a total of 143 projects more than 10 billion euro’s worth.
Only in 2009 - record year for the EIB in the Mediterranean - it has lent some 1.6 billion euro, thus holding the leadership among the investors in the region. EIB assigned 80% of 2009 funding, 1.3 billion euro, to priority projects for the Union for the Mediterranean. The Bank, in fact, coordinates three of the six initiatives of Union for the Mediterranean: the de-pollution of the Mediterranean Sea, the Mediterranean Solar Energy Plan and the establishment of maritime and land highways needed to strengthen the trade flows between the two shores of the Mediterranean. In addition, I would like to mention the financing of a water treatment project in Lebanon, a loan to improve the water system in Egypt, which had a direct impact on more than four million people. But also support measures 460 million euro’s worth for the development of the highway system in Tunisia and Morocco, a 50 million euro loan for the realizations of a wind farm in Egypt, an intervention of 50 million euro to fund urban renewal projects in Syria and a funding 200 million euro’s worth in the education sector in Morocco. The EIB accomplished its mission also through financial innovation. It carried out the first project financing transaction that combines an Islamic, or Sharia-compliant, financial instrument with a traditional loan. The project consists of the construction and start-up in Gabès, southern Tunisia, of a chemical plant. The project promoters financed the project with 35% of equity funds and 65% of project finance through external funds. The EIB and the Islamic Development Bank (IsDB) were chosen as lender by the criterion that the EIB would lend a traditional loan and the IsDB a Sharia-compliant loan.
The project won the “Islamic financial operation of the year” prize at the Islamic Finance News Awards.
The EIB also offers other instruments for Mediterranean countries such as help on risk capital. With a portfolio 470 million euro’s worth in 535 transactions, including 39 investment funds and 26 direct investments, the Bank plays a central role in this sector. With regard to equity, BEI’s transactions make use of three types of financial instruments: 1) The direct purchase of equity or quasi-equity instruments in private companies; 2) Investments in private equity; 3) co-investments with local agents. The EIB also make loans for investment in microfinance institutions, thus eliminating for them the exchange rate exposure. For instance, last December in Ramallah the Bank launched the first venture capital trust that invests in the Palestinian territories and whose objective is to support information technology SMEs. The fund will be crucial for the development of private enterprises and local high-tech sector.
In addition, the EIB is working on another priority of the Union for the Mediterranean, through an initiative launched by the Italian and Spanish Governments: The Mediterranean Business Development Initiative, an initiative to support SMEs in the region.

The next challenges.
The Mediterranean region is facing crucial challenges.
- Challenges of an economic nature. In the forthcoming years the region must create 22 million jobs (not to increase the unemployment rate) and will face a relatively low productivity labour and a regional integration to be strengthened. Suffice it to say that only 5% of international trade originates in the countries of the Mediterranean basin.
- Challenges of a social nature relating to poverty reduction, income distribution, the issue of migration and equal opportunities for young people and women.
- Environmental challenges relating to sustainable growth, climate change, environmental degradation and water shortage.
These are the shared challenges by Europe, the outcomes of which have a direct impact on all European countries. Aldo Moro’s speech given forty years ago at the Italian Chamber of Deputies is still relevant: “No one has to choose between being in Europe and being in the Mediterranean for all Europe is in the Mediterranean.”
It is a fact that the economic growth of the Mediterranean region has a significant impact on the economic activity and stability of Europe. Investing in the Mediterranean is a development opportunity for both regions, a crucial aspect of the exit strategy from the crisis. The EIB will continue to work to turn the Euro-Mediterranean ambitions into outcomes. We will put at disposal more than fifty years of experience in investment and sustainable economic development for this purpose.