Flying the flag: a stage show in Tripoli celebrates the 40th anniversary of President Gaddafi's rule.

Having emerged relatively unscathed from the global downturn, Libya is working hard to attract foreign investors, promote tourism and diversify its economy. Stephen Timewell reports.

Amid unprecedented global economic turmoil, lower oil prices and production constraints, Libya has succeeded in maintaining strong non-oil economic growth, while its external assets have grown to almost $140bn. While nearby countries such as Greece are suffering major macroeconomic problems and concerns over debt, Libya is advancing its economic reform agenda and developing its non-hydrocarbon sector, cushioned by Africa's second largest oil and gas reserves and an absence of any foreign debt.

The strength of Libya's core economic fundamentals and potential must be emphasised, but all the positives and reform initiatives aside, Libya is still recovering from decades of isolation and sanctions. While the country's rehabilitation into the global economy began in earnest with the normalisation of relations in 2005 with long-time foe the US, reintegration has been no easy matter. Other actions, such as the political spat with Switzerland earlier in the year, have also inhibited to some extent, commentators say, the region's aspirations to become a north African version of Dubai and a regional economic hub.

Nevertheless, while Libya retains elements of unpredictability, its energy resources, high external financial assets and relatively small population of 6.5 million people offer not only huge economic advantages but also big opportunities.

Energy drive

Libya's long-term economic prospects are clearly underpinned by the potential of the oil and gas sector, which is expected to continue to account for between 65% and 70% of the country's gross domestic product (GDP). But unlike many countries its hydrocarbon potential is particularly strong and ripe for expansion. Much of the country remains unexplored, the cost of production is low and development of gas resources is at an early stage. With foreign and domestic investment interest strong, the outlook is exciting; Libya's high potential for more oil and gas discoveries is shown by the six oil and gas field finds made in 2009 by international oil companies.

In 2009, Libya's oil production was constrained by the Organisation of the Petroleum Exporting Countries (OPEC) quota of 1.47 million barrels a day (b/d), while gas production amounted to 530,000 barrels of oil equivalent (boe) a day and investments in the sector amounted to Ld1.2bn ($930m). In 2010, oil production is expected to rebound to 1.84 million b/d and gas output to 560,000 boe a day, while oil and gas investment will almost double to Ld2.2bn, again reflecting the enormous potential of Libya's energy markets.

By 2013, officials forecast that oil production will reach 2.05 million b/d, representing a 41% increase within a decade, and gas production will exceed 600,000 boe a day. With current reserves forecast to last more than 70 years, more finds expected and Libya already holding the fifth highest oil reserves per capita in the world, the country's strong hydrocarbon future is not in doubt.

Partnering up

Meanwhile, Libya's non-oil sector grew strongly in 2009 at about 6%, driven by public-private partnership investments in infrastructure. And the broad reform programme being introduced should transform Libya's business environment. The country is trying hard to become fully integrated into the global economy and since 2007 has signed about 70 trade agreements related to double taxation, investor protection and the promotion of trade. Libya is also preparing for accession to the World Trade Organisation (WTO) and is negotiating a partnership agreement with the EU.

Although conveying the opportunities available in Libya has been a slow process, international investors are beginning to see the huge potential that Libya offers. Since 2003, foreign direct investment (FDI) pledged and implemented has amounted to Ld35bn, with the main contributors being the United Arab Emirates (26%), Canada (21%), Italy (13%) and the UK (9%).

While Libya's overall GDP growth rates reflect the vagaries of the oil market, in recent years its economy has been driven by annual growth in non-oil sectors of an average of 9.5% between 2005 and 2009. This figure is set to continue to grow at between 7% and 8% in 2010. This is one of the strongest growth rates in the Middle East and north Africa and shows how little the global economic crisis impacted upon Libya, and also how effectively the country's reform programmes have worked.

Both the positive core fundamentals and the conservative economic management that has been followed in recent years have been essential to the development of Libya's economy. As a result, the country is implementing reforms in a stable macroeconomic environment reflected in strong economic growth and low inflation, and both fiscal and balance of payments surpluses.

Despite lower oil prices and production, Libya's budget still registered a surplus in 2009 of $5.7bn. Revenues exceeded budget estimates and non-oil revenues remained stable, supported by tax levies from the buoyant non-oil economy and the transfer of profits from the Libyan Investment Authority.

One of the government's key focuses is on the government building a world-class infrastructure. To do this it is seeking support from, among other sources, the International Monetary Fund. The intention behind such a move is to reform the country's institutions, strengthen policy implementation and create greater transparency in economic management. To avoid future fluctuations in public investment, the development budget is being prepared in a medium-term framework , from 2010 to 2012, and oil price volatility will not impact upon fiscal policy. In case of a drop in oil revenue, all priority projects will be funded using the country's substantial assets, which include an oil stabilisation account at the Central Bank of Libya (CBL) that stood at $21.2bn at the end of 2009.

This inherent conservatism is shown in Libya's 2010 budget, which is fully funded with a budgeted oil price of $60 a barrel ($5 a barrel lower than in 2008), well below market prices. Expenditures in 2010 are increasing by 16% as a result of an increase in capital spending from an estimated Ld21.6bn in 2009 to Ld29.8bn in 2010.

The country is working to streamline the budget process and a centralised budget single account system is planned.

Banking on it

A critical part of Libya's reform process has been the complete restructuring of its banking system, based on the underlying principle that a diversified economy cannot be built without a strong banking system. The global economic crisis has not thrown this reform off course because the country's banking sector had limited contact with global capital markets. This relative financial isolation has protected Libya and is allowing its reform process to proceed unhindered.

The reforms are bringing about significant change. Libya's two largest commercial banks, Gumhouria Bank and National Commercial Bank, have been partly privatised, with 15% offered to the public through an initial public offering. There are no longer banks that are 100% publicly owned and the CBL is keen to see more foreign banks involved in the country's banking system by the end of 2011. New foreign banks were expected to be granted licences in July. In 2009, two private banks, Aman Bank and Al Motahad Bank, sold 40% stakes to Banco Espirito and Bahrain's Ahli United Bank, respectively, and to date there are six banks in Libya with foreign partners.

The CBL has been enthusiastic to build a sound financial system, strengthening supervisory systems as well as regulatory requirements. During 2009 the capital of many banks was raised, bringing the capital adequacy level of the banking sector to an acceptable 13.5%.

Asset quality is also improving following extensive efforts from the CBL to improve supervision and regulatory requirements, while the creation of new agencies such as the National Credit Bureau has helped to improve efficiency and information flow. Non-performing loans (NPLs) have also reached a more manageable level. In 2004 the figure stood at 35.5%. In December 2009 this figure was down to 17.3%; still high but heading in the right direction. The level of provisions is about 88% of total NPLs.

One-stop shop

Another key goal of the Libyan government is to attract foreign investment and expand privatisation. In 2009, the state agencies responsible for promoting local and foreign investment and for the privatisation of state-owned enterprises merged to create the Privatisation & Investment Board (PIB). This one-stop shop for private foreign and domestic investors is bullish about the opportunities, and PIB chairman Dr Gamal Al-Lamushe says there are 120 companies from various sectors earmarked for privatisation. Mr Al-Lamushe is also keen to stress some of Libya's advantages, including its proximity to Europe, cheap energy, plentiful supply of raw materials, pleasant climate and much-improved security.

He notes that since 2003, projects started have reached Ld3.5bn and those under contract are valued at Ld19.6bn. He adds that in the first quarter of 2010, projects started were worth Ld348m, those under contract were worth Ld1.5bn and schemes under negotiation were worth Ld5.3bn. Dr Al-Lamushe is also bullish about the prospects for tourism in Libya, as well as the opportunities for investment, and says that the country intends to spend Ld120bn on industry, agriculture and energy between 2010 and 2012.

In a related development, the government recently announced plans to implement more than 50 industrial zones. These will involve projects for existing companies in major Libyan cities and are set to provide 220,000 new jobs and involve investment of Ld3.4bn in the industrial sector between 2010 and 2013. One such zone is planned for the port of Misurata, the site for the country's first free zone.

Meanwhile, Libya's strong fundamentals and reforms have been noted by the rating agencies. In March, both Standard & Poor's and Fitch affirmed Libya's long-term foreign and local currency rating A-/stable/A-2 and BBB+/stable, respectively. "A strong sovereign balance sheet anchors the ratings and mitigates high dependence on oil revenue, while economic reforms continue apace," says Fitch's Charles Seville. The agency notes, however, that economic reforms are at an early stage and that Libya has structural weaknesses compared with more established emerging markets. Nevertheless, the agency notes that these weaknesses, such as the lack of development of the private sector and the financial system, are being addressed.

Libya: Selected economic/financial indicators ($bn)

Libya: Selected economic/financial indicators ($bn)

Libya's foreign assets

A pristine balance sheet provides Libya with a unique distinguishing feature that could enable it to achieve its economic ambitions while also producing huge investment opportunities. Libya's ever-improving external balance sheet is the envy of most nations. Its current account surplus was estimated to be $10bn at the end of 2009, 15% of GDP. The sovereign's net external creditor position, according to Fitch Ratings, is on a par with more highly rated Saudi Arabia (AA-/stable) and China (A+/stable), and Fitch adds: "Sovereign net foreign assets of $139bn (190% of 2009 GDP) would be enough to fund the 2010 budget three times over. The government has no debt and has not borrowed abroad."

Libya's external asset position needs to be emphasised. At the end of 2009, the country's total external assets stood at $138.7bn ($9.5bn above the $129.2bn total at the end of 2008). The vast majority (74%) is held in liquid assets (cash, highly rated treasury bills and sovereign bonds). About 75% of the country's foreign assets are held at the Central Bank of Libya (CBL).

The CBL has been keen to keep management of the reserves transparent and $135bn is broken down as follows:

- Libyan Investment Authority (LIA) holdings of $64.2bn;

- CBL foreign exchange reserves of $52.5bn;

- Government account at the CBL of $21.2bn, solely liquid assets;

- Other government entities $780m.

The LIA was established in 2006 to manage Libya's mounting oil revenue surplus, and now includes the assets of Libyan Foreign Investment Company, established in 1982. As a sovereign wealth fund with investments in various areas, including real estate, infrastructure, oil and gas, and shares and bonds, it has run a conservative investment policy with 50% of its balance sheet comprised of deposits mostly held at the CBL. Its investment portfolio was $13bn at book value at the end of 2009 and its equity portfolio was $18bn at book value for the same period.

The LIA's mandate is understood to be to invest mainly internationally on a commercial basis and in low-risk assets, with the objective of investing for future generations.

In early March, the LIA bought a 3.01% stake in UK corporate Pearson, the educational publisher and owner of the Financial Times and The Banker. The stake, worth £224m at the time, is the sovereign fund's most prominent investment to date in a UK-listed company. The LIA is understood to have made many of its portfolio investments through private equity funds and has used banks in Europe and the US to run its investments while it builds up its own expertise.

The LIA is highly liquid but is understood to be interested in investments in energy groups and the banking sector in the US and Europe. It was also recently linked to possible acquisition of shares in oil company BP.

In July, Shokri Ghanem, chairman of the National Oil Company, recommended buying a stake in BP to take advantage of its weak share price. Libya's other major equity stake, besides Pearson and a 2% stake in Italy's Fiat, seems to be in Italian banking group UniCredit, where it has a 4.9% holding and where CBL governor Farhat Bengdara was named vice-chairman last year.

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