Ten trends in Middle East business to help you prepare for 2023
As businesses across the globe face challenges in these uncertain economic times, the Middle East continues to be one of the top cross-regional sources of capital in the global financial market. To prepare all of us for 2023, our Middle East Initiative team offers these top ten takeaways to help you identify strategic business opportunities in the coming year.
"While the world faces uncertain economic times, the Middle East remains resilient. The region’s seven-year upward inflow trend, along with aggressive commitments to FDI and ample cash for investments, may protect the region’s economy from potential global downturns while helping those doing business with and in the region."
1. Real estate investment remains at the fore
Outbound investment from the Middle East to the United States primarily focuses on real estate – indeed, 25 percent of all Middle East outbound investments target the United States. In the Middle East, commercial real estate demand is currently driven by several industries, chiefly banking and financial services, technology and fintech. The e-commerce market, which burgeoned during the pandemic, continues to fuel demand for quality warehouses. Shopping malls seeking to stay relevant in the late-stage pandemic are reverting to omni-channel models or experience-based retail. Super-regional malls across Dubai, Cairo, and Riyadh continue to gain in popularity with investors.
2. Key to transformative growth: technology – and shopping
The ever-spreading technology-based economy is changing everything it touches. Across the Middle East, people are demanding more and better digital services; governments are transforming economies traditionally focused on petrochemicals to make room for tech. Approximately 25 percent of consumers in Middle Eastern countries, such as the UAE and Saudi Arabia, feel that internationalization of economics, business and politics is vital and transformative.
This evolution is most noticeable in the realm of retail. Approximately one in three consumers in the Middle East, North Africa, and Pakistan views international shopping and e-commerce as the main benefit of internationalization. In 2020 alone, the Gulf region saw a 214 percent year-on-year increase in cross-border online sales. Twenty percent of the region’s consumers say they shop online via a social media app, compared with 8 percent in China. Moreover, the Middle East remains one of the world’s most under-penetrated markets for online shopping, despite its young population, easy Internet access and proliferation of smartphones.
3. Industrial markets are growing – especially in civil aerospace, defense, and automobiles
Hit hard by the pandemic, the Middle East’s civil aerospace market – the largest segment of the region’s aerospace and defense sector – is enjoying a resurgence. By 2025, the aerospace and defense sector overall is forecast to have a value of $45.72 billion. Of the world’s top 10 countries with the highest military expenditure as a percentage of GDP, six are in the Middle East – Saudi Arabia, Oman, Kuwait, Lebanon, Jordan, and Israel. However, the Middle Eastern defense industry remains underdeveloped. Under pressure to digitalize and modernize, and to address growing security concerns, the Middle East’s armed forces find themselves having to rely on imports.
Meanwhile, the automotive sector continues to expand. More vehicles are being imported, and not just in the luxury sport car market. In 2018, Crown Prince Mohammed bin Salman lifted Saudi Arabia’s ban on women drivers, creating an instant new market for passenger vehicle sales to female consumers. Meanwhile, the UAE is looking to establish itself as a manufacturing hub for luxury sports cars. The Gulf Cooperation Council, seeking greater economic diversification, is aiming to create significant growth opportunities in the electric vehicle market, given the region’s focus on reducing emissions, including Saudi Arabia’s commitment that at least 30 percent of cars in its capital city of Riyadh will be electric by 2030.
4. Innovative, world-class healthcare continues to offer opportunity
The Middle Eastern economies where healthcare is well funded and efficient share a notable characteristic: large numbers of expats accessing the system, either because they work there or because they are medical tourists. Some regional hospitals have become global-level medical hubs. The healthcare system of Saudi Arabia provides free public healthcare both to nationals and to expats who work in the public sector. The UAE, ranked 22nd in the 2020 World Index of Healthcare Innovation, is recognized worldwide for providing innovative, high-quality medical services in ophthalmology, dental care, oncology, and cosmetic surgery.
5. Private equity investments are still active
While deal activity across the globe hasn’t seen the same level of activity as in 2021, the Middle East continues to enjoy a high level of inbound and outbound investment activity. The majority of private capital in the Middle East is held by sovereign wealth funds (48 percent), which have been particularly active in investing, and national and investment banks (33 percent). As the region seeks to diversify its holdings and move away from oil dependence, new private equity opportunities are available with investments focused on technology, cybersecurity, healthcare, industrials, and consumer goods and services.
6. Growing opportunity in financial transformation
The once traditionalist financial services sector in the Middle East is growing a vibrant, inclusive, digitalized financial ecosystem. Approximately 60 percent of the Middle East’s population is aged 25 and younger, and this hefty market is digitally connected to the tech-enabled global community. Entrepreneurial startups are spurring growth and attracting new talent to the market while cutting-edge software enables faster interactions with financial institutions, encouraging the movement of capital. Cryptocurrencies and central bank digital coins are rising in prominence, with fintech disruptors such as Saudi Arabia’s STC Pay and Al Rajhi Bank’s UrPay establishing market share. Similarly, IBM is partnering with the UAE and Saudi Arabia on Project Aber, a system of managing payments via a single regional currency. Convenient app-based trading platforms, like JIMCO’s Rain, are seeing eager consumer adoption. As these tools and levers become increasingly wired into the global financial mainframe, artificial intelligence (AI) and other predictive analytic systems are enabling Middle Eastern financial markets to be more responsive to fluctuations and opportunities.
7. Food imports matter
New trends are also emerging in the food sector. Consumers are expecting more convenience, more health-oriented food options, and locally sourced products. At the same time, the region has seen rising grain prices and disruption to its agricultural supply chains linked to Russia’s war on Ukraine. Gulf Coast member states rely on imports for about 85 percent of their food supply, meaning that sharp increases in the price of wheat, sunflower oil and other agricultural products will continue to contribute heavily to rising inflation. That being said, there is still plenty of spending happening. For example, in Egypt, consumer spending on restaurants exceeded USD 1 billion in 2021, the highest spend in the region. According to Statista, consumer spending in the Middle East and North Africa will reach about $62 trillion by 2025.
8. Energy is transitioning, but slowly
For decades, the Middle East has derived wealth from its plentiful reserves of oil and gas. In recent years, an increase in efforts to reduce emissions and support renewables has shown that countries in the region are motivated to shift to sustainable alternatives. With an average of 300 sunny days per year, the Middle East is ripe for solar energy development. But, despite efforts to gradually reduce reliance on fossil fuels, external factors have foiled significant progress. Sanctions imposed on Russia have resulted in a projected spike in natural gas production for Middle Eastern countries in the coming decade, with the UAE emerging as a key partner for Western countries as they scramble for energy deals. At the same time, oil-fired power is expected to decline by nearly 30 percent in the next decade as a result of the rising demand for lower-carbon fuels.
9. Telecoms are booming
Legal reforms in most Middle Eastern countries have set telecommunications on a dynamic growth path. Four telecom companies in the Gulf have seen substantial market growth: Etisalat, the Saudi Telecom Company, Zain Group, and Ooredoo. The Gulf countries – the UAE, Saudi Arabia, and Qatar – have been leading the rollout of 5G technology and offering it commercially, fueling the race for faster, more reliable technology while widening the gap between tech leaders and late adopters. The 4G rollout, meanwhile, continues quickly in the Levant (Syria, Lebanon, Jordan, and Palestine) and North Africa. However, tens of millions across the region are not connected to the Internet. Overcoming this obstacle to modernity will require governments to address two factors: the barriers of illiteracy and of cost.
10. Foreign direct investment may help hedge against uncertain economic pressures
While the world faces uncertain economic times, the Middle East remains resilient. In 2021 alone, US investments into the Middle East were valued at more than USD 81 billion. And the total direct position of the US was nearly USD 6.5 trillion. The region’s seven-year upward inflow trend, along with aggressive commitments to FDI and ample cash for investments, may protect the region’s economy from potential global downturns while helping those doing business with and in the region.
In our next Middle East Update, we will focus on countries within the Middle East and their strategic goals for growth. For more information about opportunities associated with any of these takeaways and preparing your company for what may come next year, please contact Dr. Ehab Elsonbaty.