According to the World Bank, the Middle East and North Africa (MENA) area will expand 3.5% in 2023, twice as fast as the world average of 1.7%, owing mostly to high energy prices and rising oil output. Many countries are looking for alternate energy sources as a result of the Ukraine conflict and associated sanctions. As a result, the future appears particularly bright for hydrocarbon producers. Growth in the Gulf Cooperation Council (GCC) is expected to reach 6.9% in 2022, topped by Saudi Arabia at 8.3%. According to World Bank predictions, both the monarchy and the GCC should stabilise at 3.7% this year.
OPEC+ (the 13 members of the Organisation of Petroleum Exporting Countries plus 10 others) production cutbacks agreed upon last autumn explain some of the year-over-year decline, but oil prices should stay high in 2023, at $90 per barrel, and over $70 per barrel for the next four years. As a result, the Gulf region, which already has some of the world's wealthiest countries in terms of GDP per capita, is predicted to earn an additional $1.3 trillion in hydrocarbon income by 2026.
Saudi Arabia and Qatar, who are among the world's top oil and natural gas exporters, should gain the most. The United Arab Emirates (UAE), Kuwait, Oman, and Bahrain, on the other hand, would benefit from sufficient money flooding their governmental coffers. The GCC is one of the remaining places on Earth where substantial amounts of cash are available. As a consequence, investors from all over the world are pounding on the door, providing banks and financial service providers with unique prospects.
Additional oil earnings also enabled GCC governments to keep inflation at a manageable 3.6% on average through price controls, subsidies, or directly targeted monetary aid in 2022. Inflation should remain below 3% this year, assuring steady client spending.
Diversification is essential
The Middle East's economy is still based on hydrocarbons, but the drive to establish a viable non-oil industry is the region's top priority. As a result, most governments have committed to diversification plans and are significantly investing in structural reforms to attract foreign capital in recent years.
Allowing 100% foreign ownership of companies in several jurisdictions where international investors previously required a local partner, boosting capital markets, introducing long-term residency programmes, and relaxing Islamic laws to allow unmarried expatriate couples to live under the same roof are all significant changes.
Saudi Arabia is the one market on everyone's radar in a fast-changing climate. Only a few years ago, the Arab world's largest economy was closed and highly conservative Islamic monarchy, but under the leadership of Crown Prince and now Prime Minister Mohammed bin Salman, the Arab world's largest economy has undergone unprecedented changes, essentially pouring hundreds of billions of dollars into the creation of a viable non-oil economy almost from scratch.
During the most recent World Economic Forum in Davos, Kristalina Georgieva, Managing Director of the International Monetary Fund, referred to the monarchy as a "bright spot for the global economy." All industries, from tourism to health, mining, logistics, agriculture, entertainment, financial services, and even aerospace, appear to have limitless funding capacity.
The private sector should contribute 65% of GDP by 2030, according to the Saudi Vision 2030 master plan. In 2016, when Vision 2030 was announced, this contribution was less than 40%. It has now grown to little more than 43%. Other GCC nations have set similar goals. Local entrepreneurs, primarily family firms that got affluent as a result of oil income, are now significantly diversifying. Several Arab countries are likewise focusing more on small and medium-sized businesses and expanding SME loans to accelerate private sector growth.
The importance of sustainability
Climate change is another heated concern in the MENA area, with temperatures rising roughly twice as fast as the world average. Water shortages, drought, and sandstorms are becoming increasingly problematic for populations. According to a 2016 Max Planck Institute research, many Middle Eastern towns may become completely uninhabitable by the end of the century.
For the time being, the region is largely regarded as the world's oil well, with some of the most polluting nations in terms of carbon dioxide emissions per capita. The war in Ukraine further exacerbates that view by raising total demand for fossil fuel output; but, as a significant contributor to global warming and one of its first victims, the Middle East is perfectly positioned to become a laboratory for the energy transition.
Arab countries appear to want to be on the cutting edge of change, with an increasing number of states committing to carbon-neutrality objectives and investing in renewable-energy megaprojects. According to the Arab Petroleum Investments Corporation, a Dammam, Saudi Arabia-based energy investment organisation, the MENA area has $257 billion in renewable energy projects in the works. Solar-power infrastructure receives half of these expenditures, followed by hydrogen (21%), nuclear (14%), wind (10%), hydropower (5%), and waste-to-energy projects (5%). With the UAE hosting the COP28 conference from the end of November to early December, this year could see an increased emphasis on green projects.
Concerns about sustainability are also at the top of the list in the tech industry. Yellow Door Energy received $400 million in investment last October, making it the region's largest startup deal, followed closely by Pure Harvest Smart Farms' $180.5 million. The two Emirati enterprises specialise in environmental innovation, both in terms of energy transition and novel farming practises.
The name of the game is technology
This year, look for technology to continue to be a significant facilitator of growth. According to ecosystem watcher Wamda, investment in MENA startups reached $3.9 billion in 2022, a 24% increase over 2021, split across 795 agreements. The United Arab Emirates, Saudi Arabia, and Egypt received the most investment, but promising partnerships were also struck in Algeria, Bahrain, Palestine, Oman, Iraq, Qatar, Yemen, Sudan, and Tunisia.
Fintech is the most dynamic area in most Middle Eastern nations, whether it tackles financial inclusion or caters to the requirements of rich geeks, with total investments exceeding $1.1 billion, roughly double the amount raised in 2021. Last year's largest table rounds included $200 million from UAE's buy-now-pay-later Tabby, $110 million from Bahraini crypto exchange Rain, $150 million from Egyptian financial services firm MNT Halan, and $100 million from Saudi payments service Tamara.
For several years, local banks have collaborated with fintechs to create specialised goods and services, while also attempting to utilise their strong market positions to launch own neobanks. Nonetheless, new laws, particularly concerning open banking, is projected to create ripples in 2023. Customers will be able to share their financial data with third-party financial service providers, namely banks and fintech firms, making the financial industry more of an interconnected ecosystem. Bahrain, the UAE, and Saudi Arabia are the forerunners in this sector, but Jordan, Egypt, and Kuwait should follow suit shortly.
While this new approach to financing has the potential to be revolutionary for the Middle East, its true impact will be determined by how it is implemented and actual client acceptance. Tarabut Gateway, the region's largest regulated open-banking platform, is one firm to keep an eye on for future market developments.
Looking ahead, prospects are promising; however, the MENA region still faces challenges, such as developing energy transition strategies that include low-income populations, and investing in education to develop a local skilled workforce that can reduce ambitious governments' reliance on foreign talent. Nonetheless, more unexpected but persistent political unrest is a looming concern in the Middle East, and it is a factor that normally undermines investor confidence.