The Case For Investing In The MENA Has Never Been Stronger

A host of stumbling blocks that were once deterrents to foreign investment are progressively being addressed.
The Case For Investing In The MENA Has Never Been Stronger
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Founder and CEO, StonePine Capital Partners
12 min read
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Until quite recently, the barriers to investing in the Middle East and North Africa (MENA) region were effectively insurmountable. Most attempts to break into the marketplace were thwarted by decades-old laws specifically designed to protect the interests of state-owned enterprises and merchant families.

Foreign investors who managed to identify potential footholds faced the further impediments of, among others, prohibitively high minimum capital requirements, combined with stringent ownership restrictions that limited their stake in companies. Local production rules and licensing processes were designed to serve as an additional set of obstacles to frustrate direct foreign investment. All these factors allowed state-owned enterprises and merchant families to build large uncontested conglomerates, requiring foreign firms to partner with them, or use them as the sole distributor.

But in 2014, the sudden and unexpected decrease in oil prices resulted in a sea change in attitudes towards foreign investment in the MENA region. The Gulf countries in particular began to rethink the role foreign direct investments could play as a means to ease fiscal burdens and restructure local economies.

In the five years since, what has happened across the region has been nothing short of an economic revolution. Legislation that favored local interests has been repealed, and, in its place, progressive investment and corporate ownership laws have taken root. A broad suite of reforms has been instituted regarding capital market rules that also strengthen the rights of minority investors.

The Executive Teams of the National Agenda 2021

In addition, a host of stumbling blocks that were once deterrents to foreign investment are progressively being addressed. Access to credit has been eased, along with changes to insolvency resolution, making the marketplace more hospitable to overseas money. Business creation has been simplified, as well as an overhaul of the tax code to encourage investment at a variety of scales.

Indeed, one of the main things that has not changed is the attitude of foreign investors towards the MENA. While the transformation in the region has been neglected in the press, resulting in a lack of attention globally, that indifference has also resulted in a rich array of opportunities for serious investors to consider.

CHANGES AFOOT

The changes that are underway can be seen at multiple levels. Most visible are the state-driven plans that will set the tone for investment in the next decade. In the Kingdom of Saudi Arabia (KSA), for instance, the Saudi Vision 2030 plan is nothing short of a transformation of the economy away from its dependence on oil, by investing in infrastructure to support diversification into manufacturing, technology, and mining, among other sectors. At the same time, KSA seeks to develop and grow its public service sectors to ensure access and improvements in areas like health and education, as well as recreation and tourism.

But changes in outlook are not limited to Saudi Arabia. In the United Arab Emirates (UAE), the government has launched the UAE Vision 2021, which focuses on environmental sustainability, as well as improvements to infrastructure in areas like healthcare and education to support a knowledge-based economy. Key emirates of the UAE like Abu Dhabi and Dubai have launched their respective strategies spanning into 2050. Egypt has similarly announced a plan (Egypt Vision 2030) to revive its traditional role in regional leadership, by promising social justice and focusing on sustainable economic development through creating a competitive and diversified economy, centered around knowledge-based innovation.

Source: NEOM

Grand visions are nice, but what impresses is that the talk is backed up by action. Take for instance the giga project currently being developed by NEOM in KSA- a massive 26,500 sq. km. smart city between the Jordanian and Egyptian borders that stretches from the Red Sea to the mountains. The city is already hosting daily flights to its airport with the goal of attracting one million residents and five million tourists by 2030. Nor is Saudi Arabia alone in building new cities- along with investments into a new canal industrial zone, Egypt is constructing a new administrative capital the size of Singapore that will be home to five million people and will feature the tallest skyscraper in Africa. At the same time, the country is busy creating seven new tunnels to the Sinai Peninsula, and updating and upgrading five separate ports.

But the ambitions in the area go far beyond mere construction projects. You can see it in the bold steps countries like the UAE has taken in launching KhalifaSat, its first ever satellite, and the creation of the region’s first space exploration program, including sending its first astronaut into outer space. But the technological innovations don’t end there- as part of its strategic plans, the UAE appointed a Minister of State for Artificial Intelligence (AI), recognizing that AI is on track to contribute upwards of $96 billion to its economy by 2030 (13.6% of GDP). The UAE has an even bolder published strategy to establish the first inhabitable human settlement on Mars by 2117.

Or consider Egypt’s moves toward a cashless economy, mandating that the collection of taxes, customs, and duties will be through cashless payment methods. Coupled with their embrace of renewable energy (from promoting net metering, deregulating highvoltage transmissions, and removing subsidies of conventional energy), one can see why the region is attracting the attention of international investors.

NEW REFORMS AND POLICIES

Supporting these changes are structural reforms that not only fundamentally alter the way these countries do business, but inspire investor confidence in the region as well. Foremost among these are changes to the laws and legal systems in these countries. Since 2017, the UAE has taken measures to modernize its judiciary, with better training for judges and arbitrators, the establishment of specialist commercial courts, electronic case management systems, and the implementation of a new insolvency regime. In 2018, Egypt implemented a raft of business reforms ranging from new laws protecting foreign investors to insolvency, tax, and credit reform.

KhalifaSat was developed at the Mohammed Bin Rashid Space Center

Source: Mohammed Bin Rashid Space Centre

The workforce itself is changing. Whereas before employers found roadblocks to recruiting talented knowledge-based employees to the region, now those hurdles are being gradually removed. The UAE recently announced a 10-year-visa for professionals and investors, and the KSA also removed requirements for local sponsors, and started offering permanent residency to some expats. Social reforms are now at forefront of the agenda in the KSA as well, with the relaxation of social norms accelerating at a very rapid pace, making the country more hospitable for foreign talent.

Many highlevel entertainment activities like cinemas and concerts have been announced and are already creating new opportunities. And nowhere have the social changes been more visible than in the unprecedented rate women have been entering the GCC workforce. The KSA lifted its long-held ban on women driving, and recently the President of the UAE called for Emirati women to occupy 50% of the country’s Federal National Council, giving women a greater say in their country’s future.

Accompanying these reforms are pro-business policies that are poised to spur investment. There is a widespread realization in the region that the path to prosperity and development requires a move towards privatization and two-way trade agreements. As the world’s top oil exporter aims to reduce its dependence on hydrocarbons, Saudi Arabia’s privatization program is one of the most ambitious, with entire sectors being privatized including healthcare, energy, and even basic services like water.

As part of its Vision 2030 economic roadmap, the KSA has plans to eventually raise as much as $200 billion by expanding the private sector and diversifying its revenue streams. Egypt has launched its own ambitious privatization program by floating several large state-owned enterprises on the public markets. The state named five companies in 2018, and it is expected to announce nine names in the second phase shortly. Similarly, the UAE announced policy changes that allow for 100% foreign ownership of onshore entities.

The Suez Canal

THE ENVIRONMENT FOR INVESTMENT 

The news is good, and investors are starting to take notice. In 2018, almost $900 million was invested into over 350 different MENA-based startups, with 30% of those investments coming from outside the region. The entrepreneurial ecosystem has attracted firms such as General Atlantic and Gobi Partners to invest in opportunities like Property Finder and HolidayMe respectively. Homegrown tech startups are becoming more visible, and they are attracting interest from foreign strategic buyers. One of the biggest acquisitions of all time was Amazon’s takeover of the e-commerce website Souq- at least until Uber acquired Careem for $3.1 billion.

Among the many attractive aspects of investing in the MENA region is its key geographic location between two of the largest growth markets in the world, China and Africa. The flow of trade between Middle East and China, as part of the latter’s Belt and Road Initiative (BRI), has almost doubled in the last decade from $40 billion to $80 billion, but China’s 21st Century Maritime Silk Road also travels through the region to Africa, where, over the past two decades, growth in trade between the Middle East and Africa has seen a nine-fold increase, with over $65 billion in bilateral trade in 2018. The influx of trade has benefitted all the countries involved, contributing to new investment opportunities, job creation, GDP growth, and human capital development.

Understanding the importance of China’s BRI initiative for the predicted growth in the MENA region cannot be understated. The Middle East and North Africa are expected to play a central role in connecting China to the rest of the world, in no small part because Chinese trade hubs such as Hong Kong and Shenzhen run through the Suez Canal. It’s no surprise to discover that China is the largest investor in Egypt’s New Suez Canal Zone initiative that covers close to 500 sq. km. and incorporates six separate ports. But their interests in the region extend far beyond the venerable canal, and include support for additional trade routes through locations like Oman’s Duqm Special Economic Zone and the UAE’s Jebel Ali Free Zone.

A closer look at the role the UAE plays as a key transit point in this network reveals just how crucial the region is for global trade networks as a whole. Currently, the UAE accounts for over 50% –$34 billion– of the Middle East’s trade with the African continent. That amount will only grow as more Chinese exports pass through the region as part of the BRI initiative. According to the UAE’s Ministry of Economy in 2018, 30% of China’s exports to the Arab world goes through the UAE. Indeed, the UAE’s two biggest trading partners are not other countries in the Middle East, but China and India.

Expo 2020

Nor is China or the Middle East sitting on its hands when it comes to investing in Africa to ensure the centrality of the MENA region in trade flows to the continent. Led by the UAE, many Gulf states have heavily invested in ports, infrastructure, mining, agriculture and other strategic sectors across Africa. The UAE has deep ties to the region: Dubai-based global ports operator DP World is a leading investor in Africa, with offices in Algeria, Egypt, Djibouti, Somaliland, Rwanda, Mozambique, and Senegal. Similarly, the UAE’s largest telecommunications operator Etisalat has international operations in Egypt, Morocco, Mauritania, Mali, Niger, Burkina Faso, Cote d’Ivoire, Togo, Benin, Central African Republic, and Gabon. China has similarly invested billions of dollars in aid, loans and investments into Africa to strengthen trade along the 21st Century Maritime Silk Road.

THE ROAD AHEAD

So, what does the future hold for the Middle East? In a word: growth. Consider just three observations of the many that could be made:

> Governments in the region have invested over $2 trillion in infrastructure upgrades.

> Population growth in the region has increased by six million in 2018 alone- twice the rate of growth of North America and Europe combined.

> Dubai’s airport experiences the highest volume of traffic amongst all airports worldwide. Economically, the region is on a strong footing. Growth in Saudi Arabia recovered strongly in 2018, growing at 2.2% versus -0.7% in 2017, with the private sector growing at 3.2% YoY. The KSA increased spending by 7% in 2019, and it is expected that the surge in investment will further boost the private sector. Real GDP growth in the KSA is projected to hit 2.1% in 2019.

National Agenda 2021 Executive Teams gathering

The United Arab Emirates is hosting Expo 2020, with estimates of tourism to the region nearly doubling, which is projected to generate $9 billion of incremental tourist spending (equivalent to 2.0% of the UAE’s GDP). Close to 100,000 jobs are expected to be created in the UAE as a result of Expo 2020, and real GDP growth in the UAE is projected to hit 2.4% in 2019.

Egypt even achieved a budget surplus in FY 2018 for the first time in contemporary economic history, with projections to expand that surplus by 2% in fiscal year 2020. After transitioning to a floating currency system and driven by gains in exports, tourism, remittances, and direct and portfolio investments, Egypt’s international reserves reached a record high of $45 billion, 0% of GDP. Real GDP growth in Egypt is projected to hit 5.8% in 2019.

In short, the MENA is primed for global investors to take a closer look at opportunities across all sectors in the region. The time is now.

Related: The Impact Of The Middle East's Fintech Boom On Economic Inequality In The Region

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