How MENA's Digital Economy Is Holding Up Amid Global Slowdown

A recent World Bank MENA Economic Update says that the region's economies would grow by 5.5 per cent in 2022, but the growth could be uneven

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Digital penetration in the MENA region has been commendable. UAE, for instance, has a 99 per cent penetration with 58.51 per cent of internet consumption through mobile. Business hubs in Dubai and Abu Dhabi are today the global centers of economic activity. MENA has also become a huge market for tourism boards across the globe.

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Even though the pandemic led to a drop in travel and live entertainment, as the world entered the new normal, revenge tourism led to a comeback. The pandemic, in fact, led to the rapid adoption of fintech and e-commerce and reduced resistance to digital in the food and beverage industry. All these factors further boosted the digital economy. According to a report by Checkout.com, one in five consumers across MENA purchased retail products online more frequently this year than last year, with 33 per cent shopping more frequently for fashion and clothing online. The report also found that 82 per cent of consumers in MENA use some form of fintech app in 2022, up from 76 per cent in 2021.

Another key report to quote here is the October 2022 edition of the World Bank MENA Economic Update which said that MENA region's economies would grow by 5.5 per cent in 2022, the fastest rate since 2016. However, the report also mentions that this growth could be uneven. Have the Russia-Ukraine and the resulting increased oil and food prices, inflation and economic slowdown in the United States, China, and Europe impacted this region? Or, is the region showing resilience despite these factors?

Impact of negative global market conditions

"The negative global market has further exacerbated the already challenging economic situation in the MENA region. Inflation in the region has been in the double digits for more than two years and is expected to continue until 2023. The ongoing conflict between Ukraine and Russia has also put a strain on the region's supply chain," said Sanjay Uppal, founder and CEO, finbots.ai, a Singapore-and-Dubai-based B2B fintech startup.

However, he also believes that despite these challenges, the MENA region's digital economy has shown some signs of resilience. "This is due in part to strategic investments in digital infrastructure, start-up ecosystems, and the development of talent. I expect that many new startups will emerge in the region to tackle issues such as access to credit, ease of doing business, education, food tech, and climate change tech. These developments are also likely to drive job creation in the region," he added.

Some feel that the MENA region has remained reasonably insulated from inflation after COVID-19, as the countries here, especially the GCC (Gulf Cooperation Council) economies, have their currencies pegged to the dollar. "Therefore, much of the inflation faced by the rest of the world is yet to be felt in this part of the world. According to the blogpost by the Arab Gulf States Institute in Washington; consumer price inflation, around 4 per cent, is considerably lesser in GCC economies than in the UK and the USA, where it is around 9 per cent," said Prashant Tandon, managing director and CEO for Dubai, Lighthouse Canton.

Funding winter and sectors affected

When it comes to the inflow of funds, even though the GCC and UAE, in particular, handled the pandemic reasonably well and had a lot of inflow of funds, negative global market conditions and funding winter in the second quarter of 2022 have allegedly led to the freezing of the flow of funds into startups. "It had a huge impact on the region. Also, for most of these tech businesses, the digital economy is still new age and in the growth stage and has been impacted a big way globally and in the MENAP region. Conventionally, private businesses and startups in MENAP have been funded by Private Equity (PE) as against Venture Capital (VC). That, coupled with relatively smaller capital allocation and investment horizon of PE vs VC has led to the region facing a bigger impact of the tighter monitory environment that we are now faced with resulting in the slump in the first to three quarters of 2022 impacting the region even more," said Tandon.

In comparison with SEA, the MENA region has traditionally had limited attraction for global investors due to its smaller market size, slower economic growth, and the slow emergence of domestic startups. "Further, investment considerations have sometimes been hampered due to limitations on business shareholding and ownerships by foreign individuals and entities. However, investments in developing the ecosystem in terms of skills, resources, and events are starting to yield results. Singapore's experience in emerging as a competitor to Silicon Valley has provided a model for other aspiring regions," said Uppal.

The Russia-Ukraine war and the lockdown in China have led to severe supply constraints. Added to that, the cost of doing business has also gone up. This has impacted companies across several sectors. "The food and beverage vertical have and will continue to be a challenging industry sector for MENAP given their reliance on foreign imports. Given the lending slowdown that has occurred globally, it is also estimated that the banking and fintech sector will continue to take a hit," Roma Priya, founder, Burgeon Law.

Several factors have hindered businesses from investing in the region in the past. However, over the years, the region's governments have started taking key steps toward opening up the economies. "Since 2019, the governments have been putting in place a series of reforms and various initiatives. Free zones are being set up to be governed by common law standards. There has also been a conscious effort to diversify the sources of economic activity from oil and related industries. Social and business norms are being changed and insolvency norms are being relooked at," said Tandon.

When asked to sum up the overall funding scene in MENA, experts said that even though the external conditions have affected funding this year, digitization is a big driving factor and so are the initiatives taken by the government. The region is creating an environment conducive to entrepreneurship, and investors are taking notice.

Lessons for startups from evolved economies

The ability to fail and fail quickly is the most important lesson the region can take from the western world or from the more evolved start-up ecosystem, says Tandon. He explains why. Historically, there has not been a robust insolvency regime in this region. In this area, it is still rather taboo to have a failing business. However, starting a business and failing at it is not frowned upon in the western world or India today. "Thus, this skill is essential, and it is even more so in the ecosystem of digital startups," he said.

Conventional businesses also need to be more open to digitization. "It is important to note that there isn't a single formula for success. However, learning from the success and failures of companies that had to make necessary pivots during their country's digital revolution is necessary to provide a better understanding of the challenges to come," said Priya.

Overall, startups in the MENAP region can learn from more evolved digital economies by understanding their strategies, approaches, and best practices. "This includes focusing on establishing strong customer relationships, leveraging emerging technologies for innovation and growth, and investing in talent development," said Uppal.