The MENA region has the potential of becoming not only a regional economic powerhouse, but a global player as well. However, we need to be careful of the impact of political, ethnic, religious and economic polarization that the area has witnessed since the last decade, which might eventually derail progress. It would indeed be a travesty if there were an en masse flight to safety for investments, as it is extremely difficult to price the risk of conflicts and instability. The best way to confront the challenges is to hold a long-term view and diversify both at a micro and macro level.
Jordan, Iraq, Libya, Iran, Egypt and Syria are countries with great potential, but some of these places are also embroiled in turmoil. Non-warring countries of the region need to step up to the plate and broker long-sustaining peace accords with warring factions. An IMF report on Arab Economic Transformation Amid Political Transition points towards the region going through political and economic transformation, where new stakeholders are becoming active as old vested interests standing in the way of reforms are losing ground.
The report also acknowledges the challenges the governments face currently with limited horizons and mandates, institutional uncertainty and socioeconomic tensions. On integration into the world economy per capita basis, the region still lags behind other emerging markets and developing countries. The report blatantly states the following reasons for the shortfall:
- Lack of competition in domestic markets
- Unemployment higher than average, especially with youth unemployment
- The well connected capture the lion's share of benefits
- High level of public debt with some running high fiscal deficits.
- Limited exchange rate movement
- Lack of leadership to create private sector jobs
- Corruption potential due to complex business regulations
- State- owned enterprises and public banks are dominant, but tend to be inefficient
- Uneven playing field amongst public sector undertakings (PSU) and private organizations, which limits competition and chances of innovation.
SIGNS OF IMPROVEMENT
Growth in general has also been hampered by the lack of access to finance, support policies to encourage trade, inadequate labor regulations (where the government is usually the first and last employer) and inadequate investments in education. This presses for an urgent call to accelerate reform efforts by the regional authorities. But despite wavering progress, there are equally encouraging signs of improvement and macroeconomic stabilization.
According to Deloitte, USD 12 billion of previously stalled projects in the UAE have now resumed construction. USD 17 billion of project management contracts are tendered in Saudi Arabia. Qatar will spend USD 70 billion in anticipation of the 2022 FIFA World Cup and Qatar Vision 2030. Therefore, with more than USD 2.5 trillion worth of projects, the GCC region is set to enjoy unprecedented construction boom in history.
The regional capital markets fared extremely well. Dubai's benchmark was one of the world's top-performing stock markets with a rise of 108% last year and is up almost 57% this year. A Deloitte report shows that the Arab stock markets increased by 13.6% and GCC markets rose by 13.2% in the first four months of 2014, compared to 4.7% and 6.7% for the same period last year.
These glowing returns certainly draw fund inflows from asset managers as UAE equities are expected to attract USD 450 million. Qatar stocks should witness fund inflow of almost USD 420 million. Asset managers with over USD 8 trillion under management are tracking emerging market indices as UAE and Qatar's blue chips are now included in the MSCI benchmark. The MENA is expected to post a GDP growth of 3.6% in 2014 and many GCC economies would expand at or above the regional average.
The time is ripe to use this momentum to diversify the revenue base, increase spending in education and health, and encourage other industrial and manufacturing verticals other than chemicals and petrochemicals. The quicker the region diversifies away from the oil reliance economy, the stronger and more sustaining the economy has the potential to be.
To quote Deloitte in its GCC Economic Report, "IMF confirmed that oil-based growth model in the GCC led to rapid development, but with cost. Diversification is needed to reduce reliance on oil, support growth and jobs. International experience shows education, competition [and] incentives are crucial".
GROWING BEYOND OIL
UAE, and specifically Dubai, has taken the lead in demonstrating how principally you can prosper, create employment and increase the GDP of a nation. But again, you have to be cautious about investing in only a certain asset class, such as real estate. China proved that the economy can be severely hit if sensible diversification is not part of the strategy. History has also demonstrated that to encourage sustained growth, investments into new and innovative technologies, education, healthcare and service-related industries is extremely important.
The UAE also leads the MENA region in the innovation input sub-index. However other regions should participate more aggressively as well to be a larger part of the equation. Explore what is needed and broken in the market and find an innovative way to solve it. It is essential to also have an open economy where talent and ideas are shared, which leads to greater innovation. This year's Global Innovation Index focuses on the human factor in innovation and the role governments and firms play in fostering creative individuals and teams. Today UAE has 10 or more incubators and accelerators, but much more is needed to build the ecosystem; as more companies are created, finance, talent, and further innovation will follow.
Today a majority of the businesses in the MENA region are family-owned companies that span multiple sectors, which are vertically integrated and has their own sizeable real estate portfolios. But with the changing economic and financial environment, there is an urgent need to change, adapt and strategize.
As a partner at AT Kearney Middle East states: "Most GCC family businesses have a highly diversified, fragmented portfolio. This contrasts with family businesses in the more mature European and North American markets, where portfolios tend to be more focused and have clear business platforms. While GCC family businesses have been extremely successful diversifying, few have implemented systematic, active portfolio management."
The MENA region currently has an abundance of private equity (PE) capital, but meager venture capital (VC) resources. Venture money is required at all stages of investments if you would like innovation to prosper, new companies to be formed and attract talent pools. PE is a little more conservative capital that might not bridge the concept that needs incubation capital for a startup company.
Technology-related companies today require less money than in the past to prove their minimum viable product (MVP) model. So the Silicon Valley mantra of fail fast, fail cheap is most applicable to the current environment. That is indeed exciting. Our fund is committed to further the spread of the start-up eco culture in the MENA region by applying our tested skill sets of the US venture world.
Swatick Majumdar is the managing director of Digital Entertainment Ventures (DEV), a New York-based venture fund, which is committed to the GCC region to build, advise and invest in companies. Majumdar can be reached at smajumdar@devny.vc.
© Zawya 2014
