*By Ayman Abualkhair
The Arab world, home to more than 360 million people, with a Gross Domestic Product of around $2.8 trillion, is playing a greater role in the world economy.
Abundant revenues from oil and gas have helped the region amass enormous wealth, which, if invested wisely will be the cornerstone of diversifying local economies.
Arab countries, led by the GCC states, have the largest sovereign wealth funds in the world, with total assets estimated at about $2 trillion (38% of the total world assets).
Investment in the region has increased from $6.1 billion in 2000 to $79.3 billion in 2009, an amount comparable to that of China ($95 billion in 2009). An ongoing pattern of global economic growth, coupled with the fact that emerging economies grow much faster than their advanced counterparts, and the shift in global economic power, will make the Middle East and Africa the fastest growing regions in 2018. This projected growth, however, would require significant investments mainly in infrastructure, renewable energy, health and education, to name a few.
With more than 135 million internet users in the Arab world, a new generation of tech savvy entrepreneurs is emerging. This region is expected to post robust growth over the next decade both in terms of population and GDP. By 2015 the Arab population is forecast to reach 371m, about 50% increase over the level in 2000. Meanwhile, real GDP (based on PPP) is expected to grow by a staggering 190%.
The economic struggle
Improving business conditions in the region and attracting new investment are on top of local governments’ agenda. The battle is now between economic ministers and government entities to create and sustain the most competitive, growth-oriented economy.
In fact, it was The Economist who predicted that “war will break out in 2011 not on the battlefield, but in finance ministries eager to climb the ranks of the world’s most business-friendly economies”.
This what exactly the Arab world needs in these extremely challenging times. In recent years, a number of Arab governments implemented regulatory reforms aimed at improving business environments at home. Investing the Arab funds locally and attracting FDIs are absolutely crucial in order to satisfy the increasing needs for infrastructure, transport, education, health care, housing, business services, logistics, agriculture, oil and petrochemicals, financial sector, defense, industrial output as well as Islamic products.
Several Arab governments implemented regulatory reforms in the past years aimed at improving the business environment for local entrepreneurs, according to Lopez-Claros, Global Indicators and Analysis, World Bank. Most MENA countries offer corporate tax holidays ranging between 2 years in Jordan and 20 years in Egypt, with the option to be extended in the case of supplementary investments.
Export/free zones (FEZs) are also common in the MENA region. Doing business in free zones, mainly in the Gulf, gives businesses large and small access to some of the world’s most prominent infrastructure and tourism hotspots.
The stock markets in the Arab world offer big opportunities as well. The well-known magazine Forbes Middle East has described the Arab stock markets as witnessing robust growth from 2013 to date, and the economic outlook for Middle Eastern countries as being bright. Capitalisation in the Middle East and North Africa (Mena) stock markets is only 2% on a global scale thus offering abundant opportunities for investment in the region, particularly but not exclusively in the UAE, Qatar, Morocco, Egypt and Saudi Arabia.
The Saudi stock exchange, which opened to international investors in 2015, is particularly interesting because its stock market (Tadawul) is the largest in the Middle East with $580 billion market capitalization (ca 1% of world’s stock market), compared to the cumulated market capitalization of United Arab Emirates’ (UAE) Dubai and Abu Dhabi of around $245 billion and Qatar of about $200 billion (Persian Gulf Fund).
Renewable Energy: The “Green Petrol”
There is also a rising demand for green energy in the region, from the Arabian Gulf all the way through to Africa and the wider Middle East.
Electricity demand is expected to increase by 84% in 2020 compared to 2010 levels, which would require an additional 135 GW of generating capacity, the equivalent of about $450 billion investment. For the first time, Arab governments have come to a broad political consensus by adopting a strategy for the development of renewable energy, which will increase installed renewable energy power generation capacity in the region from about 12 GW in 2013 to 75 GW by 2030. The contribution of renewable energy to total electricity generation is projected to reach between 4.7% and 9.4% by 2030. This energy will be necessary to satisfy mainly the needs in cooling and heating.
Islamic Economy: A New Horizon
Ten out of 30 countries with large Muslim populations have some of the world’s fastest growing emerging markets. The driving force of the Islamic economy is its population of about 1.6 billion, which is expected to rise to 2.2 billion by 2030. Furthermore, the majority of Muslim populations are structurally young: people under the age of 30 make up about 60% of the population and have significant purchasing power.
According to a report released by Thomson and Reuters “State of the Global Islamic Economy 2013”, the total size of the global Islamic economy is expected to reach over $6 trillion in 2018, with major sectors including finance and insurance, halal food, halal pharmaceuticals and cosmetics, modest clothing, Islamic values-influenced travel and media as well as recreation sectors.
Islamic Finance, currently, valued at over $ 1.2 trillion, is expected to more than double in size by 2017, reaching $ 2.7 trillion. Halal food industry and Islamic friendly family holidays are growing in popularity as well. The collective global Muslim food and non-alcoholic beverage (F&B) market is larger than F&B consumption of China, while Muslim tourists spent $137 billion on travel in 2012 and already account for more than 12.5% of global tourist spending. This sum is expected to grow to $181 billion by 2018.
Muslim consumers globally spent $224 billion on clothing & footwear consumption in 2012 (10.6% of global expenditure) and this is expected to grow to $322 billion by 2018(second after the United States). Geographically, Asia and Africa are expected to contribute significantly to the growth of the Islamic Economy, with approximately 95% of the global Muslim population expected to move to these regions by 2030.
However, despite its numerous advantages, the Arab world is still reeling from the ongoing political turmoil in the region. The absence of a demonstrated international competitiveness in both manufacturing and services as well as corruption constitute one of the main obstacles for doing business. Institutional reform, capacity building, reforming the education and the regulations facing business remains essential. Moreover, the Arab world needs to create a dynamic private-sector in order to create sufficient employment. This will be done through high competitiveness, an educational system which meets the labour markets’ needs, and through encouraging applied sciences to transform ideas into real business projects, as well as through more consolidated trade and economic relations with the rest of the world.
If the Arab region’s employment challenge can be successfully addressed, the region’s young demographic could then turn from a potential liability to a significant advantage. Now is the time to invest in the region, not only because of the high return on investment it can offer, but also because the birth of the new economic paradigm, the future “G7”.
*Mr. Ayman Abualkhair has a master in environmental economics and natural resources from “Ecole des Hautes Etudes en Sciences Sociales” in Paris. He has worked during 8 years for the promotion of Arab-Swiss economic relations at the Arab-Swiss Chamber of Commerce and Industry. He is the founder of the Swiss Arab Entrepreneurs Platform.