Having grown up through 17 years of civil war in Lebanon, it is a subject of pride for me to write about business opportunities in our region at a time of great political turmoil and widespread unrest. This is because I believe that by pushing ahead with economic and business development, we stand the best chance of giving the region hope and a path to peace and prosperity.
Two broad themes make the Arabia business opportunity compelling
These are on one hand the strong macro-economic fundamentals of the region, and on the other, the high and growing levels of wealth that make it an important source of capital for the rest of the world. In this blog we examine the macro aspects; and we will explore the wealth opportunity in a future blog about Sovereign Wealth Funds (SWFs).
What are the main attractive fundamentals of the Arabia region?
- Young and growing populations: The median age in the MENA region is 23.4 years. Population growth over the next 5 years is expected to be 2.2% per year vs. a world average of 1.1% and a developed regions average of 0.3%.
- Strong government surpluses driven by ongoing high hydrocarbon prices: Note that there is ironically a “hedging” effect whereas regional turmoil, which is bad for the economy, results more often than not in higher oil prices and hence stronger government surpluses. The International Monetary Fund (IMF) expects GCC to reach large fiscal surpluses of about 13% and non-oil sector growth of 5.5 % in 2013, which are being channeled into infrastructure spending. On similar lines, Saudi Arabia’s public spend is set to reach USD 267 billion in 2013, an increase of 15% over 2012, and this will be largely diverted towards construction of residential, educational and health facilities.
- Increasing wealth across the countries: Real gross domestic product annual growth in Egypt was 4.2%, and in the GCC 5.8% over the past 5 years. For more on the region’s fundamentals, be sure to check out my slide share presentation. While the demographic and GDP growth patterns are common across emerging markets, the government surpluses and strong expenditure programs that come with them provide an additional strong boost to regional economies.
What do these fundamentals mean in terms of business opportunities?
There are two broad implications, which in turn benefit different industry sectors:
- The strong demographic and wealth growth patterns are supportive for all consumer related industries, including food & beverage, retail, education and healthcare. Local businesses in all these sectors are booming and attracting a lot of capital. Every private equity manager I met recently has education and health care at the top of their investment target lists. And of course, every international player in any of these sectors is either already in or looking to enter the market either by exporting products and services, forming local alliances and franchises or even by relocating large chunks or all of their business to the region.
- The government spending is also supportive of the consumer sector as a lot of the spending makes its way into salaries and improved employment opportunities. In addition to that, the Infrastructure and Construction sectors benefit directly from the government spending:
Infrastructure – Roads, bridges, airports and railroads, so much needs to be built to support the growing population and the governments’ ambitious industrialization and sometimes tourism plans, including the upcoming FIFA World Cup in Qatar and the bid for the World Expo 2020 by Dubai / UAE. There is a strong infrastructure boom currently happening in the GCC. The UAE is also witnessing a sharp growth in the hospitality sector, which is estimated by industry experts to grow more than 10% annually over the next four years to reach USD 7.5 billion by 2016. Qatar is spending on infrastructure an estimated USD 140 billion in anticipation of the World Cup. The healthcare market in the Gulf region is also set to grow at an annual rate of 11% to reach USD 43.9 billion by 2015 from an estimated USD 25.6 billion in 2010.
Construction – In addition to infrastructure, government money is making its way directly or indirectly into housing, schools, and hospitals. Despite the hit the sector took in the aftermath of the great financial crisis and the regional real estate crash, this sector is in good health again and growing. The GCC’s construction industry recorded building projects worth USD 68.7 billion in 2012, an increase of 48% over the USD 46.5 billion worth projects in 2011. Industry experts expect the sector to register 19% annual growth in 2013, lead primarily by hospitality, educational and medical projects.
In my next blog, I will talk more specifically about the unique position that Dubai occupies in the region, particularly from the perspective of foreign investors, companies and individuals.
If you are a senior independent executive looking for opportunities in this region, I invite you to read about our accomplished executive self-assessment checklist.
As always, I welcome your questions and comments.