MENA: A Force To Be Reckoned With

The Middle East is ready to unleash its potential.

The Middle East and North Africa region (MENA) is one of the fastest-growing economies in the world. By 2030, the region’s 22 countries will be home to more than half a billion people. Together, they also have the world’s largest oil and gas reserves; and although “sustainability” is the name of the game, fossil energy production is set to increase in the future. The region’s wealth has also accumulated above ground: Arab states currently run four of the world’s 10 largest sovereign wealth funds.

Today, the region is about much more than hydrocarbons. A new generation of leaders, entrepreneurs and customers are changing the rules. As countries open up and modernize, business opportunities arise. Many international investors are looking to step in, especially in fast-growing economies like the United Arab Emirates (UAE), Saudi Arabia, Qatar and Egypt. A handful of key trends will define the shape of 2022.

New Tech Shapes The Region

Who are Arab customers in 2022? Most of all, they are young and connected. More than half the region’s population is under 30 years old, nearly all have mobile phones; and most of the population uses the internet.

New technologies are, therefore, a booming sector. According to Dubai-based research and data provider Magnitt, 2021 was a record year for startups in the MENA region, with $2.6 billion, up 138% from 2020, invested in 590 deals.

“While the global pandemic posed great pressures on governments, the private sector and startup ecosystems alike, the year 2021 marked the resurgence of VC [venture capital] activity with record highs across the board,” writes Philip Bahoshy, CEO of Magnitt, in a blog post.

Emirati kitchen-management outsourcer Kitopi closed the biggest round of funding with $415 million in series C, followed by Saudi Arabia’s customer-engagement platform Unifonic with $125 million and Egypt’s transport-provider and fintech MNT Halan with $120 million.

A nascent sector a decade ago, Arab tech has made a name for itself globally. The number of international investors backing MENA firms grew 146% from 2019, with venture capital firms like Germany’s Global Founders Capital, Japan’s SoftBank and US-based 500 Global becoming significant players. Although this brings exposure and expertise to the region, capital is still locally sourced, especially in Saudi Arabia. In 2021, five of the 10 most active investors in MENA startups were headquartered in Riyadh.

Fintech is the leading sector, with 18% of all deals, followed by e-commerce, transport and logistics. Looking at the country-by-country breakdown, the UAE is still the most attractive jurisdiction, with $1.2 billion invested in 155 transactions. Still, fierce competition is coming from Saudi Arabia, which recorded 145 transactions for $548 million—an impressive 270% year-on-year (YoY) increase—and Egypt with 139 deals for $502 million, a 176% YoY increase.

Adapting to Local Markets

Middle Eastern customers prefer global products be tailored to the domestic market. The English language and Latin alphabet are not widespread. Adapting content in Arabic is a strategic choice. An increasing number of companies have adapted their products to better target Saudi customers. Amazon last year added local dialect to its voice service Alexa.

But it’s not just language. Fashion brands, for instance, can tailor collections to fit the local weather and sell summer clothes almost all year long. Cosmetics brands, such as Dior or Chanel, have also launched “oud” (a very strong perfume popular in Gulf countries). Multinational banks are developing Islamic finance products.

Tech is no exception. The biggest success stories in the region came from companies that were able to take a Middle Eastern angle on a global service. An example is a local version of Spotify, Deezer or Apple Music: music-streaming Anghami, which in February became the first Arab tech company to be listed on Nasdaq. It boasts more than 72 million songs and 75 million registered users, as well as more than 40 telco partners across the MENA region. Previous examples include Souq, an e-commerce platform Amazon bought in 2017; and Careem, a car-hailing company acquired by Uber in 2020.

Like their counterparts around the globe, younger Middle Eastern generations are also increasingly concerned with the impact of their purchasing habits. A recent study by EY’s Future Consumer Index shows that “70% of MENA consumers believe brands have a responsibility to positively impact the world.” The No. 1 concern for respondents was environment and climate change. As a result, products that can tap into ethical, green, socially responsible and sustainable behaviors are increasingly attractive. That same study shows that while “67% of MENA consumers plan to be more aware and conscious of their spending,” nevertheless, “48% will buy more from organizations that benefit society, even if their products or services are more expensive.”

Local Assets Up for Sale

For international investors, a cheaper and easier way of penetrating a market is often joining or taking over an existing business. Last year was a record year for mergers and acquisitions (M&A) and initial public offerings (IPOs) in the MENA region, reflecting a change in regulatory frameworks and a shift in the business culture.

The number of M&A transactions reached 661 in 2021, compared to 397 in 2020, for a total value of $99 billion, up 16% YoY, according to EY’s latest MENA M&A Insights. The uptick is in line with global trends and reflects post-pandemic economic recovery. In the MENA region, recovery in oil prices also shed a positive light on business activity. Investment banking fees reached $1.4 billion this year, according to Refinitiv, with JP Morgan totaling a sweeping $143.7 million, followed by HSBC and Morgan Stanley.

Domestic and regional deals dominated the charts, according to EY, with 366 transactions compared to 192 in 2020. The UAE recorded the most deals, but Saudi Arabia attracted the most funds, totaling $47.4 billion. Egypt also stood out this year with $7.7 billion passing hands.

Government-related entities represented 63% of transactions, especially in the energy sector. The Saudi national oil company weighed heavily on the market with the sale of 49% in the Aramco Oil Pipelines Company for $12.4 billion, followed by a $12 billion deal for another unit. A third, $15.5 billion deal for Aramco gas pipelines was announced in December and closed in February.

Other sectors that recorded important activity include technology and financial services, especially in Egypt, where several banks closed acquisitions. Further deals should occur in the coming months as the region has space for further consolidation, especially in Kuwait, Bahrain and Lebanon.

Looking at IPOs, the energy sector recorded impressive transactions like Saudi ACWA power’s $1.2 billion listing; or UAE’s Adnoc Drilling, whose IPO brought in almost the same amount of proceeds.

Saudi Arabia led IPO activity in the Gulf, with 15 deals drawing in $4.65 billion. Aside from state assets, a growing number of family-run businesses are also getting listed. Saudi families who used to frown upon the idea of bringing outsiders to the decision-making table are starting to open the door. This is a milestone for the kingdom, as these companies make up 90% of the private sector; and for foreign investors, it is a unique chance to step into the Saudi market.

“Saudi Arabia is entering a new era of economic diversification. As the country’s stock market booms, it’s an intelligent move to enter an IPO in terms of diversifying capital for growth and enhancing companies’ visibility within global markets. For family businesses, an IPO can provide the brand-name recognition and capital they need to attract top talent and build new teams and capabilities; but some may find the greater transparency of public disclosures more challenging,” says Jane Valls, Executive Director, GCC Board Directors Institute.

To attract international investors, Arab capital markets have made significant regulatory changes. Boursa Kuwait, Abu Dhabi Exchange, Dubai Financial Markets, the Bahrain Bourse and Saudi’s Tadawul issued environmental, social and governance guidelines over the past few years. The UAE made it compulsory for listed companies to publish sustainability reports.

Although full of opportunities, the region can have its surprises; and investors should keep an eye on geopolitics. Israel, which used to be the sworn enemy of most Arab countries, is now a business partner for the UAE, Bahrain, Sudan and Morocco. This year also marked the return of Qatar after over three years of a total boycott imposed by Saudi Arabia, the UAE, Bahrain and Egypt. The third-richest country in the world by per capita GDP is getting ready to welcome the World Cup and double its liquified natural gas production. Lebanon, however, is knee-deep in one of the most severe economic crises globally in over a century. Beirut, which once stood as the region’s historic banking hub and more recently a digital leader, recorded a 58% fall in GDP in just two years.

arrow-chevron-right-redarrow-chevron-rightbutton-arrow-left-greybutton-arrow-left-red-400button-arrow-left-red-500button-arrow-left-red-600button-arrow-left-whitebutton-arrow-right-greybutton-arrow-right-red-400button-arrow-right-red-500button-arrow-right-red-600button-arrow-right-whitecaret-downcaret-rightclosecloseemailfacebook-square-holdfacebookhamburger-newhamburgerinstagramlinkedin-square-1linkedinpauseplaysearch-outlinesearchsubscribe-digitalsubscribe-printtwitter-square-holdtwitteryoutube