Mideast is the next digital frontier: UBS

KUWAIT: The Middle East is one of the fastest growing digital economies globally and the digital economy’s penetration as a percentage of the region’s GDP is set to rise from 4.1 percent in 2022 to 13.4 percent in 2030, which is still below today’s 15 percent penetration levels in advanced economies like the US, according to a report released by UBS. “Considering the Middle East’s digital economy is set to grow twice as fast as the global digital economy between 2022 and 2030, we see investor interest rising sharply over the decade.

Understandably the industry’s profitability is low today due to significant upfront investments; but with rising scale benefits and improving pricing power, we see strong scope for margin expansion in future. As a comparison, global internet profitability in terms of operating margins is close to 20 percent. Data centers are the third segment, which is hidden under the broader hardware segment. While we believe the traditional hardware segment, including smartphones and PCs, should grow by low-mid single digits, in line with the broader economic growth, data centers are a bright spot within hardware given the significant uptake of cloud and strong demand for artificial intelligence (AI), the report said.

The Middle East’s digital economy was worth some $180 billion in 2022 thanks to significant new investments during and after the COVID-19 pandemic. At a very early stage of the digital ascent in the Middle East (the region is where China was 10–15 years ago and India 5–10 years ago when the digital inflection began), with only 4.1 percent penetration of the broad economy. Supported by favorable demographics, strong policy support, solid funding, rising innovation, and low penetration rates, we expect the Middle East’s digital economy to grow to $780 billion in 2030 or roughly 20 percent growth pa.

“We expect strong investments in generative AI in the Middle East in the next few years as we see significant use cases in both consumer and enterprise applications,” the report said. Middle East should provide good options to investors. We see bigger opportunities currently in the unlisted space through private equity/venture capital funding akin to how investors participated in China tech 15 years ago or India tech 5–10 years ago,” it said. Based on data from World Bank, Gartner, Bloomberg Intelligence, and UBS estimates, the global digital economy was close to $10.5 trillion in terms of revenue in 2022; that is roughly a 10.5 percent penetration rate of the global economy.

The global digital economy is expected to grow by 10.4 percent p.a. on average during 2022–2030, reaching $23.2 trillion mainly led by the internet economy. Another way of looking at penetration rates is to compare the current size of the Middle East’s technology markets with the global levels. Compared to the Middle East’s GDP penetration of 4.1 percent, its technology penetration across segments is less than 2 percent except for hardware (3.3 percent), which is understandable given the mature smartphone and personal computer (PC) spending in the region.

However, the overall low penetration rates highlight the strong long-term growth potential of the Middle East’s digital economy, including in high margin segments like software, internet, and others in the future which we address in the next few segments. Funding for startups and unlisted companies in the Middle East hit $13.6 billion in 2022, according to data from CB Insights. Reflecting the broad weakness last year in the technology landscape amid rising rates, the Middle East’s funding was flat compared to 2021 (down 2.1 percent y/y to be precise).

But the good news is that green shoots are emerging thanks to the spiking interest around AI and hopes of a revival in key internet segments like e-commerce and digital advertising in the region. “As a result, we believe we are close to a bottom in tech funding in the Middle East as we believe the strong growth outlook for the region’s digital economy over the decade should attract solid investor interest including from local technology and telecom players, sovereign wealth funds, and major global VC/PE funds over the coming quarters,” the report said.

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