March 23, 2019

EIU Report Aims to Dispel Middle East Business Myths and Take an Evidence-Based Approach to Assessing Business Opportunities and Risks

Based on my experiences of working in the region, I support the following claim: "Operating a business in the Middle East requires executives to navigate an exceptionally challenging geopolitical and macroeconomic environment while dealing with unique labor and technological considerations on the ground. This often requires managing expectations against reality."

Sponsored by Emirates NDB, a Dubai-based financial services firm, Leadership Amid Transformation: Business opportunities and risks in the Middle East is a report published by The Economist Intelligence Unit (The EIU) that aims "to dispel regional business myths and take an evidence-based approach to assessing business opportunities and risks." The EIU has "identified these through a survey of business executives in the Middle East, complemented with in-depth interviews. This report presents these findings, along with strategies businesses are adopting to navigate these unchartered waters."

The report presents the following key findings:

"The regions business executives appear not to be swayed by short- and medium-term international and regional geopolitical risk factors. Respondents were more concerned about short-term macroeconomic risks such as oil price volatility (61% of respondents), changes to domestic tax structures (55%) and exchange-rate volatility (52%). Although Gulf Co-operation Council (GCC) tensions with Qatar were cited by 47% of respondents, it was only perceived as a lower level risk. The Economist Intelligence Unit believes that the boycott of Qatar by Saudi Arabia, Bahrain, the UAE and Egypt will continue over the medium term, as close ties with Iran are unlikely to be radically reformed over the next five years, a major point of contention. Furthermore, as the oil and gas industry in Qatar has largely been unaffected and they have taken steps towards self-sufficiency, the economic pressures of the boycott have been limited. Longer-term geopolitical events such as the ongoing conflicts within Yemen and Syria as well as the US withdrawing from the Iran nuclear deal were cited as having no direct impact on their business by a majority of respondents. However, respondents were concerned by the risk posed by civil unrest in the country they are located in (45%).

"Executives recognize the longer-term shifts in oil demand and supply and the risk of continued reliance on oil for economic growth. They strongly advocated for economic diversification to reduce the region's exposure to oil price volatility. With the exception of the infrastructure and energy sectors, all other sectors broadly support continued reform with between 40% and 56% of respondents in each sector viewing a slowdown in economic diversification as a risk.

"Short-term mega-events in the region (Expo 2020 and the World Cup in 2022) are perceived to bring positive spillovers. Respondents believe the economic benefits of Dubai's hosting of Expo 2020 will be felt beyond the UAE's borders—the event was cited as an opportunity by more than 60% of respondents in Saudi Arabia, Kuwait, Jordan, Egypt and Oman and Bahrain. Larger companies responded more positively to these mega-events than smaller companies.

"The UAE, Saudi Arabia and Egypt continue to be sweet spots for business operations in the Middle East. Market size and level of political stability are the key factors facilitating business expansion in the region. A key impediment to expansion in the Middle East is fierce competition from domestic players, as business is still highly driven by personal networks and implicit state support in some cases. Beyond the Middle East, executives prefer expansion into Asian markets (particularly India and China) over East Africa.

"The vast majority of respondents believed that advanced technologies such as artificial intelligence (AI), the Internet of Things (IoT), robotics and blockchain will have a positive impact on business operations. Building on digital transformations under way in their countries, survey respondents expect to see these implemented across the region in three to five years, and some are already taking steps to prepare for their adoption. Over 55% of respondents have taken five or more steps to prepare for the adoption of advanced technologies. Upskilling employees (71% of respondents) and hiring new talent (66%) were prioritized over investments and redesigning business practices.

"Region-wide interviews indicate that more needs to be done to accelerate the pace of adoption of advanced technologies. Interviewees attribute the slow adoption to limited understanding among senior management of advanced technologies, although the survey identified high capital investment, cyber-security risks and the skills shortage as greater impediments. Our survey revealed that non-C-suite respondents are more likely to recognize that advanced technologies will increasingly disrupt their business than the C-suite.

"Financing instruments remain focused on traditional and Islamic bank financing mechanisms, according to 93% of respondents. Alternative funding mechanisms like peer-to-peer, crowdfunding, private equity, private debt and venture capital are largely underdeveloped in the region."

The report's conclusion says, in part:
While being mindful of cyber-security risks, embracing technological change presents many opportunities across the business, particularly job creation. Virtual roles may also present opportunities to involve more women in the workplace. To prepare, many companies have picked the low-hanging fruit of upskilling workers and hiring new talent, over making investments and redesigning business practices. Through this, they acknowledge the importance of having the right skillset in place to support continued competitiveness. While the skills gap can be partially solved by improving levels of technical and vocational education and training, it requires a significant policy change. Investing in curricula that support job-readiness, early exposure to the workplace (such as through summer internships), and promoting STEM (science, technology, engineering and maths), digital and ICT skills are a few of the policies that could create a stronger education system. This, coupled with continued global geopolitical and economic uncertainties, highlights the need for the region to progress on structural reforms and economic diversification.
As reflected in posts about the Middle East and north Africa (MENA) region, my colleagues and I hold optimistic views about the business opportunities that exist in the mobile technology sector as well as those sectors that incorporate advanced technology. There are concerns, however, that not enough is being done to prepare for these opportunities compared to other regions. Therefore, I agree with the report's conclusion that "[m]ore needs to be done to accelerate the pace of adoption of digital technologies like AI, the IoT, robotics and blockchain, all of which can act as catalysts to productivity and economic growth. As these efforts accelerate, businesses in the Middle East need to be ready and, more importantly, willing to adapt."

Which geographic markets or business sectors do you think will have positive impact on business operations in the Middle East?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

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