Investments adhering to environmental, social and governance (ESG) criteria are capturing increasing interest in the Middle East. A 2020 survey carried out by multinational bank HSBC revealed that 41% of regional investors wished to adopt an effective ESG investment policy. A May 2022 PWC report confirmed this trend, adding that Middle Eastern companies’ top three sustainability priorities are diversity and equality, climate change and safety.
The region has long lagged in ESG investments. For example, in the Gulf Cooperation Council (GCC) countries, an economic model highly reliant on non-renewable energy exports has limited interest in ESG practices, especially environmental ones. However, in recent years, Saudi Arabia and the United Arab Emirates have been leading the way in matters of sustainable development, devising national plans to overcome hydrocarbons dependence, increase the share of renewable resources in their energy mix and boost the private sector.
Alena Dique is the founder of ESG Insights Middle East, a regional ESG databank. She told Al-Monitor, “ESG investments in the Middle East have boomed since the pandemic, and this trend will probably remain popular until 2030. Social investing is largely pushed forward by investors who want long-lasting, sustainable contributions left behind as their legacy. At the same time, environmental investments present a huge opportunity for the Middle East, especially with the region hosting both COP27 and 28. However, there is still a long way to go regarding the governance aspect, even though the Middle East is no stranger to responsible investing, ethical practices or sharia-compliant strategies.”
In addition to the ethical aspects, many Middle Eastern investors consider sustainable assets attractive from an economic perspective. A recent GIB asset management report highlights that ESG-compliant investments generally have higher long-term profits. “This is difficult to evaluate as ESG is both qualitative and quantitative. We need to look at how investors choose to assess ESG risk and what areas they look to emphasize. ESG rating might not evaluate all companies the same way or give a true depiction of return on investment all the time. Still, there is no denying that sustainability evaluation exists and can impact the flow of investments,” Dique added.
The increasing interest in ESGs — both at the private and the government levels — has also introduced changes in Middle Eastern business practices. “In the region, ESG strategy has been embraced as a mechanism to drive companies to demonstrate their sustainability credentials alongside their global peers,” said Dique. “New trends, such as creating ESG positions or adopting green policies, show a growing interest in sustainability issues. Regional governments are hands-on with the transition of energy and natural resources, human capital and economic development and now have taken ESG on board too. Change is challenging, but transition takes time — and that can be monitored and measured.”
The Dubai Investment Fund, one of the largest independent investment funds worldwide in terms of assets under management, recently announced the creation of an ESG investment department aiming to track the local and global market and discover the most profitable sustainability assets. ESGs are also gaining momentum in other corners of the GCC, such as Kuwait. In recent months, the National Bank of Kuwait adopted a sustainable financing framework to support the national plan to tackle climate change and integrate ESG standards in all the bank’s operations.
Despite the growing enthusiasm, finance experts argue that ESG funds worldwide have a poor track record in financial performance. Corporate executives should naturally pay attention to employee, community and environmental concerns, but setting ESG targets on this basis may distort the decision-making process and force managers to focus on sustainability issues beyond their relevance for long-term shareholders’ interests.
Even from a regional perspective, some investors are still skeptical about the potential of ESGs. “The Gulf was rather late adopting ESG initiatives, which isn’t necessarily bad, as it is a rather ambiguous and subjective term. The current energy crisis demonstrates what can happen when an initially reasonable idea is taken too far. In this case, the overall shortfall in hydrocarbon capital expenditure can become counterproductive in the long run,” said Ali Al-Salim, Co-Founder at Arkan Partners, an independent investment consulting firm based in the Gulf.
Experts and entrepreneurs also criticize ESG investment because of the lack of clear measures to define what is sustainable and what is not. They claim that ESGs have an ambiguous — and problematic — definition leading to various regulatory approaches in different jurisdictions, which means that there is no standard legal framework to deal with them. “A dose of common sense and a holistic approach to ESG investing — thinking about unintended consequences — is critical for regional investors to consider,” Al-Salim concluded.
Localising technology and digital manufacturing are major opportunities for economic growth and greater supply chain resilience
Economic diversification is imperative for the Middle East. The region’s overdependence on petrochemicals in manufacturing is a widely acknowledged risk that weakens resilience and could impede future economic growth. The industry contributes 24% of GDP in Saudi Arabia and 16% in the UAE in terms of oil rents, compared with less than 1% in the U.S. and China.
Middle East governments need to decide which tech segments within the vast technology universe—and even which product families within segments—they want to pursue with large-scale projects, and provide ample support to attract global tech companies as occupants.
In recent years, some Middle East countries, chiefly in the GCC, have launched ambitious programmes to diversify and expand their manufacturing. These countries seek to meet national and regional demand, and position themselves as export platforms. Typically, these projects are part of a state-led master economic development plan.
Countries are prioritising technology for localisation because of its growth potential and strategic importance. At present, high-tech manufacturing is concentrated in a handful of countries (none in the Middle East), whose companies function as providers to the world.
The Covid-19 pandemic has highlighted the region’s susceptibility to supply chain disruptions and tested its resilience, making it sometimes difficult or impossible for companies to secure the technology on which they depend.
In response, governments and regional authorities are accelerating their localisation initiatives, as are large, global tech manufacturers with similar interests.
Three categories of manufactured tech products, with a combined Middle East market size of roughly $125bn, are well-suited to Middle East localisation opportunities. These are:
Advanced materials such as nanomaterials, smart materials, and bioplastics;
Advanced components such as electronic semiconductor components, and battery components; and
Advanced finished products such as general-purpose robots, space systems, IoT [Internet of Things] devices, and 3D printers.
Some of these products are disruptive and innovative; others are mainstream but satisfy the pressing needs of regional companies in numerous sectors.
Competition among countries will be fierce as they stake claims on lucrative tech segments, gain first-mover advantage, and attract tenants. Already in the Middle East, Neom Tech & Digital Company, founded in 2021 as the first subsidiary to be established out of Saudi Arabia’s $500bn Neom city project, is building advanced digital infrastructure. Likewise, the industrialisation and innovation strategy of the UAE, led by projects by Abu Dhabi’s Mubadala Investment Company, is focused on the localisation of high-tech products.
In this environment, Middle East governments must target first those localisation opportunities that have confirmed market potential and grant them the right to win. Experience elsewhere indicates that governments should select products that:
Have captive and sizeable national and regional demand;
Are in markets that are not yet highly concentrated;
Can be manufactured cost competitively in global terms; and
That could create potential network effects for additional manufacturing localisation opportunities.
Next, after identifying the right opportunity, Middle East governments must put in place a supportive ecosystem. Financial incentives may include direct subsidies to lower upfront capital expenditure requirements, and indirect subsidies such as tax breaks to reduce long-term operating expenditures. Governments will also need to ensure seamless integration into global supply chains, enabled by reliable and modern physical infrastructure for road, sea, and air transport, and by digital networking capacity.
Likewise, regulatory and policy reforms targeted at the technology sector can help lure potential tenants to the region. These could include support for technology adoption, ensuring data security, and protecting intellectual property. Similarly, pure water, enabled by investments in desalination plants if needed, and high-quality and stable electricity, are prerequisites for a successful ecosystem.
Choice of tenants
Finally, to bolster their chances of success, governments should choose tenants carefully, giving priority to those that hold leadership positions in their industries and that can attract other companies into their operating sphere by virtue of their prominence. Likewise, companies that invest significantly in research and development (R&D) warrant special consideration. These companies are more apt to retain their leadership position and remain viable over the long term, given the pace of change in the tech industry. Companies that can demonstrate a strong financial position and have prior experience with greenfield localisation projects are more apt to possess the capabilities and resources to succeed.
As competition intensifies to establish tech manufacturing and satisfy captive and global demand, Middle East governments must move fast. They need to select those areas – materials, components, or products – where they have a right to win, and create the ecosystems to enable companies to thrive.
This MEED published article was produced byAlessandro BorgognaandChady Smayra, partners, andMaha Raad, principal from Strategy& Middle East, part of the PwC network.
apofeed with “What Lies Beneath the Slow Economic Growth in the MENA?” attempts to elaborate on the current situation that is prevailing in certain MENA countries.
What Lies Beneath the Slow Economic Growth in the Middle East and North Africa?
A dynamic private sector is key for the economies of the region to grow out of their currently high debt levels; Unlocking sustainable growth in the region’s private sector requires reforms that facilitate innovation, the adoption of digital technologies and investments in human capital; Reforms to support these objectives must take account of sustainability and the global agenda to limit climate change
The European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the World Bank have published a joint report, Unlocking Sustainable Private Sector Growth in the Middle East and North Africa (MENA) (https://bit.ly/3H73CdA). The report analyses constraints on productivity growth and limited accumulation of factors or production in the MENA private sector.
The report is based on the MENA Enterprise Survey conducted between late 2018 and 2020 on over 5 800 formal businesses across Egypt, Jordan, Lebanon, Morocco, Tunisia, the West Bank and Gaza. Historically, economic growth in the Middle East and North Africa has been weak since the global financial crisis of 2007-2009 and the Arab Spring of the early 2010s. Since then, gross domestic product (GDP) per capita has grown by only 0.3% a year in the MENA region. That compares unfavourably with rates of 1.7% on average in middle-income countries and 2.4% in the developing economies of Europe and Central Asia.
Achieving higher and sustainable growth is particularly important in view of other economic challenges facing the region. Public debt has increased considerably over the last decade, accompanied by declining investment. More recently, the coronavirus pandemic has battered the region, further straining public finances. In addition, the Russian invasion of Ukraine affects the MENA economies through higher hydrocarbon prices, risks to food security and declining tourism.
Against this background, it is important that policymakers exploit the potential of the private sector to propel the region towards greater prosperity.
“The spillovers from the war in Ukraine add to structural vulnerabilities in the region. The prospects for global financial tightening, persistently high energy and food prices and concerns for food security come on top of concerns related to weak economic growth and rising debt levels,” said EIB Chief Economist Debora Revoltella (https://bit.ly/2UYJi4s). “When responding to the new shock, MENA countries need to tackle the main structural bottlenecks affecting the region. Reforms that lower regulatory barriers, tackle informal business practices, promote competition, and facilitate innovation and digitalisation are crucial for achieving sustainable economic growth and improving resilience to future shocks.”
The business environment in the MENA region as reported in the survey has been held back by various factors. Political connection and informality are undermining fair competition, bringing economic benefits to a limited number of companies. Management practices lag behind benchmark countries, with a decline in average scores in all MENA countries since 2013.
Customs and trade regulations appear to be more severe barriers for firms in the MENA region than in other countries. Firms need more time to clear customs to import or export than in other countries. The MENA economies depend on high levels of imports compared to low export activities.
Although firms trading in the international market are more willing to develop and innovate processes, only 20% invest in innovation, which can affect the long-term economic prospects for the region.
The region needs to make better use of its human capital. Predominantly, only a few foreign-owned companies invest in training their human capital, and they tend to be digitally connected exporting firms. Additionally, a significant share of companies are not engaging in financial activities with other economic players, opting to self-finance voluntarily.
Incentives for companies to decarbonise are weak, and MENA firms are less likely than their counterparts in Europe and Central Asia to adopt measures that reduce their environmental footprint.
Unlocking sustainable growth in the region’s private sector, the report calls for MENA economies to lower regulatory barriers for businesses, promote competition and reduce disincentives emerging from political influence and informal business practices.
The region is also in need of reforms to facilitate innovation, the adoption of digital technologies and investments in human capital, while being in line with the global agenda to limit climate change, enhance sustainability and protect the natural environment.
Improving management practices can be instrumental to that. “Good management practices can account for as much as 30% of differences in efficiency across countries,” said Roberta Gatti, Chief Economist for the Middle East and North Africa at the World Bank. “Management practices are lacklustre in firms in the region, particularly in those with some state ownership. Improving these practices can have substantial benefits, is not costly, but is not easy. It will require — among others — a change in mindsets.”
Companies should also be given incentives to exploit the benefits of participating in cross-border trade and global value chains more broadly, accompanied by better management practices.
At the same time, the state has a duty to ensure that this transition process is just, through measures that help workers to take advantage of opportunities to obtain new, higher-quality jobs linked to the green economy, while also protecting those at risk of losing their jobs. Such measures include labour market policies, skills training, social safety nets and action to support regional economic development.
EBRD Chief Economist Beata Javorcik said: “Climate change creates an opportunity the MENA region to build up its green credentials and use them as a source of competitive advantage. This will create the much-needed high-quality jobs linked to the green economy.”
Distributed by APO Group on behalf of European Investment Bank (EIB).
Why and how does open banking make MENA an oasis of financial opportunities for investors? Maddyness answers quite elaborately as follows.
Economic growth in the MENA – Middle East and North Africa – region is on the rise, with Gulf countries leading the charge. The pace of innovation in places such as the UAE and Saudi Arabia is attracting foreign investment at a rapid rate, which, combined with dedicated tech programmes and an increasingly skilled workforce, sees the region stand out on a global front.
Although MENA’s escalating influence is widely known, it’s not necessarily talked about for facilitating financial progress in particular. Nonetheless, that’s about to change. In the past decade, the region has carefully cultivated a fertile soil that’s ready to flower. And it’s starting to blossom thanks to technological advances driving concepts like open banking that have the power to transform our financial future forever.
The UK’s longstanding relationship with MENA
It’s safe to say that the extensive opportunities haven’t gone unnoticed in Britain. Over several decades, the UK has maintained strong business ties and fostered stable relationships with MENA countries. For example, the UK has consistently been one of the largest investors in the global hub city of Dubai. So, with such a strong history, why is now an especially opportune moment to take notice of Middle East fintechs?
The transformation of the financial ecosystems in the region is certainly clear. MENA’s finTech sector is growing rapidly, with a compounded annual growth rate of 30%, paving the way for it to become a leading destination for digital financial activities in the very near future.
However, there is still plenty of room to maximise MENA’s full financial potential. The great disruptor of open banking (not to mention the even more progressive world of open finance) will be a driving force in attracting British investors to the region.
MENA as an emerging hotspot for investment
Before discussing the opportunity for fintechs, let’s take a step back. Why is there an opportunity in the first place?
The region’s demographics should enthuse any investor looking for innovation. The MENA population is one of the youngest globally, with an estimated 60% of the population under 30. Much of the region’s youth are also motivated to embrace new ways of thinking and leverage digital technologies to improve both their own lives and those of their communities. Internet penetration in MENA is one of the world’s highest.
Furthermore, the local population has proved willing to adopt digital solutions for their financial needs. According to research by Deloitte in 2020, 82% of customers in the Middle East are eager to start using fintech solutions, which coincides with the rise of a cashless economy.
Savvy entrepreneurs are already stepping up everywhere to capitalise on this market demand. Backed by the financially progressive infrastructure – which provides fintechs with regulatory support and government incentives – the fintech sector in the region has a very high growth rate. The UAE has become a hive of fintech activity – 465 fintechs there are set to generate over $2B in investment capital funding in the upcoming year, compared to merely $80M five years ago.
Open banking as the game changer
MENA is ready for disruptive innovations, which open banking can plentifully provide. Regulated access for fintechs to use financial data in order to provide solutions to a hungry audience will drive significant and sustainable economic growth. Consumers want more freedom to handle their finances and there is a need for better banking solutions, such as instant access to money and fully digitised payments.
Open banking makes all of this possible and more when banks, fintechs and even telcos work together to improve their products and put the customer in control. Against this backdrop, everyone can benefit if we move quickly to meet demand.
The emergence of a solid regulatory framework
We’re seeing MENA tread in the footsteps of the UK when it comes to regulating open banking. The PSD2 directive, which kicked off the concept in the UK, informs much of MENA’s recent developments in terms of its financial ecosystem. In Europe, the regulatory framework proved successful in levelling access to the financial services market and promoting the role of non-traditional financial institutions. As a result, the framework enhanced competition between financial service providers and provided consumers with better financial tools.
Similar regulations are shaping the evolution of MENA’s financial landscape, offering security for investors while remaining flexible enough to stay relevant in the face of constant technological development. Although the regulations differ across jurisdictions, making it potentially challenging for fintechs to scale throughout the region, any obstacles are well worth overcoming.
How to navigate your fintech journey in MENA
Considering the whole picture, MENA should get your attention as a rising star of the global financial scene. It is easy to see how becoming part of an emerging, but promising ecosystem yields tangible benefits for investors.
To comply with the regional frameworks and regulations, interested parties should seek local experts who know which paths to travel and how to traverse them. The rise of open banking is already a fundamental factor driving MENA’s financial environment forward, and its growth will only increase. As opportunity knocks, it’s better to be at the front of the queue than at the end of it.
Energy investments in Middle East and North Africa (MENA) are forecast to grow in 2022 from $805 billion and continue in the next five years on the strength of higher oil and gas prices and planned unconventional gas and upstream investments.
Energy investments in MENA will continue to grow: Apicorp
For petrochemicals, the drive for further integration and rationalisation will continue with reconfigurable petrochemical plants shifting to high-margin products such as plastic packaging films and healthcare and hygiene products, The Arab Petroleum Investments Corporation (Apicorp), a multilateral development financial institution, said in its annual Top Picks 2022 outlook on the key trends that are expected to shape the Mena energy markets landscape this year.
“The strong pipeline of investments we are seeing in the downstream projects reflects the region’s push to direct more funds to this sector, especially in brownfield petrochemicals projects versus greenfield ones. This makes sense in light of the current market conditions which favor improving cost and operating efficiencies in existing projects rather than sheer expansion,” said Nicolas Thevenot, Managing Director of Corporate Banking at Apicorp.
As for the energy markets, the report forecasts that they will remain comparatively stable during 2022 due to higher oil production by Opec+ and non-Opec countries and increased gas production and LNG supply. Brent is expected to average between $65/bbl. and $75/bbl. As for gas, the JKM and TTF/NBP hub prices in Asia and Europe are expected to cool down considerably from their all-time highs of 2021, especially after the winter season.
Meanwhile, the uptick in regional energy investments, which registered a modest $13 billion increase in Apicorp’s latest five-year outlook, will continue over the mid-term on the strength of higher oil and gas prices throughout 2022.
Among the trends the report examines is the impact of oil and gas prices on energy investments in the region and the main factors weighing down on broader economic recovery.
“Despite the volatility in commodity prices which is expected to persist throughout 2022, the good news in the short-term is that oil and gas prices will likely remain elevated throughout the year, providing support for energy investments including renewable energy and ESG-related projects. Power sector investments in Mena are also expected to continue to thrive, with an accelerating shift towards renewables. Collectively, the region is expected to add nearly 20 GW of solar power over the next five years,” noted Dr Ahmed Ali Attiga, CEO of Apicorp.
The Mena region will take centre stage in the ongoing global energy transition as all eyes shift to Egypt, which will host COP27 in November — and UAE for COP28 in 2023. Yet while the transition continues to steadily gain momentum, the report notes that it may be marred by mixed policy signals from governments as they attempt to balance imperatives which are oftentimes very difficult to align: emissions reduction, energy affordability and energy security.
Thus, a sustainable and comprehensive policy is needed in order to avoid tilting the policy scale too far towards in favor of one of these factors, as this may lead to unintended consequences such as market distortions, heightened volatility, and energy shortfalls.
The already substantial pressure on policymakers is expected to be further exacerbated by continued volatility in commodity markets in 2022 due to the pandemic, uncertainty over macroeconomic policy, and supply chain disruptions. Despite the modest –-albeit uneven—recovery in 2021, it will take time for this improvement to migrate downstream and ease cost pressures this year.
The report’s analysis of energy investment trends suggests that the expected robust oil and gas prices in 2022 have triggered an opportunity to return to pre-pandemic activity.
The uncertainty around Covid recovery will continue to influence how market dynamics will ultimately play out. Given the global vaccine inequity and a constantly evolving virus, governments are still grappling with the dilemma of public health versus economic recovery.
In addition to global trade, supply chains and services, the current surge in cases globally will also adversely affect international travel and tourism. This will dent economic growth during 2022, which has already prompted a slight downward revision of the 2022 GDP growth forecasts in some regions and a likely asymmetric global recovery that is not necessarily sustainable for all countries.
Another uncertainty stems from the need for governments to introduce fiscal austerity measures to rein in spending and curb soaring inflation. Although markets ended 2021 with high returns (27% in the case of the S&P 500 index), high jobs growth and soaring commodity prices pushed inflation rates higher.
A fear of stagflation looms as public fiscal stimulus packages are withdrawn, asset purchasing programs are tapered and interest rates rise. While these measures will very likely cause economic recovery to slow down, the lagging unemployment rates are expected to remain relatively high amid a simmering inflationary cycle that may turn out not to be transitory after all. — TradeArabia News Service
The above-featured image is for illustration and is credit to Oil Price.
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