An Imminent Technological Revolution: The Middle East’s New Promising Sector
Updated: Sep 22, 2020
Two unprecedented shocks have impacted the Middle East and North African region: the novel COVID- 19 pandemic and the severe collapse in oil prices. In response to the pandemic, every MENA country has implemented strict lockdowns that have frozen their economies. With factories shut down and flights cancelled, demand for oil has plummeted.
The failed deal between OPEC, the United States, and Russia has further pushed Brent crude oil to as low as $20 dollars a barrel, a near historic low price. The oil shock will force oil-reliant countries to diversify into new economic sectors; the coronavirus shock will force them to do so without the luxury of a large budget for capital expenditures. Many oil exporting countries will register a significant fiscal deficit at the current low oil prices and will have to cut their expenditures and issue debt to balance their economies.
However, there is a possible silver lining: this pandemic will force the technologically underdeveloped MENA countries—excluding the Gulf Cooperation Council (GCC)—to evolve faster and transition towards a no-contact, online society. The acceleration of technological adoption, the growth of the region’s young population, and the increase in internet and mobile phone usage will positively impact the regional economies, helping them create jobs and grow GDP at a faster rate.
The large MENA population (484 million people) and the high growth of mobile usage provide tech companies the opportunity to capture an enormous, untouched market. The MENA region’s median age is remarkably young at 30 years old and is expected to grow by 50% to 723 million people by 2030, according to UNICEF. This growing young population is expected to herald in social change and wide adoption of technology, as more and more teenagers connect to the web.
However, there is a sharp divide in internet access across the region. While Qatar ranked in the top 10 countries in the world with the fasted internet, Palestine, Iraq, and Algeria have some of the slowest connection speeds in the world. Oil-rich countries that avoided conflict in the Arab spring have thrived and invested in their own high tech capabilities, while the more populous, struggling countries have coped with high inflation rates and lack of internet providers. Nevertheless, the entire MENA region has some of the highest ratios of mobile subscriptions (120 lines per 100 people), but it ironically has the lowest data consumptions in the world (3.7GB per month).
This demonstrates that the Arab people are connected to the web and understand how to navigate it, but are restricted by the lack of service options. However, GMSA intelligence predicted that 4G will account for half of total connections, and monthly data consumption will jump to 19GB by 2024. Countries that suffer from poor data services, like Lebanon and Egypt, are also considering replacing fiber rollout with new 5G technology to reduce costs and improve speed. The new MENA generation is proven to be avid consumers of internet, and the improvements to infrastructure using existing technologies like 4G and future ones like 5G will create a boom in data consumption and internet penetration in the region.
Consumer-facing industries are being shaken up by tech start-ups, and COVID-19 is accelerating that process. The e-commerce platform Noon has experienced a surge in demand during the pandemic, while Visa’s MENA general manager reported that consumers are shifting towards cashless payment platforms and changing the MENA Fintech environment. New healthcare-tech platforms are emerging, as the start-up Vezeeta garners 4 million online doctor appointments a year while offering online telehealth consultations for COVID-19 symptoms.
Even before the coronavirus increased demand for online applications, many start-ups valuations rocketed to record levels, as demonstrated when Uber acquired taxi-hailing app Careem for $3.1 billion. Simultaneously, tech giants are considering entering the MENA market, with Google, Amazon, and Microsoft working to open cloud datacenters in the region.
Arab consumers utilize online products all over the Middle East; however, most start-ups originate in wealthy GCC countries to avoid the risks surrounding the region’s geo-political tensions, protests, and regulation. Although Egypt’s population of 98 million provides tangible demand for new technology, technology companies are wary of the political instability and high corruption levels in the country, especially after the 2011 revolution. As many as 40% of the MENA region’s successful startups originate in the UAE, which is more politically stable, and subsequently expand to customers in populous Egypt or Algeria.
These companies enjoy political security, are able to hire more skilled workers, and have access to sovereign wealth funds and private equity companies. Nevertheless, these tech companies will not enjoy complete freedom of speech due to government laws throughout the MENA region; more than three-quarters of MENA nationals support further regulation of the media, according to the Northwestern University in Qatar. Although the decrease in oil prices necessitates diversification away from oil, it will also decrease MENA government spending for all industries. The GCC countries, as well as Iran, Iraq, Algeria, and Libya, are all highly dependent on exporting oil; however, their break-even oil prices are very far from the current price of $20 a barrel. According to the rating firm Fitch Ratings, the break-even prices for the countries Saudi Arabia, Qatar, and the United Arab Emirates are $91, $55 and $65. In the current environment, these three countries will be operating at a significant loss for the foreseeable future – even if oil rebounds to $40, the Saudi Arabian government will lose $40 billion a year annually.
As a result, these countries must enforce capital expenditure cuts and decrease spending to all industries, including technology. This could delay or reduce funding towards innovation tech programs like Saudi Arabia’s National Transformation Plan, Qatar’s Vision 2030 and the UAE’s Dubai Industrial Strategy 2030, which plan for complex technologies like autonomous transport, smart cities, and e-governments.
Nevertheless, the low oil prices and impact of COVID-19 will have a positive long-term effect on the evolution of the technology sector in the Middle East. Venture capitalist Fadi Ghandour argued that “the lower the price of oil, the faster the change process happens.”13 GCC countries provide technology start- ups the right platform to launch their operations, attract new customers, and allow them to expand to other MENA countries to achieve economies of scale.
Furthermore, as internet penetration increases and the technological revolution spreads to countries such as Egypt, Lebanon, Algeria, and the rest of the MENA region, there will be a positive impact on the regional economies. This will result in economic growth and prosperity, while unemployment gradually gets flattened out by lines of code.
Contributed by Sami El Solh