As the Gulf’s Digital Economy Accelerates, Speed Bumps Await

Strict lockdowns and other aggressive measures to combat the coronavirus in the Gulf Arab states have pummeled regional industries from aviation to tourism and hospitality. However, the Gulf’s digital economy continues to bustle and – in some sectors – is poised for accelerated growth. The rapid adoption and implementation of digital applications and platforms raise important questions for economic policymakers in the Gulf. Where are opportunities to derive in-country value from investments in the digital economy? And how are technology-based commercial partnerships likely to shape foreign relations?

Health concerns stemming from the global coronavirus outbreak resulted in an abrupt transition to remote work. The broader use of digital platforms and demand for digital services will likely prove far more impactful on Gulf economies over the long run. Telemedicine and health-care apps, e-commerce platforms, online learning programs, and financial technology services help Gulf residents obey strict public safety measures.

These digital methods of information exchange are becoming deeply ingrained in consumer behaviors. Government entities like the Dubai Health Authority advised residents to avoid using physical banknotes, adding to the surge in electronic payments taking place worldwide. While many traditional, physical forms of economic exchange will eventually return, the newfound demand for digital services and applications is unlikely to subside.

Growth prospects for the Gulf’s digital economy looked promising before the coronavirus pandemic. All of the Gulf Arab countries possess digital transformation agendas – a political and financial commitment to create knowledge-based economies. Public cloud services’ revenue in the Middle East and North Africa is forecast to grow by 21% to around $3 billion in 2020, according to estimates by Gartner.

High per capita income and internet penetration levels have likewise contributed to the growth potential of e-commerce. According to Bain & Company, the annual growth in the e-commerce sectors of the Gulf Arab countries and Egypt stands at 30%. Bullish sales forecasts of the Gulf’s e-commerce market in 2022 exceed $41 billion. Although the dual shocks from the coronavirus and low oil prices are likely to dampen specific areas of consumer demand over the short and medium terms, the broad trajectory of these growth projections is unlikely to change drastically.

Gulf Arab states have sought to align digital transformation agendas with specific economic development initiatives. Dubai’s 50-year charter envisions a virtual commercial city capable of hosting 100,000 firms. Officials at the Bahrain Economic Development Board view the decision by Amazon Web Services to open its regional headquarters in Bahrain as evidence of a successful strategy to position the country as a data hosting hub. Moreover, Bahrain Fintech Bay seeks to develop new growth opportunities in a mature finance sector. In October, Sultan Qaboos University plans to host an international conference on how economic and digital transformation can accomplish Oman’s Vision 2040.

Business leaders in traditional industries across the Gulf states are increasingly turning to new digital platforms and applications to improve resilience and increase profitability. United Arab Emirates-based firms provide pertinent examples. The Abu Dhabi National Oil Company established the Panorama Digital Command Centre in 2018 and invested approximately $13.6 million in the initiative. According to a senior ADNOC official, the digital command center generated over $1 billion in business value through cost savings and improved efficiency. In late 2019, state-owned defense companies in the UAE formed a $5 billion conglomerate, EDGE, to develop a high-tech defense industry that, according to the group’s mission, will “bring innovative technologies and services to the market with greater speed and efficiency.”

The global coronavirus outbreak accelerated this commercial trend. In April, DP World announced new online tools and services to further digitize the management of logistics and “keep trade moving during the current crisis,” according to Sultan Ahmed bin Sulayem, the chief executive officer. The Dubai-based company previously acquired digital programs – including SeaRates.com, LandRates.com, and AirRates.com – and also established the Digital Freight Alliance, an online association of freight forwarders.

Indeed, the rapid digitization of economic exchange is no panacea. Growing demand for digital services and the adoption of new digital platforms and applications is unlikely to offset the redundancies, bankruptcies, and declining economic output in other areas of the region’s economy. The slowdown in the aviation industry, for example, may lead to over 500,000 job losses in Saudi Arabia and the UAE alone. Qatar’s aviation industry accounted for a reported 11% of gross domestic product in 2014, whereas Dubai officials hoped the aviation sector would grow to 37.5% of GDP by 2020.

Not all technology-focused firms in the Gulf states will prosper amid the uncertainty caused by the coronavirus pandemic and energy market outlook. Careem, the Dubai-headquartered subsidiary of Uber Technologies, plans to shed 31% of its workforce. The ride-hailing and delivery company has witnessed its business drop by 80%. Uber Eats ceased operations in Saudi Arabia and transferred its UAE operations to Careem. The UAE telecom operator Emirates Integrated Telecommunications Company, better known as “du,” reported a 21% decrease in net income for the first quarter of 2020, compared to 2019 figures. The company expects limitations on sale activities, changing consumer behavior, and reduced tourism and trade activities to further decrease revenue in the second quarter.

Some local tech firms will need to adjust their business models. Even the world’s leading cloud service providers have struggled to translate surging demand into revenue growth. Securing new contracts from government clients and state-owned entities in the Gulf states will remain a challenge for the foreseeable future. Nevertheless, amid underlying demand for digital services, profitability becomes the primary goal. Firms in the worst-affected niche markets confront more immediate, existential challenges owing to severely restricted or nonexistent demand.

Despite market challenges, foreign firms continue to express interest in Gulf digital economies. On April 28, the selection committee for Hub 71, a tech startup ecosystem located in Abu Dhabi Global Market, “prioritised global startups in the field of HealthTech and EdTech,” when selecting its new cohort of program participants. U.S.-based InCountry, a fast-growing data residency hosting platform, selected Hub71 as its Middle East headquarters. OneConnect, a financial technology service company and subsidiary of Chinese insurance firm Ping An, partnered with ADGM’s Digital Lab to expand commercial opportunities in the Middle East.

Chinese technology firms view Middle East markets as avenues for international revenue growth. Huawei signed a memorandum of understanding with Oman’s Ministry of Technology and Communications in early May, the latest in a string of partnerships between the Chinese technology company and Gulf government entities. In April, Tencent Holdings released its popular Arena of Valor game in the Middle East as part of its efforts to derive half of its gaming revenue from overseas. Additional plans to expand WeChat Pay-enabled terminals and services in the UAE are underway. Saudi officials also announced that eWTP Capital, a fund with links to China’s Alibaba Group, would build its headquarters in Saudi Arabia’s nascent media city.

The origin of inward direct investments in the Gulf’s digital economy may serve as a point of tension in foreign relations. U.S. officials have warned Israeli counterparts about the national security implications of Chinese investments in Israeli high-tech firms during the economic downturn caused by the coronavirus. As Gulf governments seek cost-effective commercial partnerships for technology-related initiatives and regional firms hunt for investment capital, similar scrutiny may turn toward the Gulf region. The U.S. State Department cautioned Gulf governments to “weigh the value of their partnership with the United States,” when considering economic ties with Beijing.

The risks posed by the location and application of digital capabilities are likewise growing. The settlement between the Department of the Treasury’s Office of Foreign Assets Control and SITA, a Swiss IT firm, revealed that non-U.S. technology companies might be penalized for violating U.S. sanctions.

Gulf governments may wield smaller budgets and exercise less spending power after the threat from coronavirus subsides. This economic scenario is especially likely if energy prices remain low and volatile. However, the proportion of expenditures allocated to enhance the digital capabilities of governments and promote the development of technology-focused industries is set to increase. Smart spending is needed to derive the maximum amount of in-country value from these investments and prevent avoidable tensions in the foreign policy arena.

The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.