The value of the Middle East’s digital economy would be equal to nearly 13.4 percent of its Gross Domestic Product (GDP)
Middle East’s digital economy is bolstering and is projected to grow more than four-fold by 2030 reaching $780 billion. This growth would outpass the global digital economy’s development by the end of the decade according to studies conducted. Swiss bank UBS in a new report mentioned that an increase of an estimated $180 billion in 2022 implies that the digital economy would grow at a rate of more than 20 percent in this decade.
The revenue of the worldwide digital economy was nearly $10.5 trillion in 2022. This is expected to grow by nearly 10.4 percent reaching $23.2 trillion by the end of this decade. This global growth is about half of the region’s forecasted growth rate. The value of the Middle East’s digital economy would be equal to nearly 13.4 percent of its Gross Domestic Product (GDP), up from more than 4 percent last year. This falls in line with the status of advanced economies like the US, where the sector adds up to about 15 percent of GDP.
Compared to other regions, the Middle East is still in a very early stage of digital development. The rapid boost in the industry is mainly because of significant investments made during the time of the COVID-19 pandemic and after. This would also make the region one of the fastest-growing digital economies across the globe. The Middle East is also being compared to China and India by analysts, especially during a time when digital inflection began in those countries.
How are the calculations made?
UBS breaks the digital economy into two sectors. The first would be the traditional IT spending that consists of spending on software and services, internet economy spending, and consumers and enterprises on hardware. Internet economy spending includes digital advertising, online gaming, streaming, e-commerce, FinTech, and ride-hailing.
UBS experts mentioned that supporting the strong policy, favourable demographics, increasing innovation, and proper funding could help the economy of the Middle East to grow further. The future is for the countries that ace in technological advancements and the government and enterprises play an important role in guiding the digital transformation of the country.
According to the data compiled by the International Data Corporation, spending on information and communication technology in the Middle East, Africa, and Turkey is expected to grow nearly 4 percent annually to surpass $235 billion this year. UAE and Saudi Arabia alone are likely to spend $20 billion and $34 billion respectively, in order to be among the pioneers of the region’s digital economic transformation.
Investor interest in the Middle East’s bolstering digital economy is poised to experience significant growth in the coming years especially with UBS analysts identifying internet, software, and data centers as strategic sectors for potential investment focus. The analysts point out that there are two main avenues for capitalizing on the region’s rapid digital economic expansion: investing in the right industries or in the right companies. They highlight the importance of industries that can achieve robust growth and generate higher profit margins.
Software in particular stands out as a promising sector, with a projected Compound Annual Growth Rate (CAGR) of around 15% over the next decade. UBS underscores that software companies can attain impressive operating margins, reaching as high as 35% to 40%, which naturally fuels a good amount of profit growth.
UBS views software as the optimal conduit for participating in the ongoing digital transformation of the Middle East. The firm anticipates traditional enterprises in the region to revamp their IT infrastructure through significant software investments. This encompasses a spectrum of software services, including tools for enhancing collaboration, and office productivity, cloud solutions, and cybersecurity– all of which are notably relevant in the current remote working environment.
For startups, acknowledged as pivotal drivers of the digital economy’s progress, funding levels are perceived to reach a minimum point. However, UBS anticipates a surge in investments from local technology and telecom players, international venture capital or private equity funds, and sovereign wealth funds. This growth trajectory aligns with the region’s robust economic outlook.
According to the latest data from CB Insights funding for startups and unlisted firms in the Middle East reached nearly $13.6 billion in 2022, remaining relatively steady compared to 2021. This stability can be attributed to factors like elevated interest rates. Nonetheless, UBS points out that positive trends are starting to emerge, attributed to heightened interest in artificial intelligence and expectations of a resurgence in key interest sectors such as e-commerce and digital advertising across the region.