The Energy away from Energy

If the global financial outlook at the end of the first half of 2023 is, at best, mixed, the business outlook in MENA is currently full steam ahead.  Vigorous support for the goals of Abu Dhabi Vision 2030 and KSA Vision 2030 is now acting as an economic accelerant, and with an eye toward ambitious targets for the non-oil economy creating real energy away from the energy sector, driving growth, and making the UAE and KSA some of the most attractive economies in the world today for those positioned to take advantage of their opportunities and manage their risks.

Where should one look for signs of this energy away from energy?  Three trends driven by macro fundamentals are especially noteworthy for what they say about expanding prospects in the region: the increase of non-oil foreign trade, particularly in the UAE; IPO and M&A activity, especially in the Gulf Cooperation Council (GCC); and the migration of key international players into the region’s financial services sector, particularly in the UAE.

Non-oil foreign trade is a good place to start, as its growth testifies to the increasing strength and diversity of these economies and signals job growth and opportunities for foreign direct investment. The first half of 2023 saw the UAE’s non-oil foreign trade reach a record Dh1.24 trillion ($337.6 billion), an increase of 14.4 per cent year on year.  The UAE’s non-oil exports during this six-month period alone exceeded the entire annual amount for 2018.  Moreover, these non-oil exports in the first half of 2023 contributed 16.6 per cent to the UAE’s total foreign trade, an increase from 14.2 per cent during the same period five years ago.[1] KSA’s 50% by 2030 non-oil target set in 2006 remains aggressive, but year on year performance toward the goal continues strong.  

IPO and M&A activity in the region provides another especially interesting gauge of the dynamism of these economies, highlighting their robust assets, deep capital market liquidity, and the strong interest from global emerging market investors.  2022 was a banner year for IPOs in MENA, with 51 IPOs bringing total proceeds of US$22 billion (2021 saw less than half that number, at 21 IPOs).  Q4 2022 alone had 20 IPOs raising US$7.3  billion.  MENA IPO markets saw 20 IPOs during Q4 2022 alone, raising US$7.3b in proceeds.[2] The UAE and KSA continue to lead the region in IPOs.  Especially notable among them:  Dubai Electricity and Water Authority (Dewa)’s $6 billion offering,  Adnoc Gas’s $2.5 billion float, and Salik’s $1 billion offering.

M&A activity In KSA and the UAE is particularly strong.  While the global M&A market has lost some momentum with increased interest rates, geopolitical crises, and a fall in investor confidence, activity in the MENA region has remained robust.  In the first half of 2023 the region witnessed a total of 318 M&A deals, amounting to US$43.8 billion.  The GCC accounted for nearly 80% of all deals (254) in MENA, valued at US$42.5 billion.  And within the GCC, 10 of the largest deals have come from the UAE and KSA.  Support by Sovereign Wealth Funds (SWFs) and government entities that are aligned with their countries’ economic strategies in both countries has increased since 2018.  Leaders in the deal activity include SWFs like the Abu Dhabi Investment Authority (ADIA) and Mubadala from the UAE and the Public Investment Fund (PIF) from KSA. 

This energy is not just confined to the region.  2023 has already seen hearty cross-border and outbound activity.  Looking at total MENA deal volume, 57% came from cross-border deals and 32% came from outbound deals.  The share of total deal value from these transaction categories was even larger, with 85% of total deal value coming from cross-border deals and 70% of the value coming from outbound deals.  When encouraged by new trade agreements, investors are eager to participate and collaborate, as illustrated by the host of deals arising from the 2022 UAE CEPA agreement with India.[3] 

This overall vibrancy and attractiveness, particularly in the UAE, has led an increasing number of   leading international hedge funds to open offices in the region.  For instance, the past year has seen quant investing giant AQR and multi-strategy firms Sculptor and Lighthouse Investment establish a presence in Dubai, and June alone saw Hudson Bay Capital, King Street Capital Management, and Asia Research and Capital Management Ltd. announcing that they were opening offices in the city.  Data from the Dubai International Financial Centre (DIFC) reveals that of the 40 funds registered in the emirate as of July, more than a third arrived in the past 12 months, most of them subsidiaries of London or New York-based firms. 

A range of opportunities are likely to emerge from this high-energy, non-energy sector environment. M&A activity throughout MENA, and especially in KSA and UAE will continue.  New startups and IPOs , especially from the  from the burgeoning tech and renewables sectors in KSA and UAE, will add fuel to the mix, and the progress of government initiatives in AI and Healthcare in the UAE and on the mega projects in KSA will spur innovation and draw foreign investment.   Navigating and succeeding in this fast-changing environment will require a combination of local knowledge, nimble expertise, and clear-eyed application of multi-disciplinary experience to avoid pitfalls, manage new regulations, and make tradeoffs. 

References

[1] The National (UAE), “UAE’s non-oil foreign trade hits a record $338bn in first half,” 30 August 2023.  https://www.thenationalnews.com/business/economy/2023/08/30/ uae-achieves-record-non-oil-foreign-trade-of-338bn-in-first-half/

[2] EY, “MENA IPO Eye: Q4 2022 and year-end report,” 31 January 2023.  https://www.ey.com/en_jo/news/2023/01/mena-ipo-activity-in-2022-set-a-record-with-51-ipos

[3] Dezan Shira and Associates, Middle East Briefing, “Saudi Arabia and UAE Top Middle East’s 2023 M&A Activity,” 2 September 2023.  https://www.middleeastbriefing.com/news/saudi-arabia-and-the-uae-top-middle-easts-2023-ma-activity/