The Middle East has one of the fastest growing e-commerce markets in the world. With a growth rate of approximately 25% per annum, it is estimated at close to $69bn sales from a low penetration rate of 2%. This is well below other emerging market peers that have an average e-commerce penetration of 11%.
Since the lockdown, the e-commerce market in the region witnessed a boom as companies rapidly transitioned to provide online services. Consumer staples, food delivery services and healthcare are among the sectors that have massively benefitted from the pandemic.
Following the lockdown, UBS Wealth Management expected accelerated growth in digital education technologies, online entertainment as well as retail services including healthcare and cosmetics.
‘Government and education services continue to dominate with a 38% share of the overall e-commerce spending. But new online categories such as food deliveries supported by apps like Talabat, Deliveroo as well as online demand for transport, buoyed by the emergence of ride-hailing services such as Uber have doubled their respective share of total e-commerce spending and offer material scope for growth,’ said Niels Zilkens, head of the Arabian Gulf business.
Zilkens believes that the UAE is one of the most promising e-commerce markets in the region. With about $20bn in sales and a low penetration rate of 4%, it is expected to continue to post double digit growth rates in the near future.
He also highlighted a unique feature in the region’s e-commerce sector that has supported this growth—the predominant shopping mall culture. Traditional malls have been enthusiastic early adopters of e-commerce payments and online shopping experiences in a bid to offer an omnichannel approach for its customers.
The UAE has a high volume of online payments, with close to a third in total e-commerce market transaction compared to an average of about 10-15% in other emerging market countries.
Additionally, the government has been proactive offering cashless transaction initiatives on platforms such as Dubai Smart City. Additionally, some of the fastest growing banks in the country such as Emirates NBD, Mashreq and ADIB have also launched their respective digital banks.
UBS believes that GCC countries can come out as winners in a post pandemic world. ‘Even though the pain from a low oil price will be felt for some time, some GCC economies offer competitive advantages versus many other countries when it comes to attracting talent and businesses,’ Zilkens said.
Some of these plus points include, the ease of doing business, an attractive tax environment and excellent infrastructure such as ports and airports.
‘A range of factors is favorable for the Middle East should the global economy continue to recover in 2H20. As an open economy, the UAE, as well as other GCC countries, should benefit from reaccelerating growth globally and from lower-for-longer global interest rates,’ added emerging markets CIO Michael Bolliger.
Not only would it turn into a tailwind for energy prices, it will also support the recovery of cyclical sectors of the economy such as finance, trade, tourism and real estate. Bolliger still sees hope in these industries. Numerous international companies depending on trade have been taken aback by the sudden disruption of trade routes especially in relation to China.
‘They are now looking for alternatives and the UAE, with its infrastructure and strategic location between the East and West, is ideally placed to profit from this trend,’ he said.
Similarly, within the financial industry, the DIFC could benefit from geopolitical tensions between China and the US. Its long-standing reputation, business friendly environment as well as access to human capital and infrastructure make it an attractive destination for many financial institutions.
The region’s strong economic reliance on these cyclical industries have amplified the pandemic’s impact, prompting GCC countries to accelerate the execution of their economic diversification plans towards consumer and tech-oriented sectors.
Diversification has always been a much-needed core strategy for Middle East economies. One of the many diversification efforts of GCC governments is fueling the start-up and innovation culture.
It has been a key priority for GCC governments in the last couple of years, with initiatives such as the Innovation Fund launched by the UAE’s economy ministry, Saudi Arabia’s Vision 2030 and the Oman Technology Fund.
‘In our view, countries with a more diversified economy are in a much better position to weather this crisis well, compared to those that remain overly reliant on energy exports and only start reform efforts now, amid an environment of low energy prices, forcing governments across the region to cut subsidies and spending and to raise taxes,’ Zilkens said.