Diversification to pay in long-term for GCC states

HEDGING RISK: The regional businesses should focus on building competitiveness by embracing disruptive technologies that will facilitate value creation. - KT File

Economic growth in the GCC states significantly weakened in 2019 as overall real GDP growth dropped to 0.8 per cent as compared to two per cent in 2018. Lower oil demand caused by global economic slowdown, rising trade tensions, geopolitical uncertainty, and lower commodity prices weighed heavily on the oil sector growth despite Opec's attempts to stabilise prices through production cuts.
Moreover, the oil glut, demand-supply imbalance, is expected to further worsen following the outbreak of coronavirus in China and persistent slowdown in other emerging markets such as India and Brazil. As a result, the Opec recently lowered its global oil demand growth forecast to 0.99 million barrels per day (bpd) in 2020, down 0.23 million bpd from previous estimate, suggesting a grim economic outlook, especially when most GCC states heavily rely on petro-dollars for budgetary spending.
While substantial progress made towards diversification and privatization initiatives is likely to pay dividends in the long term, uncertainty surrounding the impact of coronavirus and subdued forward-looking indicators, pose an imminent threat to the Gulf States, and could even lead to tepid or stagnant growth in the near term. As the regional businesses prepare for a challenging economic environment, they should focus on building competitiveness by embracing disruptive technologies that will facilitate value creation. Simultaneously, the regional governments should continue their reformist agenda and promote the adoptability of such technologies across sectors.
Throughout history, technological disruptions have transformed the world by creating new opportunities, new social and economic organisations, and new products and processes. Introducing the concept of 'creative destruction' in 1942, Austrian-American economist Joseph Schumpeter opined that destructive or disruptive sacrifices would need to be made if a business wants to progress in a capitalist economy, thereby arguing that disruption is necessary for growth.
Today, the world is witnessing a new era of digital revolution wherein digital networks, information technology, big data, the industrial Internet of Things, and cloud computing are transforming workplaces, cities, and whole economies. The World Economic Forum cites that over 60% of global GDP is expected to be digitized by 2022, while an estimated 70per cent of new value created over the next decade will be based on digitally-enabled platforms.
The GCC economies are no exception to this trend and the digitalisation landscape has grown and evolved significantly over the last five years. The overall contribution of digital economy to the Middle East's GDP stood at approximately 4.1 per cent driven by a tech-savvy consumer base that boasts one of the highest internet penetration and smartphone adoption rates in the world. As a result, the region witnessed the rise of several tech-enabled businesses across the e-Commerce - Noon, Souq, Mumzworld, Awok, Wadi; FinTech - Sarwa, Paytabs, Geidea, Bayzat, Souqalmal; Transportation and Logistics Tech - Careem, Fetchr, Trukker, Talabat, Carriage; F&B Tech - Talabat, Deliveroo; HealthTech - Altibbi, Sihatech, Nala, Tabeeby, Meddy; and EdTech - Noon Academy, Tarjama, Almentor, Coded Minds platforms. Some of these businesses have evolved from a startup to multi-million dollar companies, creating thousands of jobs and significantly contributing to overall economic activity.
Emergence of this tech-based ecosystem has also laid the foundation for incumbent or traditional businesses/sectors to improve their competitiveness by embracing disruptive technologies. For instance, the regional banking industry is going through a transformative phase to cater to the demands of digital-savvy consumers and compete with fintech companies.
Similarly, retail giants such as Wadi, Lulu, Choithrams, etc. are expanding their online presence to compete with e-commerce players. Moreover, traditional sectors such as Oil & Gas, Transportation & Logistics, etc. are also leveraging Artificial Intelligence (AI) and blockchain technologies to drive efficiency gains. For instance, Abu Dhabi National Oil Co. (Adnoc) established a joint venture to develop and commercialise AI-based solutions for the oil and gas industry. These digital oilfield systems are expected to dramatically alter the industry landscape and usher a new era of optimisation, efficiency and profitability. Similarly, Abu Dhabi Ports has combined blockchain technology and unique digital user identities to provide a seamless and secure link between stakeholders across the trade community while the UAE-based logistics provider Aramex also leveraged machine-learning capabilities to increase accuracy in shipping-date predictions by up to 74per cent. According to a survey by Microsoft, more than 70 per cent of the Mena companies plan to invest in AI as part of their budget in 2019. Clearly, the regional businesses across sectors are exploring ways to leverage disruptive technologies to improve their competitive advantage.
Regional governments have also responded aptly to this opportunity and have integrated disruptive technologies as part of their respective national policies. For instance, the UAE became the first government globally to appoint a Minister exclusively for the field of AI and subsequently launched an AI strategy that will cover sectors such as education, transport, space, health and renewable energy.
Meanwhile, Saudi Arabia disclosed plans to launch a futuristic megacity that will serve as an Arabian Silicon Valley at the cost of $500 billion. Simultaneously, the GCC states are also exploring cutting-edge futuristic technologies such as autonomous vehicles, 3D printing and vertical farming that can drive impactful changes in the coming years.
For instance, Abu Dhabi recently launched the region's first grid scale battery deployment and the world's largest virtual battery plant, signifying GCC's commitment to diversifying its energy supply. Similarly, Dubai Expo 2020 is likely to showcase the use of fuel-cell vehicles that run on hydrogen generated at a solar-driven hydrogen electrolysis facility at Mohammed bin Rashid Solar Park while Abu Dhabi's Mubadala has made big investments in renewable energy, building solar and wind farms across the country.
In 2016, Dubai launched a 3D printing strategy that sets an ambitious target of constructing 25 per cent of new buildings using additive manufacturing while Dubai Roads and Transport Authority (RTA) launched the Dubai Autonomous Transportation Strategy that aims to make 25 per cent of Dubai transportation autonomous by 2030, saving $6 billion annually.
Despite taking leaps in the adoption of disruptive technologies, the region has captured only a fraction of its full potential. Digital contribution to GDP in the Middle East is just 50 per cent that of the US, suggesting immense scope for growth. Accenture cites the potential increment to the UAE's GDP at $13.8 billion by 2020 if its government and businesses sufficiently optimise their digital skills, technologies, and accelerators; while Saudi Arabia could add over $31 billion (4.1 per cent of GDP), by 2020. However, the extent to which the region can maximise benefits from disruptive agents largely depends on their adaptability and willingness to translate potential into meaningful gains. Therefore, the regional governments should continue to provide a conducive business environment for tech-enabled companies, even if it means additional cost in the short-term as the region is bound to reap the benefits in the long-term.
Simply put, if the GCC embraces disruption with bold measures and open arms today, they are likely to emerge with competitive offerings that compel new thinking and offer broader growth horizons in the future. The by-product of this will be productive employment and sustainable economic growth that harnesses the region's potential to its fullest.

Shailesh Dash is an entrepreneur and financier. Views expressed are his own and do not reflect the newspaper's policy.