As countries in the region modernise and make it easier to do business, what are the opportunities and considerations for those looking to invest?
The Gulf Cooperation Council (GCC) countries – Saudi Arabia (KSA), Kuwait, the United Arab Emirates (UAE), Qatar, Bahrain and Oman – are busy adapting to a new economic reality. The price of oil has almost halved since June 2014 when it was trading at $115 a barrel and while this has been disruptive for economies that have grown reliant on ‘black gold’, it is creating opportunities. The states are collaborating to implement wide-ranging economic reforms to build diversified economies that will attract foreign businesses and investment.
Reliance on oil varies across the region. In Kuwait, for example, 63% of gross domestic product (GDP) is generated directly by oil exports, while in the UAE it is only 34% – reflecting the progress UAE has already made in diversifying its economy[i].
As with other GCC states, the UAE’s diversification has shifted the emphasis from the public to private sector. This has led to the introduction of regulation aligned to global best practice, which is creating opportunities for companies looking to invest in the region.
Hisham Farouk, the chief executive of Grant Thornton in the UAE, is confident about the future: “From 2020, and after a period of transition during which the region restructures its old economic model, the Gulf will emerge stronger than ever with diversified, efficient economies becoming magnets for investment and new ideas – so influencing a global shift towards the region.”
The GCC states are at different points on the journey but the UAE and Saudi Arabia are leading the way when it comes to attracting inbound investment.
The UAE is already seeing a return on its investment as it modernises its legislative and regulatory system to support a diversified economy. Its eight-place rise in the World Bank’s Ease of Doing Business Index between 2016 and 2017[ii] shows it is challenging myths around doing business in the region.
The UAE, which is well on its way to achieving its latest phase of growth set out in its Vision 2021, published in 2010[iii], has also climbed 12 places in the World Bank Index of places to start a business (rising from 65th to 53rd over the past year)[iv].
Furthermore, the introduction of new bankruptcy laws at the end of 2016[v] in the UAE, is likely to improve the UAE’s ranking. This is part of a series of measures to protect companies facing business challenges. It is no longer a criminal offence not to declare bankruptcy within 30 days should you be unable to pay your debts, nor it is it a criminal offence to have a cheque bounce. This removes the fear of jail for business leaders in financial difficulty.
Cynthia Habib, a director at Grant Thornton UAE, says: “The new bankruptcy law has enabled banks to change their approach with businesses in trouble, as they can now sit down at the table and discuss debt restructuring. I believe this will encourage a healthier, more robust business environment, which will bring comfort to owners and investors.”
The financial sector is arguably the most important industry in terms of attracting inbound investment to GCC countries (see panel for more details). But the technology industry is also playing an important role as governments explore how they can deliver services electronically as part of their reformation agenda. Both the UAE and KSA are also home to rapidly developing e-commerce markets, aided by growing affluent millennial populations.
Elsewhere in the region, as part of Abu Dhabi’s Economic Vision 2030[viii], the Emirate aims to be the region’s fintech hub, having recently signed a deal with the Monetary Authority of Singapore. The two countries plan to collaborate on key technologies, such as blockchain and distributed ledgers, and have developed a strategic framework to help entrepreneurs navigate the regulatory requirements of setting up[ix].
Even with all the new initiatives and favourable conditions, there are still many considerations for those looking to grow in GCC countries.
Company structure is one area that often causes confusion for inbound investors. Free zones, for example, are areas in which an expatriate can have 100% ownership of a company and have special tax, customs and import rules. Elsewhere, limited companies must be majority (51%) owned by Emiratis.
However, if based in a free zone it is difficult to work with companies outside the zone, therefore there are further considerations needed, such as whether to set yourself up as an on-shore or off-shore entity. What’s more, for those in some free zones new rules are changing the dynamics (see panel). There is also the added complication of the introduction of a 5% VAT in January 2018 with accountants waiting to learn how this will affect those based in the free zones.
Habib says: “It is best to take advice, early on, in respect of structuring. When a company plans to grow, or exit through a merger, acquisition or initial public offering, it will be much more economical and efficient for investors to work with a clean structure, otherwise the deal becomes expensive and less attractive.”
The current economic diversification by governments across the emerging economies is projected to contribute almost $1 trillion to global GDP by 2020[x], something that will not only safeguard the regional economy, but also act as a benchmark for similar economies looking to diversify.
Another key consideration for businesses looking to operate in GCC countries is access to talent. There will continue to be a reliance by businesses on expatriates, attracted by the dynamic and low tax environment, who can bring specialist skills to the region for some time.
However, increased access to further education and government initiatives such as Saudisation and Omanisation, have fueled the growth of the national workforce. The workforce is young, with for example 50.8 percent of the KSA population under 25 years. Many nationals coming through are also second- or third- generation entrepreneurs, well networked on the ground. Therefore, the most successful companies entering the market will be those who blend expat skills with national talent to achieve their goals.
Seize the opportunities
There is a lot of excitement about the growing opportunities but it is a fast-paced environment full of pitfalls for the unwary. As Farouk explains: “The region has several nuances which include cultural, financial and regulatory. However, above all, the rising and more pertinent role which the GCC will play in the global economy of the future can no longer be ignored.”
For further information or to discuss the opportunities across the region, please contact grantthornton@ae.gt.com.
