Space for agriculture in the Gulf economy

This region’s countries, in particular the United Arab Emirates, are going through a delicate phase due to the conflicts in the Middle East and the effects of the Covid 19 epidemic. This does not stop the socalled Energy Transition, the process of transforming the economy, currently based on oil products, towards new sectors. There are interesting prospects for the agricultural and agri-food chains

We participated in two recent events that allow us to provide a more updated view of the Gulf markets, despite the obvious presence of a variable - COVID 19 - whose effects cannot be foreseen at the time of writing.

We are referring to Mena Energy 2020, organized by Chatham House in London, and GTR MENA 2020, the traditional Trade Finance event organized by Global Trade Review in Dubai.

The dominant theme during the two Conferences was the so-called Energy Transition (ET), understood as a global phenomenon with serious consequences for both the Gulf countries and more generally the MENA Region (Middle East & North Africa). This new trend is accompanied by the resulting need for the Gulf countries to finalize the process of diversifying the local economies, which has often been mentioned, but has not really been implemented yet.

The economic diversification in the region’s countries surely represents a very important opportunity for our companies, given the absence of manufacturing traditions in several of these markets.

The driver of these changes, namely the Energy Transition, is understood as the process happening at a global level regarding policies that promote clean and renewable energies, with the resulting drop in demand for oil.

Actually, the Gulf countries, and more generally the MENA region, are now mostly affected by geopolitical tensions: the relationship with Israel, the Iran - Saudi Arabia tensions, the role of bridge between Asia and Africa, and the growing presence of Russia in the Middle East. The energy issue remains absolutely strategic, if only because it continues to contribute substantially to the creation of national wealth in these countries.

The ET also concerns China, which is engaged in a global challenge with the USA on this issue. One example is electric transport, which some large Chinese cities have strongly promoted (Shenzhen), and the birth of a Chinese global player - BYD - manufacturing electric vehicles. For the Gulf countries, this policy of the great Asian country is being watched carefully, and with some fear related to the possible drop in Chinese oil demand.

An example is the transition to nuclear power. In recent decades, the energy transition has seen a fundamental role played by government policies, which have often determined its speed. The example of France’s transition to nuclear power is perhaps the most obvious. The ET now has different reasons and is mainly related to climate change and the demand for using green energy. In addition to these reasons, we also have technological innovation and the ever closer connection between the various economies, which make the transformation processes happen faster. As one of the speakers at Mena Energy 2020 pointed out, the concept of “disruptive” change in the energy field is increasingly linked not only to the technological aspect, but also to the ability to apply innovation very quickly, so as to be successful in the global challenge.

In the Gulf, the reaction to this new path of energy policies was perhaps less timely, since the area continues to enjoy extremely low oil extraction costs. Consequently the RENTS - the difference between the value of oil production and production costs - remains very high, and certainly more profitable than a transition to renewables.

This is the perspective that the Gulf oil producing countries are asked to change. The big challenge is that of diversifying the economic fabric.

Part of this process certainly concerns the energy sector. For example, the need to create a fully integrated oil supply chain: from extraction to offering the final products. In the field of natural gas, which currently represents the sector’s cleanest component, the Gulf countries should strengthen the infrastructures and technologies related to the management, stocking and transport of Liquified Natural Gas (LNG).

However, the diversification on which we want to focus our attention in this article relates to other sectors of the economy. Despite the proclamations, until now this diversification has not been successful and has been unable to have a significant impact.

Experts point the finger mainly at the absence of a solid private entrepreneur base. The subsidy policies, the lack of fundamental reforms in support of business freedom, and excessive forms of protection from international competition have been structural obstacles to the emergence of private entrepreneurs capable of developing new business sectors and a capable class of managers.

Conversely, in other areas - North Africa for example - an entrepreneurial class of SMEs has developed: textile and agro-industrial companies in Egypt, Tunisia and Morocco, examples in the mechanical sector in Algeria, and shoe and ceramic districts in some of the above countries.

The last consideration regards the financial resources made available to contribute to the diversification of the economy and to green policies. From this point of view, if we look at the role hitherto played by the Sovereign (and private) Funds in the Gulf area, according to the most recent data, these have allocated only 1% to assets somehow related to green energy.

Instead, according to what the representative of an important multinational company in the sector told us, diversification and transition to renewables are closely related aspects. One example is the United Arab Emirates, where the demand for green energy is growing from both private individuals and non-traditional sectors. This is evidenced by the increase in purchases of small plants for the production of energy (2/5 megawatts) from food waste and selected waste, plants purchased especially by local utilities. Similar demands comes from private entities, for smaller plants intended for self-consumption.

Many agree that now - faced with the challenges imposed by the ET - the funds available to support effective diversification of the Gulf economies will increase significantly. In this scenario, where significant opportunities open up for our businesses, we try to identify some of the sectors that could be particularly promising.

Tourism, food and beverage, agro-industry and logistics are the areas that we believe should be closely watched.

Net of the effects that COVID 19 will have on the global economic system (already as we complete this article we hear of Chinese factories that have restarted production or have converted it towards products necessary to fight the pandemic) the attention in the Gulf area towards strengthening the above sectors is quite evident.

In tourism, the emerging protagonist is Saudi Arabia, which seems determined to conquer an important role (in addition to that linked to the pilgrimages that make it the leading destination in the Middle East). An expansion of tourist visas was announced at the end of September 2019, with further measures in early January, which simplified access to citizens from about 50 countries. Israel is now among the countries that can send their citizens to Saudi Arabia.

Next to the more classic destinations of Dubai and Oman, the Saudi Kingdom presents itself as a tourist destination in the region for the next decade.

The food & beverage sector is closely linked to tourism and business travel. In these regions it is driven by its strong propensity for international cuisine, and here too there is plenty of space for our entrepreneurs.

Last February, the 25th edition of Gulfood 2020 was held in Dubai, attended by over 4100 exhibitors, of which 192 were Italian. The event focused on some important themes, capable of guiding the choices of the local market. It is no coincidence that the theme of Gulfood 2020 was “Rethinking Food”. The sectors that received the most attention were dairy, meat (in particular poultry), wheat and wheat products, and fruit and vegetables.

Innovative issues were addressed in this venue. Here are some examples.

Digitally certified imported milk, with real-time tracking for complete transparency on the product for the consumer, and the most advanced innovations in the field of greenhouse cultivation, aimed at increasing local production. Alongside these innovations, Gulfood’s Halal World Food section once again presented the Emirates as a platform for the global launch of Halal cuisine.

We should keep in mind, however, that the issue of food in this region is not only linked to tourism and to the demand from the wealthier levels of society. It must also be seen in terms of food security, as the ability to satisfy the internal market with a significant share of local product. The topic has been on the table since at least 2008, but recently it has become more pressing due to interregional political tensions. For example, due to the blockade imposed in June 2017 by some of the region’s countries, Qatar has launched important measures to achieve food security. Saudi Arabia and the UAE also have public bodies specifically tasked with addressing this problem. An upcoming important event from the point of view of the required processes and technologies is Gulfood Manufacturing 2020 (next November). Lastly, as was reiterated during GTR Mena 2020, the Emirates intend to maintain a leadership role in the logistics sector, for the management of flows of goods and technology for the Asian and African markets. The efforts that Dubai has made over the years to achieve a leadership position have paid off, and it is now being strengthened by the financing of international trade. In practice, the digitization of the documents that regulate international trade is being adopted by Financial Institutions as well as the international companies that ship containers every day by sea all over the world. Some of these are equipped with a Trade Finance service that allows them to offer companies specific supports for the financial transaction, especially thanks to the control over the product transported and the availability of the representative documentation of the goods (bill of lading). The economic diversification in the Gulf countries, currently also driven by the Energy Transition, and the strengthening of the logistics platform in particular in the UAE, seem to be long-term trends. Once the current crisis phase of the COVID 19 pandemic is overcome, these trends deserve to be carefully assessed by our companies as an opportunity for an expansion of their business in these markets.