The Middle East’s digital economy will grow from $180 billion in 2022 to $780 billion in 2030 or roughly 20% growth per annum making it one of the fastest growing digital economies globally, said UBS, a multinational Swiss bank.

It its TechGPT report, UBS highlights why the Middle East is set to be the next major digital frontier market within global tech.

“Our estimates may prove to be conservative as the digital economy penetration as a percentage of the region’s GDP is expected to rise from 4.1% in 2022 to 13.4% in 2030, which is still below today’s 15% or so penetration levels in advanced economies like the US,” UBS said.

Investment point

From an investment point of view, the strong growth outlook should provide solid opportunities in faster growing Middle Eastern segments like internet, software (including cybersecurity) and data centres as well as interesting prospects in the private equity/venture capital space.

Based on data from World Bank, Gartner, Bloomberg Intelligence, and UBS estimates, the global digital economy was close to $10.5 trillion in terms of revenue in 2022; that is roughly a 10.5% penetration rate of the global economy. UBS expects the global digital economy to grow by 10.4% p.a. on average during 2022–2030, reaching $23.2 trillion mainly led by the internet economy.

Meanwhile, based on data from World Bank, Gartner, Bloomberg Intelligence, and UBS estimates, the size of the Middle East’s digital economy was close to $180 billion in 2022, or 4.1% of the region’s economy. The Middle East digital economy’s penetration of only 4.1% versus 10.5% globally or 15% in the US and 7.4% penetration in India (an economy with comparable size) highlights the region’s significant medium-long term growth potential.

“We believe we are at a very early stage of the digital ascent in the Middle East (we believe the region is where China was 10–15 years ago and India 5–10 years ago when the digital inflection began), with only 4.1% penetration of the broad economy.” 

Supported by favourable demographics, strong policy support, solid funding, rising innovation, and low penetration rates, UBS expects the Middle East’s digital economy to grow to $780 billion in 2030.

Fastest growing digital economy

This makes the Middle East one of the fastest growing digital economies globally. To boot, UBS estimates may prove to be conservative as according to World Bank, Gartner, Bloomberg Intelligence and UBS estimates, the digital economy’s penetration as a percentage of the region’s GDP is set to rise from 4.1% in 2022 to 13.4% in 2030, which is still below today’s 15% penetration levels in advanced economies like the US. 

UBS expects software spending to grow 15% p.a. on average in the Middle East, which, coupled with margin improvement (usually software’s operating margins can go as high as 35–-40%), should drive strong profitability growth. 

“We believe software is the best way to participate in the region’s ongoing digital transformation, where we expect many traditional enterprises to upgrade their IT infrastructure by driving significant investments across software like office productivity and collaboration, cloud including enterprise resource planning and other automation, as well as cybersecurity.”

Internet is the fastest growing segment in the Middle East at 23.5% CAGR. Understandably the industry’s profitability is low today due to significant upfront investments; but with rising scale benefits and improving pricing power, UBS sees strong scope for margin expansion in future. 

As a comparison, global internet profitability in terms of operating margins is close to 20%. Data centres are the third segment, which is hidden under the broader hardware segment. 

Data centres bright spot

While the traditional hardware segment, including smartphones and PCs, should grow by low-mid single digits, in line with the broader economic growth, data centres are a bright spot within hardware given the significant uptake of cloud and strong demand for artificial intelligence (AI). 

UBS expects strong investments in generative AI in the Middle East in the next few years as it sees significant use cases in both consumer and enterprise applications.

At the moment, the region relies a lot on the west for critical technologies like semiconductors and software, so UBS sees both challenges and opportunities as the region strives to be self-sufficient. Among all the risks, data privacy is a pressing one given the region’s high vulnerability to cybersecurity breaches. 

Data breach cost

According to data from IBM Security and Ponemon Institute, the cost of a data breach in the Middle East is $8.07 million in 2023, up 8.2% from $7.46 million in 2022.

This is alarming given the cost in 2023 is not only well above the global average of $4.45 million, but also the increase of 8.2% is sharp compared to the global average of 2.3%. The good news is that Middle Eastern tech companies have realised the importance of cybersecurity and are starting to step up investments, which also provides interesting investment opportunities. 

Albeit UBS believes that given the significant growth opportunities the Middle East offers over the next decade, the investment opportunities outweigh the risks at this stage. With the region’s digital economy growing twice as fast as the global digital economy, opportunities are plenty, but we highlight software, internet, and data centres as standouts, together with diversified opportunities through the VC/PE space to capture early- stage growth and cybersecurity to manage data privacy risks.