In January, the UAE and Saudi Arabia announced the launch of seven strategic initiatives to further integrate the countries’ two economies. The plans include creating a cryptocurrency to facilitate cross-border payments and a fast-track system to enable easier flow of goods with 81 Emirati and Saudi companies already holding Authorised Economic Operator status.
Greater economic ties between the UAE and Saudi Arabia will create more cross-border business opportunities for startups and small to medium-sized enterprises (SMEs) and reduce running costs for companies operating in both countries.
The two GCC states will also create a platform that enables UAE and Saudi SMEs to bid for government procurement contracts, and the latest schemes are in addition to 44 joint strategic projects announced in June 2018. These include co-investments in oil, gas and petrochemicals, a joint venture fund for renewable energy and an investment fund for SMEs.
“Both countries are particularly looking to SMEs for job creation and growth, and greater integration will be positive, but reforms to support SMEs will be critical to the development of the sector,” says Monica Malik, chief economist at Abu Dhabi Commercial Bank.
Historically, the economies of both the UAE and Saudi Arabia have been oil-based and the two traded relatively little with each other. But economic ties between them have swelled since the creation of the GCC Customs Union in 2003 and trade between the UAE and Saudi Arabia was worth Dh88.3 billion in 2017 ($24 billion), while UAE-Saudi non-oil trade increased 1,230 percent from 2003 to mid-2018, according to the UAE Federal Customs Authority (FCA).
“This initiative is likely to help regional startups achieve scale faster by being able to operate across these two key geographies,” says Khaled Talhouni, partner at Wamda Capital. “For companies already established in the UAE, establishing a foothold in Saudi Arabia will be far easier this way, relieving companies from the process of applying for new licences.”
The UAE is a logistical hub for the Middle East, while Saudi is both one of the region’s largest consumers and among its biggest producers. E-commerce products sold in the region originate from Asia, Europe and North America and are usually imported through Dubai’s two logistical centres – Jebel Ali and Dubai Airport Freezone Authority (DAFZA) - before being transported overland to Saudi. Making the import process more straightforward would be a boon for online merchants.
This is will likely benefit e-commerce companies that operate in these two markets and reduce the cost of logistics.
For services companies, the biggest barriers are regulatory. These include obtaining licences and having the ability to do in-country marketing.
“It’s difficult for companies to open a bank account in the UAE,” says Yousef Hammad, managing partner at BECO, a Dubai-based early-stage venture capital firm with investments in the likes of Careem, PropertyFinder and Fetchr. “The level of scrutiny that banks apply is extreme. It’s the same in Saudi.”
If a company opens a bank account in one of the countries, it should under this new plan be able to serve clients in the other without having to go through a three to six-month process of opening a bank account, which according to Hammad is a “huge step forward”.
It would simplify hiring employees, collecting money from customers and paying suppliers while also providing more human resources benefits.
“Homegrown tech industry talent in the Middle East is scarce. The UAE has built a global hub and has been able to attract talent from across the world, so joining the UAE and Saudi economically will enable that talent to provide its services in the kingdom as well,” says Hammad. “Companies launching from Saudi will be able to hire talent from the UAE, while local talent in Saudi will be able to accelerate its learning.”
Saudi investments in the UAE total around Dh35 billion, with about 2,370 Saudi companies and 66 commercial agencies registered at the UAE’s Ministry of Economy, according to the UAE’s state news agency. This states there are 206 Saudi projects in the UAE, as well as 114 joint Emirati-Saudi projects, mostly in industry and services. UAE investments in Saudi total about $9 billion.
“Whereas previously, companies were only partially interested in cross border investment, now companies are ramping up their planning and engaging in investment as part of long-term strategies,” says Karim Helal, co-founder and chief executive officer (CEO) at ProTenders, a Dubai-based construction intelligence and tendering platform that each month attracts more than 500,000 views and over 60,000 searches.
According to ProTenders’ data, there are $962.1 billion worth of active projects in Saudi Arabia and $723.4 billion in the UAE.
“With recent digital transformation initiatives across many spheres of business, construction remains an industry that is still limited by several cumbersome processes; one of them being tendering,” says Helal. “With the recent frequency of new projects being announced in Saudi Arabia, we anticipate a growing demand for a digital tendering solution like ours that will help real estate developers to build faster with reduced risk.”
The Dubai and Abu Dhabi governments are both working hard to develop homegrown financial technology (fintech) hubs, providing regulatory and logistical support to help fledgling startups succeed.
Once such company is Sarwa, a Dubai-based robo-advisory firm that enables clients to invest in a variety of funds for low fees, giving investors access to global markets via a simple-to-use website. It launched operations in 2017 and received its full licence in November 2018, enabling the company to accept clients based almost anywhere worldwide providing they show a passport, a permanent address and a selfie. It takes as little as eight minutes to sign-up.
Sarwa’s co-founder and CEO Mark Chahwan says he can envisage the UAE and Saudi following the principle of “passporting” whereby holding a financial services licence in one country would enable a company to sell financial services in the other without the need to have a local licence or office.
The European Union’s financial sector operates under this model.“I don't see that as being too much of a problem. There are a lot of similarities between Saudi and UAE in terms of the two markets - there aren’t as many expats in Saudi, but there are similar demographics in terms of age, investment goals, level of investment risk appetite,” says Chahwan.“Cost is a main factor in determining the feasibility of cross-border financial services. How can you ensure that costs are as minimal to get the correct licenses? How can this be made into an easy process? Saudi is our priority in terms of expanding abroad.”