Kuwait Financial Centre “Markaz” recently published the executive summary of an updated version of their GCC infrastructure series covering: Power, Airports, Seaports, Roads & Railways, ICT and Water. In this installment, Markaz tackles GCC ICT in terms of trends in the sector and expected investment over the next five years.
The GCC, fueled by an investment and oil boom, have kept pace with an increasingly digital world by making rapid strides in Information and Communications Technology (ICT), in both the public and private sector.
ICT is a dynamic and ever-changing sector. This is more so in the GCC because of the ongoing structural changes. The ICT sector is essential to project the GCC as an increasingly sophisticated region for investors and businesses. While the European and American markets mature, the GCC still experiences fast growth, slightly beyond other “emerging” markets. According to World Information Technology and Services Alliance (WITSA), during the recessionary period of 2008–2009, while Global ICT spending contracted by 3%, led by declines in the Americas (−4.4%) and Europe (−6.9%), ICT spending in the Middle East grew by 6.6%.
There remain various regulatory and infrastructure challenges now facing the GCC. These challenges include a lack of independent market regulation and inadequate or dated infrastructure in addition to bureacratic issues in the adoption of technology on a governmental scale.
We forecast that ICT spending in the GCC will reach US$318 billion over the next five years (2011–2015), yielding an average annual expenditure of US$ 64 billion. About 50% of this amount will be accounted by Saudi Arabia, followed by the UAE and Qatar. We expect the pace of growth in IT spending to decelerate, compared to the period of 2003–2010, because of decelerating GDP growth, reducing Average Revenue Per Use (ARPU), and a maturing phase. However, the volume of investment will still be substantial due to high levels of ICT spending and GDP in 2010 and sustained strong demand.
The GCC countries lead the Middle East region in terms of infrastructure investment due to robust fiscal balances and early new-technology adoption. It is natural for smaller states to have more advanced infrastructure as it is cheaper and logistically easier to implement. Some operators have been testing long-term evolution (LTE) technology (allowing speeds of up to 150 Mbps). Over the coming years, network upgrades to high-speed packet access (HSPA), 4G, and LTE are likely to take place.
Like many other countries, historically, the region’s fixed-line market has been served by the state or other monopoly players. Fixed-line infrastructure is not as developed as that of mobile, resulting in lower Internet penetration levels and high broadband costs. The GCC has been gradually liberalizing its fixed-line market to match that of the mobile telecom sector, except for Kuwait—although Kuwait is not always the most expensive. The basic indicators for the region are as follows in terms of penetration and cost comparison
International Internet bandwidth is very high in the UAE and Qatar. These countries (with Saudi Arabia) have been at the foremost of technology adoption at a structural level.
The ICT spending has been growing at a healthy rate in the GCC. Moreover, most GCC telecommunication markets are liberalized and highly competitive. In the UAE, for example, ICT spending has grown by a CAGR of almost 19% during the period 2003–2010.
With increased investment in fiber optics across the region, the situation is slated to improve. Markets are generally healthy with regulatory bodies, encouraging competition. Kuwait is the singular case where there is no regulatory body, making its ICT sector less dynamic. Regulatory bodies usually show a clear technology vision and intent for their countries and define their strategy. Saudi Arabia has shown strong dynamism and stands to reap the benefits. Qatar is now witness to a new surge and wants to lead the way in ICT in the region, especially through fiber optics. Although speeds of 150 Mbps are yet to be attained, Qatar has the vision of 10 Gbps.
There is a very strong correlation between the GDP and ICT spending, witnessed over the previous years. A regression analysis of the data of GDP and ICT spending available for Kuwait, Saudi Arabia, and the UAE over a nine-year period shows a very high correlation of 0.85, 0.78, and 0.91 respectively.
The ICT spending for these countries vary between 4% and 6% of the GDP. We have, therefore, extrapolated ICT spending from GDP forecast over the period 2011–2015, based on the ratio of previous spending to the GDP. Data used for GDP have been sourced from the IMF, which have just lowered their growth outlook because of the persisiting world macroeconomic uncertainties.
We forecast that spending on ICT in the GCC will reach US$318 billion over the next five-year period (2011–2015), yielding an average annual expenditure of US$ 64 billion. About 50% of this amount will be accounted by Saudi Arabia, followed by UAE and Qatar.
We expect the pace of growth in IT spending to decelerate, compared to the period 2003–2010, due to decelerating GDP growth, reducing ARPUs, and a maturing phase. However, the volume of investment will still be substantial due to the high levels of ICT spending and GDP in 2010 and sustained strong demand.
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About Kuwait Financial Centre “Markaz”
Kuwait Financial Centre S.A.K. 'Markaz', established in 1974 with total assets under management of over KD 906 million as of June 30th, 2011, is the leading and award winning asset management and investment banking institution in the Arabian Gulf Region. Markaz is listed on the Kuwait Stock Exchange (KSE) since 1997 under ticker Markaz.