As we move further into 2019, we will see an increasingly complex and unpredictable global picture, reveals Agility’s latest Emerging Markets Logistics Index but the industry is looking towards the Middle East to challenge the traditional logistics powerhouses.
At the biggest scales, risk factors include the incoming threat of a trade war between Beijing and Washington, the prospect of a disorderly Brexit and tightening monetary policy, a particularly worrisome scenario for emerging markets with high volumes of US dollar denominated debt, to name just a few.
China and India top the 2019 Agility Emerging Markets Logistics Index finishing some distance ahead of the remaining 48 emerging markets covered. The rest of the top 10 markets, however, are ranked much more closely together, with just 0.68 points separating them. The top 10 reflects the reality of emerging markets – that China and India dominate given both their scale and the initiatives undertaken to capitalise on those structural advantages, and that the remaining markets in the top 10 each present viable opportunities, between which it is difficult to discern at the surface level.
However, looking across all three sub-indices of the top 10 reveals a picture of asymmetric competition most evident in the business environments offered by the Middle Eastern and South East Asian markets.
Building a significant advantage in business fundamentals through regulatory environments which create confidence for investors has proven a viable strategy for driving performance and potential as a logistics market, as the UAE and Malaysia demonstrate. Conversely, the Philippines, which achieves top 15 rankings for both domestic and international logistics opportunities, ranks 34th overall for business fundamentals – primarily the result of a legislative and judiciary system that fails to ensure protection of investments and contracts.
“The larger point here, though, is that success and potential as an emerging logistics market in 2019 requires coherence of policy across and throughout a market’s business environment, and that this can significantly enhance a market’s potential if designed and implemented effectively. Given that it is a measure over which markets have near full control, poor performance is an opportunity lost,” says the report.
Beyond China and India, the third-place ranking of the UAE is a result of exceptional performance in the business fundamentals sub-Index, combined with solid development of domestic and international logistics markets. Capabilities across the measures have been developed as part of a plan to position the UAE as a global trade and tourism hub.
“The high ranking of the UAE’s business environment is primarily a result of its network of free trade zones, and the rules that govern foreign businesses within them. Inside free zones, foreign companies can own up to 100% equity, receive a 100% import and export tax exemption, and repatriate 100% of capital and profits,” explains the report. “These free zones form a vital component of the local economy and serve as major re-export centres to the Gulf region. Free zones in the UAE are home to more than 20,000 companies. For the logistics sector, the most important is the Jebel Ali Free Zone, where more than 300 logistics providers from 30 countries are based, many offering contract logistics and freight forwarding services.”
According to the report authors, rhe UAE is trying to position itself to be the region’s e-commerce hub by encouraging new businesses and start-ups such as Shipa.com and luring global talent and investment through ambitious projects such as Commercity in Dubai.
“The UAE’s logistics markets have also benefitted greatly from vast investment in physical infrastructure. Domestically, the UAE is investing in big ticket infrastructure projects such as the $3.5bn Al Mafraq-Al Ghuwaifat road upgrade and the creation of a 1,200 km rail network.
“The market is also undertaking expansions at its main air and sea ports. Jebel Ali, which serves as a multi-modal hub and free zone and facilitates domestic, regional and global trade flows, connecting the UAE with 140 ports worldwide, is undergoing expansions to increase handling capacity to 22.1m TEU.”
Saudi Arabia’s 6th overall ranking is primarily a result of notable improvement in its business environment, a theme which is common across Middle Eastern markets. It is a strength that will be key to the Kingdom’s ability to transform its economy under the ambitious Vision 2030 strategy.
“Announced in 2016, Vision 2030 aims to position Saudi Arabia as an investment powerhouse and a logistics hub connecting three continents. To achieve this, the strategy emphasises economic diversification away from dependence on oil, aiming to grow non-oil revenues tenfold by 2030. The Saudi government has instigated significant expansion of the road and rail networks, as well as the country’s airports in recent years, while also creating free trade and industrial zones, such as the Industrial Valley in King Abdullah Economic City, to boost economic growth.
“Saudi Arabia has prioritised development of its sea ports in particular. Some 95% of its imports and exports pass through its sea ports, of which all but one are owned by the Saudi Ports Authority, whilst being managed and operated by the private sector. The new King Abdullah Port has a single-window Port Community System which integrates regulatory and logistics data, and makes port operations more efficient. It also has a Smart Gate System which automates security functions such as authenticating the identity of the driver, vehicle and cargo, as well as reducing the volume of traffic inside the port by only allowing in trucks that have an appointment.”
According to the report, Vision 2030 will also create demand for logistics services in other areas of the Saudi economy. The petroleum sector accounts for roughly 87% of budget revenues, 42% of GDP and 90% of export earnings.
“At a time of low oil prices, Saudi Arabia is encouraging the growth of the private sector in order to diversify its economy and employ more Saudi nationals. The government has approached investors about expanding the role of the private sector in the healthcare, education and tourism industries. Its Vision 2030 strategy aims to increase the private sector’s contribution from 40% to 65% of GDP. The Saudi e-commerce market is estimated to have reached $5.7bn in 2017, as increasing numbers of Saudis gain access to the internet. However, consumer preference for cash on delivery and cyber security remain barriers to growth. In addition, November 2018 saw the inauguration of Waad Al-Shamaal mining city, which is expected to create around 10,000 jobs.”
This year’s report also includes a look at the markets with the most favourable conditions for growth in the sector and it is dominated by the Middle East, with five of the top 10 ranking positions occupied by emerging markets from the region.
In top position is the UAE, where business fundamentals are strong across much of the economy for foreign investors. In particular, the Emirates have put into place a business environment that provides a robust financial sector, a transparent regulatory system and frameworks that offer protection from corruption, ensure property rights and enforce contracts.
“Saudi Arabia’s 5th rank is driven by a similar set of strengths, although access to certain sectors of its economy remains more restrictive. The Kingdom’s ambitious Vision 2030 strategy aims to attract foreign investors with the expertise to power more diversified growth and develop local capabilities. This, however, will require consolidation of regulations to attract foreign investment, create new jobs and transfer private sector skills to the public sector, areas where the Saudi business environment still lags behind global standards. The region’s other high performing markets are Oman and Bahrain, which both gain top 10 ranking positions as a result of favourable regulatory environments for foreign investors and low disruption to business from crime and violence.”
The UAE remains the top location for FDI in the region, taking up 26% of all FDI projects in 2017, according to fDi. In the same year, the report continues, Saudi Arabia saw capital investment fall 42% and a 14% decrease in overall FDI projects. Indeed, attracting foreign investors is a key pillar in many of the economic diversification plans across the region, and developing strong business environments has taken on new impetus since the price of oil began to fall in 2014. A diversified economy is essential in dealing both with the dynamics of global energy markets, but also in creating opportunities for investment and job creation.
“Every year, the economies of the Arabian Gulf have been the pacesetters when it comes to emerging markets business fundamentals among the 50 Index countries,” says Agility.
“This year is no different. There has been a healthy competition among Gulf nations – UAE (1), Oman (4), Saudi Arabia (5), Bahrain (8), Kuwait (11) – which have pushed themselves to improve the business environment in order to diversify their economies, attract investment and technology, spur new-business growth, nurture startups, create private sector jobs, and establish conditions for long-term growth and prosperity.
“The Index draws, in part, on data from the World Bank’s annual Doing Business report, which looks at what it takes to start a business, get a permit, hook up electricity, register property and get credit, in addition to protections in place for minority and foreign investors. The World Bank rankings show emerging markets alongside developed markets and mature economies. It’s clear from those rankings that the Gulf countries and others emerging economies still have much ground to cover before they rank with New Zealand, Singapore, Denmark and the other developed nations in business fundamentals. What’s encouraging is that policy makers in the Gulf and other emerging markets are more eager than ever to listen, innovate, adapt and change.”
Read Agility’s latest Emerging Markets Logistics Index online at: agility.com
