Middle East defence spending accelerates
7 May 2023
Global military spending reached a record high of $2.24tn in 2022, up 3.7 per cent year-on-year, according to newly compiled data from the Stockholm International Peace Research Institute (SIPRI), as the Ukraine war and tensions in East Asia prompted governments to ramp up their investment in equipment.
It marks the eighth consecutive year of growth in global defence expenditure. The sharpest rise was in Europe, where there was a 13 per cent increase in spending, but the Middle East and North Africa (Mena) region was not far behind, with an 11.2 per cent rise on the previous year.
“The continuous rise in global military expenditure in recent years is a sign that we are living in an increasingly insecure world,” said Nan Tian, a senior researcher with SIPRI’s military expenditure and arms production programme.
“States are bolstering military strength in response to a deteriorating security environment, which they do not foresee improving in the near future.”
Rising regional outlay
The rise in the Mena region’s total to $168bn was mostly due to an increase in spending by Saudi Arabia and Qatar and, to a lesser extent, Lebanon and Iran.
As has long been the case, Saudi Arabia dominated the picture, with a defence outlay of $75bn in 2022 – up 16 per cent on the year before and its first increase since 2018.
Military spending data for the Middle East is often opaque. Other large spenders, according to SIPRI’s database, include Israel ($23.4bn), Qatar ($15.4bn), Algeria ($9.1bn), Kuwait ($8.2bn), Iran ($6.8bn) and Oman ($5.8bn).
However, the institute has no estimates for a number of other countries, most notably the UAE. Its most recent figure for the UAE is for 2014, at which point the defence budget was an estimated $22.8bn, the region’s second-biggest after Saudi Arabia that year.
There are also no current estimates for defence spending by the countries suffering the greatest instability, including Libya, Sudan, Syria and Yemen.
Others have drawn up figures for the UAE, though. The London-based International Institute for Strategic Studies (IISS) estimated the UAE’s defence spend was $20.4bn last year in its recently published Military Balance 2023 report. That marked a 6 per cent rise on the previous year’s estimate.
While the UAE may not have the largest budget in the region, IISS says its armed forces are “arguably the best trained and most capable of all GCC states”.
Unclear Iranian picture
The outlay by Iran is also a matter of some debate, given the questions over the value of the rial and the country’s high inflation rate of around 40 per cent.
SIPRI says that, in local currency terms, Iran’s defence spending grew by 38 per cent to IR1,988tn in 2022. That is equivalent to some $46.9bn at the government’s official exchange rate, but far less at the open market rate used by SIPRI.
Inflationary pressures have become a common concern for countries around the world, even if few are having to cope with price rises as rapid as in Iran. Many Western countries are also dealing with an energy supply crisis due to the war in Ukraine, which has led to prices spiking upwards and sanctions being imposed on Moscow.
The Middle East’s oil exporters have benefitted from elevated oil prices, making it easier to afford the rise in defence spending.
However, the most notable direct consequence of the conflict in Ukraine for the Middle East has been the surge in military cooperation that has followed between Russia and Iran. Moscow’s failure to quickly take control of Ukraine has led to a drawn-out conflict and, as its weapons inventory has become depleted, it has imported drones from Iran to fill in some of the gaps.
That cooperation may yet extend in the other direction, with Iranian media reporting in March a potential deal for Tehran to receive Russian Sukhoi Su-35 fighter jets. Iran will also have gained useful information about the performance of its Shahed 131, Shahed 136 and Mohajer-6 drones in the war.
Lingering Gulf concerns
Such developments will likely concern other Gulf governments, even if regional tensions have eased somewhat due to the rapprochement between Saudi Arabia and Iran, announced via a China-brokered agreement in March.
That fits into a broader regional trend for de-escalation and diplomatic advances. Recent talks between Saudi officials and Yemen’s Houthi rebels in Sanaa could yet pave the way to resolving that conflict – further discussions between the two sides are due to take place in May, possibly in Muscat.
The levels of violence in Libya and Syria have also been on a downward trajectory over the past year, but both remain susceptible to further outbreaks of fighting, as does Iraq.
Elsewhere, though, relations between Algeria and Morocco remain problematic, and the prospects of any peace deal between the Israelis and Palestinians look as distant as ever with the hardline government of Israel’s Prime Minister Benjamin Netanyahu in office.
Any reduction in regional tensions will be a welcome development given the high burden of defence spending on local economies. As IISS points out, many Mena countries’ defence budgets are very large relative to the size of their economies.
As has long been the case, Oman spends more as a proportion of its GDP than any other country in the region, with its 2022 outlay equivalent to 5.9 per cent of GDP, according to IISS calculations.
It is followed by Kuwait at 5 per cent and Saudi Arabia at 4.5 per cent.
The average for the region is 3.8 per cent of GDP, more than double the global average of 1.7 per cent. The overall trend for rising budgets means that the economic burden is unlikely to fall away any time soon.
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The UAE’s Emaar Properties and Dar Al-Arkan and Qatar’s Ezdan Holding have also all seen slides of more than 15%. Kuwait’s Mabanee, which rose by 22%, is the one exception in the sector.
In Saudi Arabia’s mid-tier, Acwa Power shed 29% in value even as its revenue rose 18% and its net income 5.4%. Elm Company likewise shed 33%, Dr Sulaiman Al-Habib 19% and the Saudi Tadawul Group 21%.
Mouwasat Medical Services, MBC Group, Nahdi Medical and Saudi Logistics Services fell out of the list entirely on the same trajectory. Each had reported FY2025 earnings rises before the decline. What corrected was the valuation, not the operations.
Acwa Power’s trailing four-quarter average price-to-earnings ratio was 166x, and even after this year’s decline sits at 88x against the Saudi market average of 17.8x. Elm sits at 26x, Al-Habib at 33x, Saudi Tadawul Group at 42x – all rich by any comparable benchmark.
Many of these entries have fallen away from their peak valuations as the cooling of the gigaproject programme since early 2025 has undermined sentiment.
One example that sits on the same axis from the UAE side is Abu Dhabi National Energy Company (Taqa), which fell by 28% from $95.3bn to $69.0bn despite a 6% net income rise, even as capital expenditure also expanded by 50%.
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Regional repricing
Four trends underpin the list’s 7.2% recovery. The conflict has repriced specific cohorts sharply higher – logistics up 44%, mining and fertilisers up 43%, the Yanbu refiners returning, and Aramco recovering to $181bn – with gains contingent on the Strait of Hormuz remaining closed.
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Saudi mid-tier stocks have corrected largely on valuation rather than operations, despite many reporting earnings growth through 2025, as confidence in gigaproject-driven growth has weakened. Property has also softened in the region as conflict has reduced routine and religious tourism.
The 12-month outlook depends on whether Hormuz reopens, whether Saudi mid-tier valuations stabilise, and whether banking expansion holds under broader repricing.
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