Eib B231 Meca Presentation V3.1
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Transcript of Eib B231 Meca Presentation V3.1
1
EIB-B231: International Business Strategy and Operations
Spring, 2009
Country Presentation
Investing in the Middle East and Central Asia (MECA)A Long-term Perspective
Andreas Albeck Jordan Fabyanske Fatma KayhanFrank D’Agnese Cecilia GuilfordAdam Caplan
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Adopting an equity investor’s perspective, our approach to country selection entails a four-stage filtering process
Four Key Work Steps for Equity Investment Opportunity Selection
Source: Project Team Analysis
Initial Screen for “Deal breakers”Initial Screen for “Deal breakers”
1Risk-Reward AssessmentRisk-Reward Assessment
2In-depth Country
AnalysisIn-depth Country
Analysis
3Opportunity
SelectionOpportunity
Selection
4
Increasing Depth of Analysis
Focus of Next Section
3
Initially, we assess country attractiveness along four dimensions of relative risk-reward
HumanCapital
BusinessEnvironment
2
3
Framework for Assessing Country Attractiveness
EconomicClimate
1
SecuritySituation
4
CountryAttractivenessfor Investment
Rew
ard
Ris
k
Key Dimensions
Source: Project Team Analysis
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In terms of economic climate, Kyrgyzstan, Tajikistan, and Iraq are least attractive in terms of volatility-adjusted growth
Note: (*) Refers to quarterly growth in economic output at the inflation rate, i.e., quarter-on-quarter real GDP growthSource: Project Team Analysis
1. Economic Climate
// ==
Economic Growth, Volatility, and Sharpe Ratio for MECA Countries(1998Q1-2009Q1)
Average Quarterly Risk-free GDP Growth (*)
– in % –Quarterly GDP Growth Volatility
– in % –Sharpe Ratio
– in ratio of reward to volatility –
0.09
0.09
0.23
0.34
0.59
0.60
0.63
0.76
0.86
0.95
0.97
0.98
0.99
1.01
1.04
1.23
1.23
1.36
1.57
1.72
2.67
3.02
3.10
3.37
Egypt
Jordan
Iran
Oman
UAE
Armenia
Qatar
Kazakhstan
KSA
Azerbaijan
Pakistan
Syria
Kuwait
Uzbekistan
Lebanon
Afghanistan
Kyrgyzstan
Israel
Turkmenistan
Turkey
Iraq
Tajikistan
Yemen
Bahrain
0.33%
0.40%
0.42%
0.47%
0.70%
0.74%
0.79%
0.82%
0.98%
0.99%
1.09%
1.16%
1.48%
1.51%
1.51%
1.63%
1.70%
2.20%
2.36%
2.65%
2.66%
3.41%
3.52%
6.60%
Oman
Yemen
Egypt
Bahrain
Jordan
Kazakhstan
Kyrgyzstan
Turkey
Tajikistan
Afghanistan
Turkmenistan
Azerbaijan
Iraq
Iran
Lebanon
KSA
Uzbekistan
Syria
Pakistan
UAE
Kuwait
Armenia
Israel
Qatar
0.19%
0.24%
0.60%
0.79%
0.82%
0.84%
0.91%
0.95%
1.04%
1.06%
1.10%
1.22%
1.25%
1.27%
1.41%
1.42%
1.50%
1.57%
1.68%
1.76%
1.86%
2.01%
2.01%
3.49%
Kyrgyzstan
Tajikistan
Lebanon
Turkey
KSA
Uzbekistan
Israel
Syria
Yemen
Pakistan
Oman
Egypt
Jordan
Iran
Kuwait
Bahrain
Iraq
UAE
Afghanistan
Kazakhstan
Armenia
Turkmenistan
Qatar
Azerbaijan
Excluded on the basis of low reward and high
volatility
Excluded on the basis of low reward and high
volatility
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Incorporating FDI growth considerations, Bahrain leads MECA countries in overall economic attractiveness
Note: (*) Indexes for each series calculated computing the difference between each value and the minimum of the series, then dividing by the rangeSource: World Development Indicators, World Bank; Project Team Analysis
+ =50%50%Weight 50%50% 100%100%
Calculation of Economic Attractiveness Index for MECA Countries (*)
0.34
0.79
0.80
0.82
0.83
0.83
0.84
0.85
0.85
0.85
0.86
0.86
0.87
0.87
0.88
0.89
0.91
0.92
0.92
0.92
0.96
0.98
1.00
Iraq
Azerbaijan
Qatar
Lebanon
Turkmenistan
Kazakhstan
0.00
Uzbekistan
Yemen
Afghanistan
Armenia
Israel
Pakistan
Iran
Syria
Bahrain
UAE
Tajikistan
Jordan
Egypt
Turkey
Oman
Kuwait
Kyrgyzstan
KSA
FDI CAGR Index (2002-2007)– in index –
0.04
0.08
0.15
0.16
0.17
0.21
0.24
0.26
0.27
0.27
0.28
0.28
0.29
0.35
0.35
0.39
0.45
0.50
0.79
0.89
0.92
1.00
Kyrgyzstan 0.00
Tajikistan 0.00
Iraq
Turkey
Turkmenistan
Israel
Afghanistan
Lebanon
Uzbekistan
Kuwait
Syria
Pakistan
Azerbaijan
KSA
Kazakhstan
Qatar
Armenia
UAE
Oman
Iran
Jordan
Egypt
Yemen
Bahrain
Sharpe Ratio Index (1998Q1-2009Q1)– in index –
0.02
0.31
0.45
0.48
0.50
0.50
0.50
0.50
0.51
0.53
0.56
0.56
0.57
0.57
0.60
0.61
0.63
0.64
0.68
0.69
0.85
0.88
0.91
0.93
Iraq
Azerbaijan
Tajikistan
Turkmenistan
Kyrgyzstan
Turkey
Lebanon
Israel
Afghanistan
Uzbekistan
Kazakhstan
Pakistan
Syria
Qatar
Armenia
Kuwait
UAE
KSA
Iran
Oman
Jordan
Yemen
Egypt
Bahrain
Economic Attractiveness Index– in index –
1. Economic Climate
Excluded on the basis of low inward FDI
growth
Excluded on the basis of low inward FDI
growth
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Turning to human capital, we assess attractiveness in terms of health, education, and non-oil labor productivity
Revised Framework for Human Capital Benchmarking
Note: (1) ALR = adult literacy rate; (2) CGER = combined primary, secondary, and tertiary gross enrollment ratioSource: UNDP, Human Development Report 2008
Health Education
Non-Oil LaborProductivity
HumanCapital
Attractiveness
Education Index
Human CapitalAttractiveness
Index=
+ +
Adult Literacy (ALI) and Gross Enrollment Index
(GEI)
HealthIndex
Life Expectancy (LE) Index
Non-Oil Labor
Productivity
GDP per employee
(GDPemp) Index
3
Key Indicators
Formulas2/3 ALI + 1/3 GEI
ALI = ALR(1) / 100
GEI = CGER(2) / 100
LE – 25
85 – 25
log(GDPemp) – log(100)
log(40000)– log(100)
2. Human Capital
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Combining indices, the top 10 MECA countries in terms of human capital are Israel, GCC countries, Lebanon, Turkey, and Jordan
Human Capital Attractiveness Index in MECA Countries vs. Others
Low██ 0.450–
0.499██ 0.400–
0.449██ 0.350–
0.399██ under
0.350██ not
available
Medium
██ 0.750–0.799██ 0.700–0.749██ 0.650–0.699██ 0.600–0.649██ 0.550–0.599██ 0.500–0.549
High██ 0.950 and
over██ 0.900-0.949██ 0.850-0.899██ 0.800-0.849
Bottom 25% excluded from short-list of
attractive countries for Investment
Source: Project Team Analysis
0.36
0.50
0.52
0.56
0.62
0.63
0.66
0.67
0.68
0.69
0.70
0.72
0.72
0.74
0.77
0.79
0.79
0.80
0.80
0.86
0.86
0.87
0.88
0.95
Afghanistan
Yemen
Pakistan
Iraq
Tajikistan
Kyrgyzstan
Turkmenistan
Azerbaijan
Uzbekistan
Syria
Egypt
Kazakhstan
Iran
Armenia
Jordan
Turkey
KSA
Oman
Lebanon
Kuwait
Qatar
Bahrain
UAE
Israel
2. Human Capital
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To assess the business environment, regulations affecting ten stages of the life of a business are measured
3. Business Environment
Source: World Bank “Doing Business Report 2009”
Starting a business Protecting investors
Procedures, time, cost and paid-in minimum capital to open a new business
Extent of disclosure index, extent of director liability index and ease of shareholder suits index
Dealing with construction permits Paying taxes
Procedures, time and cost to obtain construction permits, inspections and utility connections
Number of tax payments, time to prepare and file tax returns and to pay taxes, total taxes as a share of profit before all taxes borne
Employing workers Trading across borders
Difficulty of hiring index, rigidity of hours index, difficulty of firing index, firing cost
Documents, time and cost to export and import
Registering property Enforcing contracts
Procedures, time and cost to transfer commercial real estate
Procedures, time and cost to resolve a commercial dispute
Getting credit Closing a business
Strength of legal rights index, depth of credit information index
Recovery rate in bankruptcy
Key Elements of Business Environment Assessment
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Afghanistan
Tajikistan
Iraq Iran
Uzbekistan
Syria
Egypt
Jordan
Lebanon Yemen
Pakistan
Kazakhstan
Kyrgyzstan
Turkey
Oman
Kuwait
UAE
Armenia
Qatar
Azerbaijan
Israel
Bahrain
Saudi Arabia
Comparisons across various elements of the index reveal trends in regulatory policy throughout the region
Starting a business+
Registering property+
Getting credit+
Protecting investors+
Enforcing contracts
Dealing with construction permits + Paying taxes+ Trading across borders + Closing a business
Source: World Bank “Doing Business Report 2009,” Project team analysis
Comparison of regulatory policy across the MECA region (2009)
Easy
Hard
Hard Easy
3. Business Environment
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Combining all the elements, we find that countries with the most favorable business regulations are either in the Gulf or Caucasus
High >70th percentile
Medium >30th percentile
Low <30th percentile
91%
90%
83%
82%
80%
76%
75%
71%
69%
67%
62%
61%
57%
46%
45%
44%
37%
24%
24%
22%
16%
12%
10%
NA
Saudi Arabia
Bahrain
Israel
Azerbaijan
Qatar
Armenia
UAE
Kuw ait
Oman
Turkey
Kyrgyzstan
Kazakhstan
Pakistan
Yemen
Lebanon
Jordan
Egypt
Syria
Uzbekistan
Iran
Iraq
Tajikistan
Afghanistan
Turkmenistan
Source: World Bank “Doing Business Report 2009,” Project team analysis
Country Percentile (globally)
Ease of doing business in MECA countries (2009)
3. Business Environment
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Security situation can be characterized in terms of four major security concerns of investors
Source: Project Team Analysis
Major Security Concerns of Investors
4. Security Situation
NON-EXHAUSTIVE
NON-EXHAUSTIVE
Civil UnrestCivil Unrest
CrimeCrime
TerrorismTerrorism
External ThreatsExternal Threats
1
2
3
4
Security Concern Key Elements
Politically destabilizing incidents and movements, including mass demonstrations, riots, strikes
Conflict arising from underlying religious, ethnic, or socioeconomic divisions
Politically destabilizing incidents and movements, including mass demonstrations, riots, strikes
Conflict arising from underlying religious, ethnic, or socioeconomic divisions
Organized criminal activities including extortion and kidnapping
Prevalence of petty theft and burglaries
Violent criminal activities that may threaten investor assets or personnel
Organized criminal activities including extortion and kidnapping
Prevalence of petty theft and burglaries
Violent criminal activities that may threaten investor assets or personnel
Number and capability of domestic and international terrorist organizations
Stated aims and probable targets of terrorist groups
Degree of localization of terrorist threat
Number and capability of domestic and international terrorist organizations
Stated aims and probable targets of terrorist groups
Degree of localization of terrorist threat
Threat of physical incursion from neighboring countries
Degree of “permeability” of borders, allowing for cross-border attacks from non-state actors
Threat of physical incursion from neighboring countries
Degree of “permeability” of borders, allowing for cross-border attacks from non-state actors
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On the basis of these security concerns, Yemen, Iraq, Lebanon, Afghanistan, and Pakistan are the least attractive for investment…
Source: Global Insight; Project Team Analysis
Security Situation Across MECA Countries by Concern (2009)
Civil UnrestCivil Unrest CrimeCrime TerrorismTerrorism External ThreatsExternal Threats
1 2 3 4
Oman
Qatar
UAE
Egypt
Jordan
Kuwait
Bahrain
Kazakhstan
KSA
Turkmenistan
Syria
Uzbekistan
Armenia
Azerbaijan
Iran
Kyrgyzstan
Turkey
Israel
Tajikistan
Yemen
Iraq
Lebanon
Afghanistan
Pakistan
Country
Concern
In c re as in g Ri sk
Bottom 20% excluded from
short-list of attractive
countries for Investment
Low Risk High Risk
4. Security Situation
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…and Oman, Qatar, and UAE are most secure overall
Source: Global Insight; Project Team Analysis
Extreme
MediumLow High
11.251.51.75
22.252.52.75
33.253.53.75
44.254.54.75
Security Risk Index in MECA Countries vs. Others (2009)
4. Security Situation
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Across all four risk-reward dimensions, 10 countries were excluded on at least one basis…
Initial Screening of MECA Countries for Attractiveness
Source: Project Team Analysis
Economic Attractiveness
Economic Attractiveness
HumanCapitalHumanCapital
BusinessEnvironment
BusinessEnvironment
SecuritySituationSecuritySituation
1 2 3 4
Country
Dimension
Afghanistan
Iraq
Kyrgyzstan
Lebanon
Syria
Uzbekistan
Tajikistan
Pakistan
All Other Countries
Basis for exclusionAcceptable for Investment
Yemen
Iran
Summary
Azerbaijan
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…and of the remaining countries, five stand out as most attractive:Qatar, UAE, Bahrain, Oman, and Kuwait
Risk-reward Profile for MECA Countries (*)
Economic Attractiveness
Economic Attractiveness
Human CapitalAttractivenessHuman CapitalAttractiveness
BusinessEnvironment
BusinessEnvironment
SecuritySituationSecuritySituation
High
High RiskLow
Low
Note: (*) Data expressed in terms relative to other MECA countriesSource: Project Team Analysis
Tajikistan
Syria
Qatar
Pakistan
Oman
Lebanon
Kyrgyzstan
Kuwait
KSA
Kazakhstan
Jordan
Israel
Iraq
Iran
Egypt
Bahrain
Azerbaijan
Armenia
Yemen
Uzbekistan
UAE
Turkmenistan
Turkey
Afghanistan
Candidate forselection
Excluded afterinitial filter
1
2
3 4
Five countries selected on the basis of low risk and high
reward
Five countries selected on the basis of low risk and high
reward
Summary
Rew
ard
21
Having identified a short-list of countries, we now proceed with a more in-depth analysis
Four Key Work Steps for Equity Investment Opportunity Selection
Source: Project Team Analysis
Initial Screen for “Deal breakers”Initial Screen for “Deal breakers”
1Risk-Reward AssessmentRisk-Reward Assessment
2In-depth Country
AnalysisIn-depth Country
Analysis
3Opportunity
SelectionOpportunity
Selection
4
Increasing Depth of Analysis
Focus of Next Section
22
We compare short-listed countries using historical, demographic, political, macroeconomic, and enterprise perspectives
Five Perspective Framework for Short-listed Country Analysis
Oman UAEQatarBahrain Kuwait
1 2 3 4 5
Historical
Demographic
Political
Macroeconomic
Enterprise
Short-listed Countries
A
B
C
D
E
Source: Project Team Analysis
Key Elementsper
Perspective
Economic growth drivers, oil and gas history, key political events, etc.
Fertility, mortality, age, nationality, migration, future prospects
Form of government, major parties or factions, current political issues, future prospects
Inflation, interest and exchange rates, growth potential per sector, trade balance, current account balance, government debt, future prospects
Financial markets, stock exchanges and market capitalization, nature of key listed and unlisted companies, future prospects
23
The history of the GCC is fundamentally a story of oil and gas
Central Role of Oil and Gas in GCC Countries’ History (1930-2009)
Note: (*) For example, Iraq’s 1990 invasion of KuwaitSource: Project Team Analysis
1. Historical Perspective
Oil and GasOil and Gas
Discovery in 1930s/40s by Western states,
now extracting
Discovery in 1930s/40s by Western states,
now extracting
Internal politicalstability, no taxesInternal political
stability, no taxes
External threats(*), but security guarantees from Western clients
External threats(*), but security guarantees from Western clients
Reinvestment in economic development
Reinvestment in economic development
Exposure to volatile oil prices
Exposure to volatile oil prices
Gulf states control access, production,
and prices
Gulf states control access, production,
and prices
High standards of living
High standards of living
Sovereign wealth funds
Sovereign wealth funds
Wealth (In)stability
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Today, GCC countries stand at a crossroads, facing several key uncertainties that affect investment
Scenarios and Uncertainties Faced by Short-listed Countries(2009-2025F)
Source: World Economic Forum; Project Team Analysis
Alternative Future Scenarios for GCC
Reg
ion
al S
tab
ility
Reg
ion
al In
stab
ility
Ineffective Reform Effective Reform
CurrentSituation
Key Uncertainties Affecting Investment
Demographic imbalances and risks of social unrest stemming from history of using oil wealth
to import expatriate labor
Demographic imbalances and risks of social unrest stemming from history of using oil wealth
to import expatriate labor
Political instability potentially stemming from leadership succession, with high concentration
of oil wealth in few key tribes or families
Political instability potentially stemming from leadership succession, with high concentration
of oil wealth in few key tribes or families
Macroeconomic risks stemming from high economic concentration in oil and gas sector
and over-exposure to volatile oil prices
Macroeconomic risks stemming from high economic concentration in oil and gas sector
and over-exposure to volatile oil prices
Enterprise uncertainties surrounding current economic crisis and how GCC governments will
choose to reinvest oil wealth in development
Enterprise uncertainties surrounding current economic crisis and how GCC governments will
choose to reinvest oil wealth in development
1
2
3
4
1. Historical Perspective
25
In terms of demography, the GCC has experienced a population explosion entailing human capital challenges and opportunities
Population Trends in Short-listed Countries vs. Others
Total Population Across Short-listed Countries– in millions –(2002–2007)
Source: World Bank, World Development Indicators
Population Growth in Short-listed Countries vs. Others– in % CAGR –
(2002–2007)
UAE
Oman
Kuwait
Bahrain
Qatar
4.75%
2008
12.7
38%
20%
27%
6%
9%
2007
12.1
37%
21%
27%
6%
8%
2006
11.5
37%
22%
28%
6%
7%
2005
11.1
37%
23%
27%
7%
7%
2004
10.5
36%
24%
26%
7%7%
2003
10.0
36%
25%
26%
7%7%
2002
9.6
35%
25%
25%
7%7%
Total
CAGR
0.6
0.60.80.91.01.0
1.21.2
1.31.61.61.71.81.8
1.9
2.02.02.0
2.12.32.52.5
3.13.6
6.0
6.18.2
China
Tajikistan
KazakhstanAzerbaijan
USA
Oman
Turkey
Uzbekistan
Lebanon
IndiaTurkmenistan
Armenia
Iran
Bahrain
Israel
PakistanIraq
Egypt
Kyrgyzstan
Jordan
KSA
Syria
YemenAfghanistan
UAE
Kuwait
Qatar
Growth mainly driven by immigration
Growth mainly driven by immigration
2. Demographic Perspective
Short-listed GCC
Other MECA
Other non-MECA
26
Large expatriate populations entail risks of social unrest, but also greater labor market flexibility and lower unemployment
Source: Human Development Report, United Nations; Project Team Analysis
78%
41%
24%
62%
71%
Oman
Bahrain
Kuwait
UAE
Qatar
Total Population– in mm –
0.8
3.4
0.7
2.7
4.8
Expatriate Population Imbalances and Implications in Short-listed Countries (2008)
Total Foreign-born Population per Short-listed Country– in % of total population –
Large percentage of foreign born population (mostly male) poses a risk of social unrest and a threat to political stability
On the other hand, countries benefit from greater labor market flexibility, and increases in unemployment rate are tempered by emigration
Key Implications:Challenges and Opportunities
2. Demographic Perspective
27
Observing such imbalances, GCC governments have instituted labor nationalization policies to promote locals in the workplace
Source: Press Releases, Government Websites, Project Team Analysis
OmanThe Omanization policy sets quotas of 15% - 60% Omani employment in six sectors. Companies that reach mandated goals are given a "green card", which brings them press attention and preferential treatment in their dealings with the government.
OmanThe Omanization policy sets quotas of 15% - 60% Omani employment in six sectors. Companies that reach mandated goals are given a "green card", which brings them press attention and preferential treatment in their dealings with the government.
QatarThe “Strategic Qatarization Plan” was initiated with the goal of achieving a 50% national workforce in the Energy and Industrial sectors.
QatarThe “Strategic Qatarization Plan” was initiated with the goal of achieving a 50% national workforce in the Energy and Industrial sectors.
UAEEmiratization has focused on private sector job functions such as Public Affairs and Human Resources, but compliance is low.
UAEEmiratization has focused on private sector job functions such as Public Affairs and Human Resources, but compliance is low.
KuwaitKuwaitization is the official policy, though there are no defined quotas. Many companies view employment of nationals as a CSR initiative.
KuwaitKuwaitization is the official policy, though there are no defined quotas. Many companies view employment of nationals as a CSR initiative.
BahrainRecent introduction of a BD10 ($27) monthly labor fee for each expatriate employee has resulted in vehement protests from employers.
BahrainRecent introduction of a BD10 ($27) monthly labor fee for each expatriate employee has resulted in vehement protests from employers.
Key Labor Policies in Short-listed Countries(2009)
2. Demographic Perspective
28
GCC countries are all authoritarian regimes with little or no enfranchised political opposition
Source: CIA World Factbook; EIU Country Reports
Bahrain Kuwait Oman Qatar UAE
Form of government
Constitutional monarchy Constitutional emirate Monarchy Constitutional emirate Federation with specified powers divided between emirates and federal government
Head of stateKing Hamad bin Isa al-Khalifa
Emir Sabah al-Ahmad al-Jabir al-Sabah
Sultan and Prime Minister Qaboos bin Said al-Said
Emir Hamad bin Khalifa al-Thani
President Khalifa bin Zayid Al-Nuhayyan
Legislature
bicameral legislature - Consultative Council (40 members appointed by the King) and the Chamber of Deputies (40 seats directly elected)
unicameral National Assembly or Majlis al-Umma (50 seats elected by popular vote)
bicameral Majlis Oman consists of Majlis al-Dawla (71 appointed seats) and Majlis al-Shura or lower chamber (84 elected seats)
unicameral Advisory Council or Majlis al-Shura (35 seats; members appointed)
unicameral Federal National Council (20 appointed and 20 elected members)
Political parties
Prohibited Prohibited; informal religious and secular groups allowed
Prohibited Prohibited Prohibited
Political pressure groups
Shia activists; Sunni Islamist legislators
Islamists; merchants; secular liberals; Shia activists; tribal groups
None None None
Legal system
based on Islamic law and English common law
civil law system with Islamic law significant in personal matters
based on English common law and Islamic law
based on Islamic and civil law codes; discretionary system of law controlled by the Emir
based on a dual system of Sharia and civil courts
Overview of Political and Legal Systems in Short-listed Countries (2009)
3. Political Perspective
29
As such, political instability in GCC countries is relatively low, especially in Oman
Political Instability Index Score
CountryGlobal Rank of Instability
Underlying Vulnerability
Economic Distress 2008 2007
Bahrain 99 5.0 6.0 5.5 4.5
Kuwait 99 5.0 6.0 5.5 3.5
Oman 149 3.8 4.0 3.9 2.9
Qatar 142 4.2 4.0 4.1 4.1
UAE 142 4.2 4.0 4.1 2.1
Inequality History of political instabilityState history Proclivity to labor unrestCorruption Level of social provisionEthnic fragmentation Neighboring countriesTrust in institutions Regime type
Status of minorities Regime type and factionalism
Forecasted growth in incomesUnemployment rateLevel of income per head
Source: EIU Political Instability Index; ranking of 165 countries; Indexes scaled from 0.0 – 10.0 with higher values indicating greater risk
Key Elements of Political Instability for Short-listed Countries(2009E)
Lowest Political Instability
Lowest Political Instability
3. Political Perspective
30
Looking forward, GCC countries have moderate risk of political instability, and Oman has the best prospects in the near term
Very high
High
Moderate
Low
Kuwait- Dissolution of National Assembly reflects political rift between reformist government and socially conservative legislature- Al-Sabah family succession issues
Kuwait- Dissolution of National Assembly reflects political rift between reformist government and socially conservative legislature- Al-Sabah family succession issues
Bahrain- Tensions rising over economic inequalities, slow political liberalization and arrest of Shi’a opposition activists - Main foreign policy concern is Iran’s nuclear program and its respect for Bahrain’s sovereignty
Bahrain- Tensions rising over economic inequalities, slow political liberalization and arrest of Shi’a opposition activists - Main foreign policy concern is Iran’s nuclear program and its respect for Bahrain’s sovereignty
Qatar- Little pressure for political liberalization due to high per capita wealth levels- High profile foreign policy projects image as impartial interlocutor
Qatar- Little pressure for political liberalization due to high per capita wealth levels- High profile foreign policy projects image as impartial interlocutor
Oman- Political structure will remain stable under rule of the Sultan. - Greatest risk is due to uncertainty over succession
Oman- Political structure will remain stable under rule of the Sultan. - Greatest risk is due to uncertainty over succession
Source: EIU Political Instability Index; Country Reports
UAE- Relatively liberal social and economic policies although little impetus exists for substantive electoral reforms - Foreign policy is defined largely by strategic alliance with Western powers
UAE- Relatively liberal social and economic policies although little impetus exists for substantive electoral reforms - Foreign policy is defined largely by strategic alliance with Western powers
Political Instability Outlook(2009-2010F)
Best Political Prospects
3. Political Perspective
31
The oil and gas sector is the driving force behind the selected GCC economies, dominating exports and comprising much of GDP
Note: (*) Oil/Gas vs. Non-Oil/Gas distribution based on 2005 WDI data; (**) Based on 2005 and 2006 ratios to total goods exports and GDPSource: CIA World Factbook; World Development Indicators, World Bank; Global Insight; IMF; country Central Banks; Project Team Analysis
4. Macroeconomic Perspective
Oil/Gas Non-Oil/Gas
Dubai $52.3
Kuwait $149.1
5%
25% 75%
59% 41%
Oman $67.0
Qatar $85.4
41% 59%
60% 40%
Abu Dhabi
$26.7Bahrain
46%54%
95%
$111.4
90.1%
47.0%
81.6%
86.4%
86.7%
53.1%
40.7%
55.6%
46.7%
43.9%
UAE
Bahrain
Oman
Qatar
Kuwait
Significance of Oil and Gas Sector in Short-listed Country Economies
Oil/Gas vs. Non-Oil/Gas Share of GDP– in US$ bn at PPP –
(2008E (*) )
Oil/Gas Exports as Share of Total Exports and GDP– in % –
(2008E (**) )
Average = 41% Oil/Gas
as % GDP
as % Exports
32
Economic growth has varied with oil prices as government expenditure is sensitive to oil revenues…
Source: World Development Indicators, World Bank; country Central Bank websites; Project Team Analysis
Relationship Between Oil Price and Economic Growth in Short-listed Countries
Sensitivity of Total Output to Oil Prices in Previous Year– in % –
(1991-2005)
Correlation between Oil Price and GDP Growth– in % –
(1977-2005)
37.8%
3.1%
7.9%
14.4%
16.6%
Bahrain
Oman
Qatar
Kuwait
UAE
15%
2%
-14%
59%
41%
-33%
-8%
21%
8%
-7%
-12%
-3%
30%
-40%
-20%
0%
20%
40%
60%
-8%
-4%
0%
4%
8%
12%
2005
33%
200320011999199719951993
-16%
1991
Change in Oil PriceChange in Real GDP
Cha
nge
in R
eal G
DP
for
All
Sho
rt-li
sted
Cou
ntrie
s
Y-o-Y
Change in O
il Price in P
revious Year
Sensitivity of output to oil prices is due to changes in government expenditure following changes
in oil revenues
Sensitivity of output to oil prices is due to changes in government expenditure following changes
in oil revenues
4. Macroeconomic Perspective
GDP in GCC Countries more than doubled since
2002
GDP in GCC Countries more than doubled since
2002
33
…and while capital inflows from oil and gas exports have driven inflation, interest rates are increasingly attractive to foreign investors
Note: (*) Exchange rates in all short-listed countries are pegged to the US dollar, which is currently appreciating against most currenciesSource: U.S. Energy Information Agency; Global Insight; World Development Indicators, World Bank; Project Team Analysis
Impact of Oil Price on Inflation and Interest Rate in Short-listed Countries (*)
93
137
56
6862
5654
35323028
28
55
$0
$25
$50
$75
$100
$125
$150
0%
3%
6%
9%
12%
15%
18%
2009
35
99
2008
94
7670
65
20072006
56
48
2005
41
2004
262625
2003
Y-o-Y CPI Inflation vs. Quarterly Oil Price (Q1 2003 – Q1 2009E)
Short-term Interest Rate vs. Quarterly Oil Price (Q1 2001 – Q1 2007)
Oil Price
UAE
Oman
Qatar
Kuwait
Bahrain 68
62
5654
262522
56
48
24
1920
$0
$15
$30
$45
$60
$75
-3%
0%
3%
6%
9%
12%
2007
5556
20062005
35
41
3230
2004
2826
2003
282825
2002
2423
2001
Y-o
-Y C
PI I
nfla
tion
(in %
)
Sho
rt-t
erm
Inte
rest
Rat
e (in
%)
Beg. of Q
uarter Oil P
rice (in US
$ per bbl)
Beg. of Q
uarter Oil P
rice (in US
$ per bbl)
4. Macroeconomic Perspective
34
In financial markets, Dubai was hit hardest by the economic crisis, while Oman and others have been more resilient
Size and Performance of Selected Financial Markets
Note: (1) Data from October 2008Source: Gulfbase.com; individual country stock exchange websites
Change in Selected Stock Exchange Indices– in % change since 01 Jan 07 –
(01 Jan 07 – 01 Apr 09)
Oman 13,235
Bahrain 17,898
Dubai 34,130
Qatar 58,076
Abu Dhabi 62,048
Kuwait 89,427
New York (1) 10,100,000
Total Market Capitalization per Stock Exchange– in US$ mm –
(01 Apr 09) Total Listed Firms
2,773
133
49
65
43
66
218
S&P 500
5. Enterprise Perspective
Oman
Bahrain
Dubai
Abu Dhabi
Qatar
Kuwait
35
Today, the largest and fastest growing listed firms are majority state-owned telecom companies, banks, and real estate firms
Key Firms Listed on Short-listed Country Stock Exchanges
Note: (1) Refers to market capitalization in current US$ mm; (2) refers to top % gainers in stock performance on 01 April 2009Source: Zawya
Bahrain Kuwait Oman QatarAbu
Dhabi
Re
ce
nt
Ma
rke
t M
ov
ers
(2)
La
rge
st
Lis
ted
Fir
ms
(1)
Dubai
Mobile Telecom Co.($10,417 mm)
National Bank of K.($10,415 mm)
Kuwait Finance House($9,342 mm)
Gulf Bank($5,382 mm)
K. National Cinema(+11.63%)
Al Dar Real Estate(+10.00%)
Int’l Resorts Co.(+9.80%)
MENA Holding(+9.62%)
Mashreq Bank($6,282 mm)
National Bank of Dubai($4,388 mm)
Emaar Properties($3,652 mm)
Dubai Islamic Bank($2,542 mm)
Ekttitab Holding(+14.93%)
DSI Power(+6.25%)
Ajman Islamic Bank(+2.97%)
National Bank of Dubai(+2.57%)
SNAPSHOTSNAPSHOT
Bahrain Telecom Co.($2,063 mm)
Ahli United Bank($1,987 mm)
Arab Banking Corp.($1,840 mm)
Albaraka Banking Grp.($1,488 mm)
Innovative Investments(+2.78%)
Gulf Finance House(+2.78%)
Bahrain Islamic Bank(+1.43%)
AD Telecom Corp.($20,546 mm)
National Bank of AD($5,399 mm)
AD Nat’l Energy Co.($3,373 mm)
First Gulf Bank($3,316 mm)
ASMAK Fishing Co.(+9.64%)
Abu Dhabi Aviation(+8.45%)
ALDAR Properties(+8.00%)
RAKBANK(+6.71%)
Oman Telecom Co.($2,248 mm)
BankMuscat($1,572 mm)
Nat’l Bank of Oman($767 mm)
Bank Dhofar($692 mm)
Al Shams(+9.17%)
Oman Cables Industry(+8.80%)
Voltamp Group(+7.88%)
Jazeera Steel(+7.18%)
Industries Qatar($12,101 mm)
Qatar Nat’l Bank($7,841 mm)
Qatar Telecom($3,819 mm)
Qatar Islamic Bank($3,356 mm)
Q. Tech Inspection Co.(+9.68%)
Family Food Center(+7.25%)
Doha Insurance Co.(+4.22%)
Diala Holding(+2.94%)
United Finance Co.(+8.82%)
5. Enterprise Perspective
36
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5
31.8%
18.9%
13.2%
11.3%
17.6%
20.1%
17.3%
13.9%15.6%
17.2%
15.2%
2.9%
14.5%
23.1% 15.7%
10.5%
26.1%
8.8%
4.5%
24.1%
7.3%
19.2%
7.1%
25.5%
9.0%
13.0%
20.5%
Looking across individual firms, we found that investments in telecom are delivering the highest returns on equity…
Average Return on Equity of Listed Firms by Sector and Stock Exchange (*)
– in % –(April 2009)
Note: (*) Based on sample of top listed firms per economic sector and country stock exchange; (**) excludes companies in Manufacturing, which mostly operate in FTZs, as well as ‘Other Services’, such as healthcare, which are largely unlisted across selected stock exchanges
Source: Gulfbase.com; Country stock exchange websites; Project Team Analysis
Bahrain Kuwait Oman QatarAbu
DhabiDubai
Oil and Gas
Electricity and Water
Real Estate, Building, and Construction
Trade, Restaurants, and Hotels
Transportation and Logistics
Finance and Insurance
Telecommunications
Unlisted Unlisted Unlisted Unlisted Unlisted Unlisted
Sector (**)
Country
Unlisted Unlisted Unlisted
Unlisted Unlisted
Unlisted
Unlisted
Unlisted
See Abu Dhabi
INDICATIVEINDICATIVE
5. Enterprise Perspective
37
…and telecom firms are mostly open for foreign direct investment, with caveats for UAE and Oman
Openness to Foreign Direct Investment (FDI) by Sector and Short-listed Country(2009)
Note: (*) Excludes manufacturing firms, which mostly operate in FTZs; (**) Max 25% foreign ownershipSource: U.S. Commercial Service; country investment promotion websites
Oil and Gas
Electricity and Water
Real Estate, Building, and Construction
Trade, Restaurants, and Hotels
Transportation and Logistics
Finance and Insurance
Telecommunications
Closed to FDIOpen to FDI
Caveats and Exceptions
70:30 rule outside FTZs
51:49 rule outside FTZs
(**)
Sector (*)
Country
5. Enterprise Perspective
Oman UAEQatarBahrain Kuwait
1 2 3 4 5
38
Historical
Demographic
Political
Macroeconomic
Enterprise
A
B
C
D
E
Integrating perspectives, it is apparent that Qatar’s telecom sector is most attractive for equity investment
Summary of Key Takeaways per Short-listed Country
Short-listed Countries
Source: Project Team Analysis
Key TakeawaysAcross
Perspectives
Highest GDP-per-capita in the world
Low political risk
Liberal investment climate
High % expats, but highest pop growth
Liberal non-gas labor policies
Telecom poised for rapid growth with dereg.
Finance sector closed for invest.
Summary
High % expats
Relatively liberal labor policy
Potential for social unrest in long-term
51:49 rule
Least exposed to oil shocks
Dubai most exposed to financial crisis
Lowest inflation
Attractive real estate market in Abu Dhabi
Sectarian tensions
Relatively liberal labor policy
No FDI restrictions
Most competitive telecom sector
Moderate risk of political instability
Most stable financial market
Best business environment
Least dependent on oil sector
Lowest % expats
Strict local labor employment policy
Lowest political instability
Historically high growth in telecom
But be wary of high interest rates
70:30 rule
Highest inflation
Highest political risks in the region
Most stable interest rates
Highly exposed to financial crisis
Only average ROEs among top Kuwaiti firms
Oil/gas sector closed for invest.
Oman UAEQatarBahrain Kuwait
1 2 3 4 5
39
The mobile telecom market has grown at a staggering rate as the five GCC countries have deregulated telecom for WTO ascension
Note: (*) Total worldwide mobile subscribers increased at a CAGR of just 23.3% (2002-2007); (**) Telecom liberalization commitment is a requirement for WTO accession which makes it imperative for GCC countries to commit to open their telecommunications sector
Source: World Development Indicators, World Bank; Global Investment House; Project Team Analysis
Total Mobile Phone Subscribers in Short-listed Countries– in millions –
(2002-2007)
UAE(25.6%)
Kuwait(17.7%)
Oman(40.1%)
Qatar(36.5%)
Bahrain(65.8%)
27.8%
15.25
50%
18%
16%
8%
2007
7%
2006
11.69
47%
22%
16%
8%8%
2005
9.61
47%
24%
14%
7%8%
2004
7.63
48%
26%
11%6%
9%
2003
5.81
51%
24%
10%6%
8%
2002
4.47
54%
27%10% 6%2%
CAGR
Country(CAGR)
Recent deregulation in GCC countries has resulted in some of the fastest market expansion
in the world (*)
Recent deregulation in GCC countries has resulted in some of the fastest market expansion
in the world (*)
Path to Telecom Market Liberalization (**) (2009)
Qatar BahrainOmanUAEKuwaitLow Competition High Competition
Recommendation
40
Telecom earnings growth is expected to outstrip all other sectors in 2009, and industry analysts encourage investment in all of the major companies
Note: (*) Refers to the leading, previously state-owned telecom company per short-listed country; (**) valuation implicitly reflects expectations of future cash flows; P/E ratio data retrieved 13, Apr, 2009, and low P/E values can be due to under-valuation
Source: Markaz Research, Feb 2009; Global Investment House, Fall 2008; Bloomberg; Project Team Analysis
Expected Profitability of the Telecom Sector and Legacy Companies (*)
Expected Earnings Growth per Selected GCC Sector– in % –
(2009-2010F)
-25%
-11%
-10%
-10%
-9%
-6%
-2%
10%
10%
10%
21%
Investment services
Real estate
Industrial conglomerates
Marine port services
Construction materials
Banks
Oil and gas refining
Utilities
Steel
Chemicals-commodity
Telecom
Estimated Under-valuation of Stock per Legacy Company– in est. % premium to market value –
(2009F (**) )
Qatar Telecom(Qtel)
Emirates Telecom(Etisalat)
Oman Telecom(OTEL)
77.16%
Bahrain Telecom(Batelco)
50.00%
Kuwait Telecom(Wataniya)
18.72%
38.71%
17.95%
BUY
BUY
BUY
BUY
BUY
P/E Ratio
5.28
7.39
7.46
10.21
9.39
Recommendation
41
QatarTelecom
Specifically, ‘Qtel’ offers the best short-term and long-term prospects, and experts confirm that Qatar telecom is low risk
Evidence of Highest Rewards and Lowest Risk forEquity Investment in Qatar Telecom (2009-2019F)
Source: Pantera Capital; EIU; Project Team Analysis
Recommendation
Telecom Risks per Short-listed Country– in risk score (1 to 100) per category –
(21 April 2009)
Evidence of Highest Rewards in Short-term and Long-term
(21 April 2009)
Short-term:
Highly profitable and among the highest EBITDA margins across region
Qtel seeking rapid international expansion, investing up to US$2 billion overseas in 2009
Long-term:
Capitalize on a fast-growing and young population with demand for high-tech services
Liberalization and consolidation is favoring emergence of significantly larger players
Domestic saturation driving expansion into the low penetration regional MENA markets
Kuwait
382
18%
13%
12%
14%
10%
10%
7%
11%
6%
UAE
328
15%
16%
13%
14%
13%
8%
12%
4%4%
Bahrain
306
17%
16%
23%
13%
10%
8%4%
2%7%
Oman
287
18%
16%
17%
12%
13%
7%4%
7%4%
Qatar
247
15%
17%
12%
12%
15%
7%8%
11%3%
Gov’t effectiveness risk
Legal & regulatory risk
Political stability risk
Labor market risk
Financial risk
Infrastructure risk
Macroeconomic risk
Tax policy risk
Foreign trade risk
LowestRisk
42
Invest in Qtel!
Andreas Albeck Jordan Fabyanske Fatma KayhanFrank D’AgneseAdam Caplan Cecilia Guilford