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

2

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


4

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

5

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

6

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

11

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


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

12

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

14

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


15

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)


16

Security situation can be characterized in terms of four major security concerns of investors


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

17

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


18

…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)


19

Across all four risk-reward dimensions, 10 countries were excluded on at least one basis…

Initial Screening of MECA Countries for 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

20

…and of the remaining countries, five stand out as most attractive:Qatar, UAE, Bahrain, Oman, and Kuwait

Risk-reward Profile for MECA Countries (*)



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


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


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

24

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


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)


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


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


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


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)


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%)


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


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



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


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.


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