Lancaster University, 17 May 2011

GCC MACROECONOMIC PERFORMANCE, PROSPECTS, PROBLEMS AND POLICY PRIORITIES

DR. NAHED TAHER FOUNDER & CEO GULF ONE INVESTMENT BANK

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

AGENDA
Review of Global Macroeconomic Outlook

Economic Performance, Prospects and Problems in the GCC Region

Policy Priorities for addressing key risks & challenges facing the Gulf Region The Role of Gulf One Investment Bank in supporting economic growth in the Middle East Conclusion
(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c). 2

Global Macroeconomics

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

Global Economic Recovery Still in a Two-Speed Mode Between Developed & Emerging Economies
Real GDP Growth Rate (%) 10
Emerging and Developing Economies 8 6

4
2 Advanced Economies 0 -2 -4
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f
Source: IMF (WEO, April 2011), Gulf One Bank

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

A closer look at the two-speed recovery: BRICS would continue to be the main drivers of global growth ....
Real GDP Growth Rate in Selected Countries/Regions (%)
11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00 -4.00 -5.00 -6.00 -7.00 -8.00
Source: IMF (WEO, April 2011); Gulf One Bank

2009 2011f

2010 2012f

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

... and despite pockets of downside risks, global economic outlook remains encouraging
World Economic Outlook Growth Rates of Real GDP (%)
World output
Advanced economies United States Euro area Germany France Italy Spain Greece Japan United Kingdom Emerging and developing economies Brazil Russia China India Middle East
Source: IMF, WEO, April 2011

2009 -0.52
-3.36 -2.63 -4.08 -4.67 -2.55 -5.22 -3.72 -2.04 -6.28 -4.87 2.72 -0.64 -7.80 9.20 6.75 1.78

2010e 5.01
2.97 2.83 1.74 3.50 1.49 1.30 -0.15 -4.53 3.94 1.25 7.25 7.49 3.95 10.30 10.36 3.76

2011f 4.40
2.38 2.76 1.63 2.54 1.65 1.05 0.83 -3.04 1.40 1.66 6.54 4.46 4.83 9.59 8.24 4.06

2012f 4.51
2.58 2.87 1.77 2.09 1.78 1.30 1.61 1.08 2.07 2.33 6.48 4.13 4.51 9.52 7.82 4.22

2013f 4.54
2.50 2.72 1.83 1.88 2.00 1.36 1.77 2.11 1.69 2.49 6.54 4.12 4.34 9.47 8.16 4.33

2014f 4.63
2.47 2.73 1.85 1.77 2.07 1.38 1.93 2.13 1.51 2.49 6.66 4.16 4.24 9.52 8.14 4.90
6

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

Economic Outlook & Challenges in the GCC

Summary of Key Issues
Favourable oil price boosts production and growth; improves fiscal & external positions Fiscal space is allowing continued execution of infrastructure programmes Private sector activity has started to pick up after a brief lull

Economic growth gathers momentum

Inflation remains a key concern High unemployment, especially among youth, poses real challenge Low human capital endowment is bane to productivity growth Deepening & strengthening the financial sector is a real headache Risks & medium term Diversifying the economy away from hydrocarbon remains illusive
challenges

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

Favourable Economic Fundamentals in the GCC

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

RISING OIL PRICES TO IMPROVE ECONOMIC FUNDAMENTALS IN GCC COUNTRIES

World Oil Price (US$/Barrel)
140

130
120 110 100 90 80 70

The boom end 2007beginning 2008

The global financial crisis

Social political unrest in MENA & natural catastrophes

60
50 40 30

Ideal path

Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 Source: Thomson Reuters, and G1 Bank

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

GCC economies have recovered from the downturn of 2009 and economic growth outlook is promising
Real GDP Growth Rates in GCC Countries (%)
8 7 20 18 16 14

6
5 4 3 2 1 0 -1 -2 -3 -4 -5 -6
Source: IMF (WEO, April 2011); Gulf One Bank

12
10 8 GCC Bahrain Kuwait Oman Saudi Arabia UAE 6 4 2 2009 2010e 2011f 2012f 0 Qatar
10

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

All GCC countries would continue to enjoy favourable external account positions ....
45 40 35 30 25 20 15

Current Account Balances in GCC Countries (% of GDP)

10
5 0 -5 Bahrain 2009 2010 Kuwait 2011f Oman 2012f Qatar Saudi Arabia UAE
Source: IMF (WEO, April 2011); Gulf One Bank

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

11

... and despite recent extra-budgetary spending fiscal balances would remain healthy as rising oil prices exceed break-even levels used in the budgets
Fiscal Balances in GCC Countries (% of GDP)
30 2009 25 20 15 10 5 0 Bahrain -5 -10 Kuwait Oman Qatar Saudi Arabia UAE 2010 2011f 2012f

Source: IMF (WEO, April 2011); Gulf One Bank

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

12

Sovereign Ratings of GCC countries remain sound & stable.

Entity Domestic Rating Foreign Rating T&C Assessment

International:
Brazil China France Germany India Japan United Kingdom United States BBB+ A+ AAA AAA BBBAA AAA AAA AA A A AAA AA AABBBA+ AAA AAA BBBAA AAA AAA AA A A AAA AA AABBB+ A+ AAA AAA BBB+ AAA AAA A AA AA+ AAAA+ AA+ AAAA+ AA+
13

GCC:
Abu Dhabi Bahrain Ras Al Khaimah Kuwait Oman Qatar Saudi Arabia
Source: Standard and Poors

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

RISKS AND MEDIUM TERM CHALLENGES

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

14

Inflation poses a key risk to growth although prices are likely to be contained below pre-financial crisis levels
Inflation Rates in GCC Countries (%)
7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5
Source: IMF (WEO, April 2011); G1 Bank

Bahrain

Kuwait

Oman

Qatar

Saudi Arabia

UAE

2009

2010

2011f

2012f

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

15

But the regions inflation is underestimated as the high Inflationary Gap figures suggest

30
25 20 15 10 5 0 -5 %

Inflation & Inflation Gap in Saudi Arabia

-10

Source: Reuters; G1 Bank

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Inflation

Inflationary Gap
16

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

High youth unemployment is a real problem

Unemployment Rate in MENA Region

31 29 27

Saudi

Youth Unemployment (%)

25 23 21

MENA6*

19
17 15 13 11 9 7 5 4 5 6 7 8 9 10 11

SE Asia &Pac. Developed Economies World Sub-Saharan Africa

South Asia
East Asia

Total Unemployment (%)

*: Egypt, Jordan, Lebanon, Morocco, Syria and Tunisia
Source: IMF, ILO, Gulf One Bank

Unemployment of resources lead to a huge Output Gap (Potential GDP exceeds Actual GDP)
Saudi Arabia: Actual GDP versus Potential GDP
2400 2200 2000 1800 Billion riyals 1600 1400 1200 1000 800 600 400 200 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
18
Potential GDP Observed GDP Expon. (Potential GDP) Expon. (Observed GDP)

Sources: Thomson Reuters, Gulf One Bank

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

Low Public Sector Labour Productivity is a Real Concern

Saudi Arabia: Labour productivity in the private & public sectors
250 200 150

'000 Riyals

100
50 0

2004
Source: Reuters and Gulf One Bank

2005
Private Sector

2006

2007
Public Sector

2008
Linear ( Private Sector )
19

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

ENVIRONMENTAL CONCERNS

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

20

Another challenge to economic growth comes from rising CO2 Emissions

CO2 emissions from industrial processes in the GCC countries
16 14

Million metric tons

12 10 8 6 4 2 0

1992

1990

1991

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Bahrain
Source: World Resources Institute

Kuwait

Oman

Qatar

Saudi Arabia

United Arab Emirates

21

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

2007

Cost of Environmental Wastage in KSA has risen by more than three-fold since 1980 ...
Saudi Arabia: Environmental Emission Costs (1980-2009)
170 22

150
130 Billion Riyals 110 90 70 50

20
18 16 14 12 10 % of GDP

Source: Gulf One Bank

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Value of Environment Emissions (Billion Riyals) Environment Emission Cost (% GDP)

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

22

Biggest CO2 Emissions in KSA come from Electricity Generation!

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

23

FINANCING CHALLENGES

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

24

Global Infrastructure Financing Gap Is Huge

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

25

GCC INFRASTRUCTURE EQUITY FUNDS GROSSLY INADEQUATE

Total infrastructure required in GCC infrastructure by 2020 =

Equity required = 30% of total investment Current regional infrastructure equity funds = < 5% of total equity required

US$1,500 billion

US$450 billion

US$22 billion

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

...Despite Attractiveness of Infrastructure Asset Class

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

27

POLICY PRIORITIES

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

28

Policy priorities
Education and Market Development Labour market flexibility Jobs and Sustainable Growth Diversification And Competitiveness Managing International Financial linkages

(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c).

29

GULF ONE INVESTMENT BANK

A knowledge-based investment bank for financing infrastructure in the GCC and MENA Regions Mission: To mobilise local & global capital to execute infrastructure projects via innovative financial solutions Strategy:
a catalyst for unleashing the GCC's potential to achieve sustainable economic growth and social prosperity by building on regions resource strength and competitive advantage structuring and investing in infrastructure projects and energy-related mega-initiatives, by building of strategic partnerships and alliances with local and international investors and institutions in our core businesses Providing advisory and debt arranging services to infrastructure, PPP/BOT sector
(C) Copyrights 2010. Gulf One Investment Bank B.S.C. (c). 31

SECTOR FOCUS KEY FOR ECONOMIC GROWTH AND DEVELOPMENT

SAUDI ARABIA INCOME MULTIPLIER

Sector Crude oil Non-crude oil industries Transport and communication Water, gas and electricity Finance Construction Commerce and tourism
Source: Gulf One analysis from official data

Income multiplier (GDP / loans) 4.3 4.5 3.1 1.8 1.6 1.2

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

32

ONGOING INVESTMENTS
Fund / Deal
Moya Holding Company B.S.C. (c) Gulf One SME Opportunities Fund Gulf One Buchanan Industrial Technologies Fund I L.P. Montajat Veterinary Pharmaceuticals Co. Jao Investment Fund Z Aljazira SCC & SCCMENA
Source: Gulf One Bank

Sector

Market

Water sector SMEs Industrial Technologies Pharma Aviation Power Environment

MENA / India GCC Germany, Austria, Switzerland Saudi Arabia GCC Saudi Arabia GLOBAL & GCC

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

33

Our Projects

Jeddah Hajj Terminal: Islamic Deal of the Year 2007 Euromoney PF

Advisory: A 20-year BTO concession for the Hajj Terminal at King Abdulaziz International Airport, Jeddah

Source: Gulf One Bank

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

34

Our Projects
Moya Holding Company
Investment: A PE Company in partnership with the Bushnak Group investing in water projects (desalination, wastewater treatment, distribution etc.) principally in the MENA region and the Indian Subcontinent

Source: Gulf One Bank

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

35

Our Projects JAO Investment Fund

Investment: A MENA focused private equity fund investing in attractive opportunities within the aviation sector

Jao Investment Fund

Source: Gulf One Bank

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

36

Our Projects
Gulf One Buchanan Industrial Technologies Fund: DACH Fund Investment: A private equity fund developed in partnership with BIT, investing in attractive companies in the industrial technologies sectors within the DACH Mittelstand a conduit for industrial technology transfer to the GCC

GULF ONE BUCHANAN INDUSTRIAL TECHNOLOGIES FUND I LP

Source: Gulf One Bank

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

37

Our Projects
Investment: An exclusive MENA joint venture operating company for the carbon abatement, Clean Development Mechanism and alternative energy business in the MENA region

SCC MENA

(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c).

38

CONCLUSION
Despite ongoing unrest in the Middle East, economic fundamentals in the GCC region are encouraging

But economic growth in the region will remain below potential unless appropriate policy measures are put in place to address key challenges high unemployment, inflation, imbalances in the education system, labour market rigidity, shallow financial markets, difficult business climate, environmental & diversification concerns
Policy priorities should focus on job creation and sustainable economic growth through sustained policy reforms that could tackle the risks and challenges and unleash growth potentials GULF ONEs strategic positioning to finance key infrastructure projects will help to support sustainable economic growth in the region
(C) Copyrights 2011. Gulf One Investment Bank B.S.C. (c). 39

Gulf One Investment Bank

Thank you

40