The Gulf Region of the Middle East and its Relevance to Global Business

1. June 23 2009 The Gulf Region of the Middle East and its Relevance to Global Business

2. The “Middle East” is highly diverse Atlantic Ocean L e v a n t Mediterranean Sea N o r t h A f r i c a Persian Gulf G u l f s t a t e s Red Sea Indian Ocean Note: Yemen, a Gulf state, is not a member of the GCC.

3. GDP per capita varies greatly by “cluster” GDP per capita ($’000) (PPP, 2006) Source: IMF data, CIA World Factbook estimates (Iraq, West Bank, Gaza).

4. The GCC’s “Opportunity Formula” drives its dynamism Attractive demographic shifts Sustained prosperity and growth Ongoing regulatory reform Economic opportunity = + +

5. GCC per capita income is three times China’s and five times India’s GDP per capita ($’000) (PPP, 2006) Source: EIU, CIA World Factbook, 2007

6. GCC countries have high birth rates and high expected population growth Source: Population Reference Bureau

7. Gulf “age pyramids” contrast starkly with the US

8. GCC countries have growing workforces Population Aged 15-64 (%) Qatar UAE Bahrain Kuwait Saudi Arabia Oman Workforce boom Source: UN, medium variant

9. Regulatory reform is creating opportunities … and all GCC members have joined the WTO “Ease of doing business” ratings are favorable… Source: Heritage Foundation, 2007

10. Mineral wealth is the core source of prosperity…

11. “Not all about oil” … but high oil and gas income is stimulating economic activity across all sectors International investment Increase GCC importance in global markets International spending Government surpluses and private wealth High oil and gas income Local investment Stimulate local economy and promote additional private sector investment Capital deployment Local government spending Local consumption

12. “Not everyone is rich” Not all news is good: half of GCC states have double-digit unemployment Unemployment rate, 2006 Source: CIA World Factbook, 2006

13. “Women matter” Most GCC college students are women Female first-year students in university-level programs (% of total students) Source: GCC government data

14. “Gulf customer does not ‘hate us’” Bilingual packaging is the norm in for consumer goods

15. “Gulf customer does not ‘hate us’” McDonald’s customizes its message (and its menu)

16. Marketing strategies take “Four Degrees of Adaptation” 3 1 2 4 Adapting the message Non-customization Adapting the portfolio Custom product design Fully leverage global branding and marketing Customize marketing messages and language Customize mix of product and services based on local needs Create market-specific products and services

17. “Not only Arab” Half the GCC states are majority expatriate Expatriate and local (National) populations as % of total, 2005 Local / National Expatriate Majority expatriate Source: GCC government data and CIA World Factbook, 2006

18. Prosperity without institutions: the “back-fill” imperative GCC development experience “Classic” development model GDP per capita (illustrative) GDP per capita (illustrative) Imperative to build institutions Sustained institutional development Oil boom Time Time

19. Effectively engaging the Gulf market has its challenges Market challenges Execution challenges Economic Awareness Regulatory Institutional Will Social Resources Engaging the Gulf brings challenges and rewards

20. The “Engagement Spectrum”: Market entry strategies range widely “High engagement” Direct market entry: Organic or acquisition-based Joint ventures and partnerships “Moderate engagement” Simple distribution agreements “Shallow engagement” “Shallow engagement” has been the norm for leading MNCs

21. The current crisis is deeply impacting the “Opportunity Formula” Attractive demographic shifts Sustained prosperity and growth Ongoing regulatory reform Economic opportunity = + + • Oil price is down over 50% from its 2008 peak • Equity markets down over 60% in 2008 • Budget surplusesare at serious risk, especially in KSA and Bahrain • Long-term trends remain in place, with remarkably young populations and increasing social capital • Demographic pressures felt more acutely as economies struggle • Opening of markets increasingly recognized as needed • Protectionist pressures already, however, gaining strength • Key test cases: Kuwait Bourse and KSA Economic City

22. Gulf decision makers have severe constraints regarding economic policy Fiscal policy Monetary policy • Government investment has a degree of flexibility, particularly in regards to large projects • State benefits are quite inelastic due to expectations and pressures • Income tax is absent, although fees and other mechanisms are used to generate supplementary income • Dollar peg remains firmly in place in all countries but Kuwait • Maintaining the peg is important for both economic and political reasons • Effect of peg is that the Gulf’s interest rates are effectively set by the US and driven by US domestic needs Key driver is the global energy market Key driver is the US Federal Reserve

23. For Gulf decision makers, the imperative is on the “real” Institutional development and the “back-fill imperative” 1 Equity-based financial systems and investments 2 Domestic investment to stimulate the “real economy” 3 Budget rationalization and prioritization of initiatives 4 Diversification of public revenue sources 5 Crisis is an opportunity for decisive action

24. Stay in touch! Aamir A. Rehman www.rehmaninstitute.com aamir.rehman@rehmaninstitute.com