Aamir A. Rehman | 1 The Gulf Region of the Middle East and its Relevance to Global Business June 23...

Aamir A. Rehman | 1

The Gulf Region of the Middle Eastand its Relevance to Global Business

June 23 2009

Aamir A. Rehman | 2

The “Middle East” is highly diverse

Atlantic Ocean Mediterranean Sea

N o r t h A f r i c a

L e v a n t

G u l f s t a t e s

Indian Ocean

Red Sea

Persian

Gulf

Note: Yemen, a Gulf state, is not a member of the GCC.

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GDP per capita varies greatly by “cluster”

GDP per capita ($’000)(PPP, 2006)

Source: IMF data, CIA World Factbook estimates (Iraq, West Bank, Gaza).

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The GCC’s “Opportunity Formula” drives its dynamism

Sustained prosperity and growth

Economic opportunity

=Attractive

demographic shifts

Ongoing regulatory

reform++ ++

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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

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GCC countries have high birth rates and high expected population growth

0%

20%

40%

60%

80%

100%

1 2 3 4 5

Expected population

growth, 2006 – 2050

Lifetime births per woman

United States

Bahrain

KuwaitSaudi Arabia

Oman

Qatar

UAE

Source: Population Reference Bureau

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Gulf “age pyramids” contrast starkly with the US

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GCC countries have growing workforces

50

55

60

65

70

75

80

85

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Qatar

Source: UN, medium variant

Population Aged 15-64 (%)

UAE

Kuwait

Bahrain

Oman

Saudi Arabia

Workforce boom

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Regulatory reform is creating opportunities

Country Freedom %

United States 82.0

Bahrain 68.4

Oman 63.9

Kuwait 63.7

GCC average[1] 62.7

Brazil 60.9

Qatar 60.7

UAE 60.4

Saudi Arabia 59.1

India 55.6

China 54.0

Russia 54.0

Source: Heritage Foundation, 2007

“Ease of doing business” ratings are favorable… “Ease of doing business” ratings are favorable…

Year of Joining WTO Country

1995

Bahrain

Kuwait

1996

Qatar

UAE

2000 Oman

2005 Saudi Arabia

… and all GCC members have joined the WTO… and all GCC members have joined the WTO

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Mineral wealth is the core source of prosperity…


… but high oil and gas income is stimulating economic activity across all sectors

High oil and gas income

High oil and gas income

International investment

International investment

International spending

International spending

Local investment

Local investment

Cap

ital

dep

loym

ent

Cap

ital

dep

loym

ent

Local government

spending

Local government

spending

Government surpluses

and private wealth

Local consumption

Local consumption

Increase GCC importance in global markets

Stimulate local economy and

promote additional

private sector investment

“Not all about oil”“Not all about oil”


Not all news is good: half of GCC states have double-digit unemployment

Unemployment rate, 2006

Source: CIA World Factbook, 2006

“Not everyone is rich”“Not everyone is rich”


Most GCC college students are women

Female first-year students in university-level

programs (% of total students)

Source: GCC government data

“Women matter”“Women matter”


Bilingual packaging is the norm in for consumer goods

“Gulf customer does not ‘hate us’”



McDonald’s customizes its message (and its menu)




Marketing strategies take “Four Degrees of Adaptation”

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

Non-customization

Non-customization

Adapting the message

Adapting the message

Adapting the portfolio

Adapting the portfolio

Custom product design

Custom product design

11 22 33 44


Half the GCC states are majority expatriate

Expatriate and local (National)

populationsas % of total,

2005

Source: GCC government data and CIA World Factbook, 2006

Local / National

Expatriate

Majority expatriate

“Not only Arab”“Not only Arab”


Prosperity without institutions: the “back-fill” imperative

GDP per capita

(illustrative)

Time Time

Oil boom

Oil boom

“Classic” development model GCC development experience

Sustained institutional development

GDP per capita

(illustrative)

Imperative to build institutions

Imperative to build institutions


Effectively engaging the Gulf market has its challenges

Economic

Market challengesMarket challenges

Regulatory

Social

Awareness

Execution challengesExecution challenges

Institutional Will

Resources

Engaging the Gulf brings challenges and rewardsEngaging the Gulf brings challenges and rewards


The “Engagement Spectrum”: Market entry strategies range widely

Simple distribution agreementsSimple distribution agreements

Joint ventures and partnershipsJoint ventures and partnerships

Direct market entry:

Organic or acquisition-based

Direct market entry:

Organic or acquisition-based

“Shallow engagement”

“Moderate engagement”

“High engagement”

“Shallow engagement” has been the norm for leading MNCs


The current crisis is deeply impacting the “Opportunity Formula”

Sustained prosperity and growth

Economic opportunity

=Attractive

demographic shifts

Ongoing regulatory

reform++ ++

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

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

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

Opening of markets increasingly recognized as needed

Protectionist pressures already, however, gaining strength

Key test cases: Kuwait Bourse and KSA Economic City


Gulf decision makers have severe constraints regarding economic policy

Monetary policy

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

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

Fiscal 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

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

Key driver is the US Federal Reserve

Key driver is the US Federal Reserve

Key driver is the global energy market

Key driver is the global energy market


For Gulf decision makers, the imperative is on the “real”

Institutional development and the “back-fill imperative”11

Equity-based financial systems and investments22

Domestic investment to stimulate the “real economy”33

Budget rationalization and prioritization of initiatives44

Diversification of public revenue sources55

Crisis is an opportunity for decisive actionCrisis is an opportunity for decisive action


Aamir A. Rehman

www.rehmaninstitute.com

[email protected]

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Aamir A. Rehman | 1 The Gulf Region of the Middle East and its Relevance to Global Business June 23...

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