MEED presentation

1. Middle East prospects
Opportunities for Scottish business
Middle East Seminar
Scottish Development international
Glasgow, 2 March 2016
Richard Thompson
Editorial Director, MEED
richard.thompson@meed.com

2. MEED

3. The Middle East opportunity
• Dynamic high-growth market
• Growth driven by visionary policy making
• Investment in infrastructure and industry
• Need to meet expectations of young population
• Home to the world’s most abundant oil and gas reserves
• Geocentric hub between Europe and emerging Asia, Africa
• Desire to harness innovation and technology

4. Three years of ‘ideal’ scenario
0
28
55
83
110
138
12
14
15
17
18
2002 2004 2006 2008 2010 2012 2014 2016F 2018F
GCC oil production (m b/d)
Oil price ($/barrel)
Peak?

5. Market changing fundamentally
• Biggest sustained fall in oil prices in history
• Economic focus is structural reform
• Political focus has shifted to security
• Shockwaves of 2011 Arab uprisings still resonating
• Civil wars in Libya, Syria and Yemen
• Rising sectarian tensions across region
• Lifting of nuclear sanctions on Iran

6. There is no Middle East
350m people in 22 countries, and many more cities
Broadly 4 groups:
• Wealthy oil-exporting Arab countries of the Gulf - GCC
• Oil importing states - Jordan, Egypt, Tunisia, Morocco, Lebanon, (Algeria*)
• Failing states - Libya, Syria, Yemen
• Emerging markets - Iran, Iraq

7. Markets by size…

8. …or by wealth

9. The new environment
Source: ft.com
• Oil prices set to stay low as global supply is outpacing demand growth
• Regional oil producers maintaining production to retain market share
• Prices will remain in the $20-50 a barrel range in 2016
• IMF Forecast for Brent average $50-70/barrel until 2020

10. Impact of low oil prices
• In January, IMF downgraded GDP growth forecast
2016: MENA = 3.6%, down 0.3%; KSA = 1.2%, down 1%
2017: MENA = 3.6%, down 0.5%; KSA = 1.9%, down 1%
• Mea oil exporters lost about $360bn in oil revenue in 2015
• GCC ran $700bn deficit in 2015, 13.2% GDP
• Saudi’s fiscal deficit 21.6%

11. 0.0
27.5
55.0
82.5
110.0
137.5
-6.0
-3.0
0.0
3.0
6.0
9.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
World Advanced economies MENA GCC Oil prices
Opec basket oil price ($/barrel)
GCC growth
Source: IMF; OPEC
Economic outlook

12. Strong financial buffers
• $2.1tn of reserves built up enabling deficit spending but unsustainable
• Financial buffers mitigated need for sudden adjustment in fiscal policy
• Reforms such as the removal of subsidies and new taxes needed
“Many countries have built up buffers, and have started to
consolidate their fiscal position but fiscal deficits, averaging
almost 13 per cent for Mena oil exporters, are likely to persist
for years. Sizeable, sustainable fiscal consolidation is needed.”
Masood Ahmed, Director, Middle East and Central Asia, IMF, 21 Oct 2015
• Fiscal and current account balances deteriorating sharply
• MENA oil exporters need $1tn in financing over next 5 years and will
exhaust buffers

13. Reserves of strength
0
100
200
300
400
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
GCC current account, 2002-13 ($ bn)
$2.1tn GCC current account surpluses since 2001

14. Tough decisions ahead
• Fall in revenues put pressure on governments to make savings.
• Policy options limited:
• Oil production already running close to full capacity (Saudi)
• Non-oil revenues through taxation unpalatable
• Spending cuts as the main option
• Regionally, primary focus on capital spending cut
• Public sector wages are protected
• Some governments looking at fuel subsidy cuts
• Slowdown in the rate of hiring in the public sector
• Direction has become clearer over past two months
• Budgets signal spending cuts and deficits
• Government restructuring and job cuts
• Reform programmes
• Focus on healthcare, education, energy

15. $3.26tn projects planned or
underway in the Gulf. $2.7tn in
GCC
Market shrunk 2.1% over past
year, GCC down 2.9%
Lowest mark of year, 20 Nov
Saudi fallen 13.8% to $1.0tn as
real estate schemes placed on
hold, still 38% of GCC total
UAE, Kuwait, Bahrain grown
Infrastructure, industry and
real estate are priorities
Iran up 12%, Iraq down 9.8%

16. GCC Project Pipeline
Source: MEED Projects
Saudi Arabia has biggest pipeline of
planned projects, with about $800bn
The UAE is second, with about $600bn of
planned projects
Qatar at $200bn of planned projects
Kuwait at about $175bn
Construction sector – buildings, property
and real estate – offers the biggest
segment of future projects, with a pipeline
of about $1tn
The pipeline of power and transport
projects in the GCC each shows about
$400bn-worth of schemes planned

17. • GCC contract awards will be down about 16 per cent in 2016 to just over $140bn.
• Worst affected will be Saudi Arabia
• UAE, Kuwait, Qatar and Oman will be marginally down on last year
• Iran and Egypt offer strong potential, but progress depend on the political situation

18. •The most wasteful region in the world
• Remove subsidies
• Diversify energy mix
• Renewables drive
• Investment in technology to drive efficiency
• Big Data
• IoT
• SMART
Energy policy reform

19. Finance
As liquidity in the region tightens and project clients look for new
sources of funding, opportunity for new models of project finance
Private finance for infrastructure through banks and bonds has risen
back up the agenda. About $42bn of project finance needed in MENA at
start of 2016
Many governments setting up PPP units (Kuwait, Egypt) or introducing
new PPP laws (UAE, Oman)
Contractors providing or facilitating equity for the projects they work
on.
International contractors are less likely to invest, but some are playing
an active role in facilitating funding with institutional support from their
home countries

20. Iran • 79 million people
• World’s biggest gas reserves
• Region’s second biggest economy (GDP =$404bn)
• Trade and investment opportunities
• Key sectors:
Energy Petrochemicals Mining Finance
Power Water Rail Ports
Technology Tourism Metals Manufacturing
But
• Impact on energy prices
• Tense geopolitical relations

21. Opportunity Iran
• Nuclear sanctions lifted on 17 January 2016
• Potential for rapid growth of 4% - 5.5% growth in 2016/17 driven by higher oil
production and lower trade and financial transaction costs
• But severe structural challenges -Lower oil prices, banking system faces high
non-performing assets that have led to high interest rates and stagnant credit
• Comprehensive reforms critical for macroeconomic stability and high growth
“Llifting of economic sanctions brings a unique opportunity…Prudent policies
have allowed the economy to return to positive growth last year and to reduce
inflation to around 15%. The authorities have also regained stability in the foreign
exchange market and advanced with subsidy reform.”
Martin Cerisola, IMF Iran mission leader, 6 Oct 2015
• Risks to the outlook are significant will depend crucially on the depth of reforms
• Uncertainties about the implementation of the nuclear agreement
could constrain foreign direct investment and capital inflows

22. Impact of sanctions on projects
Iran punches far below its weight in
the project market, reflecting
impact of sanctions
$244bn worth of projects planned
or underway in Iran
Sixth biggest market in Gulf, about
8% of $3.4tn of overall Gulf market
Grown at 3.5% over past 12 months
Peaked at about $330bn in Dec
2009

23. Priority projects
Increase in exports, unfrozen assets and an inflow of investment
will enable Iran to move on a large pipeline of strategic projects
$800bn of investment required
Oil & Gas: - Enhanced oil recovery projects and LNG export facilities
- Petroleum Ministry is preparing New Iranian Petroleum Contract
Petrochemicals: 2nd-largest pets industry with plans to be biggest methanol
producer
Mining: Increase steel, copper and alumium production by 2025
Power: Electricity demand to grow at 6.5% p.a. until 2020
Iran needs 25.6GW of new generating capacity over this period.
$70bn investment required
Infrastructure: Plans for thousands of kms of new railways, metro lines and
upgrading ports and airports.
Hospitality: Tehran faces a severe shortage of hotel rooms,
http://buy.meed.com/pr
oduct-p/opportunity-
iran-2015.htm

24. Risks
• Collapse in world oil prices due to intra-OPEC competition
• A collapse of the sanctions relief programme, either due to objections in the US
or by the failure of the Islamic Republic to adhere to the conditions of the deal.
This will immediately lead to the re-imposition of at least some of sanctions
• Supply bottlenecks particularly in Iran’s defective transport and logistics
infrastructure
• Poor financial management that could lead to asset bubbles, hyperinflation and
a new wave of currency depreciation
• A serious deterioration in regional stability involving Iraq, Syria, Afghanistan and
other countries that neighbour Iran

25. But beware
• The business environment can also be challenging and complex
• Investors will need to assessment as to how any of the recent developments in the
local Iranian legal and regulatory environment would affect their business in Iran
• Snap back risk: One of the major concessions by Iranian negotiators in Vienna
appeared to be the “snap back” clause on the removal of sanctions
• The snap back is a commercial risk that every company has to take [but] I think the
snap back after such a long discussion is not going to be a reality
• Legal complications with investing, risks of association with still-sanctioned entities,
and problems with implementing monetary transfers, initial foreign investment is
likely to be slow going
• Sanctions against key entities in Iran’s energy industry – such as affiliates
of the Iranian Republican Guard Corps (IRGC) – due to terrorism links “ could make
initial work in the Iranian energy sector challenging”.

26. Big themes for 2016
• Low oil prices continue
• GCC oil producers cut capital expenditure in 2016 budgets
• Priority projects included in budgets but non-critical projects cut
• Social infrastructure – Education, Healthcare, Housing
• Transport – Rail, airports
• Oil & gas – new production, downstream diversification
• Security
• Iran and Egypt
• Alternative funding and contract models – PPP, etc
• Liquidity, payment delays and cash flow

27. Summary
Our business landscape is changing fundamentally
• Oil prices will stay low
• Geopolitical and security tensions will remain high
• Governments will rein in spending
• Iran
But in this region, unpredictable change is to be expected
• Don’t lose sight of what is driving regional policy
• Many challenges but the opportunities are great
Strategic conclusion
• Stay focused and consistent
• Understand your customer’s needs
• Remain committed
• Be flexible

28. Appendix: Middle East policy drivers

29. 1. Population growth
• 350 million to 602 million by 2030
Significant challenges
• Youth bulge, more than 50% under 25,
67% under 30
• Need to create jobs and develop skills
• Meeting expectations of living
standards
• Closing wealth gap and maintaining
social cohesion
• Role of women

30. 2. Diversification
• Heart of regional policy for decades
• Dependence on oil is unsustainable
• Region driving new industries
• Manufacturing, tourism, finance,
logistics, ICT
• Private sector is key
• Entrepreneurs are key

31. 3. Energy demand
• Rising population and growing industrial base
increasing demand for energy
• 34% increase in generation capacity 2020
• 2.2 billion gallons a day of desalination capacity is
required by 2020
• Current supply cannot meet demand
• New sources needed – renewables, nuclear, EOR
• Energy efficiency – new approach

32. 4. Urbanisation
• The growth of cities – Dubai, Riyadh, Doha, Abu
Dhabi
• Congestion, pollution, leisure, jobs, community
• Cost of living, house prices, social issues
• New approach needed for social infrastructure,
transport, energy consumption
• Technology solutions – SMART cities & The Internet
of Things
• Dubai – the world’s smartest city

33. 5. Investment in
education
• Skill up local workforce to compete – academic and vocational
• Knowledge transfer a priority
• Support diversification, jobs, retain talent and self sufficiency
• Drive investment - $21.8bn projects in GCC
• Also education reform - maths, sciences, and critical thinking
• Dubai, Abu Dhabi and Qatar aim to be regional hubs for higher
education
• Saudi Arabia pushing technical training

34. 6. Localisation
• Major challenge for policy makers
• Youth bulge – 67% under 30
• 4 million jobs needed in KSA in 5 years
• Saudi unemployment - 12%
• Private sector has only 1 million
• Almost half unemployed have degree

35. $3.26tn projects planned or
underway in the Gulf. $2.7tn in
GCC
Market shrunk 2.1% over past year,
GCC down 2.9%
Lowest mark of year, 20 Nov
Saudi fallen 13.8% to $1.0tn as real
estate schemes placed on hold, still
38% of GCC total
UAE, Kuwait, Bahrain grown
Infrastructure, industry and real
estate are priorities
Iran up 12%, Iraq down 9.8%
7. Capital projectson

36. 8.Finding finance
• Major challenge for markets with high debt and
limited hydrocarbons – Dubai, Egypt, Jordan
• Regional banks highly liquid and prepared to lend
• Region looking for innovative financing solutions
 Sovereign bond issues
 Private finance models e.g. PPP
 Equity raising through IPOs
 Export credit agency support
 Contractor finance

37. 9. Structural reform
• State main driver of growth and jobs for decades
• Unsustainable -Expensive and inefficient
• Roll back the state and stimulate the private sector
• Reforms will be needed
• Open up for private sector – PPP
• Stimulate entrepreneurship
• Taxation – diversify state revenues

38. 10. Supporting enterprise
• 60% of UAE GDP in 2011 and 92% of companies
• Businessses relocating to Dubai as hub - Logistics, tourism
• Start ups rising - Most in retail, services and manufacturing
• Initiatives to increase access to capital and reduce costs
• Big family firms dominate and benefit from patronage
• SMEs differentiate on quality but drives up cost
• New regulations – proposed SME law and new companies law
• Red tape, licences and visas

39. For Meed Subscriptions please contact: Richard.Thompson@Meed.com