Growth Markets Webcast Series by s Growth Markets Centre Middle East : Windows of Opportunity
Welcome & Introductions 2
Speakers Stephen Anderson Partner Consulting Martin Berlin Partner Deals Nadine Bassil Director Tax and Regulatory Picture to be added Nicolas Boukhalil Director Deals David Wijeratne Leader Growth Markets Centre 3
Agenda The Middle Overview of Eastern Middle Eastern economy in the markets global context 1 2 Opportunities and challenges in key growth sectors 3 The tax and regulatory environment in the Middle East 4 in the Middle East s Growth Markets Centre 5 6 4
The Middle Eastern economy in the global context 1. The Middle Eastern economy in the global context 5
The Middle Eastern economy in the global context The overall economic growth in the Middle East (ME) has been relatively stable, when compared globally Annual GDP growth of selected growth markets 2015E 2016F -3.7% -1.2% Russia 2.5%2.5% 2.6% 2.9% 7.5%7.5% 6.9% 6.7% Mexico -3.8%-4.0% Middle East 2.7% 0.8% India 4.8% 5.1% China Brazil Nigeria 1.3% 0.6% South Africa Indonesia Source: World Bank, BMI Research 6
Real GDP growth, 2016f The Middle Eastern economy in the global context Within the region, the GCC nations account for a combined GDP of US$ 1.4 Tn, of which Saudi Arabia and UAE contribute ~75% Comparison amongst GCC Nations (2015 16) 3.5 Bubble size represents GDP per Capita in USD, 2015 Qatar 3.0 4% 2.5 Large GCC economies with relatively high GDP growth Bahrain 2.0 2% United Arab Emirates 1.5 Oman Kuwait Saudi Arabia 1.0 0 0 50 100 150 200 250 300 350 400 450 500 550 600 650 700 Source: World Bank Nominal GDP in USD Bn, 2015 7
The Middle Eastern economy in the global context The business environment in many GCC nations has been improving, with UAE the highest ranked in ME Country Doing Business - Rank Doing Business DTF Score* Countries with a positive trend in scores (2015 vs. 2016) United Arab Emirates 26 76.89 Bahrain 63 68.44 GCC Countries Oman 66 67.73 Qatar 83 63.66 - Saudi Arabia 94 61.11 Kuwait 102 59.55 - Russian Federation 40 73.19 - South Africa 74 65.20 - BRICS Nations China 78 64.28 Brazil 123 56.53 - India 130 55.27 Source: Doing Business 2017 (World Bank) *The distance to frontier score helps assess the absolute level of regulatory performance over time. It measures the distance of each economy to the frontier, which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005 8 A green arrow indicates an improvement in the score between 2015 and 2016 (and therefore an improvement in the overall business environment as measured by Doing Business), while the absence of one indicates either no improvement or a deterioration in the score.
The Middle Eastern economy in the global context This is expected to have a positive impact on economic growth, creating opportunities for investment in future GDP Growth Forecast for GCC Countries 3.5% 4.0% 3.0% 2.0% 1.9% 1.6% 2.4% 1.9% 2.6% 2.3% 2.0% 2.4% Bahrain Kuwait Oman Qatar Saudi Arabia United Arab Emirates 2017F 2018F Source: World Bank Global Economic Prospects, June 2016 9
2. Overview of Middle Eastern markets
GDP 2015 (USD Bn) Population 2015 (Mn) Overview of Middle Eastern markets UAE & KSA combined account for only 15 % of the population across the middle eastern countries but are key drivers of growth 100 80 82 77 60 40 33 29 20 0 Egypt Iran Iraq Saudi Arabia 9 6 4 4 2 1 UAE Jordan Lebanon Oman Qatar Bahrain 800 748 600 400 200 0 272 Egypt 369 Iran 229 Iraq Saudi Arabia 402 203 34 44 80 33 UAE Jordan Lebanon Oman Qatar Bahrain 11
Overview of Middle Eastern markets Although there are many countries across the Middle East, UAE & KSA are key drivers of growth KSA UAE Population (Mn) 27.8 9.4 Iraq Iran GDP/ Capita ($) 25,962 42,550 Kuwait Bahrain Qatar Unemploy ment Rate (%) 11.6% 2.4% S&P Rating A+ AA KSA UAE Oman Internet Penetration Ease of doing business 63.7% 90.4% 82/189 22/189 Personal Income tax rate 0% 0% 12
Overview of Middle Eastern markets Large decline in oil prices along with a non diversified economy have had a double impact on KSA 160 140 120 Brent Crude Daily Price US$/bbl ~ 90 % of the population derives its income from the government Source of Income (KSA): Private Sector 1% Social Transfers 11% Public Sector 88% 100 80 60-74% -76% 40 20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 +76% 13
Overview of Middle Eastern markets Megatrends and the Middle East Once in a generation transformation Demographic shifts Shift in global economic power Resource scarcity Technological breakthroughs Urbanization MENA region pop. to double by 2100 ~40% of the population in KSA & 35 % in UAE is < 24 years of age High unemployment rate for youth needs to be addressed GCC sovereign wealth funds are among the world s largest investors Strategic location : 3 bn people within a 4 hr flight radius GCC relies on desalination for ~ 80 % of its water consumption Only 178 MW of installed capacity in the region Less than 1% of Germany s Amongst world s highest internet and mobile penetration rates Less than 5% of retail happens on-line GCC is one of the most urbanized regions in the world with 85% urbanization Expo 2020 & Qatar 2022 Expected to boost L&E, real estate & hospitality sector 14
Overview of Middle Eastern markets Vision 2030 Looks to address both the lower for longer environment and the opportunities and threats inherent in the Megatrends Megatrend Impacts KSA Vision 2030 NTP Population up 50% by 2050, 22% FLFP, 29% youth unemployment Health Positioned and in education the centre of deficiencies SAAAME access to New Silk Road $1tn of planned infrastructure, 30mn visitors to Mecca No oil and no water within 50yrs, 80%+ of food imported World s most active Twitter and social media usage Vibrant Society Saudi Arabia s status as heart of the Arab and Islamic worlds Thriving Economy Becoming a global investment powerhouse and a global hub connecting three continents Ambitious Nation Adopting leading standards in public life 1 2 3 Cost Reduction Privatization Non-Oil Revenue Private Sector Growth Digitization Fiscal Management Subsidy Reform 1 2 3 4 5 6 7 15
Opportunities and challenges in key growth sectors 3. Opportunities and challenges in key growth sectors 16
Opportunities and challenges in key growth sectors There are several sectors that are key engines of growth across the Middle East Government/ Public Services Real Estate Hospitality Leisure Sovereign Wealth Funds Energy, Utilities & Mining 17
Government/ Public Services Opportunities and challenges in key growth sectors Key focus areas that have emerged as focus areas for Middle Eastern Governments Citizen Engagement Innovation Revenue Enhancement & Economic Reform Digital Education Smart Cities and Government Local Capacity Building Cost Reduction & Budget Reform Public Safety & Cyber Security 18
Government/ Public Services Opportunities and challenges in key growth sectors Government Practice Sectors and Themes We continue to explore and build capacities in new areas while enhancing our existing sectors/themes taking in consideration current trends and need by ME Governments and public entities Cities & Local Government Current Sectors/Themes within G&PS Labor Market Public Safety, Security & Justice Education Strategy Institutional MEPSI Economic Development SPMOs Transformation New Sectors/Themes for FY17 Public Service Delivery Public Finance Social Affairs Foreign Affairs National Agendas Defence 19
Real Estate Opportunities and challenges in key growth sectors Emerging trends across ME real estate... Emergence of REITs REITs are underpenetrated across the Middle East and represent only 1% of UAE listed real estate market cap Affordable Housing Shortage of ~ 125,000 affordable housing units in KSA alone Targeted accommodation (Student/ staff accommodation) There are ~ 100,000 students in the UAE with very limited dedicated student housing Co-working Underpenetrated concept in the UAE but witnessing phenomenal growth internationally with members growing at ~2.8x y-o-y 20
UAE Finland Hong Kong Germany Spain Japan Malaysia Singapore Ireland UK Canada France Belgium US Australia Italy Mexico South Africa Netherlands Real Estate Opportunities and challenges in key growth sectors REITs are currently underpenetrated in the UAE and represent a significant market opportunity 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% REIT market cap as a % age of listed real estate market cap Non- REITs REITs 2,000 REIT market cap by market (US $ Bn) 1,650 1,500 550 1,000 740 500 300 1,100 0 440 2010 2016 Excluding US US Source: SNL Financial, Analysis 21
Riyadh Paris Dubai London Sydney Singapore Hong Kong New York Sydney Hong Kong London Singapore Riyadh Dubai Paris New York Sydney Riyadh London Hong Kong Singapore Dubai Paris New York Hospitality Opportunities and challenges in key growth sectors Hospitality Overview Dubai is one of the top performing hospitality destinations globally Global performance analysis 1 Occupancy (%) ADR (USD) RevPAR (USD) 2015 2015 89% 85% 85% 86% 82% 80% 77% 259 284 294 2015 260 64% 210 207 218 156 172 176 177 132 134 144 148 150 Source: Analysis, Knight Frank The Hub Report, Market Representatives (1) Based on 2015 data points 22
Hospitality Opportunities and challenges in key growth sectors Currently there are opportunities in the UAE for mid market hotels as well as alternate models (Airbnb) Hotel inventory international benchmark 10% 11% 12% 24% 34% 49% Upmarket Segment Average cost difference between hotel and Airbnb accommodations Hotels are cheaper by Barcelona Austin 139.4$ 126.2$ Airbnb is cheaper by San Diego 61.7 $ 90% 89% 88% 66% 51% 7 6% Mid-market Segment Nashville New Orleans San Francisco 22.9$ 9.6$ 3.5$ Los Angeles 5.1$ Los Angeles Ney York London Paris Dubai Hong Kong Sydney Berlin NYC Venice Airbnb currently provides an attractive value for money option and is proving quite popular with tourists 45.0$ 63.4$ 81.8$ 85.8$ Compared to international benchmarks, Dubai s mid market hotel segment seems undersupplied and would require an additional 15,000 rooms Paris Dubai London 104.4$ 106.1$ 108.3$ 23
Leisure Opportunities and challenges in key growth sectors Leisure - Dubai has already achieved a significant milestone... Overnight International Visitors in 2014 (In millions) Dubai international visitor: 2005-2015 2005 6.2 million 2010 8.4 million CAGR 2005-2015: 8.64% 18 17 16 13 12 12 11 2015 11 10 14.2 million 8 London Bangkok Paris Dubai New York Singapore Istanbul Kuala Lumpur Seoul Hong Kong 24
Leisure Opportunities and challenges in key growth sectors However several attractions in development are set to strengthen the UAE s offering and help achieve its Vision 2020 Attractions Examples Future trends Theme Parks Focus on immersive/interactive experiences Cultural Attractions Union Museum Dubai Al Hamra Heritage Village Revamping local heritage and culture Adventure Parks Meydan Ski Slope Dubai Safari Park Pearl of Dubai Al Qana Aquarium Emergence of indoor multi activity centers Family entertainment centres Play!Town by Meraas Movement towards edutainment focused FEC s 25
Sovereign Wealth Funds Opportunities and challenges in key growth sectors Sovereign Wealth Funds There is a large investment pool in the MENA region, investments allocated to asset managers is below 10% Wealth sources USD in trillions, 2016 AUM by Asset manager USD in billions, 2016 Institutions 0.5 0.5 Retail Mutual Funds 75 HNWI 1.5 2.0 Portofolios 225 Sovereign Wealth Funds (SWF) Source: Local stock exchange, CMA (KSA), Fund manager Website, Zawya, Analysis 26
Sovereign Wealth Funds Key investment trends of institutional investors Opportunities and challenges in key growth sectors 1 2 3 4 5 6 Move towards Alternative Portfolios Insourcing VS Outsourcing Partnerships/ Joint Ventures Co-investments Diversification through Foreign Investments Use of Investment Funds Social Responsible Investing Source: Market Research Centre, 2016 27
Energy, Utilities & Mining Opportunities and challenges in key growth sectors There are four key trends for MENA Oil & Gas Key trends 1 Fight for market share 2 3 Price, margin pressures across the supply chain Localization of supply chain and privatization of upstream / downstream value chain Oil price per barrel 120$ 100$ 80$ 60$ 40$ 20$ Fiscal budget breakeven 4 Expanded focus to an energy / renewable based industry 28
Energy, Utilities & Mining Opportunities and challenges in key growth sectors Alternative perspectives to future of oil Sector evolves along current lines with continued uncertainty Energy consumers drive transition to low carbon world Policies and geopolitical events trigger supply constraint Governments accelerate green demand 29
The tax and regulatory environment in the Middle East 4. The tax and regulatory environment in the Middle East 30
The tax and regulatory environment in the Middle East One region, many jurisdictions Perception There is no tax in the Middle East, is there? Kuwait Bahrain Qatar Saudi Arabia U.A.E. Saudi Arabia Oman Reality Number of very different tax systems. Taxation often depends on nationally and residence of ultimate shareholders, type of legal set-up, nature of business activities, and location within the relevant country. 31
The tax and regulatory environment in the Middle East Tax systems in the Middle East Non-taxing regimes (Bahrain/UAE) Industry specific regimes (Banking, Oil & Gas, Telecommunications) Discriminatory tax regimes (GCC/non-GCC) Multi tier tax regimes (Zakat and Income Tax) GCC Customs Union and VAT No personal income tax Free zones, tax holidays / incentives Deemed profit regimes, tax retention Local tax authorities. No established tax ruling practice BEPS 32
The tax and regulatory environment in the Middle East Fiscal reforms Countries in the Middle East are embracing fiscal reforms to diversify revenues and meet economic objectives Country Egypt Fiscal Reform Measures Various Income Tax Law changes Recent transition from sales tax to VAT GCC Introduction of VAT (2018-2019) Jordan Lebanon Kuwait Oman Saudi Arabia United Arab Emirates Fiscal Reform II Project Comprehensive program covering tax policies and administration, and budget reform Potential increase in VAT rate Ongoing structural reforms focusing on simplifying and automating tax compliance New Foreign Direct Investment Law Proposed introduction of corporate income tax on all companies Introducing VAT 2018/19 Studying fiscal reforms Introducing VAT per 1/1/2018 Transfer pricing regulations Branch / PE taxation Introducing VAT per 1/1/2018 Possible introduction of a Federal corporate income tax Introducing VAT per 1/1/2018 33
The tax and regulatory environment in the Middle East Introduction of VAT in the GCC A Common VAT framework The GCC Member States are in the process of agreeing a common framework for the introduction of a VAT system in the GCC On 16 June 2016 the GCC Finance Ministers approved a Treaty in principle. A formal announcement of the Treaty is expected in October 2016 VAT legislation Upon ratification of the GCC Treaty, each Member State is expected to issue its own national VAT legislation based on the agreed common principles This legislation will set out the applicability of VAT on various goods and services and the compliance requirements. It is expected that some countries will issue VAT legislation shortly after announcement of the treaty by the GCC VAT Regulations To bring into effect the VAT legislation, each Member State will also issue implementing regulations in accordance with their national legislative process These regulations will provide guidance to tax payers in each GCC Member State on the interpretation of the VAT legislation in that Member State. We anticipate that the regulations will be issued shortly after the VAT legislation is issued Go live The introduction of VAT across the GCC is expected to take effect from 1 January 2018 34
The tax and regulatory environment in the Middle East Middle East legal and regulatory landscape Legal Most legal systems are mixed legal systems: continental European law applied in civil and commercial matters and administrative law; and Islamic law applied to criminal matters, family law and inheritance/trusts and estates. Exceptions: Iran, Saudi Arabia and Oman. Lack of precedents & case law Regulatory Foreign ownership restrictions / Free Zones Local content rules Flexibility of business set-up Different regulators for same activities 35
in the Middle East 5. in the Middle East 36
One Firm: Transforming our Region Solving our region s most important problems and building trust in our society in the Middle East 37
in the Middle East One Firm: Transforming our Region We are delivering against our purpose Improving employment in KSA Developing the new model of Healthcare for KSA Assuring Emirates Airlines Developing the Saudi Arabian Industrial Investment Company (SAIIC) Transforming finance in UAE Establishing VAT in the GCC Developing PPP in Qatar Housing PPPs in Kuwait National transformation Oman Delivering EXPO 2020/Qatar 2022 Ensuring worker welfare in Abu Dhabi Partnering EUM on strategy and IFRS compliance Assuring the world s most valuable company Transforming e-health and postal service in Qatar Digitizing the KSA Government Building the cloud in KSA 38
s Growth Markets Centre 6. s Growth Markets Centre 39
s Growth Markets Centre About s Growth Market Centre s Growth Markets teams are supported by the Growth Markets Centre (GMC), which is a global team bringing s global expertise to help clients grow profitably in complex new markets How the GMC can help Access to global expertise: ensures clients receive the full benefit of s global expertise and access to bespoke teams Sector focused insights: thought leadership on how the Growth Markets are evolving and what clients can do to ensure profitable growth Growth Markets Framework : our framework enable s our clients to assess and prioritize their entry and expansion needs by helping to: Navigate the business environment Enter the right market(s) with effective value proposition(s) Build effective partnerships and teams Develop operating model capabilities for growth Navigate the business environment Build effective partnerships and teams Enter the right market with effective value proposition Develop operating model capabilities for growth 40
s Growth Markets Centre Accessing our growth markets point of view Annual GMC event: Emerging Markets Conference Growing in the age of volatility : The GMC has partners with INSEAD to host an annual conference focused on key Growth Markets issues GMC thought leadership: Addressing key Growth Markets issues whilst highlighting s expertise in the region Sector deep-dive analysis: Insights on up and coming sectors across Growth Markets, e.g. Powering Nigeria for the Future and A new delivery: Satisfying Southeast Asia s appetite through digital GMC blogs: Regular updates on growth opportunities and challenges in emerging markets www pwc.com/gmc growth.markets.centre.sg@sg.pwc.com 41
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