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Thoughts from a Renaissance man A wave of reform by oil exporters

Thoughts from aRenaissance manEconomics & Strategy

28 April 2016

In the 1980s, oil exporters were late to reform and did not do enough. Today, we see more pro-active polic ies in the Gulf, the CIS and Africa.

Gulf countries are pushing more far-reaching reform than in the 1980s

While global investors are overweight oil importers, we are interested by signs that oil exporters are not taking low oil prices lying

down. Markets have focused on their recent (failed) efforts to push prices up. More important, in our view, are the reform plans to

diversify economies, from Saudi Arabia this week, to Nigeria and Kazakhstan after their elections in 2015.

Saudi Arabia’s Vision 2030 joins a host of reformist plans from the Gulf, including Vision 2020 in Oman, Vision 2021 in the U AE,

Vision 2030 in Bahrain and Qatar National Vision 2030. Each targets economic diversification. We think the Gulf is acting in a

much more vigorous and far-reaching way than was the case the last time oil prices collapsed in the 1980s. Reform then was

modest and late, and by the 1990s their economies remained too dependent on the state, over-subsidised and with excessively

rigid labour markets. Today we already see subsidy cuts being imposed in the UAE, being promised in Saudi Arabia, and a pro-

privatisation agenda that reflects the evidence that the private sector in Bahrain and the UAE in the 1990s delivered positive

results. Gulf states will be hoping their reform drive will bring more of them towards the top-ranked Gulf Cooperation Council

(GCC) UAE, which is ranked 31st in the World Bank’s Ease of Doing Business (EODB) survey (Saudi Arabia currently ranks 82nd).

Kazakhstan, Russia and Azerbaijan – again better placed than in the 1980s

In Russia we expect to hear more on structural reforms from President Putin and his team at SPIEF 2016 in St Petersburg and at

our 20th annual Russian conference in Moscow. For now the focus seems directed at achieving the 4% inflation target from 2017

and advancing Russia’s EODB rank – which has already surged from 120 th in 2012, to 51st in 2016, and towards the 20-30 target

for 2018 that we wrote about in Everyone’s a Winner , published 9 May 2012. Privatisation is also back on the agenda. With a

currency around fair value – and per capita GDP below China for the first time in perhaps a century or two – Russia is now

competitive with its eastern neighbour.

The most far-reaching reform plans were unveiled last year in Kazakhstan, which Sberbank’s CEO has suggested will turn the

country into the next Singapore. Kazakhstan already ranks an impressive 41st in the EODB. The country has joined Russia in

floating its currency and is cheap according to our REER model, or fair value on our CIS economist Oleg Kouzmin’s estimate.While Azerbaijan too has floated its currency, we think the tightening of capital controls and the recent flare-up of fighting with

Armenia are negatives for now.

Gabon was better prepared for o il, Nigeria has a mixed out look, Angola lagging

Within SSA, it is notable that Gabon has an economic diversification plan that has been in place since 2010, which the IMF thinks

may produce 5% growth in the medium term – but it has work to do on subsidies and fiscal reform. We think Nigeria is torn

between policies that echo those favoured by the Middle East and North Africa in the 1960s, and 21st century reform plans for the

electricity sector and a jump in the EODB from 169 to a top 100 rank. Independent studies suggest the former – if sustained – will

hold Nigeria back. At least Nigeria has plans though – Angola is ranked 181st in the EODB, which is not encouraging. Perhaps a

hoped for IMF deal will encourage more structural reforms.

We may have bitten off more than we can chew with this report but we are encouraged by reforms that should help oil exportersmanage in a $45 oil price world, with potential upside surprise if oil does not continue to follow the 1980s template.

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Renaissance Capital28 April 2016

Thoughts f rom a Renaissance man

In this report we focus on the GCC (Saudi Arabia, Kuwait, Bahrain, UAE, Qatar and

Oman), CIS countries (Russia, Kazakhstan, Azerbaijan) and Nigeria, with fleeting mention

of Angola and Gabon.

We may have bitten off more than we can chew with this report. We cannot answer all ofour own questions – such as who will be most successful on reform and how we can

quantify this – let alone yours. But we can address a few key points.

First, most (and perhaps all) oil-exporting countries are not repeating the mistake of the

1980s when the collapse in oil prices was expected to be temporary. They are planning

for a long period of low oil prices and reacting early to this. They may end up being

positively surprised if oil rebounds strongly – but my working assumption is that oil prices

will average roughly $45 (in a $35-55 range) over the decade.

Figure 1: Oil at $45 would be consistent with what we saw from 1986 until 2003

Source: BP, IMF, World Bank, Renaissance Capital

Second, the GCC (Saudi Arabia, Kuwait, Bahrain, UAE, Qatar and Oman) and CIS

countries (Russia, Kazakhstan, Azerbaijan) have entered this low oil price world better

prepared than they were in the 1980s. Foreign exchange reserves are high. EODB

reforms have been underway for many years and the private sector already plays a larger

role in their economies than they did in the 1980s.

Third, we are now seeing demonstrable reforms from subsidy cuts in the UAE to currency

floats in Russia and Kazakhstan. Not all the reforms outlined by governments are merely

a wish list.

Fourth, we can already identify countries that are struggling: Nigeria appears torn

between adopting 1960s policies (state-directed development via the currency, import

substitution, protectionism) of the Middle East and North Africa on one hand, while

advancing 21st century reforms in the electricity sector, pension reform and the EODB.

Azerbaijan did float its currency in line with CIS peers such as Russia and Kazakhstan,

but did it late and still ended up tightening capital controls. Angola has begun talks withthe IMF on a three-year loan.

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f g l o b a l G D P

Cost of global oi l consumption as % of global GDP Oil price (2014 prices, rhs)

Oil at $45 wouldbe equivalent to2% of GDP today

The global oil bill (production times oil price, dividedby global GDP) fell from a tough 4-5% of GDP in the 1970s and early 1980sor the unbearable 7-8% of GDP peak around 1980 to 2% of GDP from 1986

1.1% of GDP was the 50-year low in 1998 (equivalent of $24 oil today)

This graph shows $45 oil in 2016 and 2017

Iranianrevolution

If we’re re-running the 1980s


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Lastly, while reforms are underway – IMF work has warned that economic diversification

will take decades –there are no short-term fixes.

In addition, we should point out that consensus can be wrong. In 1986, very few had

foreseen that oil prices would plunge and many expected oil to rise again, not leastbecause low oil prices in 1986 were expected to encourage more demand for oil again 1.

In fact oil stayed low for nearly a generation. Today few seem to expect oil prices of $70-

80 in the medium-term. Any rise to that level or above would present a big upside

surprise, adding to the positive momentum from reforms being undertaken.

Russia, Kazakhstan and Azerbaijan

The oil price slump of the 1980s culminated in a halving of oil prices to 2% of global GDP

in 1986. It is not original of us to point out that the oil price slide probably helped make

Mikhail Gorbachev leader of the USSR. After years of economic stagnation, the Soviet

Union was willing to try his political (‘glasnost’ meaning openness) and economic

(‘perestroika’ meaning restructuring) reforms. The communist economic and political

system was however too rigid to adapt and collapsed in the early 1990s.

Today, we think these CIS countries are better placed to manage a period of low growth.

As noted above, all three have significant foreign exchange reserves. In addition, the IMF

estimates that per capita GDP in all three, in current dollars, are above the levels of 2006

and five times (Azerbaijan), four times (Kazakhstan) and three times (Russia) higher than

in 2001. Political risk for incumbents do exist – but that wealth effect might ameliorate it.

Meanwhile, reforms have already pushed Kazakhstan to 41st place globally in the EODB,

Russia is 51st and Azerbaijan is 63rd. This should help the private sector diversify

economies.

These CIS countries have adopted flexible currency policies that should help the

competitiveness of their economies. Russia let its currency float in 2014 after many years

of preparation. Manufacturing in Russia and Kazakhstan is likely to be as cheap or

cheaper than in China. Per capita GDP in Russia is lower than in China in 2016 – and this

may be the first time this has happened in a century (Russia may well have been lower in

the Civil War) or two. This is encouraging import substitution in some sectors of the

economy as my colleague, Oleg Kouzmin is happy to explain.

We do not see evidence of deep structural reform in Russia, but ongoing EODB reforms

are likely as Russia sees the need to develop a competitive SME sector. The central bank

is being very serious in targeting a reduction in inflation towards 4% that they hope willmake Russia look more like Mexico over the medium term. Plans to force state-owned

companies to increase dividends are aimed at improving government finances, but might

also encourage more efficiency in these companies (paying dividends is now a patriotic

duty). The government has been prepared to accept constructive bankruptcies, such as

Transaero (although it was taken over by Aeroflot). Privatisation of existing equity stakes

in companies and banks such as VTB is also promised.

Russian officials have also made significant progress in developing the domestic financial

market, via improved regulation and the merging of MICEX and RTS into MOEX.

1 http://www.brookings.edu/~/media/Projects/BPEA/1986-2/1986b_bpea_gately_adelman_griffin.PDF

http://www.brookings.edu/~/media/Projects/BPEA/1986-2/1986b_bpea_gately_adelman_griffin.PDFhttp://www.brookings.edu/~/media/Projects/BPEA/1986-2/1986b_bpea_gately_adelman_griffin.PDFhttp://www.brookings.edu/~/media/Projects/BPEA/1986-2/1986b_bpea_gately_adelman_griffin.PDFhttp://www.brookings.edu/~/media/Projects/BPEA/1986-2/1986b_bpea_gately_adelman_griffin.PDF


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Kazakhstan has a more extensive reform agenda – as noted in the following two reports

by Oleg Kouzmin: Kazakhstan: Constructive policy approach, published 23 March 2016;

and Kazakhstan: Impressive reform plan initiated, published 9 July 2015.

Deep rooted structural change is planned, including wide-ranging privatisation. As inRussia, the currency has been floated. We estimate that the Kazakh tenge is the best

value currency in frontier markets, when compared to its real effective exchange rate

(REER) average of the past 20 years, which we estimate at KZT277/$.

Figure 2: REER-based currency valuations, Frontier and Beyond Frontier

Current FXrate vs $

FX rate impliedby long-term

average REER

FX rate if REERfalls to lows

Date of REERLow

Long-term averagedivided by current

rate

IMF WEO APR 162015E C/A (%

GDP)

IMF WEO Apr 162016E C/A (%

GDP)

Standarddeviations awayfrom historical

averageKenya 101 161 289 Jul-95 1.59 -8.2 -8.3 1Nigeria 199 311 690 Apr-95 1.56 -2.4 -2.8 2Ethiopia 21.5 31.9 42.5 Jan-04 1.48 -12.8 -10.7 2Zambia 9.57 12.2 21.9 Jul-95 1.27 -3.5 -3.8 0

Angola 169 213 703 Oct-99 1.26 -8.5 -11.6 0

Egypt 8.88 10.8 16.7 Dec-03 1.22 -3.7 -5.3 1Botswana 10.7 12.8 15.3 Sep-98 1.20 9.3 2.2 2Cameroon 582 657 753 Oct-00 1.13 -5.8 -5.7 2Mauritius 35.1 39.2 45.0 Dec-06 1.12 -5.1 -4.5 1Ivory Coast 589 633 734 Aug-97 1.07 -1.7 -1.8 1Gabon 582 603 668 Sep-00 1.04 -2.8 -7.2 0Tanzania 2,199 2,192 2,688 Dec-93 1.00 -8.7 -7.7 -1Morocco 9.66 9.52 10.2 Aug-12 0.99 -1.4 0.4 -1Senegal 589 571 634 Nov-00 0.97 -7.6 -6.0 -1Uganda 3,345 3,220 4,222 Aug-11 0.96 -8.9 -8.4 -1

Algeria 109 103 121 Mar-08 0.94 -15.7 -17.1 -1Rwanda 789 733 963 Feb-04 0.93 -13.8 -14.2 -1Namibia 14.4 13.1 18.0 Dec-01 0.91 -9.8 -14.5 -1Tunisia 2.02 1.83 2.18 Dec-13 0.91 -8.9 -7.7 -1Mozambique 52.8 44.5 58.2 Oct-10 0.84 -41.3 -43.0 -2Ghana 3.79 3.02 5.69 Aug-14 0.80 -8.3 -7.2 -2

South Africa 14.4 11.1 16.4 Dec-01 0.77 -4.4 -4.4 -2Source: Bruegel, Renaissance Capital

Azerbaijan looks least well placed among the three, in our view. Its EODB reforms have

been more limited – although it does outrank most of the GCC countries. While the

currency was floated, this was only after an expensive defence of the currency and came

too late to prevent the tightening of capital controls as well. These controls, and rising

tension with Armenia, which led to 100 deaths earlier this month, are likely to deter foreign

direct investment in the near term.

GCC reform plans

The IMF produced a good report on GCC reform plans in 20142. This pointed out that

diversification takes a long time – it cites Malaysia’s 20-year process that was begun in

the early 1970s. It warned that “import substitution or reliance on labour -intensive

manufacturing” – the model favoured by Nigeria – “led to inefficient firms with limited

scope for income and productivity gains”. The report said countries should focus on

clusters around certain sectors. They should use foreign capital to promote technological

transfer. The report also said export subsidies and tax incentives for infant industries were

helpful. Improving human capital through training was also necessary. It further pointed

out GCC countries in that year all ranked in the top 50 in the EODB (but methodological

changes mean this is no longer the case3), while criticising legal systems and labour

2 https://www.imf.org/external/pubs/ft/sdn/2014/sdn1412.pdf3 In 2016, methodological changes have shifted these significantly; the UAE is in 31st place, Bahrainis 65th, Qatar is 68th, Oman is 70th, Saudi Arabia is 82nd and Kuwait is 101st.

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market laws. Overall the IMF report suggested the GCC is starting with a good base to

advance economic reforms.

Saudi Arabia’s Vision 2030 is the latest reform plan to join what is a GCC party of

reforms. These include Vision 2020 in Oman, Vision 2021 in the UAE, Vision 2030 inBahrain and Qatar National Vision 2030. Each targets economic diversification.

A key question is whether reform is more credible now than it was in the 1980s? The

answer, we think, is yes. Some reform did happen then but from a poor base – when

human capital was under-developed, governments believed they should maintain a strong

role in the economy and basic economic principles were ignored for political reasons (eg,

the maintenance of subsidies).

Taking Saudi Arabia as an example4 – budget surpluses from 1973-1982 of $107bn were

wiped out by deficits over 1983-1992 that reached $141bn5. The current account moved

into a cumulative deficit of $138bn from a surplus in the previous decade of $163bn. In

the 1980s, Saudi Arabia borrowed largely from internal sources, before tapping

international sources after the 1990-1991 Gulf war. Saudi Arabia cut back on

infrastructure spending, but maintained subsidies – which had risen from 4% of oil

revenues in 1975, to 68% by 1984.

Elsewhere in the MENA region, structural reforms did happen in the 1980s. A point we

have made regularly is that many oil exporters educated far too low a proportion of their

population in 1971. Through the oil boom of the 1970s and bust of the 1980s, this

radically improved. The 1980s also saw some governments across MENA cut subsidies,

reduce public expenditure and reform exchange rate regimes – despite provoking mass

protests in Egypt in 1977, Algeria in 1988, and others.

Yet still in the 1990s, the public sector accounted for nearly 18% of total employment in

the MENA region – the highest in the world – and the state remained in control of largeswathes of sectors such as banking, telecoms and transport. There was also little reform

of labour markets. Countries with the most dynamic private sectors, Bahrain, Oman and

the UAE did better – with the UAE achieving 7% GDP growth through the 1990s. By

2012, in Bahrain 5% of the workforce consisted of nationals in the public sector and 35%

in the private sector (expats made up the rest), while in Saudi Arabia nearly 30% of the

workforce consisted of nationals in the public sector, double the 15% or so in the private

sector (with expats making up the rest)6.

There was some currency reform. Saudi Arabia let its currency depreciate from SAR3.5/$

in the early 1980s, before accepting a last 2.75% devaluation of the riyal to SAR3.75/$ in

1986, when the oil price halved. Oman also devalued its currency by 10%in 1986. Yet

Middle East exchange rates were overvalued by an estimated 22% over 1985-2000 and

protectionism meant that integration with the world economy shrank even in the non-oil

sector. Foreign direct investment inflows were a feeble 0.5% of GDP over 1985-2000.

Today we are encouraged by proof that the UAE is already cutting subsidies, and that

Bahrain has raised gasoline prices by nearly 60%7. Saudi plans to do the same. We think

Saudi Arabia is able to sustain current spending until the early 2020s without reform – but if

Vision 2030 is implemented, even partly, this could extend until 2025 or beyond. The IMF

estimates that Saudi Arabia has already slashed the fiscal break-even oil price from $106 in

2014, to $95 in 2015 and now $67 in 2016. Qatar and Kuwait have figures around $50.

4

Data in this paragraph is sourced from http://www.jcpa.org/jl/vp308.htm5 It is worth noting given Saudi support for Egypt today, that through the 1980s even as oil pricesslumped, Saudi Arabia was giving significant fiscal support to Iraq in its war with Iran.6 https://www.imf.org/external/pubs/ft/sdn/2014/sdn1412.pdf7 http://www.imf.org/external/np/sec/pr/2016/pr16186.htm

http://saudigazette.com.sa/saudi-arabia/full-text-saudi-arabias-vision-2030/http://saudigazette.com.sa/saudi-arabia/full-text-saudi-arabias-vision-2030/http://saudigazette.com.sa/saudi-arabia/full-text-saudi-arabias-vision-2030/https://books.google.co.uk/books?id=_qreCwAAQBAJ&pg=PT45&lpg=PT45&dq=oman+devaluation+1980s&source=bl&ots=ljyMAlamh-&sig=A7RGEeG9B-Yq11EBIFjQRzNXiLI&hl=en&sa=X&ved=0ahUKEwi-rL7cra7MAhVJ_iwKHXLcA_MQ6AEIOTAE#v=onepage&q&f=falsehttps://books.google.co.uk/books?id=_qreCwAAQBAJ&pg=PT45&lpg=PT45&dq=oman+devaluation+1980s&source=bl&ots=ljyMAlamh-&sig=A7RGEeG9B-Yq11EBIFjQRzNXiLI&hl=en&sa=X&ved=0ahUKEwi-rL7cra7MAhVJ_iwKHXLcA_MQ6AEIOTAE#v=onepage&q&f=falsehttps://books.google.co.uk/books?id=_qreCwAAQBAJ&pg=PT45&lpg=PT45&dq=oman+devaluation+1980s&source=bl&ots=ljyMAlamh-&sig=A7RGEeG9B-Yq11EBIFjQRzNXiLI&hl=en&sa=X&ved=0ahUKEwi-rL7cra7MAhVJ_iwKHXLcA_MQ6AEIOTAE#v=onepage&q&f=falsehttp://www.imf.org/external/pubs/ft/reo/2016/mcd/eng/pdf/mreo0416st.pdfhttp://www.imf.org/external/pubs/ft/reo/2016/mcd/eng/pdf/mreo0416st.pdfhttp://www.imf.org/external/pubs/ft/reo/2016/mcd/eng/pdf/mreo0416st.pdfhttp://www.imf.org/external/pubs/ft/reo/2016/mcd/eng/pdf/mreo0416st.pdfhttp://www.imf.org/external/pubs/ft/reo/2016/mcd/eng/pdf/mreo0416st.pdfhttp://www.imf.org/external/pubs/ft/reo/2016/mcd/eng/pdf/mreo0416st.pdfhttps://books.google.co.uk/books?id=_qreCwAAQBAJ&pg=PT45&lpg=PT45&dq=oman+devaluation+1980s&source=bl&ots=ljyMAlamh-&sig=A7RGEeG9B-Yq11EBIFjQRzNXiLI&hl=en&sa=X&ved=0ahUKEwi-rL7cra7MAhVJ_iwKHXLcA_MQ6AEIOTAE#v=onepage&q&f=falsehttp://saudigazette.com.sa/saudi-arabia/full-text-saudi-arabias-vision-2030/


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The last question that keeps coming up is over foreign exchange regimes. For most of the

Gulf, we are struck by our work in January8, which showed that their fixed pegs are

surprisingly appropriate. Roughly 0% of the time do Gulf currencies end up either 20%

overvalued or 20% undervalued relative to the REER. This contrasts significantly with

Nigeria and others that attempt to peg their currencies – where there is a substantialdispersion of valuation over a 20-year period. We suspect this shows that even oil

exporters (so dependent on highly variable oil prices) can sustain a pegged currency if: 1)

they are rich countries pegging to another rich country, and 2) they are prepared to accept

significant shifts in inflation to keep the currency fairly valued. A brief look at Qatar shows

just such inflation flexibility over time. Our data imply we must see strong disinflation

relative to the US in Kuwait and Qatar, and also (but less so) in Oman, Saudi Arabia,

Bahrain and the UAE.

Figure 3: This table shows how often a currency trades close to or far from its REER implied fair value rate(shaded areas shows where we are today)

20%+ less thanfair value

5-20% less thanfair value

fair value(+/-5%)

5-20% morethan fair value

20%+ morethan fair value

Kuwait 0% 31% 43% 23% 4%

Qatar 0% 24% 56% 18% 3%UAE 0% 24% 55% 21% 0%Oman 0% 33% 43% 24% 0%Saudi Arabia 0% 34% 32% 33% 0%Bahrain 0% 40% 27% 33% 0%

Angola 40% 8% 9% 7% 36%Nigeria 27% 21% 12% 18% 22%Gabon 0% 15% 74% 11% 0%

Kazakhstan 2% 37% 24% 34% 4%Russia 18% 25% 14% 18% 25%

Source: Bruegel, Renaissance Capital

Africa

In contrast to the GCC – Nigeria seems torn between competing economic visions. We

outlined our views on Nigeria in Thoughts from a Renaissance man – there is much to like

in Nigeria published 10 February 2016, with a more recent update Nigeria: Policy based

financing from Yvonne Mhango, published 22 April 2016.

We find it striking how similar some of Nigeria’s economic plans are to this description of

the Middle East Development model from the 1960s. We have bolded the key sections

that we think are similar. “From the 1940s to the 1970s, most economies of the Middle

East region were guided by a development model with a strong interventionist-

redistributive orientation (Richards and Waterbury, 1996). Some key characteristics of this

model consisted of broadly similar economic and social policies that included reliance onstate planning in determining economic prio rities; the adoption of import-

substit ution industrialization policies; the implementation of a wave of agrarian

reform programs; sweeping nationalizations of private and foreign assets; programs for

state provision of education, housing, health care and food subsidies; and the

emergence of centralized, hierarchical and tightly controlled trade unions, professional

associations and ruling-party governments in which the political arena was viewed as an

expression of the unity of the nation rather than a site of political contestation” 9.

While it is a western consensus today that such policies would not drive growth – in fact

GDP growth per labourer in the Middle East rose 6% annually in the 1960s, before

slowing to 3.8% in the 1970s and 0.3% in the 1980s. This suggests that a statist model

8 See Thoughts from a Renaissance Man S&P500 at 1,100 and FX valuations published 7 January,2016, in particular Figures 5 and 69 https://www.uni-trier.de/fileadmin/fb4/prof/VWL/KUU/SS2009/Seminar_Regional-

_und_Umweltoekonomie/1.4.Yousef2004.pdf

https://research.rencap.com/eng/download.asp?id=21438https://research.rencap.com/eng/download.asp?id=21438https://research.rencap.com/eng/download.asp?id=21438https://research.rencap.com/eng/download.asp?id=21438https://research.rencap.com/eng/download.asp?id=21438https://research.rencap.com/eng/download.asp?id=21438http://research.rencap.com/eng/download.asp?id=21688http://research.rencap.com/eng/download.asp?id=21688http://research.rencap.com/eng/download.asp?id=21688http://research.rencap.com/eng/download.asp?id=21688http://research.rencap.com/eng/download.asp?id=21346http://research.rencap.com/eng/download.asp?id=21346http://research.rencap.com/eng/download.asp?id=21346https://www.uni-trier.de/fileadmin/fb4/prof/VWL/KUU/SS2009/Seminar_Regional-_und_Umweltoekonomie/1.4.Yousef2004.pdfhttps://www.uni-trier.de/fileadmin/fb4/prof/VWL/KUU/SS2009/Seminar_Regional-_und_Umweltoekonomie/1.4.Yousef2004.pdfhttps://www.uni-trier.de/fileadmin/fb4/prof/VWL/KUU/SS2009/Seminar_Regional-_und_Umweltoekonomie/1.4.Yousef2004.pdfhttps://www.uni-trier.de/fileadmin/fb4/prof/VWL/KUU/SS2009/Seminar_Regional-_und_Umweltoekonomie/1.4.Yousef2004.pdfhttps://www.uni-trier.de/fileadmin/fb4/prof/VWL/KUU/SS2009/Seminar_Regional-_und_Umweltoekonomie/1.4.Yousef2004.pdfhttps://www.uni-trier.de/fileadmin/fb4/prof/VWL/KUU/SS2009/Seminar_Regional-_und_Umweltoekonomie/1.4.Yousef2004.pdfhttp://research.rencap.com/eng/download.asp?id=21346http://research.rencap.com/eng/download.asp?id=21688http://research.rencap.com/eng/download.asp?id=21688https://research.rencap.com/eng/download.asp?id=21438https://research.rencap.com/eng/download.asp?id=21438


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might be appropriate at very low per capita GDP – as Ethiopia seems to show today10.

Coincidentally or not, the Madison database shows that Nigeria’s per capita GDP in 1990

purchasing power parity dollars is less than that of all the GCC countries in the 1960s

(except Oman). While the model worked in the 1960s, we assume it was no longer

appropriate once the GCC countries were richer in the 1980s.

Nigeria is not following the above model completely. We are impressed by the pro-market

direction of reform in the electricity sector. While some in Nigeria’s ruling APC favoured

nationalisation of the electricity sector – it has since its election both 1) hiked electricity

prices in February (which is partly why inflation rose to 12.8% in March); and 2) said that

the transmission network will be run by the private sector too, via a concession or

privatisation. This reform has more in common with that pioneered in the 1980s in the UK,

than the Middle East in the 1960s.

In a nod to 21st century economic reform – Nigeria has also prioritised a leap in its EODB

ranking from 169th place to 100th place. We outlined how this can be achieved in Vikram

Lopez’s report Can Nigeria jump to top 100 in EODB?, published 11 February 2016. It

remains far behind either GCC or CIS countries, but ahead of Angola in 181st place in 2016.

We have not seen Angola unveil a reform agenda. It is reportedly seeking IMF support

because oil accounted for over 95% of export earnings and 52% of government revenue

in 201511; numbers that are fairly similar to Nigeria in 2015. The main positive we see in

Angola – at least compared to the 1980s when the country was in conflict – is that the

non-oil sector accounts for 69% of GDP now compared to 40% of GDP in the mid-1980s.

Gabon appears to be better prepared. In 2010 it launched a strategic plan called Vision

2025 aimed at economic diversification and the IMF at least believes the agricultural

sector could help produce medium-term growth of 5% annually. The IMF is calling on

Gabon to cut fuel subsidies and contain the wage bill. The country would also benefit from

EODB reforms – currently it is 162nd in the world.

With regard to currencies – we know that dollar shortages are a problem in Nigeria and

Angola (as well as Ethiopia and Egypt) – and that our REER model tells us their

currencies are too expensive. Gabon is closer to fair value – which again supports our

view that currency pegs are more appropriate in richer countries.

10 See Thoughts from a Renaissance Man: Eggs, omelettes and IPOs, published 12 April 201611 http://africabusiness.com/2016/04/08/the-government-of-angola-is-aware-that-the-high-reliance-on-the-oil-sector-represents-a-vulnerability-to-the-public-finances-and-the-economy-more-broadly/

http://research.rencap.com/eng/download.asp?id=21444http://research.rencap.com/eng/download.asp?id=21444http://www.aninf.ga/telechargements/PLAN%20STRATEGIQUE%20GABON%20EMERGENT.pdfhttp://www.aninf.ga/telechargements/PLAN%20STRATEGIQUE%20GABON%20EMERGENT.pdfhttp://www.aninf.ga/telechargements/PLAN%20STRATEGIQUE%20GABON%20EMERGENT.pdfhttp://www.aninf.ga/telechargements/PLAN%20STRATEGIQUE%20GABON%20EMERGENT.pdfhttp://research.rencap.com/eng/download.asp?id=21663http://research.rencap.com/eng/download.asp?id=21663http://research.rencap.com/eng/download.asp?id=21663http://africabusiness.com/2016/04/08/the-government-of-angola-is-aware-that-the-high-reliance-on-the-oil-sector-represents-a-vulnerability-to-the-public-finances-and-the-economy-more-broadly/http://africabusiness.com/2016/04/08/the-government-of-angola-is-aware-that-the-high-reliance-on-the-oil-sector-represents-a-vulnerability-to-the-public-finances-and-the-economy-more-broadly/http://africabusiness.com/2016/04/08/the-government-of-angola-is-aware-that-the-high-reliance-on-the-oil-sector-represents-a-vulnerability-to-the-public-finances-and-the-economy-more-broadly/http://africabusiness.com/2016/04/08/the-government-of-angola-is-aware-that-the-high-reliance-on-the-oil-sector-represents-a-vulnerability-to-the-public-finances-and-the-economy-more-broadly/http://africabusiness.com/2016/04/08/the-government-of-angola-is-aware-that-the-high-reliance-on-the-oil-sector-represents-a-vulnerability-to-the-public-finances-and-the-economy-more-broadly/http://africabusiness.com/2016/04/08/the-government-of-angola-is-aware-that-the-high-reliance-on-the-oil-sector-represents-a-vulnerability-to-the-public-finances-and-the-economy-more-broadly/http://research.rencap.com/eng/download.asp?id=21663http://www.aninf.ga/telechargements/PLAN%20STRATEGIQUE%20GABON%20EMERGENT.pdfhttp://www.aninf.ga/telechargements/PLAN%20STRATEGIQUE%20GABON%20EMERGENT.pdfhttp://research.rencap.com/eng/download.asp?id=21444


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Figure 4: REER-based currency valuations, Frontier and Beyond Frontier

Current FXrate vs $

FX rate impliedby long-term

average REER

FX rate if REERfalls to lows

Date ofREER Low

Long-term averagedivided by current rate

IMF WEO APR 162015E C/A (%GDP)

IMF WEO APR 162016E C/A (%GDP)

Standard deviationsaway from

historical averageKenya 101 161 289 Jul-95 1.59 -8.2 -8.3 1Nigeria 199 311 690 Apr-95 1.56 -2.4 -2.8 2

Ethiopia 21.5 31.9 42.5 Jan-04 1.48 -12.8 -10.7 2Zambia 9.57 12.2 21.9 Jul-95 1.27 -3.5 -3.8 0

Angola 169 213 703 Oct-99 1.26 -8.5 -11.6 0Egypt 8.88 10.8 16.7 Dec-03 1.22 -3.7 -5.3 1Botswana 10.7 12.8 15.3 Sep-98 1.20 9.3 2.2 2Cameroon 582 657 753 Oct-00 1.13 -5.8 -5.7 2Mauritius 35.1 39.2 45.0 Dec-06 1.12 -5.1 -4.5 1Ivory Coast 589 633 734 Aug-97 1.07 -1.7 -1.8 1Gabon 582 603 668 Sep-00 1.04 -2.8 -7.2 0Tanzania 2,199 2,192 2,688 Dec-93 1.00 -8.7 -7.7 -1Morocco 9.66 9.52 10.2 Aug-12 0.99 -1.4 0.4 -1Senegal 589 571 634 Nov-00 0.97 -7.6 -6.0 -1Uganda 3,345 3,220 4,222 Aug-11 0.96 -8.9 -8.4 -1

Algeria 109 103 121 Mar-08 0.94 -15.7 -17.1 -1Rwanda 789 733 963 Feb-04 0.93 -13.8 -14.2 -1Namibia 14.4 13.1 18.0 Dec-01 0.91 -9.8 -14.5 -1

Tunisia 2.02 1.83 2.18 Dec-13 0.91 -8.9 -7.7 -1Mozambique 52.8 44.5 58.2 Oct-10 0.84 -41.3 -43.0 -2Ghana 3.79 3.02 5.69 Aug-14 0.80 -8.3 -7.2 -2South Africa 14.4 11.1 16.4 Dec-01 0.77 -4.4 -4.4 -2

Source: Bruegel, Renaissance Capital

Conclusion

In terms of reform winners it is easy to nominate Kazakhstan among oil exporters in the

CIS, and the UAE among GCC countries. We struggle a little more in Africa as each face

challenges. We expect the Gulf and CIS countries should do better from 2017 than these

three SSA markets – in terms of per capita GDP. Having said that, we still maintain that a

change of currency policy in Nigeria would probably let that country thrive more (after an

initial painful 12 months) thanks to its much lower dependence on oil. We reiterate again

that countries on the right hand side of the following graph should be best placed in an oil

environment precisely because they have relatively little oil. Nonetheless, the reform drive

from the GCC is encouraging and may well present some positive surprises for investors

over the medium term. Obviously we plan to do more work on this subject in the future.


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Figure 5: Oil exports per capita (lhs) in 2014

Source: Polity IV, Freedom House, BP, IMF, Renaissance Capital

360

321305

270 267

227

82 80 77 69 67 64 62 58 54 5238 29 20 19 17 14 12 7 7

0

50

100

150

200

250

300

350

400

Q a t a r ( - 1 0 )

K u w a i t ( - 7 )

E q . G u i n e a ( - 5 )

N o r w a y ( 1 0 )

U A E ( - 8 )

S a u d i A r a b i a ( - 1 0 )

B r u n e i ( N F )

O m a n ( - 8 )

K a z a k h s t a n ( - 6 )

A z e r b a i j a n ( - 7 )

I r a q ( 3 )

G a b o n ( 3 )

A n g o l a ( - 2 )

C o n g o ,

R e p . ( -

4 )

V e n e z u e l a ( 4 )

T r i n i d a d & T o b .

( 1 0 )

C a n a d a ( 1 0 )

R u s s i a ( 4 )

L i b y a ( n a )

A l g e r i a ( 2 )

I r a n ( - 7 )

E c u a d o r ( 5 )

T u r k m e n i s t a n ( - 8 )

C o l o m b i a ( 7 )

N i g e r i a ( 4 )

M e x i c o ( 8 )

C h a d ( - 2 )

P o p u l a t i o n d i v i d e d b y n e t e x p o r t s o f o i l ' 0 0 0 b p

d

Left-hand scalecapped at 400

When countries are large netexporters of energy, then theytend to be autocracies asdefined by Polity IV or Not Freeas defined by Freedom House.The exceptions are those like

Norway that were rich democracies

before they exported energy.

UAE has 25 timesmore oil exportsthan Nigeria and saysit cannot afford a fuel

subsidy

749 655


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Figure 6: Key data

Local currency BHDGDP/capita, $ (2015) 23,899Population, mn (2015) 1.3S&P/Moody's rating BBB-/Baa3Weight in MSCI FM, % 1.9%

MSCI Index MXBH2016E P/E, x 4.12016E FY EPS growth 67.7%Trailing P/B, x 1.1Beta to FM 0.5MSCI full MktCap, $bn 6.5MSCI free float MktCap, $bn 2.9No. of companies 33M ADTV, $mn, MSCI cos 0.7Local index BHSEASIMktCap, $bn 17.2No. of companies 413M ADTV, $mn 0.8

Figure 7: Index performance Figure 8: MSCI sector weights, 27 April 2016

Figure 9: Index and stock data

Ticker Name SectorMktCap FF 3M ADTV $ performance (%) 12MF Trail 12MF # analyst MSCI($mn) MktCap ($mn) ($mn) 1M 3M 12M P/E (x) PBV (x) RoE (%) Recs wgt (%)

MXBH MSCI Bahrain 6,525 2,928 0.7 -4.3 -3.4 -34.9 4.3 1.1 14.6 6 1.9 AUB KK Ahli United Bank Financials 4,111 2,494 0.6 -5.3 -2.9 -13.9 6.3 1.2 15.4 2 85BATELCO BI Bahrain Telecom Telecoms 1,324 331 0.0 -3.8 -1.9 -13.3 1.1 0.9 8.5 2 11

ALBH BI Aluminium Bahrai Materials 1,040 104 0.0 -6.7 -21.6 -44.8 na 0.4 -6.6 2 4NBB BI Natl Bank Bahr Financials 1,636 913 0.1 -4.9 -6.0 -23.8 6.4 1.9 14.3 2 -SALAM BI Al-Salam Bank Financials 545 432 0.0 0.0 18.5 -32.9 na 0.7 na 0 -GFH BI Gfh Financial Gr Financials 553 429 0.0 8.9 75.0 40.0 na 0.3 na 0 -BBK BI Bbk Bsc Financials 935 398 0.1 -8.9 -15.5 -26.6 na 1.1 na 0 -BMMI BI Bmmi Bsc Cons. Disc. 311 222 0.3 -5.9 -5.9 -2.4 na 2.0 na 0 -DUTYF BI Bahrain Duty Fre Cons. Disc. 276 206 0.1 0.6 -1.0 6.7 na 2.2 na 0 -BARKA BI Albaraka Banking Financials 552 199 0.1 -9.4 -11.7 -27.3 na 0.4 na 0 -BHOTEL BI Gulf Hotel Group Cons. Disc. 325 162 0.0 -9.6 -9.6 -19.0 na 1.8 na 0 -

ITHMR BI Ithmaar Bank Bsc Financials 394 158 0.0 18.2 23.8 -16.1 na 0.1 na 1 -CINEMA BI Bahrain Cinema Cons. Disc. 202 158 0.0 6.5 -1.7 -29.0 na 1.8 na 0 -INVCORP BI Investcorp Bk -$ Financials 480 120 1.5 -9.1 -9.1 -0.2 na 0.7 na 0 -SEEF BI Seef Properties Financials 223 108 0.0 -5.2 -6.1 -9.4 na 0.6 7.2 1 -KHCB BI Khaleeji Commerc Financials 167 82 0.1 0.0 1.6 16.7 na 0.5 na 0 -TRAFCO BI Trafco Group Bsc Cons. Staples 49 44 0.0 6.5 -4.1 12.7 na 0.7 na 0 -INOVEST BI Inovest Co Bsc Financials 46 43 0.0 0.0 0.0 -23.8 na 0.3 na 0 -NASS BI Nass Corp Bsc Industrials 55 28 0.0 4.4 -19.5 -46.9 na 0.4 na 0 -

AHLIA BI Al Ahlia Insura Financials 47 22 0.1 0.0 -3.9 -13.8 na 1.4 na 0 -

Figure 10: 3M ADTV, $mn Figure 11: Valuations vs FM, 12M fwd P/E (x)*

Note: all forward figures for valuations are taken from Bloomberg consensus estimates. *12M Fwd P/E is constructed by using broker estimates and filtering anomalous results.

Source for all charts: Bloomberg

0

20

40

60

80

100

120

140

160

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

J u l - 1 5

J a n - 1 6

MSCI Bahrain, $ MSCI FM, $

85%

11%

4%

Financials

Telecoms

Materials

0

1

2

3

4

5

6

7

J a n - 1 0

M a y - 1 0

S e p - 1 0

J a n - 1 1

M a y - 1 1

S e p - 1 1

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M a y - 1 2

S e p - 1 2

J a n - 1 3

M a y - 1 3

S e p - 1 3

J a n - 1 4

M a y - 1 4

S e p - 1 4

J a n - 1 5

M a y - 1 5

S e p - 1 5

J a n - 1 6

Bahrain 3M ADTV ($mn) MSCI Bahrain 3M ADTV ($mn)

4

6

8

10

12

14

J a n - 1 2

A p r - 1 2

J u l - 1 2

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - 1 4

A p r - 1 4

J u l - 1 4

O c t - 1 4

J a n - 1 5

A p r - 1 5

J u l - 1 5

O c t - 1 5

J a n - 1 6

Bahrain Frontier

Bahrain


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11



Figure 12: Population, ’000

Source: UN

Figure 13: Export destinations, total $37bn

Source: IMF

Figure 14: CPI avg %, CA % of GDP

Source: IMF

Figure 15: Bahrain – dinar

Source: Bruegel, Bloomberg

Figure 16: Bank lending growth vs GDP

Source: IMF, Renaissance Capital

Figure 17: Real GDP % change, YoY

Source: IMF

0

200

400

600

800

1,000

1,200

1,400

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

2 0 1 5

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2 0 2 5

2 0 3 0

2 0 3 5

2 0 4 0

2 0 4 5

2 0 5 0

0-19 20-64 65+

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0%

1%

1%

2%

2%

3%

3%

4%

S a u d i A r a b i a

E U

U S A

U A E

E u r o A r e a

K o r e a

J a p a n

I n d i a

K e n y a

T a n z a n i a

% of total exports Value ($bn), 2014, RHS

-10

-5

0

5

10

15-1

-1

0

1

1

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2 0 1 2

2 0 1 3

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2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E

Current account balance (% of GDP) RHS CPI (average % YoY)

90

100

110

120

130

1400.3

0.4

0.4

0.5

0.5

0.6

0.6

0.7

J a n - 0

0

J a n - 0

1

J a n - 0

2

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3

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4

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5

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0

J a n - 1

1

J a n - 1

2

J a n - 1

3

J a n - 1

4

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5

J a n - 1

6

BHD vs $ BHD vs EUR Bahrain REER (Dec 07=100)

Weaker

Stronger

-10

-5

0

5

10

15

20

25

30

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

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2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

Change in Lending as % of GDP Real GDP growth

7.0 6.86.5

8.3

6.2

2.5

4.3

2.1

3.6

5.4

4.5

3.2

2.2 2.0 1.9

0

1

2

34

5

6

7

8

9

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2 0 0 5

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2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E

Bahrain


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Figure 18: Key data

Local currency KZTGDP/capita, $ (2015) 11,028Population, mn (2015) 17.7S&P/Moody's rating BBB-/Baa3Weight in MSCI FM, % 1.5%

MSCI Index MXKZ2016E P/E, x 11.62016E FY EPS growth -65.7%Trailing P/B, x 0.5Beta to FM 1.4MSCI full MktCap, $bn 3.9MSCI free float MktCap, $bn 1.3No. of companies 23M ADTV, $mn, MSCI cos 1.9Local index KZKAKMktCap, $bn 8.0No. of companies 93M ADTV, $mn 0.4



Ticker Name SectorMktCap FF MktCap 3M ADTV $ performance (%) 12MF Trail 12MF # analyst MSCI($mn) ($mn) ($mn) 1M 3M 12M P/E (x) PBV (x) RoE (%) Recs wgt (%)

MXKA MSCI Kazakhstan 3,864 1,341 1.9 -8.2 3.0 -47.2 9.9 0.5 15.3 21 1.5KMG LI Kmg Ep-Gdr Energy 2,719 1,129 1.3 -8.0 3.0 -45.8 13.2 0.5 4.3 9 83HSBK LI Halyk Saving-Gdr Financials 1,090 211 0.6 -12.2 -0.1 -47.4 4.1 0.7 15.8 12 17KAZ LN Kaz Minerals Plc Materials 1,167 640 3.0 11.3 70.3 -33.2 19.7 3.8 13.9 20 -KCEL KZ Kcell Telecoms 633 241 0.0 -20.0 7.5 -58.9 6.9 2.0 38.3 4 -KKGB KZ Kazkommertsbank Financials 464 145 0.0 11.0 13.7 -55.8 na 0.4 na 0 -KZTO KZ Kaztransoil Jsc Energy 1,081 108 0.1 7.2 47.8 -35.9 na 0.8 11.4 4 -KZTK KZ Kazakhtelecom Telecoms 300 69 0.0 -2.1 17.1 -39.9 na 0.3 na 1 -KEGC KZ Kazakhstan Elect Utilities 684 68 0.3 3.0 40.0 22.3 na 0.7 na 3 -CCBN KZ Bank Centercredi Financials 70 19 0.0 6.3 24.1 -46.6 na 0.3 na 0 -

Figure 22: 3M ADTV, $mn* Figure 23: Valuations vs FM, 12M fwd P/E (x)

*Reflects higher liquidity in DR linesNote: all forward figures for valuations are taken from Bloomberg consensus estimates.

Source for all charts: Bloomberg

0

20

40

60

80

100

120

140

160

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

J u l - 1 5

J a n - 1 6

MSCI Kazakhstan, $ MSCI FM, $

83%

17% Energy

Financials

0

2

4

6

8

10

12

14

16

18

0.0

0.2

0.4

0.6

0.8

1.0

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J u l - 1 5

J a n - 1 6

Kazakhstan 3M ADTV ($mn)MSCI Kazakhstan 3M ADTV ($mn) (RHS)

0

2

4

6

8

10

12

14

J a n - 1 0

M a y - 1 0

S e p - 1 0

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M a y - 1 2

S e p - 1 2

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M a y - 1 3

S e p - 1 3

J a n - 1 4

M a y - 1 4

S e p - 1 4

J a n - 1 5

M a y - 1 5

S e p - 1 5

J a n - 1 6

Kazakhstan Frontier

Kazakhstan


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Source: UN


Source: IMF


Source: IMF

Figure 27: Kazakhstan – tenge





Source: IMF

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

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1 9 9 5

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0-19 20-64 65+

0

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10%

20%

30%

40%

50%

60%

E U

E u r o A r e a

C h i n a

R u s s i a

G e r m a n y

F r a n c e

I t a l y

G r e e c e

R o m a n i a

S p a i n


-10

-8

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80

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2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E


60

70

80

90

100

110

120100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

J a n - 0 0

J a n - 0 1

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

J a n - 0 9

J a n - 1 0

J a n - 1 1

J a n - 1 2

J a n - 1 3

J a n - 1 4

J a n - 1 5

J a n - 1 6

KZT vs $ KZT vs EUR Kazakhstan REER (Dec 07=100)

Weaker

Stronger

-10

-5

0

5

10

15

20

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6


9.6 9.7

10.7

8.9

3.3

1.2

7.3 7.5

5.06.0

4.3

1.2

0.11.1

1.8

0

2

4

6

8

10

12

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E

Kazakhstan


14/44

14



Figure 30: Key data

Local currency KWDGDP/capita, $ (2015) 29,983Population, mn (2015) 4.1S&P/Moody's rating AA/Aa2 *-Weight in MSCI FM, % 19.9%

MSCI Index MXKW2016E P/E, x 7.22016E FY EPS growth 58.7%Trailing P/B, x 1.2Beta to FM 0.9MSCI full MktCap, $bn 37.3MSCI free float MktCap, $bn 17.4No. of companies 83M ADTV, $mn, MSCI cos 17.4Local index KWSEIDXMktCap, $bn 83.1No. of companies 1823M ADTV, $mn 44.7



Ticker Name SectorMktCap FF MktCap 3M ADTV $ performance (%) 12MF Trail 12MF # analyst MSCI($mn) ($mn) ($mn) 1M 3M 12M P/E (x) PBV (x) RoE (%) Recs wgt (%)

MXKW MSCI Kuwait 37,335 17,424 17.4 3.5 8.7 -21.1 6.7 1.2 10.8 40 19.9NBK KK Natl Bank Kuwait Financials 11,570 5,670 4.0 2.0 2.5 -19.4 4.1 1.3 11.8 8 33KFIN KK Kuwait Finance Financials 8,422 4,170 5.6 8.9 19.2 -21.5 13.0 1.5 9.8 7 24ZAIN KK Mobile Telecommu Telecoms 5,017 2,799 2.8 0.1 5.1 -28.6 8.0 1.0 10.7 10 16MABANEE KK Mabanee Co Sakc Financials 2,392 1,196 1.0 -2.2 -0.6 -9.6 15.0 2.4 14.8 5 7

AGLTY KK Agility Industrials 2,007 1,104 1.7 3.2 21.2 -32.7 na 0.6 4.4 1 6KPROJ KK Kuwait Projects Financials 2,636 940 0.9 2.0 6.5 -15.6 10.8 1.1 na 2 5BOUBYAN KK Boubyan Bank K.S Financials 2,907 872 1.0 2.5 9.7 -2.2 na 2.9 na 1 5BURG KK Burgan Bank Financials 2,308 672 0.4 1.6 10.3 -24.4 8.8 1.1 12.0 6 4CBK KK Commercial Bk Ku Financials 2,157 1,649 0.1 -0.8 -8.9 -29.1 13.1 1.1 8.7 2 -

ABK KK Al Ahli Bank Kuw Financials 1,797 1,391 0.1 0.1 -2.2 -8.2 na 1.0 na 0 -GBK KK Gulf Bank Financials 2,504 1,267 0.6 18.2 19.9 -8.1 na 1.3 na 1 -FOOD KK Kuwait Food Co Cons. Disc. 3,329 1,105 0.9 0.1 42.9 -5.3 14.4 2.7 na 1 -

BPCC KK Boubyan Petroch Materials 921 801 0.3 10.7 18.9 -10.5 na 0.9 na 0 -VIVA KK Viva Kuwait Tele Telecoms 1,654 536 0.5 1.1 0.6 12.4 11.2 5.4 34.7 6 -KIB KK Kuwait Internati Financials 687 448 0.2 0.1 5.9 -20.0 na 0.8 na 1 -

ALQURAIN KK Qurain Petrochem Materials 758 424 0.2 8.4 41.3 0.0 na 0.7 na 0 -SRE KK Salhiahia Real Financials 611 403 0.1 -1.6 9.8 2.9 na 1.2 na 1 -

ALMUTAHE KK Ahli United Bank Financials 2,382 380 0.3 6.2 6.8 -17.0 na 1.8 na 1 - ALTIJARI KK Commercial Real Financials 462 371 0.1 -3.6 7.5 -10.3 na 0.5 na 0 -MEZZAN KK Mezzan Holding C Cons. Staples 1,139 342 0.8 5.5 24.2 56.8 15.4 3.7 21.9 4 -FACIL KK Commercial Facil Financials 338 338 0.1 -0.8 27.7 -19.3 na 0.6 na 0 -

Figure 34: 3M ADTV, $mn Figure 35: Valuations vs FM, 12M fwd P/E (x)

Note: all forward figures for valuations are taken from Bloomberg consensus estimates. Source for all charts: Bloomberg

40

60

80

100

120

140

160

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

J u l - 1 5

J a n - 1 6

MSCI Kuwait, $ MSCI FM, $

78%

16%

6%

Financials

Telecoms

Industrials

0

100

200

300

400

500

600

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

J u l - 1 5

J a n - 1 6

Kuwait 3M ADTV ($mn) MSCI Kuwait 3M ADTV ($mn)

0

2

4

6

8

10

12

1416

18

J a n - 1 0

M a y - 1 0

S e p - 1 0

J a n - 1 1

M a y - 1 1

S e p - 1 1

J a n - 1 2

M a y - 1 2

S e p - 1 2

J a n - 1 3

M a y - 1 3

S e p - 1 3

J a n - 1 4

M a y - 1 4

S e p - 1 4

J a n - 1 5

M a y - 1 5

S e p - 1 5

J a n - 1 6

Kuwait Frontier

Kuwait


15/44

15




Source: UN


Source: IMF


Source: IMF

Figure 39: Kuwait – dinar





Source: IMF

0

500

1,000

1,500

2,000

2,5003,000

3,500

4,000

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

2 0 1 5

2 0 2 0

2 0 2 5

2 0 3 0

2 0 3 5

2 0 4 0

2 0 4 5

2 0 5 0

0-19 20-64 65+

0

2

4

6

8

10

1214

16

18

0%

2%

4%

6%

8%

10%

12%14%

16%

18%

K o r e a

I n d i a

J a p a n

U S A

C h i n a

T a i w a n

E U

E u r o A r e a

E g y p t

S i n g a p o r e


-10

0

10

20

30

40

500

1

2

3

4

5

6

7

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E


90

95

100

105

110

115

120

125

1300.2

0.3

0.3

0.4

0.4

0.5

J a n - 0 0

J a n - 0 1

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

J a n - 0 9

J a n - 1 0

J a n - 1 1

J a n - 1 2

J a n - 1 3

J a n - 1 4

J a n - 1 5

J a n - 1 6

KWD vs $ KWD vs EUR Kuwait REER (Dec 07=100)

Weaker

Stronger

-10

-5

0

5

10

15

20

25

30

35

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

Change in Lending as % of GDP Real GDP growth10.8

10.1

7.5

6.0

2.5

-7.1

-2.4

10.6

7.7

1.00.0

0.9

2.4 2.6 2.6

-8

-6

-4

-2

0

2

4

6

8

10

12

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E

Kuwait


16/44

16



Figure 42: Key data

Local currency NGNGDP/capita, $ (2015) 2,758Population, mn (2015) 178.7S&P/Moody's rating B+/Ba3 *-Weight in MSCI FM, % 11.6%

MSCI Index MXNG2016E P/E, x 7.52016E FY EPS growth -3.5%Trailing P/B, x 1.2Beta to FM 1.3MSCI full MktCap, $bn 35.1MSCI free float MktCap, $bn 10.1No. of companies 163M ADTV, $mn, MSCI cos 7.6Local index NGSEINDXMktCap, $bn 43.4No. of companies 1773M ADTV, $mn 9.5



Ticker Name SectorMktCap FF 3M ADTV $ performance (%) 12MF Trail 12MF # analyst MSCI($mn) MktCap (%) ($mn) 1M 3M 12M P/E (x) PBV (x) RoE (%) Recs wgt (%)

MXNI MSCI Nigeria 35,090 10,118 7.6 -5.9 3.3 -33.3 7.0 1.2 15.1 252 0.0NB NL Nigerian Brewer Cons. Staples 4,250 2,122 0.8 -9.4 10.4 -29.8 20.2 4.6 22.5 18 21GUARANTY NL Guaranty Trust Financials 2,387 1,192 2.0 0.9 5.2 -43.6 4.7 1.1 23.7 22 12NESTLE NL Nestle Nigeria P Cons. Staples 2,473 988 0.4 -11.3 -12.4 -32.1 19.1 12.9 60.1 16 10DANGCEM NL Dangote Cement Materials 13,804 965 0.4 -1.7 26.5 -7.9 13.1 3.9 27.5 18 10ZENITHBA NL Zenith Bank Plc Financials 1,927 962 1.5 -6.0 9.1 -44.5 3.8 0.6 16.0 23 10ETI NL Ecobank Transnat Financials 1,843 551 0.1 3.3 6.6 -20.8 4.5 0.8 13.1 9 5WAPCO NL Lafarge Africa P Materials 1,696 508 0.5 -8.4 -6.0 -20.7 10.8 2.9 15.9 15 5FO NL Forte Oil Plc Energy 1,638 491 0.1 -14.6 -20.1 26.7 33.1 19.9 6.0 6 5SEPLAT NL Seplat Petrol Energy 964 385 0.6 13.5 84.1 -9.9 8.5 0.7 8.3 14 4GUINNESS NL Guinness Nigeria Cons. Staples 720 359 0.1 -12.7 -12.7 -40.6 21.6 2.9 14.0 16 4UBA NL United Bank Afr Financials 617 308 0.4 -10.4 23.1 -33.6 2.4 0.4 15.0 18 3

FBNH NL Fbn Holdings Plc Financials 612 306 0.4 2.0 -12.9 -64.1 2.0 0.2 9.1 18 3STANBIC NL Stanbic Ibtc Hol Financials 692 299 0.1 -8.4 6.0 -51.9 5.9 1.2 21.2 13 3

ACCESS NL Access Bank Plc Financials 568 283 0.3 -2.1 2.8 -37.5 2.3 0.3 13.0 18 3UNILEVER NL Unilever Nigeria Cons. Staples 557 278 0.1 -5.3 -24.9 -26.9 43.5 12.2 28.6 16 3PZ NL Pz Cussons Niger Cons. Staples 407 122 0.0 -10.6 -2.9 -31.7 21.1 2.0 8.3 12 17UP NL 7-Up Bottlng Cons. Staples 467 467 0.1 -4.2 -25.9 -18.4 11.4 3.9 26.2 2 -DANGSUGA NL Dangote Sugar Re Cons. Staples 361 317 0.0 5.1 8.9 -16.9 5.9 1.2 17.2 11 -UACN NL Uac of Nigeria Industrials 184 181 0.1 -7.1 -6.2 -52.4 8.1 0.8 10.7 15 -FIDELITY NL Fidelity Bank Financials 173 166 0.1 -13.0 -11.7 -37.3 2.5 0.2 6.7 10 -OANDO NL Oando Plc Energy 276 156 0.1 13.9 14.0 -76.6 9.6 1.3 na 5 -

Figure 46: 3M ADTV, $mn Figure 47: Valuations vs FM, 12M Fwd P/E (x)

Note: all forward figures for valuations are taken from Bloomberg consensus estimates. Source for all charts: Bloomberg

0

50

100

150

200

250

J a n - 1 0

J u l - 1 0

J a n - 1 1

J u l - 1 1

J a n - 1 2

J u l - 1 2

J a n - 1 3

J u l - 1 3

J a n - 1 4

J u l - 1 4

J a n - 1 5

J u l - 1 5

J a n - 1 6

MSCI Nigeria, $ MSCI FM, $

38%

38%

15%

9% Financials

Cons.Staples

Materials

Energy

0

5

10

15

20

25

30

35

40

J a n - 1 0

M a y - 1 0

S e p - 1 0

J a n - 1 1

M a y - 1 1

S e p - 1 1

J a n - 1 2

M a y - 1 2

S e p - 1 2

J a n - 1 3

M a y - 1 3

S e p - 1 3

J a n - 1 4

M a y - 1 4

S e p - 1 4

J a n - 1 5

M a y - 1 5

S e p - 1 5

J a n - 1 6

Nigeria 3M ADTV ($mn) MSCI Nigeria 3M ADTV ($mn)

4

6

8

10

12

14

J a n - 1 2

A p r - 1 2

J u l - 1 2

O c t - 1 2

J a n - 1 3

A p r - 1 3

J u l - 1 3

O c t - 1 3

J a n - 1 4

A p r - 1 4

J u l - 1 4

O c t - 1 4

J a n - 1 5

A p r - 1 5

J u l - 1 5

O c t - 1 5

J a n - 1 6

A p r - 1 6

Nigeria Frontier

Nigeria


17/44

17




Source UN


Source: IMF


Source: IMF

Figure 51: Nigeria –naira





Source: IMF

0

50,000

100,000

150,000

200,000

250,000

1 9 9 0

1 9 9 5

2 0 0 0

2 0 0 5

2 0 1 0

2 0 1 5

2 0 2 0

2 0 2 5

2 0 3 0

2 0 3 5

2 0 4 0

2 0 4 5

2 0 5 0

0-19 20-64 65+

0

5

10

15

20

2530

35

40

0%

5%

10%

15%

20%

25%30%

35%

40%

E U

E u r o A r e a

I n d i a

B r a z i l

N e t h e r l a n d s

S p a i n

F r a n c e

S o u t h A f r i c a

G e r m a n y

J a p a n


-5

0

5

10

15

20

250

5

10

15

20

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E

Current account balance (% of GDP) RHS CPI (average % YoY)50

70

90

110

130

150

17050.0

100.0

150.0

200.0

250.0

J a n - 0 0

J a n - 0 1

J a n - 0 2

J a n - 0 3

J a n - 0 4

J a n - 0 5

J a n - 0 6

J a n - 0 7

J a n - 0 8

J a n - 0 9

J a n - 1 0

J a n - 1 1

J a n - 1 2

J a n - 1 3

J a n - 1 4

J a n - 1 5

J a n - 1 6

NGN vs $ NGN vs EUR Nigeria REER (Dec 07=100)

Weaker

Stronger

-10

-5

0

5

10

15

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6


8.8 8.7 8.39.1

8.0

9.0

10.0

4.94.3

5.46.3

2.7 2.3

3.53.9

0

2

4

6

8

10

12

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

2 0 1 8 E

Nigeria


18/44

18



Figure 54: Key data

Local currency OMRGDP/capita, $ (2015) 20,925Population, mn (2015) 3.7S&P/Moody's rating A-/A1Weight in MSCI FM, % 5.6

MSCI Index MXOM2016E P/E, x 9.02016E FY EPS growth 2.4%Trailing P/B, x 1.2Beta to FM 0.5MSCI full MktCap, $bn 12.3MSCI free float MktCap, $bn 4.9No. of companies 93M ADTV, $mn, MSCI cos 8.1Local index MSM30MktCap, $bn 17No. of companies 303M ADTV, $mn 13.1



Ticker Name SectorMktCap FF 3M ADTV $ performance (%) 12MF Trail 12MF # analyst MSCI($mn) MktCap($mn) ($mn) 1M 3M 12M P/E (x) PBV (x) RoE (%) Recs wgt (%)

MXOM MSCI Oman 10,626 4,253 4.8 9.3 17.2 -8.4 9.3 1.2 11.4 48 0.0OTEL OM Oman Tel Telecoms 3,117 1,407 0.9 3.9 11.9 -1.6 10.2 2.2 20.1

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