News & Events

Presentation to the Arab Cable Manufacturers Association
Re: Overview of the Middle East & North Africa (MENA) Economies

Top

• Executive Summary
• Investment Opportunity

• Overview of MENA Economies
• Overview of MENA Markets

• Firm Credentials
• The EFG-Hermes MEDA Fund

Executive Summary

The sharp decline in oil prices from a peak of USD147/bbl in July to USD45-55/bbl will drive the deceleration of economic growth in the MENA economic growth in the region, but will not bring to a grinding halt unless oil prices fall below USD25/bbl and stay there
As a result of the global credit crunch, MENA governments have been forced to step in and inject liquidity in their banking systems to avoid a credit freeze and help move vital infrastructure projects forward
Some MENA economies will fare better than others with Saudi Arabia (large domestic economy, low debt/GDP ratio, highly liquid SWF) and Qatar (LNG exports) more cushioned for a downturn than Dubai (regional services hub, small open economy) and Egypt (pressure on currency, fall in FDI, tourism and Suez Canal revenue)
MENA markets are trading at levels comparable with other Emerging Markets with a PE09 average of 7.9x and PE10 of 7.4x, but are poised to post higher EPS growth of 5% vs. an Emerging Markets average of -10.7% and a BRIC country average of 0-5%

Overview of MENA Economies
The Oil Factor

While MENA economies are likely to face deceleration in their growth prospects in 2009, they will not come to a grinding halt unless oil prices stagnate at USD25/bbl or below
Assuming oil prices between USD45-50/bbl in 2009, GDP growth is expected to slow to 2.3% in 2009 from 6.1% in 2008 with Qatar leading the region given its ramp-up in infrastructure spending and LNG exports
The large accumulated reserves during past years when the GCC posted record current account surpluses would continue to shield the region from a severe downturn as governments re-direct some of their savings domestically (already the case for Kuwait, Qatar and Saudi) and commit to continue with vital infrastructure spending programs
Assuming that GCC countries maintain spending levels outlined in their 2009 budgets and oil prices remain in the USD45-50/bbl range, Gulf countries will likely run single-digit current account deficits in 2009

The Credit Crunch

While the MENA financial sector did not have significant exposure to the subprime sector and structured credit, liquidity in the banking sector tightened after the outflow of speculative foreign funds betting on revaluation gains
As depositors exited the region, overleveraging and underfunding (i.e. burgeoning loan to deposit ratios) by regional financial institutions –namely in the UAE and Qatar –became apparent
The lack of convergence between LIBOR and the Emirates Interbank Offering Rate (EIBOR) rates despite the currency peg is symptomatic for the higher cost of funding and tightening credit prevalent in the banking sector
Governmental and quasi-governmental institutions are looking to act as lenders of last resort to bridge financing gaps directly or through the injection of liquidity in the banking system

Silver Lining

The slowdown in GDP growth has helped record inflation ease while favorable demographics are expected to continue to drive higher levels of private consumption
- The strengthening of the US dollar has led to a decline in imported inflation as commodity prices have declined (i.e. construction materials)
- Credit growth has moderated substantially helping domestic inflation to decrease
The population growth of MENA is the highest globally while more than 50% of the region’s population is under the age of 25; these favorable demographics are contributing to increased infrastructure spending and private consumption levels

Overview of MENA Markets
Market Capitalization and Liquidity

The MENA region’s market capitalization has declined by USD500 billion in 2008 but remains higher than that of South Africa, Russia and
Southeast Asia; the region also boasts a daily trading value which is higher than other Emerging Markets. Saudi Arabia’s Brazil Russia India making it the second most liquid emerging market the Comparative Market Capitalization
Saudi Arabia's daily traded value is higher than Brazil, Russia, and India, globally after China; Saudi CMA has allowed foreigners to invest through certified swaps leading to further institutionalization

Market Performance

Markets have experienced a pronounced correction in 2008 due to the global meltdown, increasing scrutiny of corporate governance and weakening liquidity which has markedly increased the correlation between the MENA region and other Emerging Markets
Secondary reasons for the market correction were:
- The decline in oil prices from $147 to the USD45-55/bbl range
- Concern over Dubai’s ability to finance its debt amidst a “real estate bubble”
- Capital flight on account of the diminishing probability of a currency de-peg
In the first quarter of 2009, the correction continued, however, recent policy implementations by various MENA governments led to encouraging signs that the economic uncertainty surrounding the region has started to abate

Country Valuations

Following the recent sharp correction, regional equity valuations are at attractive levels relative to global peers trading at a 2009 PE of 7.9x vs. an average of 10.0x for Emerging Markets
Domestic liquidity is significantly higher than other emerging markets, coupled with high ROEs (10%) and 2009 EPS growth (5%+), the region could justifiably trade at a premium in the medium to long term to emerging market peers

Country vs. Fund Valuations*

Firm Credentials
Overview

Structure

The Firm

EFG-Hermes is the Arab world's largest investment bank in the region with a net cash balance of USD400M as of end of 2008
EFG-Hermes went public through a GDR offering in July 1998 and has a current market capitalization over USD1.2 billion, a book value of USD1.5 billion, and a liquidity to equity ratio of 0.3x (as of 31st December, 2008); the company is listed on the London, Cairo and Alexandria Stock Exchanges
EFG-Hermes is the market leader in the field of privatization, mergers & acquisitions, equity and debt finance raising.
Since 1997, EFG-Hermes has raised around USD12 billion for its clients and advised on more than USD18 billion worth of M&A transactions

Organizational Structure

Asset Management

The EFG-Hermes Asset Management Team is part of the EFG-Hermes Group
Has a 14-year track record in regional markets since the Firm's establishment in 1994
Currently managing approximately USD4 billion:
- Equity & money market funds across the MENA region
- Private Equity funds across countries/sectors
- Discretionary portfolios and segregated mandates for institutional and ultra high net worth clients
Product Range
- Equities (long/short), Fixed Income and Money Markets
- Specialized (e.g. Islamic, sector specific etc.)
- Indexed and absolute return
- Private Equity
Top performing funds in the regional market over the last 5 years
Experienced Team of 25+ investment professionals across four countries (Egypt, the UAE, Lebanon, Saudi Arabia and Qatar) making it the largest on-the-ground team of any investment manager in the Middle East