GCC Demographic Shift Intergenerational risk-transfer at play

Kuwait Financial Centre Markaz R E S E A R C H Research Highlights: Analyzing the demographic structure of the GCC in addition to implications on various economic and fiscal aspects Markaz Research is available on Bloomberg Type MRKZ <Go> M.R. Raghu CFA, FRM Head of Research +965 2224 8280 rmandagolathur@markaz.com Mai Sartawi Intern Kuwait Financial Centre S.A.K. Markaz P.O. Box 23444, Safat 13095, Kuwait Tel: +965 2224 8000 Fax: +965 2242 5828 www.markaz.com GCC Demographic Shift Intergenerational risk-transfer at play At some point around 1800, after untold millennia of human history, the global population reached its first billion. The world s population now grows by 1 billion about every 12 years -2010 World Population Datasheet, Population Reference Bureau. The demographic structure of a country or region has wide-ranging implications, from health and education, to labor force make-up and fiscal budgeting. The population is the driving force of an economy; it is the unit by which economic output is realized and as such, should be invested in and shaped in a manner to better influence economic growth. That being said, population no matter the structure constitutes a burden on the country s fiscal budget. An old population will be exiting the workforce, and hence their productivity will drop, while at the same time their retirement compensation, i.e. social security, will be drawn upon, draining fiscal reserves. Conversely, a very young population also requires a great deal of government expenditure, particularly in welfare-based states such as the Gulf, in terms of, education, subsidies, and wages. The GCC is in a unique position of having an extensive welfare system based on hydrocarbon revenues; this has created a growing drain on fiscal reserve as the demographic structure is skewed towards the younger population which is entering the labor force in higher numbers each year. The GCC has a low population, when compared with other regions, totaling 45 mn people in 2011, less than 1% of the global population. Moreover, the region is young with 54% under the age of 25, though this is expected to rise to about 36 by 2050. The current demographic structure has created several pressure points for the GCC economies. The report pinpoints these pressure points, explains their implications and offers alternative reforms for them. Figure 1: GCC Population Pyramid 2010/2050 Source: US Census

Table of Contents 1. Overview... 3 GCC Demographic Structure... 6 2. Pressure Points... 13 Welfare... 13 Housing... 15 Education... 16 Employment... 20 3. Policy Agenda... 25 Housing Reform... 25 Education Reform... 25 Governance and Regulation of Education Sector... 26 Labor Reform... 26 Appendix 1: MENA Statistics... 28 Kuwait Financial Centre Markaz 2

The global population currently stands at just under 7 billion, nearly 40% of which are in China and India The world is adding people at an alarming rate, adding over 80 mn people a year 1. Overview The global population currently stands at just under 7 billion, nearly 40% of which are in China and India. The third most populous country, the United States, is far behind at 312mn. By 2050, the UN projects the world population to hit 9 billion, with India and China s share of world total declining to 30%. Nigeria will have usurped the United States as the third most populous nation, at 433mn. Russia and Japan will have dropped out of the top ten, making way for Ethiopia and the Philippines with 174mn and 150mn, respectively. Table 1: World s Most Populous Countries 2011 2050 Country Population (mn) Country Population (mn) 1 China 1,346 India 1,692 2 India 1,241 China 1,313 3 United States 312 Nigeria 433 4 Indonesia 238 United States 423 5 Brazil 197 Pakistan 314 6 Pakistan 177 Indonesia 309 7 Nigeria 162 Bangladesh 226 8 Bangladesh 151 Brazil 223 9 Russia 143 Ethiopia 174 10 Japan 128 Philippines 150 Source: 2011 World Population Data Sheet, Population Reference Bureau Billion after Billion The world is adding people at an alarming rate, adding over 80 mn people a year, despite world population growth rates declining to about 1.2% p.a. Birth rates around the world are highly variable, with the number falling to two children per family in some countries while the same has barely decreased in other countries. As seen below, the first billion total population was reached in the 1800s, encompassing all of human history to that point, while the second billion was reached just 130 years later, in 1930. The rate of addition declined exponentially thereafter, with the fifth, sixth, and seventh billion milestones reached in 12 year intervals. This pattern suggests that the world could hit 8 billion in another decade, with 9 billion reached by 2035, i.e. 15 years ahead of the UN projection Figure 2: Billionth Milestones Kuwait Financial Centre Markaz 3

The Population Clock Almost all of the world s population is in less developed countries; consequently the main driver of the global population is in those regions, where 27 infants are born per minute in developed countries, 239 are born in less developed regions. Health care divergences and life expectancy have decreased the number of deaths per minute in developed countries at 23 versus 84 in their less developed counterparts. Predictably, infant mortality is also higher is less developed countries, at 11 per minute or over 16,000 per day. Table 2: The Population Clock World More Developed Countries Less Developed Countries Population 6,986,951,000 1,241,580,000 5,745,371,000 Births per Year 139,558,000 14,070,000 125,488,000 Day 382,351 38,548 343,803 Minute 266 27 239 Deaths per Year 56,611,000 12,201,000 44,410,000 Day 155,099 33,427 121,671 Minute 108 23 84 Natural Increase per (Birth-Death) Year 82,947,000 1,869,000 81,078,000 Day 227,252 5,121 222,132 Minute 158 4 154 Infant Deaths per Year 6,078,000 77,000 6,001,000 Day 16,652 211 16,441 Minute 12 0.1 11 Source: 2011 World Population Data Sheet, Population Reference Bureau How Does the GCC Measure up? As a region, the GCC has a very small population, with just around 45mn, less than 1% of the global population. However, in contrast to the small population, the GCC is one of the wealthier regions, in terms of GDP/capita (at just under $32,000), well above the MENA Ex. GCC, and in line with North America and Europe. Figure 3: Population versus GDP/capita 60,000 50,000 North America GDP/capita (USD) 40,000 30,000 20,000 GCC Europe 10,000 0 MENA Asia 0 1000 2000 3000 4000 5000 Population (Millions) Source: IMF Note: Size of the Bubble indicates population percentage. Kuwait Financial Centre Markaz 4

The Four Phases of Demographic Transition (Excerpt - 2011 World Population Data Sheet, Population Reference Bureau) In the parish of Mouy, north of Paris, there were 47 burials recorded in 1693; in 1694, the number jumped to an appalling 262. This is a dramatic example of life during Phase 1 of the demographic transition (albeit a somewhat modern one compared to the 50,000 years of human existence that preceded Phase 1). A rise in the price of grains meant more people could not afford food, a situation that nearly always led to excessive mortality, as happened in Mouy. In Phase 2 of the transition roughly the beginning of the Industrial Revolution death rates began to fall more regularly, although the preference for larger families may have remained for a time. Next, increasing urbanization lessened the need for children even as early public health measures improved life spans. Now the transition was really underway. By the 20th century, the development of modern medicine and the desire to limit family size combined to cause the low death rates and very low birth rates we see today. That, at least, is what happened over the centuries in Europe and North America. Most developing countries arrived in the 20th century still in the first phase of the transition. In the aftermath of World War II, however, the benefits of public health and modern medicine became available to them in a comparatively short period of time. Mortality fell with unusual rapidity but the desire for large families remained. Then, with mounting concern over record rates of population growth, birth rates did begin to fall in many countries. Today, we can find examples around the world of all four stages of the transition. Kuwait Financial Centre Markaz 5

GCC Demographic Structure Size and Growth The GCC has a low population, when compared with other regions, totaling nearly 45 mn people in 2011 The GCC has a low population, when compared with other regions, totaling nearly 45 mn people in 2011. The most populated country is Saudi Arabia with 28 mn (65% of the total), followed by nearly 8 mn in the UAE. The International Monetary Fund forecasts a compounded growth rate (CAGR) of 2.41% in the next 5 years, increasing the population further to 49 mn in 2016. The growth rate is substantially lower than the CAGR throughout 2004-2008 of 5.9%. 1 By 2025, the GCC is expected to have a total population of 57mn, to grow by about 14mn more by 2050. As of 2011, the lowest median age in the GCC is 24 yrs in Oman and the highest is 31 yrs in Qatar. The average age in the entire GCC region is 27 yrs with over 20% below the age of 15. Table 3: GCC Population Statistics Population mid-2011 (mn) Births per 1,000 pop. Deaths per 1,000 pop. Rate of Natural Increase % Projected Population (mn) mid- 2025 mid- 2050 2050 pop. as multiple of 2011 Infant Mortality Rate Total Fertility Rate % of population ages <15 65+ World 6,987 20 8 1.2 8,084 9,587 1.4 44 2.5 27 8 Saudi Arabia 27.90 21 4 1.8 36.0 44.6 1.6 18 2.9 31 3 United Arab Emirates 7.90 13 1 1.2 9.9 12.2 1.5 7 1.8 18 1 Oman 3.00 29 3 2.6 3.9 5.3 1.8 12 3.3 24 2 Kuwait 2.80 19 3 1.6 3.7 5.2 1.8 9 2.3 26 3 Qatar 1.70 11 1 1.0 2.1 2.4 1.4 8 2.1 14 1 Bahrain 1.30 15 2 1.3 1.7 2.0 1.5 7 1.9 20 2 GCC Total * 44.6 18 2 1.6 57.3 71.7 1.6 10 2.4 22 2 * All GCC averages denote the average of six member nation figures Source: 2011 World Population Data Sheet, Population Reference Bureau By 2050, the developed world pyramid becomes more column-like, with the bulk of the population in the higher age brackets The Pyramids The population pyramid in more developed countries (Figure ) is relatively uniform, with a small tapering at the higher age range. The median age for the developed world is over 35. By contrast, developing countries have a bottom heavy pyramid, indicating support for the aging population through youth entering the labor force; here the median age remains below 30, with some countries having a median age of 24. But developing countries pyramids are liable to change with modernization, increased life expectancy, and family planning. By 2050, the developed world pyramid becomes more column-like, with the bulk of the population in the higher age brackets; the median age will have increased to 45 in some cases such as Europe, while remaining in the low 40s in the US. 1 GCC Population Forecast to Reach 50 Million in 2013, Business Intelligence Middle East, 18 February 2012 Kuwait Financial Centre Markaz 6

In the developing world, the pyramid also bulges at the mid-age range by 2050 as the younger population ages and birthrates decline or slow. The median age will increase to around 37 by then. Figure 4: Population Pyramids Developed World vs. Developing World 2010/2050 Source: US Census GCC Pyramids The fertility rate in the GCC has been declining as there is greater awareness of family planning The fertility rate in the GCC has been declining as there is greater awareness of family planning. With the exception of Oman, all other GCC countries fertility rates have decreased by more than 50%. 2 This could also be correlated to the increased cost of living as well as increased education opportunities for women. As the age of marriage increases, this decreasing trend in birth rates is expected to continue. Moreover, GCC pyramids have a skewed bulge in the male bracket, specifically working age, which is due to the high number of male expatriates in the countries. Saudi Arabia s population pyramid is expansive 3 showing that the majority of the population is below the age of 30, with a median age of 26. This alludes that there is a high birth rate as well as a high death rate and a relatively short life expectancy. However, a decreasing birth rate suggests that the pyramid will 2 Arab Human Development Report, United Nations Development Program, 2010 3 Smaller Old age population and the number of people in each age group increases as we move down the population pyramid Kuwait Financial Centre Markaz 7

transform into a contractive pyramid where the majority of the population is in the middle ages as seen in the 2050 chart. Figure 5: Saudi Arabia and Kuwait Population Pyramids - 2010/2050 Source: US Census Kuwait s pyramid is less expansive than Saudi Arabia s, with most of its population below the age of 35 yrs, but over 20 Kuwait s pyramid is less expansive than Saudi Arabia s, with most of its population below the age of 35 yrs, but over 20. There is also more discrepancy between the higher numbers of males to females, particularly in the 20-40 age brackets. This is attributed to the high flow of expatriates looking for employment, usually in this age bracket. The high expatriate rate is expected to decrease as more nationals enter the labor force and demand jobs. Similar to Kuwait, UAE also has a very high expatriate rate. UAE s population pyramid would look more expansive if it was exclusive to the national population. However, its total population, including expatriates, is a more contractive pyramid with the majority of the population between the ages of 20-60. The UAE population s growth is expected to continue, driven by a steady inflow of expatriates. Qatar has the highest expatriate rate in the region. Its population pyramid alludes to it with the higher percentage of males in all working age groups, above the age of 20. Qatar s demographic boom is accompanied by its economic boom that gave rise to many opportunities for expatriates. However, population growth is expected to decrease as expatriates exit to be replaced by local talent Kuwait Financial Centre Markaz 8

Figure 6: Qatar and UAE Population Pyramids 2010/2050 Source: US Census Bahrain is the least populated country in the GCC. Its population pyramid shows that there is no huge discrepancy between the age group Oman s population pyramid is the most expansive in the GCC region. Similar to Saudi Arabia, Oman has the second highest population of nationals compared to expatriates in the region. The majority of Oman s population is also under the age of 25. The pyramid is projected to become more contractive as the fertility rate decreases and health care services are availed of. Bahrain is the least populated country in the GCC. Its population pyramid shows that there is no huge discrepancy between the age groups. There is also an equal distribution of males to females, with exception of the 40-60 yrs age brackets. Bahrain population is expected to grow. Kuwait Financial Centre Markaz 9

Figure 7: Bahrain and Oman Population Pyramids 2010/2050 Source: US Census While the young bracket (15-24) comprises the bulk of the Arab population, growth rates among countries differ greatly and are falling over time While the younger age group (15-24) comprises the bulk of the Arab population, growth rates among countries differ greatly and are falling over time, indicating that this bracket will experience declining growth rates going forward. Between 1995-2010 Yemen had the highest rate among Arab countries, with the youth population nearly doubling, however this is expected to grow by under 40% over the next 15 years. Saudi Arabia saw its youth population grow by 66% over the last 15 years, but this rate is expected to fall to just 15% through 2025. It is interesting to note that the youth population aged 15-24 will decline in Iran, Algeria, Morocco, Tunisia, Lebanon, and Turkey over the next 15 years, indicating sharply declining birth rates and/or increased infant mortality rates. Kuwait Financial Centre Markaz 10

Figure 8: Youth Population Growth The majority of the GCC population consists of expatriates Source: 2011 World Population Data Sheet, Population Reference Bureau The Expat Factor The majority of the GCC population consists of expatriates. Based on 2010 data, Credit Suisse reported Qatar as having 86.5% expatriates, the highest percentage of international migrants in the world, although these tend to have a transient quality and migrate in and out on a seasonal basis. This is followed by 70% and 68.8% in Kuwait and the UAE, respectively. The GCC region as a whole has an average of 53.43% of expatriates compared to an average of 9.5% in the MENA region The GCC region as a whole has an average of 53.43% of expatriates compared to an average of 9.5% in the MENA region. Qatar has the largest immigration rate in the world with 40.62 of 1,000 people entering the country being expatriates. None of the GCC countries have a negative net immigration rate which indicates that there is always a higher rate of expatriates entering than leaving the region. Table 4: Expatriates Population 2010 Qatar 86.5% UAE 70% Kuwait 68.8% Bahrain 39.1% Oman 28.4% Saudi Arabia 27.8% Source: Credit Suisse The high inflow of expatriates is reflected in the GCC labor force. The positions filled by expatriates range from low-paying, low-skilled construction jobs to highly professional and specialized jobs. Nearly,, 4.5 million nationals are potentially entering the job market compared to 5 million nationals who were employed in 2010. IMF predicts that an additional 2 to 3 million nationals will not be able to find employment. 4 4 Meeting the Unemployment Challenge, Masood Ahmed, 19 January 2012 Kuwait Financial Centre Markaz 11

Fiscal Situation The GCC is a distinctive region due to its unique hydrocarbon reserves compared to a relatively small, although increasing, national population The GCC is a distinctive region due to its unique hydrocarbon reserves compared to a relatively small, although increasing, national population. Growth in the six economies, in terms of spending and GDP/Capita as well as welfare, heavily relies on oil rent to attract private investors and to provide extensive public services and subsidies to nationals. With not enough diversification in the economy, the GCC countries government spending will continue to cause a drain on fiscal accounts. Based on unchanged policies and historic trend, the International Monetary Fund (IMF) forecast a 2% annual growth in real GDP for the rest of the decade. In addition, IMF also predicted an annual increase in population of 3.5%. The imbalance in growth rates requires GCC governments to look closer at their policies to better match macroeconomics priorities and objectives. Fiscal Balance as a % of GDP has been decreasing in all GCC countries, in standing budget deficit which is expected to increase to 9.7% this year. 5 UAE was also severely affected by the financial crisis due to their broad exposure to the global Oman, Saudi Arabia and Bahrain government expenditures exceeded revenues in 2009 as the economies were downturned during the financial crisis, causing government budget deficits. Saudi and Oman recovered the following year, on higher oil prices, yet Bahrain is still suffering from its long market. Figure 9: Fiscal Balance as % of GDP Inefficient policies to allocate governments budgets will cause the GCC to experience continued and exacerbated fiscal drain Inefficient policies to allocate governments budgets will cause the GCC to experience continued and exacerbated fiscal drain. GCC citizens feel unaccountable for their welfare, the current education systems do not provide them with world-class, competitive skills, government employment and unemployment benefits remove the incentive for specialization and dynamic job seeking and the lack of skilled national manpower, and consequent dependence on expatriate labor will remain. Reforms are needed to aid countries to diversify their economies to head away from an unrestrained fiscal drain. 5 Bahrain s Budget Deficit up 5-fold in 10 Years, SyndiGate.info, 4 April 2012 Kuwait Financial Centre Markaz 12

2. Pressure Points Welfare GCC countries are known for their generous and extensive welfare system GCC countries are known for their generous and extensive welfare system. The government distributed its oil revenues for strategic reasons to ensure available essential services. Most government services are either at no cost or at highly subsidized prices such as electricity, water, gas, healthcare and commodities such as food. Except for Oman where local companies are taxed, taxes in the other GCC countries mainly consist of foreign corporation income taxes. This welfare system is strained and exasperated by the Elderly Support Ratio, which calculates the degree to which the youth population is able to support the aging and retired. Currently, on a global scale, there are 9 working age persons supporting one non-working age person while in the GCC the ratio is significantly higher, with the UAE and Qatar having the highest at nearly 80 people in support of one senior citizen. However, a stark reversal is expected in just 40 years, when this ratio is expected to drop to the low single digits across the GCC. This essentially means that by 2050, Kuwait, for example, will have just 3 working age persons supporting one senior citizen; this will constitute a major strain on resources for the country. Table 5: GCC Elderly Support Ratio Elderly Support Ratio* Life Expectancy at Birth (yrs) 2010 2050 All Male Female % Urban Pop. Per km 2 GDP/capita (US$) 2009 Mobile Subscribers per 100 inhabitants World 9 4 69 67 71 50 51 10,030 60 United Arab Emirates 79 9 77 77 79 83 14 38,960 143 Qatar 78 5 76 75 77 100 152 61,532 131 Bahrain 32 4 75 73 77 100 1,807 17,609 186 Kuwait 32 3 78 76 80 98 175 41,365 100 Saudi Arabia 22 5 76 74 78 81 64 13,901 209 Oman 21 4 72 70 74 72 10 17,280 116 * Elderly Support Ratio = Working age population (age 15-64)/ Population 65+ Source: 2010 World Population Data Sheet, Population Reference Bureau, GDP/Capita sourced from World Bank Data In 2010, welfare expenses took up 30% of all Kuwait government expenses Kuwait s welfare system subsidizes many of its citizens essential needs such as government housing for employed married Kuwaitis, free healthcare, and free education. Kuwait s welfare housing is emphasized more as a form of sustenance for low-income citizens and Bedouins. Expenses on subsidies and other transfers were almost all of the Kuwaiti government s expenses after the Gulf War. In 2010, welfare expenses took up 30% of all government expenses. Similar to Kuwait, the Saudi Arabia housing program exists to guarantee housing for lower income nationals. Saudi Arabia successfully implemented developmental plans from 1970 to 1995 encompassing social services and free healthcare and a system of free enterprise, which requires and encourages the private sector to play a bigger role in the economy. 6 Saudi s subsidies alone 6 A Welfare System, Kingdom of Saudi Arabia Ministry of Foreign Affair Kuwait Financial Centre Markaz 13

make up a large percentage of total expenditure. For example, subsidies expense on electricity accounted for 9% of total expenditure in 2009. 7 Qatar s expenses on welfare equaled a little more than 20% of total expenditures in 2009 UAE s welfare system is as encompassing as the other GCC countries. Welfare expenses fell to a little more than 10% of total expenditure in 2009 after steadily increasing to reach 25% of expenditure in 2006 (Figure 4). The retail price of fuel increased three times in the UAE. The volatile world oil prices have made most GCC countries more aware of a need to reform their subsidies and welfare system. For example, Qatar increased fuel prices by 25% and Saudi reduced domestic wheat production which relies on heavy subsidies. Regional inflation is better controlled with measured reduction on state subsidies. Qatar s Ministry of Labor and Social Affairs provides free education and health services as well as assistance for those in need such as orphans and widows. Free healthcare extends to all residents of Qatar, regardless of nationality. Qatar s expenses on welfare equaled a little more than 20% of total expenditures in 2009. Bahrain s welfare system includes a social security system which provides citizens with several benefits. Foreign corporations contribute to the system as well as employers. Benefits contain health care payments, housing benefits, and unemployment benefits. Health care is free for citizens. A state pension scheme is also available for citizens of the country but require a percentage payment of income to be accessed. Bahrain s expenses on welfare in 2008 reached its highest since 1990 reaching around 20% of all government expenses. Oman s welfare average expenses as a percentage of government expenditure is the lowest in the GCC region Oman s welfare average expenses as a percentage of government expenditure is the lowest in the GCC region. Healthcare subsidies alone are 5% of total expenditure. 8 In addition to education and interest on housing, Oman subsidizes development loans, farmers and fishermen equipment, and some exemptions from in income tax for some companies. Oman is expecting to allocate 8.5% of total expenditure on welfare for its 2012 budget. 9 GCC governments use welfare to provide a high standard of living for their citizens. Citizens of the GCC rely on their country s welfare system without feeling any sense of accountability, unlike when citizens pay taxes for public services. In return, citizens expectations for welfare grow as they remain unconscious of the expensive cost of their governments far-reaching subsidies and transfers. With the help of an extensive welfare system, GCC citizens wealth has been increasing at the cost of a fiscal drain on government accounts. Citizens can afford unemployment, living off the paradise supply of transfers from their governments which derive from unsustainable oil rent. Welfare in the GCC is creating adverse incentives to its citizens by indirectly demotivating dynamic job seeking attitudes since there is little fear of unemployment. Kuwait s government spending and welfare spending was the highest recorded in 2009. Welfare spending included a one time payment of KD 5.5 billion for the Public Institution for Social Security. 10 7 Employment and Salary Trend in the Gulf 2010, GulfTalent, 2011 8 The State General Budget for 2012, Omanet, 2011 9 Oman Budget 2012, Ministry of National Economy, 15 January 2012 10 Assembly Closes Term by Approving Crazy Budget, Kuwait Times, 30 June 2011 Kuwait Financial Centre Markaz 14

Figure 10: Welfare as % of Government Expenses MARKAZ RESEARCH In addition to public services and subsidies, increasing demand for housing with a rising population requires additional spending on infrastructure Housing Source: IndexMundi Database and UAE National Accounts 2009 In addition to public services and subsidies, increasing demand for housing with a rising population requires additional spending on infrastructure. Governments in the GCC are aware of the demographic boom and its resulting pressure on the government s fiscal budget. Some residential markets in the GCC are already facing shortages due to increasing demand for housing. Sale prices for residential properties increased in 2011 compared to 2010. There is a strong demand for compounds and a short supply, leading to growth in the rental segment. Riyadh s office market is facing an oversupply and moderate demand. 11 Growth in the real estate market is mainly driven by the residential segment Similar to Saudi Arabia, Kuwait is facing a strong demand for residential housing. Growth in the real estate market is mainly driven by the residential segment. Only Kuwaiti nationals are permitted to buy residential property. 12 National Bank of Kuwait sourced robust credit growth which is stimulating private residential segment growth. 13 Dubai s real estate suffered the most in the GCC region. There is an oversupply of rental apartments which caused downward pressure on prices. Oversupply is due to delayed projects from 2011, which are adding to residential units. Office space rental prices declined and are expected to continue to decline in 2012. In Abu Dhabi also commercial segment faces low demand. In Oman, the demand for higher-end properties has been decreasing as the demand for affordable housing increases. The residential property market is expected to improve in 2012. The lower priced areas Bowsher and Mawaleh face increased demand, and villas in the Waves and Muscat are still demanded by foreigners due to their higher quality and modern design as they are short in supply. 14 Qatar was the least affected country by the global financial crisis. Qatar is suffering from an oversupply in the residential and commercial property market. Rental prices have been declining in Doha. The Qatari government is expected 11 Real Estate Commentary, Kuwait Financial Centre Markaz, 26 February 2012-03 March 2012 12 GCC Real Estate- Back on Growth? Al Masah Capital, 13 March 2011 13Real Estate Market Commentary, Kuwait Financial Centre Markaz, 25 March 2012 14 Real Estate Market Commentary, Kuwait Financial Center Markaz. 12 February 2012 Kuwait Financial Centre Markaz 15

Qatar is suffering from an oversupply in the residential and commercial property market to increase spending for infrastructure in preparation for the 2022 World FIFA Cup. Qatar s current main concern is attracting foreigners to buy property and hosting them in 2022, benefiting Qatar s real estate market. However, foreigners ownership permits are limited to designated areas. Similar to Saudi Arabia, Qatar has potential for growth as demand rises for affordable housing. The Bahraini residential market is slowing down in both the free-hold and leasehold segments. There has been a declining trend in the residential rental market and are expected to remain flat throughout the year. Office Rentals have declined compared to the third quarter of 2011. This is due to supply-side competition between demanded small offices against large unfitted units. 15 Residential supply is also expected to decrease due to the political unrest in the country. Bahrain and UAE are expected to face declines in the real estate market due to an over supply and decreased demand for rentals. Generally, GCC real estate is stabilizing in terms of commercial rentals due to an oversupply.. Most GCC countries are facing an increased demand for affordable housing, which demands extensive spending on infrastructure. As population increases, GCC countries should allocate infrastructure spending to provide their citizens with affordable housing needs before accommodating expatriates and attracting foreign investments. a) Government Developmental Plans GCC governments fiscal balances could face a severe drain with the rising pressure on infrastructure and housing GCC governments fiscal balances could face a severe drain with the rising pressure on infrastructure and housing. GCC countries are already taking initiatives with infrastructure and development plans. Kuwait s development plan is allocating KD995 mn on human and social development agencies. Effectively, for the years 2009-2010 and 2010-2011, respectively, 5,169 and 6,740 housing units and houses were built. 16 In Saudi Arabia, Alwaleed Bin Talal Foundation initiated a Housing Development Program in 2003. The project identified low-income families in need. In addition, King Abdulla has allocated $62 billion to build 500,000 homes in Jeddah with an addition of $15 billion to fund 1.65 million homes in over five years. Such immediate public spending ambitiously provides incentive for short-term development in construction and other support sectors. 17 Education Except for Oman, all GCC citizens belonging to the matching age group are enrolled in primary education. 18 Oman primary gross enrollment ratio was 75% in 2008 which causes a high illiteracy rate in the country, reflecting its high unemployment rate of 15%. 15 Real Estate Market Commentary, Kuwait Financial Centre Markaz, 08 April 2012-14 April 2012 16 The Supreme Council for Planning and Development- State of Kuwait 17 Saudi Construction Leads the Region, Construction Week Online, March 31 2012 18 Primary education is preceded by nursery or pre-school and is also known as elementary school. Secondary education is preceded by elementary school, and is also known as high school. Tertiary education is usually preceded by high school and is also known as higher education such as college or university curriculum. Kuwait Financial Centre Markaz 16

Figure 11: Gross Enrollment Ratio (2008) Bahrain s tertiary enrollment is predicted to be the highest in the region at 57.6% by 2020 Source: Alpen Capital Report In 2008, GCC s secondary education gross enrollment ratio average was a high 93.3% with Bahrain leading at 96.8% and Oman lagging at 88.1%. Having a primary gross enrollment ratio lower than a secondary gross enrollment ratio forecasts a lower secondary gross enrollment ratio in future, which could be problematic for Oman. On the other hand, Oman is focusing on tertiary education. ; however, this will create a great imbalance between its citizens education. Primary education is necessary to increase the literacy rate of Oman, which was recorded as 86.6% in 2008. 19 For the year 2020, Alpen Capital forecast that primary and secondary enrollment to reach 100% in all GCC countries. Bahrain s tertiary enrollment is predicted to be the highest in the region at 57.6% by 2020. Qatar s tertiary enrollment is forecast to improve but growth is expected to be slow, resulting in the lowest enrolment among the GCC nations at 15.7% in 2020. The GCC average for tertiary enrollment is forecast to improve by 14.6% to reach 38.6% in 2020. Figure 12: Tertiary Enrollment Forecast With rising GDP/capita, the GCC population has become more aware of the necessity of education Source: Indexmundi With rising GDP/capita, the GCC population has become more aware of the necessity of education. Primary completion rate has risen as well as secondary enrollment throughout the region. For 2010, IMF estimated Secondary enrollment to reach an average of 96% in the GCC region. UAE secondary enrollment has been increasing at the fastest pace. This is coupled with the rise in UAE s exposure to global standards through its international economy (Figure 6). 19 Indexmundi Database Kuwait Financial Centre Markaz 17

Figure 13: Secondary Enrollment Qatar reported the lowest tertiary gross enrollment ratio of 11% Source: World Bank Report Bahrain also has the highest tertiary gross enrollment ratio in the GCC of 32.8% compared to GCC s average of 24.0%. Qatar reported the lowest tertiary gross enrollment ratio of 11%. This fact brings to light that a majority of Qatar nationals are meer high school graduates, endorsing our previous statement that Qatar has the least number of nationals in its workforce. However, Qatar is attempting to increase their low tertiary gross enrollment rate by trebling spending on tertiary education. Arab states have the second lowest rate of tertiary enrollment following the Sub-Saharan African countries. Since 1970, Asian, European and American students have constituted around 80% of the student body in tertiary education. Their needed skill sets are apparent in GCC s high expatriate rate, particularly workers from America and Asia. Figure 14: Student Enrollment in Tertiary Education The country spending highest on education in the GCC is Saudi Arabia, allocating 5.6% of GDP on education expenditure Source: UNESCO Institute for Statistics The country spending highest on education in the GCC is Saudi Arabia, allocating 5.6% of GDP on education expenditure (Table 6). Saudi Arabia is ranked 40 in the world. The second highest is Oman, with only 3.9% of GDP spent on education expenditure. Oman is ranked 108, followed by Kuwait at 111, Qatar at 120, Bahrain at 136 and, finally, UAE at 161. The top 5 countries spending the highest percent of GDP on education are Timor-Leste, Cuba, Lesotho, Marshall Islands and Maldives. Kuwait Financial Centre Markaz 18

Table 6: Education Expenditure % of GDP Country Rank Year Bahrain 2.9 135 2008 Most nationals enroll in the public sector, attracted by its free cost. As a result, private schools have less than 50% enrollment Kuwait 3.8 111 2006 Oman 3.9 108 2006 Qatar 3.3 120 2005 Saudi 5.6 40 2008 UAE 1.2 161 2009 Source: CIA World Factbook a) Education Shortcomings Most nationals enroll in the public sector, attracted by its free cost. As a result, private schools have less than 50% enrollment. Other than private schools being expensive, there are notable differences between private and public education. Government schools use Arabic as the primary language and focus on humanities, most importantly Islamic Studies. On the other hand, private schools usually use English as the main language and accord importance to sciences and mathematics. All GCC countries scored lower than the Organization for Economic Co-operation and Development (OECD) nations in the International Trends in International Mathematic and Science Study test (TIMSS) for 8 th grade. Figure 15: Grade 8 TIMSS Score (2007) Source: World Bank Note: The test is conducted every four years; 2011 results will be published end of 2012. Predominantly, GCC primary and secondary education does not prepare its citizens for modern industries and is not united with world-class qualifications GCC countries have the resources to enhance their human capital. As projected by the World Bank, 20.5 million nationals will enter the labor force by 2020. Unemployment is expected to rise only if GCC governments do not tackle the core of the problem. Governments in the GCC should commit to investment opportunities in the education sector, the healthiest and most vital long-term investment. Predominantly, GCC primary and secondary education does not prepare its citizens for modern industries and is not united with world-class qualifications. The stability of the economy mainly lies in the education system which should prepare national manpower to better integrate in the workforce. Especially with the rising need of the GCC countries to diversify their economies, governments should insure that their citizens have the opportunities and resources to excel in needed specializations. Kuwait Financial Centre Markaz 19

The GCC has a student to teacher ratio of 11:1 compared to developed nations ratio of 15:1 According to Alpen Capital, students in the region are expected to grow from 9.5 million in 2010, to 11.3 million in 2020 (2010). Educating the new wave of students at global standards would require 163,200 additional teachers. The GCC has a student to teacher ratio of 11:1 compared to developed nations ratio of 15:1. Even though the GCC s average is better, the teachers lack the required skill-sets to be as effective. GCC countries have a very low percentage of vocational training compared to the 10% global average (Figure 8).. Figure 16: Technical and Vocational Training Enrollment (2007) Source: UNESCO Employment More dangerously, GCC governments dominate the economy by being the biggest employers of their citizens. Nationals lose motivation to compete on a global level in the private sector as public sector employment offers them higher wages with more attractive benefits and requires fewer skills. More dangerously, GCC governments dominate the economy by being the biggest employers of their citizens This overstaffed safe haven of employment for GCC citizens exacerbates the most problematic factors for doing business in Kuwait which, according to the World Economic Forum, are an inadequately educated workforce and an inefficient government bureaucracy. The bureaucratic system of GCC countries is saturated with public workers. This increasingly complicates the regulatory framework which undermines and slows down private ventures and risk-taking. From 2000 to 2010, an estimated 7,072 thousand jobs were created in both the private and public sector. Only 1.15% of the jobs were created by the public sector. Out of those 7,072 thousand job openings, only 25% were taken by nationals. Based on the following estimates, Qatar created 96.4% new jobs for expatriates, which is justified by its high expatriate ratio. Only 3.6% new jobs were taken by nationals. Nevertheless, Out of the six GCC countries, Qatar has the lowest population of nationals. Their dependence on expatriate labor is necessary to spur economic growth and to maintain the highest GDP/capita in the region. Kuwait Financial Centre Markaz 20

Table 7: 2000-2010 Job Creation Throughout 2000 to 2010, Saudi Arabia s population witnessed the highest population growth in the region as well as the highest number of job creation Source: International Monetary Fund Middle East and Central Asia Throughout 2000 to 2010, Saudi Arabia witnessed the highest population growth in the region as well as the highest job creation, an estimate of 2,598 thousand jobs. Exactly one half of the new jobs were taken by nationals. Yet, Saudi Arabia s unemployment rate is still high at 10.8%. Bahrain and Oman have even higher unemployment rates and only 19% and 30%, respectively, of new jobs created were taken by nationals. Oman has the highest unemployment rate of 35% and Kuwait s 0.5% unemployment rate is the lowest in the GCC The average unemployment rate is higher than the world s average which was estimated to be 8.7% in 2010. 20 However, the GCC average does not account for masked unemployment and underemployment which have similar implications as unemployment. Unemployment is masked by bloated bureaucracies with ineffective and overstaffed employees. In addition, the nationalization quota system has also resulted in private employers who deploy nationals without utilizing their labor. For this reason, the unemployment in the GCC is swayed to look lower and less challenging than its actual connotations, especially with the rising population. a) Expatriate Labor Job creation is not the biggest challenge of the GCC as much as the mismatch between national labors demand and supply in the job market. For GCC countries, expatriate labor is more attractive than national labor. Even though the latter is more robust, expatriate labor is cheaper, highly skilled and more flexible. In addition, the types of jobs experiencing steady growth are unappealing to nationals, such as jobs in services, construction, and trade. On the other hand, Expatriates accept lower wages, longer hours and come with more foreign experience and skill. 20 Indexmundi Database Kuwait Financial Centre Markaz 21

Figure 17: Salary Increases for 2010 Job creation is not the biggest challenge of the GCC as much as the mismatch between national labors demand and supply in the job market Source: GulfTalent Expatriate labor, especially Asian, has become harder to attract with the growing opportunities in their domestic economies and the rising cost of labor such as in India. A survey by Gulf Talent showed that westerners in the GCC received the lowest salary increases; this is rationed by the high unemployment rate in western countries which make it harder for them to find better job opportunities. Nevertheless, another Gulf Talent Survey indicated that in both UAE and Saudi Arabia, Western professionals in mid-management received a higher average salary than Emiratis and Saudis, reflecting their superior skills. Nationals in the private sector did not receive the highest salary increases, supporting nationals lack of appeal to the private sector compared to the better paying public sector. Expatriate labor, especially Asian, has become harder to attract with the growing opportunities in their domestic economies and the rising cost of labor such as in India The restrictions on expatriate labor make them even more attractive to be hired by employers. The No-Objection Certificate (NOC) requirement prohibits expatriates to switch from one employer to another. This restriction makes employers have better control on expatriate labor in terms of pay and mobility. Qatar uses NOC strictly as a retention tool, attracting professionals with high job offers and forcing them to relocate when they want to change jobs. NOC has been liberalized in Bahrain and Oman resulting in higher payments to expatriates as competitive pay offers arise. b) Nationalization Policies GCC countries are aware of their dependence on expatriate labor in the private sector and the threat of higher unemployment as young nationals enter the labor force. Since governments can no longer absorb the large pool of graduates, GCC countries have implemented nationalization policies in an attempt to increase the percentage of nationals in the private sector. GCC countries are trying different approaches such as subsidizing salaries in a firm willing to hire nationals, or in the case of Bahrain, taxing companies for hiring foreign employees. The aim of nationalization policies is to decrease the dependence of one foreign nationality in certain specialized fields and to make the GCC country nationality the highest single nationality in each sector. In Saudi Arabia, visa slots are given to each employer based on the nationality of expatriates being hired. UAE uses a similar approach and charges higher visa fees when a certain nationality visa slot is being exceeded. By contrast, when UAE employers surpass the Emiratisation minimum employment requirement, they are rewarded with lower visa fees. Kuwait Financial Centre Markaz 22

Since governments can no longer absorb the large pool of graduates, GCC countries have implemented nationalization policies in an attempt to increase the percentage of nationals in the private sector Nationalization targets in the GCC are more pragmatic in some countries than in others. Bahrain removed its unsuccessful quota system all together before implementing its tax on companies who hire expatriate employees. Some nationalization policies focus on target benchmarks of nationals in different sectors and others focus specifically on positions in organizations. The Saudization policy mainly aims at growing Saudi manpower by requiring companies to increase Saudi employment by 5% annually. The quota-system sets different targets for different sectors. For instance, the media industry, commercial sector, insurance companies and public schools have a target of 19% nationalization compared to a low 6% in construction and a 49% target in the banking sector. The actual policies put in place are mainly associated with Article 45 of Labour and Workman Law of Saudi Arabia: Saudi workers shall not comprise less than 75% of the total number of the company/establishment [and] their wages shall not be less than 5% of total wages of workers; the employer shall vocationally train his Saudi workers to replace foreign workers and should keep a record of the replacements names. 21 The policy has enforced a responsibility on employers to train nationals and increase Saudi manpower. Companies are rated as Red, Green or Yellow depending on their commitment to the policy and face resultant consequences. Nationalization targets in the GCC are more pragmatic in some countries than in others The Kuwaitization policy is considered to be more of a nationalization approach by decree, aiming to increase employment of nationals simply by enforcing strict quotas in different sectors and professions (Figure 6). In an attempt to fill the quotas, employers are offering nationals a pay worth double of expatriates even when the latter is being more productive. With such rigorous policies, employers look for policy exemption rather than seek a long-term collective alternative. In 1997, Kuwait experienced a sudden increase in unemployment and in response organized the Manpower and Government Restructuring Program (MGRP). MGRP is a government organization aiming to increase the percentage of nationals in the private work force while improving Kuwaiti manpower. MGRP s creation aims to help the economy meet the Kuwaitization policy quotas. MGRP recognize that nationals prefer working the public sector due to better working conditions and higher wages. To bridge the gap between the private and public sector, MGRP implemented a social allowance limited to nationals working in the private sector in an attempt to decrease their unwillingness to work in the private sector. Also, MGRP imitated the public sector by paying social allowances for private sector s national employees children. However, conflictingly, the government faces societal pressures to increase government wages and continuously responds with public salary increases. Other than an increased cost of living, and influencing inflationary problems, the government is countering MGRP motives by increasing the salary gap between the private and public sector. 22 21 Human Resource Management (HRM) in Saudi Arabia: A Closer, 11 March 2011 22 MGRP- The Kuwaitization Engine, Ahmad Saeid, 16 August 2009 Kuwait Financial Centre Markaz 23

Table 8: Nationalization policy by sector MARKAZ RESEARCH Saudi UAE Kuwait Oman Qatar Bahrain Local Workforce 28% 12% 18% 46% 17% 45% Oil Refinery 30% 50-90% 79% Contracting 5% 30-80% Construction 30% 5% Banking 49% 50% 60% 90% Investment 40% Transport 78-95% Communication 56% 50-80% Hotels and Restaurants 75-100% Agriculture 2% Manufacturing 2% Source: WikiLeaks, Qatarization, Arabian Business, Zawya Note: Local Workforce percentages represent private sector quotas states by nationalization policies The government faces societal pressures to increase government wages and continuously responds with public salary increases The Emiratization policy also consists of different quotas in different job sectors The Emiratization policy also consists of different quotas in different job sectors. The banking, insurance, and trade sectors are imposed to increase the Emirati employees by 4%, 5%, and 2% respectively. Human resources and secretarial positions were also nationalized in 2006. Emiritization policies also increase the costs of the firm when the proportion of expatriate to national employees rises, constituting an implicit tax on firms. This form of penalizing indirectly lowers the ability of employers in the private sector to employ national employees who require a higher labor cost. Even with their unemployment rate still highest in the GCC, Oman s nationalization policies are more encompassing with their encouragement of citizens to work in private semi-skilled positions and increased enrollment in vocational training. 23 The government set different quotas for different job sectors: 60% in transport, storage and communication sectors; 45% in finance, insurance and real estate sectors; 35% in industries; 30% in hotels and restaurants; and 20% in wholesale and retail trading. Employers who successfully reach the corresponding quotas are rewarded by press recognition and privileged treatment by the government. The most thriving aspect of the Omanization policies is its alignment with Oman s educational reform. The government instituted federal universities to train Omani workers. Omanization also supports The Committee for Vocational Training with compensation schemes for the private sector and subsidizing salaries for Omani workers during their training period. Bahrain s nationalization policy began in the early 1980s with the introduction of a committee instituted to tackle unemployment problems among nationals. However, time has proven that Bahrainization policies increase the employment of nationals in the public sector and decrease their employment in the private sector due to the former s better pay and working conditions. In 2001, Bahrain s Ministry of Labor and Social Affairs initiated a project which consists of a training program for employees combined with wage subsidies for employers who replace expatriated with Bahraini citizens. Many employers find their governments targets unrealistic such as the 15% Emiratisation target in the engineering sector or the 60% Kuwaitisation target 23 Work Nationalization in the Gulf Cooperation Council States, Kasim Randeree, 2012 Kuwait Financial Centre Markaz 24