Emerging markets in 2013 2014

Emerging Markets in 2013-14 Will the soft patch for business continue and should companies worry?

Special report by Nenad Pacek President and Founder, GSA Global Success Advisors GmbH Co-Founder, CEEMEA Business Group [email protected] January 10th 2013

CEE in 2013 and 2014 – Growth prospects and impact on corporate sales

© 2013 GSA Global Success Advisors GmbH / CEEMEA Business Group 1

Contents Business in 2012 2 So why have so many key emerging markets slowed down in 2012? 4

The Euro zone mess 4 Has the US economy had a negative impact on emerging markets? 6

Why is the current soft business and economic period temporary in most emerging markets? 9 Emerging Asia 9 Latin America 10 Central and Eastern Europe (CEE) 11 Middle East and North Africa 13

Sub-Saharan Africa 14 Growth outlook by region 15

Emerging Asia 15 Latin America 16 Central Eastern Europe (CEE) 17 MENA 19 Sub-Saharan Africa 20

What should companies do in such an environment? 22 About the author 25

Tables Table 1: Developed markets, real GDP growth % 8 Table 2: Developed markets, government debt as a % of GDP 8 Table 3: Foreign debt as a % of GDP, regional weighted average and a selection of countries 10 Table 4: Government debt as a % of GDP, regional weighted average and a selection of countries 10 Table 5: Foreign exchange reserves, $bn 10 Table 6: Foreign debt as a % of GDP, regional weighted average and a selection of countries 11 Table 7: Government debt as a % of GDP, regional weighted average and a selection of countries 11 Table 8: Foreign exchange reserves, $bn 11 Table 9: External debt as a % of GDP, aggregate CEE and selected countries 12 Table 10: Government debt as a % of GDP, CEE and selected countries 12 Table 11: Foreign exchange reserves, $bn 12 Table 12: Foreign exchange reserves (including sovereign wealth fund estimates), $bn 13 Table 13: Government debt as a % of GDP 13 Table 14: External debt as a % of GDP 14 Table 15: External debt to official creditors as a % of GDP, selected countries 14 Table 16: Government debt as a % of GDP, selected countries 14 Table 17: Real GDP growth, %, selected countries in emerging Asia 16 Table 18: Real GDP growth, %, selected markets in Latin America 17 Table 19: Real GDP growth, %, CEE selected markets 19 Table 20: Real GDP growth, %, selected markets in MENA 20 Table 21: Real GDP growth, %, selected countries in Sub-Saharan Africa 22



Over the last few quarters we have been bombarded with news headlines in various serious newspapers about an emerging markets slowdown. Headlines such as “The end of the Brazil growth miracle”, “The great Chinese slowdown?”, “Serious concerns about the Turkish economy” or “Poland on the verge of recession” were hard to avoid even if you wanted to. And even if you miraculously managed to avoid seeing these headlines, any time you went into internal global and regional meetings, the business reality on the ground did confirm weaker business in a number of these geographies (luckily, not all of them), particularly in the second half of 2012. In this paper I argue that companies should not worry too much about the majority of emerging markets and should continue to treat them with the utmost corporate focus, attention and upfront investment (despite the current soft patch in a number of important emerging markets). I will go through the reasons later, but let’s first look at what happened in 2012 and why.

Business in 2012 During 2012 I participated and spoke in numerous internal corporate meetings with multinationals operating in consumer goods, light and heavy industry, pharma/health, IT or professional services. A quick summary of the internal corporate meetings held in the second half of 2012 goes something like this and may well sound familiar to most of you (there are some notable exceptions):

a) Emerging Asia is now softer for business. It is still growing well, but below original expectations and this is proving difficult to explain to global HQ. Hitting the budget numbers for 2012 was a real challenge. Also the region accounts for 12-16% of global sales so any slow-down is immediately felt in global figures and puts extra heat on regional directors.

b) Latin America. Also softer than anticipated, especially Brazil. Still growing, but not as well as companies expected in late 2011. As the region accounts for 5-7% of global revenues any weakness can still make a dent in the global budget and put regional managers under pressure.

c) Thank goodness that commodity prices are still mostly overpriced and this is keeping business still in good shape in key Gulf markets, Russia, a good chunk of Sub Saharan Africa as well as any other commodity driven markets, at least in terms of top line growth. In these markets companies are still on the whole hitting or exceeding budgets. Even if North Africa and Levant are proving tougher for business, strong oil prices are pushing overall Middle East North Africa (MENA) results up and most companies are still hitting their regional targets. The commodity driven markets of Central Eastern Europe Middle East Africa (CEEMEA) account for some 5-7% of global sales and are also significant for global figures.

d) Central and South East Europe – “we did not expect much and we got even less than expected”, is succinctly stated by one of our clients; this part of the world typically represents some 3% of global sales and is the region where corporate expectations are the lowest in the next two years (and rightly so).

e) European Union and non-Eurozone Western Europe slowed progressively in 2012, especially in peripheral markets, but with weaker results by many companies also beginning to be felt in fundamentally sound Scandinavia, Austria or Germany. As a market that accounts for some 30% of global sales for typical multinationals, the chronic European slowdown has had a deep impact on global results.

f) The US market has been in a small plus for most firms, but also softened in the second half of 2012 as worries about the fiscal cliff intensified (and the fiscal cliff story is not over yet despite the temporary deal that averted automatic tax rises and automatic spending cuts).

As quite a few emerging economies go through this soft patch, competitive pressures have increased at unprecedented speed, sophistication and complexity in all emerging markets during 2012. This is particularly true in markets where real GDP is still growing very well (or in markets where companies expected extra high GDP growth in 2012, but which did not necessarily materialize). The increase in competitive activity, which in my opinion will only intensify is no surprise for at least a few reasons. First, when there is little or no growth in the developed world (which accounts for over 65% of global GDP at market exchange rates and some 50% calculated at purchasing power parity), all corporations are chasing growth in the markets where GDP is still growing strongly (and these are mostly in the emerging markets arena).



Second, multinationals are beginning to step up their efforts in all emerging markets. The corporate shift of focus to emerging markets is, to put it mildly, tectonic. And those companies that are currently resisting or delaying investing in high growth initiatives in emerging markets should urgently snap out of hesitation mode. As I argued extensively in my last book “The Future of Business in Emerging Markets: Growth Strategies for Growth Markets”, any multinational that does not build a sustainable business in emerging markets that can outperform all kinds of competition year after year will have a hard time creating any consistency of global earnings and steady growth. I would also argue that many underinvested multinationals (those sitting on their cash and those managing their quarterly figures instead of managing their business) might not even survive the next decade or two. Multinationals should take a look at the Fortune 500 list today and 25 years ago – only 40% of companies on the old list are still on it today. Most multinationals do have cash reserves or access to international or domestic financing to build long-lasting local infrastructure, capabilities, competencies and brands in every single emerging market. They should use this financial advantage sooner rather than later. If they do not then somebody else will eat their lunch. Third, companies originating in emerging markets are also stepping up their domestic, regional and often global expansion. This includes major companies originating in emerging Asian economies (including some 700 Chinese companies with global ambitions), but also those originating in Brazil, Turkey, South Africa, Mexico, just to name a few. The difference between today and perhaps 10-15 years ago is that now these companies have ample access to equity and debt financing, but also many have reached a good size that enables or forces them to look beyond their domestic borders. They are also proactively hiring talent from multinational companies and paying top dollar to buy the expertise they sometimes have lacked. They are tough competitors and should not be underestimated. Fourth, medium sized companies from the developed world are increasingly targeting emerging markets for growth. They are struggling with top line growth in their home markets of Germany or USA and are spreading their wings and taking away market share from larger multinationals. They are hard to compete against. They are flexible, quick to react and usually have aggressive pricing combined with high quality products. Companies should monitor them in the same way they monitor their big global competitors. And last but not least, purely domestic players are becoming very formidable competitors even in markets where companies would not necessarily expect that to be the case. Just ask some of the executives in the beverage industry how many local beverage players are popping up in some small Sub Saharan markets every year. Therefore, the second half of 2012 has been marked by a combination of slowing economic growth in many emerging markets, combined with an astonishing acceleration of competitive pressures. A sort of double whammy that is not easy to deal with, especially when it comes to managing expectations from the headquarters. Whilst the acceleration of competitive pressures will inevitably continue, I do believe that the economic slowdown in many emerging markets will prove fleeting. Because the economic slowdown will be temporary, companies should not derail or postpone their emerging markets growth initiatives. Any company that does so will leave cracks in its armor that will quickly be exploited by both traditional and new competitors aggressively. Companies that get cold feet during this slower period will lose share. Regaining this lost share will either be impossible or prohibitively expensive. Multinationals should take a countercyclical view -- any such temporary economic slowdown is a wonderful opportunity to grab more market share when some more short-termist competitors get nervous and postpone growth initiatives. Now, let’s look at what has caused the growth slowdown in a number of emerging markets. And then I will explain why this soft patch is temporary in most emerging market regions.



So why have so many key emerging markets slowed down in 2012?

The Euro zone mess “The surest sign that intelligent life exists elsewhere in the universe is that none of it has ever tried to contact us”. This wonderful quote from the reclusive US cartoonist Bill Watterson is the principal reason why emerging markets are currently going through a temporary economic slowdown. Well, sort of… but at least I sometimes think that the essence of it is actually hidden in this quote. It all has to do with the late, inadequate and misguided economic policies we have been witnessing in the Euro zone and which are now impacting the rest of the world. Because of its size, the Euro zone does have an impact on all countries around the world, and particularly on those that export to it. Every time I look at how European politicians have been trying to resolve the Euro problem and the European sovereign debt crisis, the above quote is what comes to my mind. I just can’t help it. At first, I would laugh thinking about that quote, but it is not funny anymore when put in the European context and even global context. The Euro zone ended 2012 in a recession, but the 2012 recession is mostly a self-inflicted recession. The global crisis that started in 2008 originated in the USA where toxic assets were sold not only to unsuspecting domestic buyers in the USA, but also exported to many institutions in Europe, including its banks. When the global crisis began, government debt as a % of GDP in most EU markets (except Greece) was within international benchmarks and sustainable. So a recent claim by Jens Weidmann at the European Central Bank that “European governments caused this crisis and the governments should solve it” is a diagnosis that does not make sense. And worse, this claim basically puts the supposed governments’ fiscal irresponsibility at the heart of the crisis and then prescribes the cure of fiscal tightening as the only real cure to the current economic ills. We should remember that the reason why government debt exploded in a number of Euro zone markets in recent years is due to

a. a transfer of private bank debts to the government balance sheet so that tax payers have to pick up the bill (just ask the Irish how they feel about this) and

b. fiscal tightening during a time of low private confidence in 2009 and still today has caused tax revenues to plummet (just as economic theory and practice would predict) and government debt to rise.

As government debt has soared, this has prompted even more calls for increased fiscal tightening, but tragically, when private and corporate confidence has still not really recovered. So we have ended up in a vicious, downward spiral. What politicians in Europe (and the Republicans in America) are sadly not asking is the following:”If corporations and consumers are not willing to spend and if government spending goes down at the same time, who is going to buy?” If no one is buying, who is going to sell? If no one is selling, how can companies justify having people employed and making investments? And when people lose their jobs, they will buy even less…. I find it astonishing that there are still economists and government officials out there who believe that an economy cannot suffer from the lack of demand. The same group also believes that recessions are self-correcting. Yes they are, but self correction can take a very long time (remember that Keynes said “In the long-run we are all dead”) and while waiting for a self-correction people can lose their businesses, jobs, homes and savings. In such extremes only those companies and individuals with large amounts of cash will flourish by buying distressed assets. I have written extensively about the causes of the European crisis and possible solutions in my last two books and here is a quick summary of why the Euro zone will struggle to recover in 2013 and possibly longer.

1. The recession in the Euro zone has affected most markets around the world to some extent, just look at the double digit falls in Japanese, Brazilian or Chinese exports to the EU. As many markets around the world go through a softer patch, exports from Europe to other markets are suffering too. So the big export engines, markets such as Germany, Austria or Finland, are feeling the heat too. The Euro zone has pushed almost the whole world into an unnecessary slowdown because it accounts for some



30% of global output. It is too big not to have an impact on other regions. And the current downturn is hurting the Euro zone itself the most.

2. One obvious solution that has been historically proven would be to engage in quantitative easing (central bank buying government bonds) and then governments using the proceeds to engage in fiscal stimulus programs (remember that governments should temporarily increase spending during the time of slow private and corporate confidence so that someone actually starts the process of buying). This would kick start growth and would help private confidence to return. And as growth returns and becomes more robust, the government debt burden as a percentage of GDP would start falling. And the governments could slowly withdraw from extra fiscal spending as the capitalism engine stutters back to life. Will this happen in Europe? Sadly, no. Unlike the Federal Reserve in the USA (which has a double mandate to focus on both growth and inflation), the European Central Bank focuses only on price stability and does not have a mandate to engage in quantitative easing. This means that governments will have to borrow in the open markets and markets will demand fiscal austerity in return for extending financing, particularly in peripheral Euro zone markets. It also means that we will not get any fiscal stimulus programs and many markets in the Euro zone will go through a difficult, job-destroying, economic self-correction. At the moment many peripheral markets are borrowing at reasonable rates following Mario Draghi’s statement “we will do whatever it takes to preserve the Euro” and following his Outright Monetary Transactions (OMT) announcement, but the condition attached is still that markets would have to commit to deeper austerity before having their bonds bought by the ECB. Since the OMT announcement, the ECB has bought a zero amount of government bonds in secondary markets, but luckily the announcement itself reduced the borrowing costs for many EU markets, including those in the periphery. The markets might call this a bluff at some stage and yields could rise again (although theoretically, the ECB with its money printing ability, could buy all outstanding government bonds in the Euro zone tomorrow morning).

3. Despite having access to large volumes of liquidity provided by the ECB, banks in Europe are not lending much. Not only do many still have dodgy balance sheets as a legacy of buying nicely packaged American toxic waste (from those doing “God’s work”, remember that quote?), but they also have massive exposure to sovereign bonds in the Euro zone and rising non-performing loans as Euro zone unemployment ticks up. They also still need to meet the new capital requirements (which are luckily being relaxed a little) and are hoarding cash. Will they lend more in 2013 compared to 2012? Not really. Will they reduce their exposure to emerging markets? They have already done so. Just ask companies that have been waiting for European banks to engage in loan syndications for various Asian, Latin American or Middle East projects.

4. Government debt as a GDP is now close to 100% of GDP (it should not be more than 60% based on international benchmarks and based on the Euro zone Maastricht criteria). This means that virtually all EU governments are likely to continue to cut spending and increase taxes, both of which are recessionary triggers when private and corporate sectors lack confidence. In fact, only the “very large strategic” Euro zone markets of Luxembourg, Finland, Slovenia and Slovakia have government debt below the 60% threshold. Deleveraging from such high levels of debt (especially with austerity policies in action) could actually result in a lost decade for the Eurozone or at best, sub-par growth.

5. And now the biggest issue of all: a number of current European initiatives (such as banking union which has been initiated, the European Stability Mechanism (ESM) fund, OMT initiative, the drive for fiscal union, fiscal austerity, liquidity injections to banks etc) are mostly dealing with symptoms; they do not really resolve the underlying problem that caused the unsustainable boom in private debt in markets such as Spain or Ireland and that is currently causing all the political, economic and social friction. The underlying problem is that the Euro was introduced into markets that cannot live with the fixed exchange rate. Only globally competitive economies with ultra strong export sectors can live with a fixed exchange rate. Clearly a number of Euro zone markets do not fit this profile, including Italy which has been steadily falling down the competitiveness rankings for a number of years. In other words, even with the current hard economic adjustment (that is destroying jobs and growth) the euro is still over-valued for a typical Spanish exporter and will continue to be so for a long time. The underlying design of monetary union continues to be flawed. However, the current attempts to drive through a fiscal and political union (which would enable the continuation of the common currency) in the Euro zone could easily fail at some stage. The backlash from peoples in nation states could come



sooner or later, especially if austerity continues to increase unemployment and hardship (as it is doing). The latest calculations from a prominent university in Germany even show that it would be cheaper for Germany or Finland to go back to their own currencies than keep providing endless, long-term guarantees to other nation states in the Union. And the poorer countries know that the only real way to make their exports or tourism competitive again would involve going back to their own currencies. I have long argued that the way to preserve the grand, good ideas of the European Union is to keep the parts of EU integration that make sense (free trade, free movement of people etc) and to ditch those that do not make sense (a common currency). The sooner this is done, the better it will be for the EU long term. If six strong exporting nations say we want to have a monetary union, that is fine, but others should join it only once they truly converge.

I am writing this is as a friend of the European Union project. For the sake of my three daughters and all of us, I want Europe to avoid conflict and wars and I want it to preserve its social cohesion. However, the current obsession with the economically strange idea of a monetary union in a mish-mash of countries is not helpful. Try to think of any common currency benefit and you will struggle to find anything except a reduction in transaction costs and some day to day convenience. The existence of the euro in more than 6-7 core competitive countries is just causing current political friction that did not exist before in what was a reasonably well functioning EU. The political and financial elites are pushing for the preservation of the common currency against both economic and common sense. This will continue to cause problems in the basic functioning of the Union going forward and it will keep corporate and private confidence below average in the years to come. Because European politicians have made the commitment to preserve the common currency, I will repeat my long held view that many of you have heard in my various speeches. The euro will be with us in the short-term (perhaps for a number of years still), but because the exchange rate will still be too strong for many countries, the problems will come to the surface again and again if the monetary union stays intact. And it could well be that ultimately it will be the people who will decide the fate of the monetary union. Many peripheral markets are already at the breaking point in terms of unemployment and especially youth unemployment. If their conditions continue to deteriorate, be assured people will vote in different kinds of politicians sooner or later. Sure, a short term storm from a disintegration of the Euro would be massive and bad news for business for a year or so. But like with all such crisis in economic history, the storm would swiftly pass as some currencies fall and get oversold. Overselling will attract buyers and local currencies would gain strength gradually.

6. It is not helpful when the “chairwoman of Europe” Angela Merkel shows up on public television before New Year to say that: ”The economic environment next year will not be easier, but more difficult…The crisis is far from over.” Economic history teaches us that economic recoveries are partly about rebuilding confidence. I always say that 50% of economics is about confidence and psychology. Politicians should know better than spooking what is already desperately fragile private and corporate confidence in such a manner.

To conclude, although Europe is not the original epicenter of the crisis, the above described self-inflicted wounds are not only hurting Europe but, because of the size of the European economy, damaging growth in many geographies around the world. And this is the principal reason why so many emerging markets have recently gone through a softer patch for growth and business (as their exports started to struggle).

Has the US economy had a negative impact on emerging markets? As the place where the 2008 global crisis originated, it certainly had a profound impact on the rest of the world and gave us the biggest peacetime global recession in 80 years. However, the US economy is currently outperforming Europe for essentially two reasons: first, the chairman of the Federal Reserve Ben Bernanke (the scholar of the Great Depression of the 1930s) has rightly engaged in a series of quantitative easing programs (buying government bonds and toxic waste assets from banks). Such new monetary emission (read: money printing) does help at a time of weak corporate and private confidence. It puts fresh funds into the government’s budget and into wounded banks. The latest version is buying $85bn per month of long dated government bonds (benefiting the government) and mortgage backed securities (banks benefit as this strengthens their balance sheets). Secondly, the US government (which is pro growth unlike many in Europe) has used these newly created funds to create demand (when demand from corporations and households is so dampened). Ben Bernanke of course knows that temporary quantitative easing programs do not create



inflation until there is sustainable job creation and private demand. This is why he has made his commitment to keep doing it until unemployment falls to 6.5%. I am sure every Spaniard would love to have an independent central bank with a goal of that kind! (By stepping out of the Euro zone, this would be instantly possible). But there is a short-term impact on emerging markets coming from the “fiscal cliff” talks. (The “fiscal cliff” refers to the $600bn per year expiration of tax cuts and the automatic beginning of spending cuts.) Lack of agreement would cause the US economy being pushed into a recession. The uncertainty about the deal between the Democrats and the Republicans spooked global markets in the second half of 2012 and may continue to hurt emerging markets until a lasting resolution is found. Just as we entered 2013 US politicians prevented the automatic spending cuts kicking in and also stopped the tax increases that would have hit 99% of Americans. While this initially sounded like good news, the truth is that the deal merely postpones the fiscal cliff by about two months. In the coming weeks and months there will be further talks about raising the US government debt ceiling as well as talks about the fiscal deal. Many CEOs in America will therefore continue to complain about a “lack of visibility” and the mountain of debt that the economy is generating each year. Any lack of clarity keeps corporate investments low. Ongoing fiscal cliff negotiations will keep corporate confidence below par and already indebted US consumers will continue to delay spending. And we are not going to get another fiscal stimulus program. In fact, some members of the Federal Reserve are now questioning the continuation of the quantitative easing programs. With US government debt hitting some 100% of GDP (essentially as bad as the Eurozone), there will be ongoing political pressures on the authorities to make savings and increase taxes in the coming years. Therefore, the US economy will not prove to be very helpful in 2013 when it comes to stimulating global growth. Some investment houses in America actually believe that the US market dipped into recession in the second half of 2012 and that the current growth figures will be revised downwards in the coming months – let’s see if that is correct. But the US will still outperform the Euro zone in the short-term (over the next one or two years) because of its more proactive economic policies in counteracting the lack of demand. On aggregate, the US and Western Europe constitute over 55% of global GDP (at market exchange rates) and therefore will continue to keep growth elsewhere in the world under a degree of unpleasant pressure, volatility and uncertainty in the short-term. The Japanese economy is also on a slow growth trajectory. In fact, the figures could be revised downwards in the coming months (the Japanese authorities always make large revisions, and usually downwards). Companies can’t rely on Japan as a growth market either. And this market represents some 9% of global GDP. Most multinationals hoping for a big sales growth boost in the US, the Euro zone and Japan are hoping in vain. This is another reason why they should treat emerging markets with utmost seriousness and undertake upfront investment in as many regions as possible. As I will demonstrate in the following pages, this is because emerging markets’ economic fundamentals are far superior to those of the developed world (with the exception of a number of Central Eastern European markets). This means that most emerging markets will not only continue to outperform developed world in terms of growth, but most of them will bounce back from the current soft patch much quicker than the developed world!



Table 1: Developed markets, real GDP growth % (the forecast is base case, but risks are on the downside) 2011 2012 2013 2014 USA 1.7 2.1* 1.9 2 Euro Zone 1.4 -0.4 0** 0.9 Japan -0.7 1.4* 0.2 0.6 Germany 3 0.9 1 1.4 France 1.5 0 0 0.7 Italy 0.3 -2.2 -0.4 0.2 Austria 2.7 0.8 0.9 1.3 Finland 2.7 0.4 0.9 1.4 Greece -7.1 -6.3 -4 -1.5 Netherlands 1.1 -0.8 0.2 0.8 Spain 0.6 -1.5** -1.2 0.3 Sweden 3.9 1 1.4 1.7 United Kingdom 0.9 -0.2 0.2 0.7 Australia 2.1 3.6 2.9 3 Canada 2.6 2.1 1.9 2.4 Switzerland 1.9 0.5 0.8 1.2

*With a possibility of downward revision; ** The chance of another shallow recession is a good 45%; ***I wonder why electricity consumption in Spain was -5%. There is something wrong with statistics in Spain it seems. It is hard to believe that Spanish GDP is down just 1.5% with African style unemployment levels….

Table 2: Developed markets, government debt as a % of GDP (anything above 60% of GDP is not seen as sustainable and will most likely be deleveraged in a combination of tax increases and spending cuts – which always hurts growth and business) 2011 2014 USA 92 103 Euro Zone 87 99 Japan 231 260 Germany 80 78 France 86 92 Italy 120 125 Austria 72 76 Finland 49 51 Greece 170 193 Netherlands 65 73 Spain 69 94 Sweden 38 35 United Kingdom 85 90 Australia 26 27 Canada 34 34 Switzerland 36 35



Why is the current soft business and economic period temporary in most emerging markets? The answer is relatively simple: most emerging markets have good, very good or excellent economic fundamentals (with a few exceptions as you will see later in the text). When houses are built on good foundations they last longer and don’t crack or sink into the ground. Countries are similar. Let me explain a few strategic arguments and then take you on a trip to each region. Emerging markets growth slowed from 7.4% in 2010 and 6.1% in 2011 to just 4.7% last year (still subject to some, probably downwards, revision). This is the slowest since 2009 when overall emerging markets growth dipped below 2%. It is also below the potential mid-case scenario which I believe to be between 5-6% per annum in the next decade. There is no such thing as “decoupling” of emerging markets. This notion was introduced some years ago and it assumed that emerging markets are now completely independent from anything that happens in the developed world. Because there is no decoupling they must, to varying degrees, feel any downturn in the developed world. But there is partial “decoupling” taking place as domestic demand in many emerging markets is making countries more resilient than at any time over the last 150 years. As I will demonstrate in the following pages, most emerging markets are now more resilient than ever. They will grow on average 3-4x quicker than the developed world in the coming decade. And they can bounce back from any downturn faster than the highly indebted parts of the developed world. This is because most emerging markets have no sizeable debts and therefore have no need to deleverage, they have record accumulations of foreign reserves (which serve as buffers in case of any speculative currency attacks), most banks in most emerging markets continue to lend (which enables private and corporate investment) and domestic confidence in many markets is much better than in the developed world. Most importantly, in many markets there is an ongoing shift to domestic demand as a key driver of growth and the relative reliance on exports to the developed world is shrinking. This is particularly true of many Asian and Latin American markets. None of the above was the case during the 1990s when we had the succession of major emerging market crises in Mexico in 1994, Asia in 1997, Russia in 1998, Brazil in 1999 and then Argentina etc. Seasoned executives do remember these crises and of course are cautious about any overly optimistic emerging markets outlook. But this time, the emerging markets house is built on far better foundations. These markets are not perfect and there are some risks in a number of geographies, but the fundamental differences between now and the 1990s are massive. Emerging markets now hold over 80% of global foreign exchange reserves, they buy half of the world’s exports and have more than 80% of the global population (which is also increasing by over 70m people every year). At purchasing power parity, they also account for half of global economic output.

Emerging Asia Let’s look at how emerging Asia has improved its fundamentals ever since the unhappy events of the late 1990s. First, emerging Asia has a very low foreign debt accumulation. The weighted average of key markets shows just 17% of regional GDP (countries usually need external help and run into trouble when it hits 70% of GDP). This is the lowest regional foreign debt accumulation in the world. It indicates that markets and its private entities do not need to deleverage and can engage in corporate and private investments (and many are doing so).



Table 3: Foreign debt as a % of GDP, regional weighted average and a selection of countries

Emerging Asia weighted average 17 China 9 India 20 Indonesia 28

Malaysia 27 Philippines 26 Taiwan 21 Thailand 31

Secondly, government debt (which is such a burden today in the United States, Eurozone and Japan) is just 42% of regional GDP (less than half of Eurozone or US public debt). Anything below 60% of GDP is considered sustainable. The important thing about these figures is that they show emerging Asian governments will not need to deleverage in times of economic crisis. Also, in case of any downturn, there is plenty of room for fiscal stimulus programs (which was demonstrated in many markets in 2009). And there is scope for increasing government spending to continue.

Table 4: Government debt as a % of GDP, regional weighted average and a selection of countries

Emerging Asia weighted average 42 China 42 India 67 Indonesia 23


Thirdly, foreign exchange reserves are approaching US $6 trillion; the largest accumulation of reserves of any region of the world (this figure excludes Japan and some small markets like Sri Lanka or Bhutan). Reserves will exceed $7 trillion in about two years. Emerging Asia now holds some 70% of all foreign exchange reserves held by emerging economies. These reserves will continue to rise as authorities continue to buy foreign exchange in a desire to keep their own currencies relatively cheap and supportive of their export strategies.

Table 5: Foreign exchange reserves, $bn

Emerging Asia 5,850 China 3,400 India 249 Indonesia 102


Fourthly, the region runs a current-account surplus of 2% of GDP, a rare thing these days anywhere in the world. In fact, all the larger Asian markets run a surplus, except India. This shows the underlying stability of the currencies, and most likely a future trend of currency appreciation. In fact, in the next 5–10 years, all emerging Asian economies will likely see their currencies appreciate in both nominal and real terms. But Asian governments will also intervene against excessive appreciation. Due to high reserves, countries can choose to defend their currencies; an option they did not have back in 1997–98. Finally, the regional budget deficit is low at some 2% of GDP, and only in India, Malaysia and Vietnam is it higher than it should be compared to international benchmarks.

Latin America The economic, political and business transformation of Latin America of the last decade has been remarkable in a number of countries. Growth has been underpinned by vastly improved economic fundamentals that are better than at any time in living memory. Firstly, Latin America is not overly indebted anymore and debt was its Achilles’ heel in the past. The continent’s foreign debt is now among the lowest in the world with a regional weighted average of key markets of just 20%



of GDP (economic history tells us that countries usually start to default or run into problems when their foreign debt reaches 70% of GDP).

Table 6: Foreign debt as a % of GDP, regional weighted average and a selection of countries

Latin America weighted average 20 Argentina 30 Brazil 17 Chile 40

Colombia 20 Mexico 18 Peru 23

Secondly, government debt is just 46% of regional GDP, less than half of the levels in the Eurozone or the United States. At least on this criterion, most Latin American economies would qualify to join the Eurozone – unlike most Eurozone members, who would not.

Table 7: Government debt as a % of GDP, regional weighted average and a selection of countries

Latin America weighted average 46 Argentina 42 Brazil 56 Chile 11


Thirdly, foreign exchange reserves have increased more than threefold in the last 10 years and are now over $700bn. This figure will rise to close to $900bn in two years. In the likelihood of any economic turbulence, most governments have enough reserves to intervene in the currency markets (if they choose to do so).


Latin America 750 Argentina 40 Brazil 380 Chile 43


Fourthly, the regional current account deficit is remarkably low at just 1.5% of regional GDP. Usually currency pressures start when the current account deficit is about 4% of GDP or higher. Together with strong inflows of foreign direct investment this shows underlying currency stability. Fifthly, the budget deficit is low as a regional aggregate (unlike in the EU, UK or the US), at around 2.3% of GDP. Sixth, interest rates are still hovering around an all time low and so helping improve access to finance for households and companies. And they will keep falling in the future. From the current 7% regional average, interest rates in Latin America are likely to converge to emerging Asian levels of 4% in the next five years.

Central and Eastern Europe (CEE) Many CEE markets have worse fundamentals than markets across Asia, Latin America or the Gulf. Because of that many are still in a prolonged period of weak growth or even recession. There are three principal reasons for that. One is close proximity to a recessionary Euro zone. The other is that large west European banks own most CEE banks and their lending has been curtailed. And in terms of fundamentals, the overall foreign debt accumulation is higher in the CEE region than in any other region (comparable only to the likes of Ireland or Spain where there were real estate bubbles) and is some 65% of regional GDP (just shy of the 70% level where problems usually arise). This foreign debt is largely a legacy of overvalued currencies in the pre-crisis period that made imports too cheap (and caused a sharp rise in current- account deficits).



Table 9: External debt as a % of GDP, aggregate CEE and selected countries (countries in bold are highly leveraged and their slowdown will last longer as consumers and companies deleverage. Such countries could also be much more volatile in the coming years!)

CEE weighted average 65 Poland 68 Hungary 133 Czech Republic 49 Slovakia 77 Russia 31 Ukraine 78 Romania 74 Bulgaria 89

Kazakhstan 67 Croatia 103 Serbia 87 Slovenia 118 Estonia 86 Latvia 150 Lithuania 80 Turkey 42

Luckily, when it comes to government debt, most CEE markets except Hungary do not have a problem (see below). However, most governments have decided on implementing some kind of austerity policies that could actually increase government debts as tax revenues fall and growth disappears. So the likes of Serbia, Slovenia, Poland could be somewhat vulnerable on this front in the coming few years.

Table 10: Government debt as a % of GDP, CEE and selected countries

CEE weighted average 41 Poland 56 Hungary 78 Czech Republic 46 Slovakia 51 Russia 10 Ukraine 42 Romania 35 Bulgaria 20

Kazakhstan 13 Croatia 55 Serbia 59 Slovenia 52 Estonia 6 Latvia 44 Lithuania 37 Turkey 37

Foreign exchange reserves in the CEE region are similar to Latin America at over $700bn, but Russia accounts for more than half of that amount (not counting oil and stabilization funds) and Turkey and Poland for some 10% each. So the total number hides some vulnerable markets. See the table below. Hungary, Ukraine, Croatia and Serbia and the Baltics (and perhaps Romania and Bulgaria) are relatively vulnerable in case of major problems with accessing international finance. Turkey is vulnerable only in a sense of its reliance on short-terms loans, but I except this to cease as a problem in the next five-six years.


CEE total 765 Poland 77 Hungary 27 Czech Republic 32 Slovakia n.a. Russia 398 Ukraine 16 Romania 31 Bulgaria 15

Kazakhstan 23 Croatia 11 Serbia 10 Slovenia n.a. Estonia 2.5 Latvia 7.5 Lithuania 5.5 Turkey 77

With a relatively low regional budget deficit of 2.9% and the small current account surplus (again mainly thanks to Russian oil and gas exports) the region looks good by these indicators. The current account deficit problem exists only in Turkey, Serbia and Ukraine. Ukraine also has a budget deficit problem, while there are relatively manageable budget deficit issues in the Czech Republic, Romania, Poland or Serbia.



As you can see, except for the foreign debt, the fundamentals in CEE are not bad. But you should be aware of the issues hindering a quick recovery: in addition to the excessive foreign debt in markets mentioned above there is the EU recession and its impact on CEE exports, low credit growth or no lending at all (with notable exceptions still in the likes of Turkey or Russia, or bit in the Czech Republic/Poland) and an unwillingness to engage in fiscal and monetary stimulus in most countries. In fact, many CEE markets have fallen in to the self-inflicted austerity trap of a similar kind that we have seen in Western Europe. For country-by-country details please take a look at our regular country updates.

Middle East and North Africa MENA economic fundamentals are some of the best in the world when taken as a region (there are of course bad spots as I will show in the tables below). Total official and unofficial reserves, plus the amounts accumulated in sovereign wealth funds, exceed US $2.5 trillion dollars (largely concentrated in hydrocarbon-driven markets). This is the second largest regional accumulation of reserves after emerging Asia and an all-time-high for the region. The reserve accumulation is also higher than emerging Asia on a per capita basis and also as a percentage of regional GDP. Even if oil prices fall, the reserves could keep spending fueled for several years in a number of oil exporting markets (which are the most promising for business in the next few years).

Table 12: Foreign exchange reserves (including sovereign wealth fund estimates), $bn

MENA total estimate 2,600 Saudi Arabia 600 UAE 820 Qatar 130 Kuwait 400 Oman 35 Bahrain 5 Iraq 67

Iran* 100 Jordan 7 Lebanon 51 Egypt 15 Libya 170 Tunisia 7 Algeria 190 Morocco 16

*(but it could be zero!) Total government debt as a percentage of GDP is low, particularly in oil exporting markets. Oil exporting markets have an aggregate government debt of 18% of GDP. This is one of the lowest percentages in the world. The only markets with government debt exceeding 60% of GDP (the international benchmark of sustainability) in MENA are Lebanon, Egypt and Jordan and Tunisia is on the verge of vulnerability.

Table 13: Government debt as a % of GDP Saudi Arabia 12 UAE 38 Qatar 30 Kuwait 10 Oman 5 Bahrain 33 Iraq 44 Iran 17

Jordan 69 Lebanon 90 Egypt 83 Libya n.a. Tunisia 60 Algeria 8 Morocco 53

Foreign debt burden in MENA is small, too, at just 27% of regional GDP. When private and corporate entities do not have a need to deleverage, countries can also grow better or closer to their potential. The only markets in MENA where external debt is higher than it should be (i.e., 70%+ of GDP) are Lebanon and Dubai (if we treat the latter as a separate entity). In these places, growth will be below par for a few years.



Table 14: External debt as a % of GDP

Saudi Arabia 20 UAE 43 Qatar 55 Kuwait 30 Oman 15 Bahrain 60 Iraq 40 Iran 3

Jordan 20 Lebanon 110 Egypt 15 Libya 10 Tunisia 60 Algeria 2 Morocco 40

With strong oil prices, the region is running a current account surplus, with the exceptions of Yemen, Jordan, Lebanon, Tunisia and Morocco (where the current account deficits are higher than they should be, therefore indicating some potential currency pressures). Hydrocarbon economies run budget surpluses while several other have sizeable budget deficits (such as Iran, Jordan, Lebanon, Egypt, Tunisia and Morocco) and in these markets government spending will be under pressure for some time. For details, please take a look at our detailed country-by-country reports.

Sub-Saharan Africa Although Sub Saharan Africa accounts for just over 1% of global GDP (at market exchange rates) it is attracting disproportionate corporate attention because of solid double-digit sales growth in most countries. Most multinational companies are crafting proper Africa strategies for the first time. The good news in terms of fundamentals is that the region is no longer highly indebted. Foreign debt to official creditors is just 10% of regional GDP, which represents a vast improvement over the 1990s. Yes, quite a few markets are still dependent on donor inflows but the dependency is far less than in the past.

Table 15 : External debt to official creditors as a % of GDP, selected countries Angola 7 Cameroon 9 Nigeria 2 Botswana 10 Ghana 20 Namibia 8 South Africa 3

Zambia 12 Ethiopia 19 Kenya 23 Mozambique 33 Tanzania 26 Uganda 19

Government debt is also low for the whole region, just one third of the Eurozone and the USA as a % of GDP. Last year it averaged just 32% of regional GDP.

Table 16: Government debt as a % of GDP, selected countries

Angola 35 Cameroon 14 Nigeria 18 Botswana 18 Ghana 45 Namibia 27 South Africa 41

Zambia 28 Ethiopia 34 Kenya 50 Mozambique 42 Tanzania 47 Uganda 36



Foreign exchange reserves are now over $150bn, an all-time-high but mostly concentrated in South Africa ($48bn), Nigeria ($43bn) and Angola ($30bn). These three countries account for the vast majority of reserves. The populous Kenya has just $5bn in reserves. But most countries have enough reserves when measured by months of imports (reserves should cover at least the value of three months of imports as a minimum yard-stick for stability). Only the following markets are below the 3% threshold now: Ghana (but with oil revenues this will improve), Namibia, Seychelles, Ethiopia, Burkina Faso, Malawi, Niger, Sierra Leone, Guinea and Zimbabwe. The ones that could be vulnerable on this measure also include Cameroon, Chad, Zambia, Kenya and Tanzania. Remarkably, the whole continent runs a relatively low current account deficit of 3.1%, however the figure is highly distorted by strong surpluses in some of the oil exporting nations. In fact, companies should be aware that most Sub Saharan markets (including the important markets such as South Africa or Kenya) run current account deficits that are much higher than 4% of GDP (which often leads to currency weakness if there are not enough capital inflows). This is why we have had frequent rounds of extreme volatility with a number of free floating currencies in the region and this situation will not improve in the coming 3-4 years. For details, please take a look at our regular country-by-country updates. The budget deficit for the continent is just 2.2%, again an all-time low. Combined with good government debt figures, there is scope in a number of countries to increase government spending over the next decade. But budget deficits are higher than they should be (in larger markets) in Namibia, Senegal, South Africa, Zambia, Kenya, Mozambique, Tanzania and Uganda. At least in the short-term there will be constraints on government spending in these markets. Before I look at outlooks region by region, one can conclude in terms of emerging market fundamentals: they are better than ever overall and there are only scattered weakness points in Central Europe, a few Middle East markets and a few currency vulnerabilities in smaller Sub Saharan markets. Most emerging markets have never been in such a good shape before in terms of economic fundamentals. Growth outlook by region (including selected countries) Emerging markets will continue to outperform developed markets in the coming years. This is not surprising considering the fundamentals described above. Let’s take a look at each region.

Emerging Asia Emerging Asia is currently the fastest growing region in the world. This is likely going to continue for the next 5–10 years, and possibly beyond. The region’s resilience during the crisis was remarkable. When most world economies were collapsing in 2009, emerging Asia grew by more than 5%. Growth exploded to almost 9% in 2010, beating all other regions with ease. In the next five years, emerging Asia will grow some 7%, outperforming other emerging markets, let alone the developed world. Of course, China’s growth is not sustainable at these levels but politically it will be impossible to let growth rates sink below 7.5% because it would go against the overarching government goal of creating “harmonious society”. The good news in emerging Asia is that growth is increasingly broad based and rests on good fundamentals. Growth will be supported by exports (although they are currently slower due to the “EU effect” on the rest of the world), rising domestic demand (especially in China) but also (unlike in the developed world) by solid increases in domestic credit. Most governments reacted well to the crisis in 2009 by introducing strong fiscal stimulus packages, deep cuts in interest rates and employment guarantees. As private and corporate confidence around the world and in the region plummeted in 2009, most governments in emerging Asia refused to allow their economies to suffer for too long, and they did not. If there is any larger sustained global downturn, the authorities in key markets will again react to reverse the downturn and stimulate demand. In the case that any currencies come under threat, ample reserves exist to defend any speculative attacks with ease (this was not the case in 1997).



Executives running global and regional operations should continue to be bullish about economic and business prospects in the region. Currencies will continue to appreciate and gradually an expanding proportion of economic growth will be generated by increases in domestic demand (household, corporate and government). It is a myth that emerging Asian consumers are not spending more than before. In the last seven years, retail spending grew by more than 65%, and it is likely that this trend will continue for years to come. Strategically and especially from a long-term perspective, it makes perfect sense for companies to treat emerging Asia as the biggest priority in emerging markets for new business development investment and to go deeper into exploring all sales and manufacturing opportunities. China and India will continue to drive regional growth, but companies should not ignore other markets. Countries such as Indonesia and Malaysia will continue to do well. Executives should watch the twin deficits and some unsustainable policies in Vietnam, monitor that Indian public debt does not climb any higher from relatively inflated levels, make sure they understand that the savings rate in Korea is low, and appreciate the political risks in Thailand. But overall, these risks are relatively small and seen as manageable by seasoned regional executives, and do not ruin the broadly positive outlook for the region.

Table 17 : Real GDP growth, %, selected countries in emerging Asia

2011 2012 2013 2014 Emerging Asia 7.4 6.1 6.7 7.0 China 9.2 7.8 7.9 8.0 India 7.1 5.9 6.6 7.2 Indonesia 6.5 6.0 6.2 6.3 Malaysia 5.1 4.4 4.6 4.8 Philippines 3.9 4.7 4.8 4.9 Thailand 0.1 5.5 5.8 5.6 Vietnam 5.9 5.1 5.7 6.0

Latin America Growth was resilient during the global crisis when GDP fell just 1.8%. The 2010 bounce back was remarkable and growth reached just over 6% (and of the bigger markets only Venezuela stayed in recession). After growing 4.5% in 2011 and just 3.2% in 2012, we expect growth to pick up again in the coming years. Growth will again reach 4% this year and then 4.4% in 2014. Regional growth is likely to continue at 4.5–5% per annum until 2020. Most currencies in key markets for business are likely to experience further appreciation pressures over time and some will continue to be targets of speculative portfolio investments in search of high yields (this means short term volatility in some currencies is a possibility as such money flows in and out). After the IMF stated that capital controls on short-term capital movements (largely changing its previous stance) are not a bad idea after all, we can expect more measures by governments in the region to try to stop speculative inflows that can push currencies to levels that are out of line with fundamentals. Countries that are likely to do very well in a very sustainable way in the near future are Brazil (with new measures to stimulate growth), Chile and Colombia. Brazil, like Turkey or Indonesia will be among the most exciting markets in the world in the next decade and a temporary slowdown in Brazil should not derail corporate ambitions for growth and market share gains. Mexico continues to be dependent on US growth and this could mean that it might not be able to grow by more than 3.5% per annum in the next few years. However, this will still be respectable growth compared to the developed world. Argentina was booming, but this was partly driven by a commodity boom and partly by a few unsustainable economic policies (so the slowdown in the coming years is almost inevitable). Peru is doing well but this is also mainly down to a commodity-driven boom. Panama will continue to grow some 7% in the next few years. Venezuela, Ecuador and Bolivia will be relative laggards with substantial risks for multinationals resulting from government policies. The good news is that the big markets are likely to do well for years to come (on the back of pro-growth policies and most importantly on the back of very solid fundamentals). The temporary slowdown should not derail corporate growth initiatives.



Executives should be aware of the risks going forward: much of the region’s growth is still driven by commodities. A flow of money out of commodity markets would shave off some growth in Latin America, and this will be inevitable periodically since commodity markets are schizophrenic. But commodity prices do tend to bounce back so although such issues could derail a quarter or two of business they should not impact corporate long-term plans. A second risk, which is more medium term, arises from the following questions: will Latin American economies manage to diversify their economies, will they manage to consistently reduce inequality, reduce crime and improve access to education at all levels? Speed in these issues matters. If people see that there is economic stability but are not gaining personally then the risk arises that some countries could slip back into the more ideological forms of economic management that can currently be seen in Venezuela or Bolivia and also Argentina. The third risk is that Latin America is still a popular playground for portfolio investment, much of which is purely speculative in nature. If currencies get too strong on the back of such speculative inflows, this would increase current account deficits, foreign debt will begin to rise and local exports would start to die. Cynically, this would be a good short-term period for foreign companies, since stronger currencies would reduce import prices and make people feel a bit richer. But imbalances would grow and trouble would be stored up for later when speculative funds leave. Again, executives have learned to live with such volatility and ultimately this should not derail the long-term corporate plans especially since most central banks will try to prevent excessive currency appreciations.

Table 18: Real GDP growth, %, selected markets in Latin America

2011 2012 2013 2014 Latin America 4.5 3.2 4 4.4 Argentina 8.9 2.7 3 3.5 Brazil 2.7 1.5 3.9 4.2 Chile 5.9 5 4.5 4.8 Colombia 5.9 4.3 4.5 4.9 Mexico 3.9 3.8 3.6 3.7 Peru 6.9 6 5.7 5.6

Central Eastern Europe (CEE) 2011 and 2012 were the third and fourth years in a row when the CEE region underperformed other emerging regions. Companies will not be able to rely much on external economic conditions to drive sales growth in many Central and South East European markets for a few years. Things will be better in Russia and other (largely) commodity driven markets in the east as long as commodity prices hold at elevated levels. How things change. Between 1999 and mid-2008, CEE outperformed all emerging regions and enjoyed an unprecedented decade of fast growth, appreciating currencies and general optimism. But as the global crisis hit, it turned out that a number of growth drivers were not sustainable. Underlying weaknesses were suddenly exposed; 2009 was a disastrous year for virtually all multinational companies and 2010 proved to be a challenging year for business in most sectors and most countries despite some recent encouraging headline growth rates. Until recently, growth in Central and South East Europe has been driven only by exports and even that driver has weakened during 2012 (since most exports go to the Eurozone). Domestic demand is weak in most markets and this will mostly continue into 2013. When the global financial system imploded the CEE region was among the first to feel the consequences because of its high dependency on external financing and large exposure to loans. On top of that most governments in the region did not react well to the crisis and the banks are still not lending effectively. Regional GDP declined by 5.9% in 2009, after growing by 5.9% per year on average between 2000 and 2008. The best years were 2006 and 2007, when growth exceeded 7%, fuelling record corporate sales and profit growth. An unsustainable credit bubble prior to 2008 means that 7% plus growth will not be reached again for decades.



Today, most of the regional growth is linked to high commodity prices (the latter helping the likes of Russia and Kazakhstan, for example). The CIS markets are fundamentally better with low debts and high reserves, especially in Russia, Kazakhstan and Azerbaijan. However their current good growth is linked to high commodity prices. Growth will be uneven across the region over the next few years. It will be weaker in markets with high foreign debt and in need of deleveraging but will be stronger in less leveraged markets. Less leveraged markets include Russia, Turkey, Poland, Czech Republic; the first two in particular should be very good for business for years to come. All four have good fundamentals but Russia has virtually no public debt, low foreign debt and it is sitting on the third largest accumulation of foreign exchange reserves in the world. Business is growing well in Russia but oil prices do constitute a risk. If prices were to fall to the $70-80 range the rouble would come under pressure and businesses will be hit for a quarter or two. Political instability could create risks in the future, although most companies now choose to ignore this threat since it is difficult to quantify (like China). Russia is too much of a strategic global player to be ignored. Even if there are temporary slowdowns, this market must feature prominently in any serious emerging market strategy. Turkey will be one of the most exciting emerging markets in the world in the coming years, despite the current slowdown (as authorities try to engineer a soft landing from a previous economic overheating). The fundamentals are broadly good and further good news is that the government is trying to manage its reliance on short-term financing from abroad better than it has in the past. To reduce its large current account deficit, I think the Turkish government will continue to favour a weaker lira rather than having to rely on external borrowing. This will hurt sales and business in the short term, but it is good news for future sustainability and over the medium term it will be good for business. In other words, companies should use the current soft patch to improve market share. It will pay handsome dividends in the future. This crisis in many CEE markets in Central and South East Europe is temporary and partly cyclical. The region has a number of fundamental strengths that means that the CEE region has a solid, sustainable future ahead (once short-term foreign debt deleveraging is over). These strengths are:

• CEE economies are significantly more diversified than those in Latin America or Middle East or Africa and not dependent on one or two strong commodities

• Education levels are high, feeding competitiveness • These economies usually combine (still) stable social structures and low taxation • There is a solid SME sector in many markets • The region has happy and experienced foreign direct investors who will keep returning • Public debt is relatively low and much better than in Western Europe • Highly indebted markets are swallowing the hard medicine now and they will come out of the crisis

with vastly improved balance sheets at private, corporate and government levels – but companies should be patient and use this time to build stronger market shares. Patience can be quite testing considering that debt levels in some markets are very high and could take (at the minimum) a few more years of deleveraging!

• Not all markets are highly indebted and the likes of Russia, Turkey and Poland offer solid growth opportunities, even in the short term.



Table 19: Real GDP growth, %, CEE selected markets base case, with substantial downside risks in CE and SEE depending on EU developments and the depth of local austerity programs 2010 2011 2012 2013 2014 Czech Republic 2.7 1.7 -1.1 0.4 2.0 Hungary 1.3 1.6 -1.3 0.2 1.3 Poland 3.8 4.3 2.1 1.2 2.3 Slovakia 4.2 3.3 2.4 1.8 3.0 Slovenia 1.4 -0.2 -2.3 -1.5 0.5 Estonia 3.1 7.6 2.8 3.3 3.7 Latvia -0.3 5.5 4.9 3.2 3.5 Lithuania 1.2 5.9 2.7 2.3 3.0 Bulgaria 0.4 1.7 0.6 1.6 2.6 Croatia -1.2 0.0 -1.9 -0.2 1.4 Romania -1.7 2.5 0.1 1.2 2.7 Serbia 1.0 1.6 -2.1 0.5 1.8 Turkey 9.0 8.5 2.8 3.5 4.5 Kazakhstan 7.3 7.5 5.2 5.0 5.5 Russia 4.3 4.3 3.8 3.8 4.1 Ukraine 4.2 5.2 0.5 1.2 2.8

MENA Between 2003 and 2008 the MENA region grew on average by 5.7%. With regional growth at 1.4% in 2009, the region displayed resilience compared to other regions of the world (the only more resilient region was Emerging Asia), but was still exceptionally challenging for business, as many key markets sharply deteriorated. MENA recovered in 2010 and grew by an estimated 4.1%. But social and political unrest threaten the outlook for at least several markets. If Egypt and Tunisia can achieve some form of normality soon then regional growth could easily reach 4.5% in the next few years – which will be similar to Latin America, a bit worse than Asia and Sub-Saharan Africa, but much better than Central and Eastern Europe (where in many markets corporations and households are still deleveraging and spending less). High oil prices are currently helping major oil exporters and those economies are booming due in no small part to the “Arab Spring” revolutions boosting oil prices. From an economic perspective, the MENA region has often lacked underlying sustainability over the last 15–20 years. And it is not surprising that this underlying problem has dictated how companies have treated the MENA region. These uncertainties spilled over into corporate perceptions and many regional directors have consequently struggled to get the resources needed to build a sustainable business in the region. When oil prices were low (between 1985 and 2004 they fluctuated between US $9 –$30 per barrel – and mostly around $20), many companies simply treated the region as an opportunistic cash cow, with a corporate structure largely relying on remote partners and a strategy that was too regional. Most companies did not put enough internal resources on the ground, especially at the country level. When oil prices started to climb rapidly from 2004 (culminating at US $147 per barrel in July 2008), corporate results in hydrocarbon exporting nations improved beyond recognition. The results were also boosted in several previously sleepy markets in North Africa as their economies started improving. Simultaneously, Lebanon continued to defy gravity despite massive debts, and Dubai was riding a debt wave. No wonder companies started to think about how to build on these strong results in MENA and more importantly, how to institutionalize sales growth into an organisation that would outperform the competition over an extended period of time. In other words, corporate strategies started to shift from opportunistic remoteness to systematic depth.



The period from 2005 up until today has seen exceptional growth in terms of systematic corporate investment in business development, brand building and local presence. In the last few quarters business development investment increased to all-time highs, especially in hydrocarbon exporting economies (except Iran). On the back of stronger economic fundamentals competition has been heating up in MENA (just like in other strongly performing regions), pushing more companies to take the region seriously. But just as companies started to treat the MENA region more seriously and plans put in place to invest more in business development, the political risk (which was latent and hard to quantify for years) suddenly increased, with instability first in Tunisia and Egypt, and then in Libya, Syria and tiny Bahrain. These eruptions have caused companies to wonder if similar events might occur in Saudi Arabia, Kuwait, Algeria, Jordan and Morocco. The elevated political uncertainty will linger on, and global perceptions about the region will probably cause many companies to put major investments on hold, at least in riskier markets. However, companies should at the minimum continue to invest in strong hydrocarbon exporting nations to build faster sales growth. These markets are fundamentally good in terms of debt levels and reserves and are booming on the back of high oil prices. The business winners in the next few years will be Saudi Arabia, Abu Dhabi (as the wealthiest of the United Arab Emirates), Qatar, Oman, Algeria and, if political paralysis allows enough spending, Kuwait. Israel will, as usual, behave more in line with the business cycle in its key export markets, which are mostly in developed nations. Therefore growth in Israel will be a bit softer in the short term but good over the medium term, provided political issues do not intercede one way or the other. Iraq should boom on the back of rising oil output, provided that security can be managed after US troops pullout. Iran, potentially one of the most exciting markets in the world due to its size, will struggle under yet tighter rounds of sanctions, with the shadow of military strike looming. Morocco and Tunisia, although under economic pressure now, will continue to provide single digit growth opportunities for companies. Egypt is currently a political and economic mess, with no full clarity on how the current political power struggles will finish. The IMF deal is now critical or the pound will continue to fall. Libya should also be able to restore oil production fully by mid 2013. If local political and tribal factions can agree on the future, Libya should be an exciting emerging market for years to come (although its small population will limit corporate activities). Lebanon will continue to struggle under high debts and significantly elevated political risks. Most companies expect the steady, unexciting business environment in Jordan to continue.

Table 20 : Real GDP growth, %, selected markets in MENA

2012 2013 2014 Saudi Arabia 5.5 4.6 4.6 UAE 3.6 4.0 4.8 Qatar 6.3 5.3 6.2 Kuwait 4.6 3.5 3.5 Oman 5.3 5.3 4.8 Bahrain 3.3 3.4 3.5 Iraq 9.8 9.2 9.5 Iran -5.0 -7.0 -4.0 Jordan 2.6 2.8 3.3 Lebanon 1.2 1.5 2.0 Egypt 2.0 2.8 4.0 Libya 90.0 13.0 9.0 Tunisia 2.8 3.3 4.5 Algeria 2.6 3.5 4.0

Sub-Saharan Africa Sub-Saharan Africa is attracting the attention of companies wishing to expand in to new territories. Sales growth is solid in many markets and there is less competition (although it is rising, particularly from Chinese companies). However, in absolute terms, sales are low, typically representing just over 1% of global sales of a typical multinational company.



The economic outlook is not bad as long as commodity prices remain reasonably high. The region had several very good years in terms of growth in the pre-crisis period. Between 2003 and 2008, the region grew by 6.2% per annum, or twice as fast as the 1990–2002 world average. The rise in commodity prices, inflows of FDI, stronger currencies, debt write-offs, donor inflows, the rise of South Africa and Nigeria, and improvements in fundamentals all contributed to a strong pre-crisis performance. But the region was not immune from the global crisis. In 2009, regional growth slid to just 2.1%, and in per capita terms the region barely grew at all. But compared to other regions, Sub-Saharan Africa showed resilience, largely (and sadly) due to a lack of integration with the global economy. Credit was flat (unlike in developed regions), donor money kept coming in and this helped to maintain s semblance of growth. The relatively good news is that the region has recovered well on the back of:

• higher commodity prices • ongoing donor inflows • strong growth in Nigeria (despite political issues) • generally good reactions to the crisis by central banks (i.e. looser monetary policies) • gently improving credit conditions • stronger economic fundamentals • improved reserves due to the IMF’s allocation of SDRs (which helped stability and enabled some public

spending increases) • rising FDI and financing from China, but increasingly from other countries too • some improvement in corporate spending (largely drawn from corporate reserves) • higher public spending in most markets (70% of the countries managed to actually increase public

spending in the last few years). All of the above resulted in stronger domestic demand. Growth should easily exceed 5% for the foreseeable future. This is respectable compared to other regions of the world in the post-crisis period. But Sub-Saharan Africa would have to grow at least 8% for a sustained period to really start improving living standards. Mere 5–6% growth is simply not enough to make a significant difference. The three principal risks to growth are lower commodity prices, lower donor inflows and higher food prices. Donor inflows could become more erratic as developed markets struggle with their own record public debt burdens (preliminary signs indicate that donor money might slow over the next two to three years). Executives should also be aware that headline GDP figures can be heavily driven by exports of commodities and that domestic demand tends to be weaker than the headline figures. The biggest market in terms of GDP, South Africa, is not growing well and is now re-examining its economic priorities in terms of growth, employment and cheaper exchange rates. However, Nigeria is growing well and companies are increasingly prioritizing this large market of some 150 million people. Other markets attracting corporate attention now are Angola (oil), Zambia (copper), Ghana (also oil driven), Ethiopia (a population of 80 million), Kenya (services driven, no big commodities to export). Other markets also worth considering are Mozambique, Tanzania, Uganda, Senegal, Cameroon and the Democratic Republic of Congo, Botswana and Namibia. It is worth noting that competition is not as fierce as in other emerging regions and that one can carve out good, profitable positions and fast growth in many markets. Companies should note, though, a tremendous increase in competition not only from China and India but also from major multinationals who are designing new Africa strategies as we speak.



Table 21 : Real GDP growth, %, selected countries in Sub-Saharan Africa

2012 2013 2014 Sub-Saharan Africa 5.3 5.4 5.4 Angola 7.5 7.5 7.0 Cameroon 4.2 4.5 4.8 Nigeria 6.3 6.6 6.9 South Africa 2.3 2.8 3.0 Zambia 7.3 7.7 7.7 Ethiopia 6.5 7.0 7.3 Kenya 4.3 5.0 5.0 Mozambique 7.0 7.5 8.0 Tanzania 6.8 6.6 6.7 Uganda 4.1 4.2 5.8 Namibia 4.5 4.5 4.3 Senegal 3.6 4.1 4.3

What should companies do in such an environment? As you can see, the good news about emerging markets is that the most important markets in Asia, Latin America, Eastern Europe, the Gulf and even part of Sub Sahara have solid economic fundamentals. The number of emerging countries with shaky fundamentals is at a historic all-time-low. Any company that is serious about building a stronger, sustainable business in emerging markets should not forget this. In other words, companies should not allow the temporary slowdowns in Brazil, Turkey, Poland or India to derail their medium and long-term plans. Any company that retreats now due to this softer patch and puts focus and investment on hold will most likely suffer later in terms of lost share, weaker brands and weaker business in the future. Competition is simply too aggressive. My recommendation to multinationals is to use any temporary slowdowns to build stronger market positions, to continue to build brands and to preserve at least a medium-term perspective. Only those companies with a strong emerging market business in the next decade will be able to consistently improve their global earnings. They will also be much better positioned when it comes to fighting off rising competition. In the short term, regional directors face a difficult task of managing expectations, especially within those companies obsessed with quarterly earnings. Very proactive management of expectations in the short-term is essential and this paper offers plenty of ammunition to explain to global headquarters what is actually going on. Finally, what should companies do now to build sustainable businesses in emerging markets that will outperform the competition year after year? This is the topic of my most recent book “The Future of Business in Emerging Markets” and here are a few selected bullet points that you are welcome to cut and paste into your regional and global presentations:

• Treat EM with as much focus as the developed world • Do not treat EM as just a profitable cash cow • “Two headed monster“ with two corporate mindsets is the corporate structure of the future • Each region/market should get corporate resources based on its own opportunity potential • Avoid corporate short-termism • Engage in long range planning and investment for emerging markets • Enable the execution of long-range plans • Diversify corporate boards to include executives with EM knowledge • Global leaders must support upfront investments in EM without the expectation of quick returns



• Do not expect automatic market leadership, but invest substantially in brand building, even if this means lower profitability during the build up phase

• Deepen country-level local presence, infrastructure, capabilities and competencies, especially for face-to-face functions – regional strategies are not enough

• Make sure corporate leadership is aware of EM opportunities and challenges • Decentralize decision making, but not to the extreme • Flexibility in approach and structures • Speed, urgency and agility are essential otherwise competition will eat your lunch • Geographic leadership or at least co-leadership is an important element of the corporate structure • Do not finance EM expansion just with earnings from EM • Think about other sources of financing for EM expansion, because properly increasing resources is not

cheap • Sustain growth initiatives and do not over-react to short-term market turmoil • Never ignore even the smallest competitor and ensure your competitive intelligence is the best in the

market • Make gaining market share a priority and that managerial incentives are aligned with long-term KPIs • Close geographic and resource gaps as fast as possible with a long-term view – make sure you do not

under-penetrate markets • Use the advantages of a multinational firm while you still have them • Spend a substantial amount of money on fresh research before any new market expansion • Accelerate knowledge and best practice exchange within your company • Intensify market monitoring • Avoid saying the following to your regional and country managers: “you will get more resources when

you prove there is more business“ – this is short-termist, suicidal Catch 22 in EM • Consider acquisitions as a way of growing • Think of set up change • Avoid doing anything that will damage your long-term business • Keep shifting R&D and manufacturing to the most competitive and most appropriate locations • Never underestimate the value of personal relationships in EM • Contingency planning and execution are critical • Rethink innovation to compete in as many market segments as possible • Make sure your product portfolio always matches rapidly changing market/customer/consumer needs

and competitive pressures • Frequent, scientific, granular and per country market research is needed to keep track of changing

customer needs and to adjust product portfolio • Innovate also through EM customers • Accelerate brand building initiatives and sustain them • Marketing should not be “lazy“ but heavily localized, and customized even to a municipality or

customer level if required • Rethink distributor relationships and route-to-market if distributors are not willing or able to follow a

fast growth strategy • Ignore global pay and pay rise scales for EM staff – adjust to local supply and demand as well as

current conditions • Employ unorthodox measures to attract and to retain scarce white collar talent • Hire even when you do not need anyone, especially in high growth markets so you do not lose

momentum when you lose staff • Invest in leadership training for EM – from good managers to great leaders • Invest in creativity training for all employees • Mentor local talent to take over country level leadership roles and seek entrepreneurial traits • Make sure you are totally in tune with the employee needs in each market – motivational drivers

differ and fluctuate.



Please do not hesitate to contact me if you have any questions and if you require more insights into any of the above mentioned markets or business issues. I hope you found this paper useful and you are welcome to pass it on to other global colleagues if you think they would benefit. For more details on CEE and MEA markets please refer to our regular country updates. I wish you a successful and healthy 2013! Safe travels and I hope to see you soon at our upcoming CEEMEA Business Group meetings. Nenad Pacek [email protected]

mailto:[email protected]



About the author Nenad Pacek Nenad and his businesses currently advise global and regional directors of over 300 multinational corporations. He is founder and president of Global Success Advisors (global business and economic advisory) and co-founder of the CEEMEA Business Group corporate service (advisory for regional executives running Central Eastern Europe, Middle East and Africa). The advisory focus is on helping executives understand economic/business outlooks for virtually all countries around the world and on helping companies build strategies for sustainable growth in emerging markets. Nenad is the author of “The Future of Business in Emerging Markets: Growth Strategies for Growth Markets” (2012), “The Global Economy” (2012), lead author of “Emerging Markets: Lessons for Business Success and Outlook for Different Markets” (2003, 2007), and a contributor to the book “The Future of Money” (2010). He is one of the world’s leading authorities on economic and business issues that concern multinational corporations seeking faster growth internationally and those that concern governments seeking faster economic growth. He performs on average two speeches/advisory sessions every week at various corporate meetings on issues ranging from global, regional and country level economic/business outlooks to best business practices for outperforming competition internationally. In corporate circles he is well-known for not using any notes or power point slides while speaking and engaging in discussion. Nenad is former Vice President of The Economist Group (Economist Intelligence Unit) where he spent almost two decades advising multinationals on economic and business issues and managing several business units in Europe, Middle East and Africa and one business unit globally. He chaired over 100 Economist Government Roundtables with Prime Ministers/Presidents and their cabinets throughout Western Europe, Eastern Europe, Middle East, Africa and Latin America. Nenad is a board member of the Center for Creative Leadership (globally no. 1 provider of leadership education). He is guest faculty at Duke Corporate Education (globally no. 1 provider of corporate education), Notre Dame Executive MBA and a number of corporate universities. He was educated in Austria where he studied international business, finance and economics. Nenad lives with his wife and three children near Vienna, Austria. He spends his rare free time mostly with his family, but occasionally sneaks out to play basketball, tennis, golf and to ski and swim. Contact: [email protected] © 2013 CEEMEA Business Group* CEEMEA Business Group currently works with senior leaders of over 300 large multinational companies operating in the Central Eastern Europe, Middle East and Africa regions, helping them understand economic and business outlooks globally, regionally and at country levels. Regional and global executives also receive regular advice and updates on best practices for expansion and success in emerging markets. Executive members of the CEEMEA Business Group can also attend regular peer group meetings held throughout Europe and in Dubai. Sources: GSA Global Success Advisors GmbH and CEEMEA Business Group research. Basic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey, governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by GSA Global Success Advisors GmbH and CEEMEA Business Group. This material is provided for information purposes only. It is not a recommendation or advice of any investment or commercial activity whatsoever. Global Success Advisors and CEEMEA Business Group accept no liability for any commercial losses incurred by any party acting on information in these materials. Contact: Nenad Pacek, President and Founder, GSA Global Success Advisors GmbH; Co-founder, CEEMEA Business Group M: +43 676 646 0607 [email protected] www.ceemeabusinessgroup.com *a joint venture between DT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria, Company registration: FN 331137t and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, Austria Company registration: FN 331082k



http://www.ceemeabusinessgroup.com/

www.allenovery.com

Allen & Overy has one of the largest and best known practices in the CEE region and is one of the few major international firms with a well established and expanding presence. We have offices in five key centres: Bucharest, Budapest, Bratislava, Prague and Warsaw, and the offices have close working ties and are fully integrated with our global network. Consequently, we offer a seamless service to our clients across the region and beyond.

Lawyers operating from these offices also co-ordinate projects in other Central and South Eastern European countries, particularly Ukraine, Kazakhstan, Bulgaria, Croatia, Serbia and Slovenia. In each case, we work closely with a small number of experienced local law firms who have worked with us on successful large scale and international transactions in the past.

Our clients value the fully integrated service we can provide for domestic and cross-border transactions

across all practice areas in the CEE region, combining our international experience with local expertise and knowledge of local market conditions and regulators.

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Allen & Overy is one of the world’s largest international law practices, with 40 offices in 28 countries. We offer a full-service legal capability for both international and local organisations through our team of over 500 partners and 2,400 lawyers. We meet the evolving needs of our clients as their businesses grow, both in established and in emerging markets. We continue to invest in our practices and our network to ensure that we remain at the forefront of legal advice and market developments.

AFRICACasablanca

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For more information, please visit www.allenovery.com or contact:

Jane Townsend [email protected]

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CS1205_CDD-3169_ADD-5092 A4

Company profile - KPMG Central and Eastern Europe Ltd.

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 150 countries and have 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such. As the business world changes in response to new political and economic situations, so does KPMG. As a professional services firm, we provide comprehensive, tailored and industry specific services to meet clients' needs, whether they are multinational or local. The world's leading companies rely upon KPMG member firms to provide them with high quality professional services. Through our worldwide network we are able to offer our clients the benefits of a wide pool of skills and experience, while also utilizing an in-depth understanding of each national market. These factors enable KPMG member firms to carry out international engagements, as well. KPMG was one of the first professional services firms to align its services along industry lines and still focuses on delivering high-quality, coordinated services to organizations in five key lines of business: Financial Services; Consumer Markets; Industrial Markets; Information, Communications & Entertainment; Infrastructure, Government & Healthcare. Companies in different industries have very different needs - that is why KPMG member firms place an emphasis on industry focus. The targeting of specific industry sectors is fundamental to our approach. KPMG in Central and Eastern Europe (CEE) continues to build upon its success in the region with 4300 staff working in 18 countries: Albania with its branch in Kosovo, Belarus, Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Macedonia, Moldova, Montenegro, Poland, Romania, Serbia, Slovakia and Slovenia. In order to meet the needs of international and regional clients, we coordinate our various businesses across CEE in a unified operating structure. Shared centres of excellence and infrastructure help to ensure a high level of client service in each location and across the region. We remain committed to facilitating the future growth of our member firms' clients in the high potential markets of the region.

Audit • Financial Statement Audit

• Statutory Audit

• Audit Related Services

Tax Business Tax • Corporate & Business Tax

• International Corporate Tax

• Indirect Tax

• Mergers & Acquisitions

• Transfer Pricing

• Global Compliance Management Services Driving Tax Performance

• Legal Services

Personal Tax • Taxation Services to Individuals

• International Executive Services

Advisory Management Consulting • Business Performance Services

• IT Advisory

Risk Consulting • Accounting Advisory Services

• Financial Risk Management

• Internal Audit, Risk and Compliance Services

Transactions & Restructuring • Corporate Finance

• Transaction Services

• Restructuring

• Forensic

Neumann Partners is a community of commercially-minded executive search professionals who merge

extensive consulting experience into individual state-of-the-art solutions, enabling their clients to access

and attract the very best people within the local, regional and global candidate markets.

The company was founded in 2002 by Dr. Helmut Neumann, and is headquartered in Vienna, Austria.

Helmut Neumann has been active in our business since 1971 and is one of the pioneers in Executive

Search in Europe. Hans Jorda, our CEO, has a proven track record in the developing new markets and

brought together a team of highly-qualified consultants who share the same values:

• Hard work can be fun. We enjoy what we do and we enjoy the people we do it with.

• We respect our partners and earn respect for ourselves.

• We value diversity. Our group consists of people from different cultures with different

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• We share our findings openly with our clients and pass on all relevant information to our

candidates.

• We are experts in what we do. We recognize our responsibility to maintain a high level of

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performance and service.

Headquartered in Vienna, Austria, we are organised in five regions (Central & Eastern Europe, Western

Europe, Asia Pacific, North America, Latin & South America) with 21 fully owned NP-offices that

currently employ more than 150 specialists.

Our diverse team of consultants has experience across a wide range of practices such as

Consumer/Luxury Goods & Retail; Technology, IT & Telco; Life Sciences, Healthcare & Hospitals; Legal

& Professional Services ; Industry, Automotive & Energy; Sports, Media & Entertainment, and Financial

Services, internationally organised in Competence Centres.

Our services include:

• Executive Search, which is our largest service practice. Neumann Partners assists its clients by

identifying, assessing and on-boarding the most talented business leaders and specialists.

• Neumann Management Colloquium is a state-of-the-art process for evaluating professional

competences along with selected aspects of the personalities of the candidates and managers in

the commercial setting.

• Board Services provide professional support in staffing supervisory boards and advisory councils.

The focus is on continuous improvement in the performance of supervisory bodies as efficient

tools for strategic company management.

• Special Projects are those activities in which we go the extra mile, when our clients require the

support of a whole team of consultants to carry out projects that include complex, creative and

tailor-made solutions – such as setting up entire organisations and teams.

ORACLE FACT SHEET

Oracle engineers hardware and software to work together in the cloud and in your data center—from servers and storage, to database and middleware, through applications. Oracle systems

• Provide better performance, reliability, security, and flexibility

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• Deliver greater productivity, agility, and better business intelligence

For customers needing modular solutions, Oracle’s open architecture and multiple operating-system options also give custom-ers unmatched benefits from best-of-breed products in every layer of the stack, allow-ing them to build the best infrastructure for their enterprise.

Oracle DatabaseOracle Database—the world’s first commercial relational database, as well as a critical tool in the implementation of cloud computing environments—helps ensure that enterprise information is always available and secure. Oracle is the most reliable choice for enterprises and departments of any size.

Oracle provides the

• #1 database • #1 database on Linux • #1 database on Oracle Solaris

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MySQL is the world’s most popular open source database because of its high performance, high reliability, and ease of use. Many of the world’s largest and fastest-growing enterprises rely on MySQL to save time and money powering their high-volume Websites, business-critical systems, and packaged software.

Oracle Fusion MiddlewareOracle Fusion Middleware consolidates Oracle’s leading standards-based infrastructure software to deliver hot-pluggable middleware with a comprehensive, seamlessly integrated, service-oriented architecture software infrastructure.

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Oracle Engineered SystemsOracle engineered systems are for customers who want the highest level

Hardware and Software, Engineered to Work Together. In the Cloud and in Your Data Center.

With more than 380,000 customers—including 100 of the Fortune 100—and with deployments across a wide variety of industries in more than 145 countries around the globe, Oracle offers an optimized and fully integrated stack of business hardware and software systems.

ORACLE CORPORATION

• US$35.6 billion total GAAP revenue in FY11

• 380,000 customers worldwide

• 305,000 Oracle Database customers

•110,000 Oracle Fusion Middleware customers

•70,000 Oracle Applications customers

• 48,000 Oracle hardware customers

• More than 280,000 midsize customers

• More than 20,000 partners worldwide

• More than 108,000 employees, including

• 32,000 developers and engineers

•18,000 support personnel

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•14 million developers— the largest developer community worldwide

CONTACT USTo learn more, visit oracle.com or call +1.800.ORACLE1 to speak to an Oracle representative. Outside North America, visit oracle.com/corporate/contact/global.html to find the phone number for your local Oracle office.

Copyright © 2011, Oracle and/or its affiliates. All rights reserved. Oracle and Java are registered trademarks of Oracle and/or its affiliates. All SPARC trademarks are used under license and are trademarks or registered trademarks of SPARC International, Inc. Other names may be trademarks of their respective owners. [October 2011] 100003991 | C17759

• Oracle Financing provides payment solutions for technology purchases from Oracle and Oracle partners, offering the lowest cost of entry for Oracle customers

Oracle Industry SolutionsOracle’s industry solutions leverage our best-in-class portfolio of products to address complex business processes unique to specific industries. These solutions address industry challenges and processes, and enable customers to speed time to market, reduce costs, and gain a competitive edge.

Oracle Accelerate Oracle Accelerate helps midsize companies achieve high growth by providing comprehensive, integrated solutions that are industry-focused for rapid deployment, best practices, and a custom fit. They are packaged, priced, and delivered to be easy to own, implement, and maintain.

CommunitiesOracle is the steward of several large and diverse user and customer communities. Oracle Technology Network is the world’s largest community of application develop-ers, database and system admins, and architects using Oracle products. It is also home to the Website for complete and authoritative technical information and learning about Java.

Get Better Results and More Innovation with Oracle Oracle’s comprehensive and integrated approach brings tremendous benefit to customers. Oracle is able to provide more innovation more quickly than its competi-tors because the company coordinates development among all of its engineering teams at all levels of the Oracle product stack. This allows Oracle to move new features and capabilities—developed with input from thousands of advisory board and user group customers—from develop-ment to the marketplace at a rapid pace, and allows customers to get the most out of their technology investments.

of system performance, reliability, and security with the lowest total cost of ownership. These systems are predefined, pre-engineered, preassembled, focused configurations that simplify deployment, maintenance, and support. They are optimized and ready to work right off the shelf.

Oracle ServersOracle servers provide the performance, scalability, and cost-effectiveness that meet customer requirements in technical computing, virtualization, and eco- and energy-efficient design. With the complete family of servers from Oracle, a flexible IT ecosystem is a reality. And Oracle software runs faster on Oracle’s SPARC/Oracle Solaris systems than on any other platform.

Oracle StorageOracle’s end-to-end storage solutions include advanced software and hardware, integrated Flash technology, and leading expertise in long-term information management and retention—as well as a fully unified storage and disk portfolio. Oracle Services Oracle Services help companies get the most from their technology investments and span the full solution lifecycle.

• Oracle Support offers comprehensive maintenance and problem resolution for the complete stack, from applica-tions to disk

• Oracle On Demand delivers the world’s leading software and hard-ware to end users and manages the IT infrastructure, software, security, service levels, and IT governance

• Oracle University delivers flexible, quality instruction with a commitment to customer satisfaction—offering hundreds of courses covering virtually all Oracle products

• Oracle Consulting assembles, opti-mizes, and manages the complete, integrated business systems that put companies’ business data to work

ORACLE LEADERSHIP

• #1 UNIX server

• #1 database

• #1 database on Oracle Solaris and Linux

• #1 database on SAP

• #1 embedded database

• #1 identity and access management

• #1 development language—Java

• #1 data warehousing

• #1 middleware

• #1 application server

• #1 business analytics

• #1 customer relationship management

• #1 enterprise performance management

INDUSTRY LEADERSHIP

• #1 in banking

• #1 in communications and media

• #1 in construction

• #1 in discrete manufacturing

• #1 in life sciences and healthcare

• #1 in professional services

• #1 in public sector

• #1 in retail

• #1 in transportation

ORACLE CUSTOMERS INCLUDE

• 20 of the 20 top airlines

• 20 of the 20 top automotive companies

• 20 of the 20 top governments

• 20 of the 20 top high tech companies

• 20 of the 20 top insurers

• 20 of the 20 top manufacturers

• 20 of the 20 top oil and gas companies

• 20 of the 20 top pharmas

• 20 of the 20 top utilities

•10 of the 10 top banks run Oracle’s SPARC servers with Oracle Solaris

•10 of the 10 top telcos run Oracle’s SPARC servers with Oracle Solaris

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