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Abraaj Capital
A Period of Consequences
How we see the world and where its going
Arif Masood Naqvi Founder and Group CEO November 2008
The four most expensive words in the English language are, This time its different.
Sir John Templeton (1912-2008)
1636-1637
1720
1840s
1929
1980
1986-1990
1997
2000
2008
Source: KPMG, Deloitte, FDIC, Bank for International Settlements, Los Angeles Times, Federal Reserve Bank of San Francisco, Bureau of Economic Analysis (1) Professor Kindleberger (2) Long Term Capital Management (3) Securities & Exchange Commission (4) Federal Deposit Insurance Corporation
200
As per a story in the Economist in 2005, the total value of residential property in developed economies rose by more than $30 trillion from 2000-2005 to reach $70 trillion, an increase equivalent to 100% of those countries combined GDP. The Economist observed In other words, it looks like the biggest bubble in history 2001-2006 CAGR 12%
175
150
125
1987-2001 CAGR 4%
100
75
50 1987
1988
1990
1991
1993
1994
1996
1997
1999
2000
2002
2003
2005
2006
2008
US Recession Periods
Disproportionate Rise in Asset Prices Recycling Surplus into US Treasuries Improved Productivity in Emerging Asia
Increased Leverage
Suppressed Inflation
Abraaj analysis
Ex fro cess iv m low che e le ap ver s co aving mon age ns um s / h ey / pti igh on
Excessive leverage
across all areas of the financial markets due to protracted monetary easing
An extended period of low inflation and interest rates
US CPI and Fed Funds Rate
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1981
2x
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 US Household Debt (LHS) Consumption (RHS)
600
12x 10x 8x 6x 4x 2x 0x
Average 27x
500 400 300 200 100 Jun '00 Jun '01 Jun '02 Jun '03
Jun '04
Jun '05
Jun '06
Jun '07
1. Notional amounts outstanding Source: Bureau of Economic Analysis, Economist Intelligence Unit, Bank for International Settlements, Bloomberg, Company filings
Irresponsibility
evidenced most clearly by a reduction in the quality of lending
Substantial increase in loans to high risk borrowers
Distribution of US$ Mortgage Originations (%)
100 80 60 40 20 0 Subprime Alt-A 2002 Prime Conforming 2006 Prime Jumbo Government
4.0x
75
60
45
58 43 29
20 14
*End June 1. Notional amounts outstanding Source: Sequoia Capital, Bank for International Settlements, Fitch Ratings, SIFMA
2005
1H06
2H06
1H07
2H07
9
Inadequate regulation
allowed leverage to increase to unsustainable levels, with insufficient checks on underlying credit quality
Banking Sector
Glass-Steagall: Prevented commercial banks from issuing / underwriting securities. Repeal of the Act in 1999 enabled commercial banks to take on significantly more risk Basel II: allowed banks to selfregulate by determining the underlying risk in their portfolios and the capital required to be set aside Leverage: significant increase in leverage at financial institutions, after the SEC abolished the net capital rule for the largest banks, making these firms more vulnerable to systemic shocks Irresponsible lending and absence of regulatory oversight: allowed banks and other lenders to issue loans to individuals with poor credit, and to use such loans as collateral for structured products
Derivatives Industry
Mark-to-model accounting: financial institutions able to book profits on CDS transactions based on assumptions in their own financial models rather than market price (mark-to-market) Ratings agencies: inadequate due diligence led to flawed ratings, creating a false sense of security for investors in derivative instruments Off balance sheet: The offbalance sheet nature of derivative contracts left these instruments virtually unchecked in the financial system Naked short selling: naked shorting led to market-cornering operations by mismatching long and short positions, thereby grossly inflating volumes
10
20% 15%
Subprime fixed
10%
Subprime as % of total
88% 87%
Prime variable Prime fixed
5% 0% Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
11
Feb-07
May-07
Aug-07
Nov-07
Feb-08 May-08 Aug-08 Nov-08 creating panic as the S&P Volatility Index witnesses its greatest rise over the past 18 years
Volatility of the S&P 500
90
Equity markets have lost US$ 29 trillion over the last 12 months
68
Early 2000 recession; collapse of the dot-com bubble Early 1990s recession
1.8x
45
23
Nov-03 Nov-04 Nov-05 Dow Jones Commodity Index (LHS) Crude Oil Index (RHS)
Nov-93
Jan-96
Mar-98
Apr-00
Jun-02
Jul-04
Sep-06
Oct-08
Several industry majors have already announced earnings declines, losses, job cuts or worse
Business bankruptcy filings have increased 41.6% from June 2007 to June 2008 after declining for three consecutive years between 2004 and 2007 As of October 2008, c. 1.2 million total job losses in the US this year 3 million jobs in the US could be lost if the big three US car makers were to fail (unlikely given government support) Italy's Fiat said its global demand could drop 10% to 20% and profit could fall up to 65% Hyundai and its Kia affiliate posted a 38% fall in third-quarter net profit Circuit City filed for bankruptcy protection in November 2008 UK high street retailer Woolworths went into administration and plans to close all stores Sonys net profit has declined 72% YoY for its fiscal second quarter ended September 30th Neiman Marcus, J.C. Penney, and Gap reported double digit fall in sales in the year to October General Electric has stated it is planning on cutting US$ 2 billion of costs next year
Source: Sequoia Capital, Factset, Press releases, Administrative Office of the U.S. Courts, The Economist
14
Real Private Compensation Index=100 at Business Cycle Troughs Average of Past 4 Cycles Current Cycle
70% 68%
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
Source: Economist Intelligence Unit, Morgan Stanley, CEPR, NBER, Center for Economic and Policy Research, Center for Retirement Research, Federal Reserve, NAR Estimate, Dean Baker
11,000
Oct 6, 1931
10,000
11.1% 10.9%
9,000
8,000
7,000 10/1/08
10/7/08
10/13/08
10/19/08
10/25/08
10/31/08
20 2000 18 Long-Term Interest Rates 16 14 12 Price-Earnings Ratio 1901 1966 10 8 6 4 2 1920 1940 1960 1980 2000 0 2020
1929
1880
1900
Looking ahead
The likely outcome is expected to be a deep recession, with emerging markets becoming the new engine of global growth
Most Likely scenario (Abraaj view)
Less Severe
More Severe
Shallow Recession
Financial crisis substantially behind us Slight impact on real economy especially in developed markets Some sectors experience consolidation/reorganization Government intervention gains traction Market/consumer confidence drop is arrested Recovery begins relatively quickly (4-5 quarters into slowdown?) Increased level of government regulation and oversight going forward Emerging market growth continues Overall global economy emerges relatively intact
Deep Recession
Financial crisis more behind than ahead Serious impact on real economy especially in developed markets Further coordinated government intervention required to avoid escalation Market/consumer confidence deeply hurt Fundamental shift in risk perception, major changes in business models Slow recovery (begins 6-7 quarters into slowdown?) Change in government policy mind-set, high levels of intervention and regulation Slow but sure transition towards Asia and the emerging markets as new engine of global growth (consumption as well as production)
Paradigm Shift
Financial crisis lots more to come Catastrophic impact on financial and real economy Massive government intervention implemented to avert economic meltdown will not be effective Market/consumer confidence crushed Total shift in risk perception with current business models debunked Long period of negative growth, major bankruptcies/failures across the board Diminished drive for free markets and globalization as governments move towards controlled economies and protectionist policies
17
Derivatives Sub-prime loans that triggered the current crisis accounted for US$ 1.5 trillion Derivatives account for a total of US$ 1.144 quadrillion amounting to over 22x global GNP - Listed credit derivatives - US$548 trillion - Over-the-Counter derivatives - US$596 trillion Interest rate - US$393 trillion+ Credit default swaps - US$58 trillion+ Foreign exchange - US$56 trillion+ Commodity and equity linked - US$17.5 trillion Unallocated - US$71 trillion+ Auto Industry Global slowdown has substantially weakened the auto industry The auto industry accounts for nearly 10%1 of the US GDP 2.3 million jobs at risk in the US alone International motor stocks have fallen on fear of supplier impact and consumer confidence in the US market - Toyota US sales plunged 34% in November GM and Chrysler face bankruptcy without federal support
We believe the current economic deceleration in China is worse than that during the Asia financial crisis Deutsche
Bank
"As a result, 5 per cent [gross domestic product] growth in the first half of 2009 is now a reality, not a risk. - Ben
Simpfendorfer, RBS Economist
Other Loans Commercial property: US$ 25 trillion Global mortgages outstanding: US$22 trillion Corporate Bonds: US$ 15 trillion Credit Cards: US$ 2.5 trillion
Source: Sir Paul Judge, Sean Clarey , BIS, 1 Alan Mulally (Ford Motors CEO), Merrill Lynch
18
are they good enough? Is there a Churchill, FDR, Mandela in the making?
19
Financial order Will the US be able to continue to borrow and support its deficit Unipolarity / hegemony Importance of Emerging Markets (China and India in particular) Oil Is the asset allocation model dead (i.e. spread between hedge funds, cash, real estate, equities etc..) given how contagious this round was Gold Future of Sterling
20
Political instability
Pre-Crisis Thinking
Market fundamentals
Emerging Markets
Legal / Regulatory
Structural issues
Developed Markets
Currency (F/X)
Environmental
Market fundamentals
Legal / Regulatory
Post-Crisis Thinking
Counterparty
Black Swan moment; risk came from where traditionally it was least expected; the model needs to be re-thought
21
22
Investors / LPs
Increase in default rate of LPs and growth in secondary LP sales LPs questioning private equity business model Are historical returns sustainable given lack of leverage Is the 2 / 20 model dead?
Renewed focus on distressed opportunities and LBO debt to keep up return expectations LBO model under stress as credit crunch impacts availability of leverage
Deals
Decreasing returns due to increasing equity requirement Decreasing deal sizes Increasingly attractive public-to-private opportunities
Valuations adjusting
Portfolio Companies
Reassessment of business plans Impact of current crisis on industry - focus on survival? Access to high quality management increasingly available due to downturn Exit multiples impacted significantly
Exits
An industry in turmoil
as evidenced by the significant drop in the share prices of leading publicly traded alternative asset managers
Ashmore
Oaktree
Man Group
GLG Partners
Blackstone Group
Fortress Investment
Investcorp
0%
(25%) (26%)
(50%) (58%) (75%) (79%) (80%) (85%) (92%) (95%) (96%) (60%)
(100%)
Oct 06 UK LSE
May 07 US GStrUE
Dec 06 US NYSE
Jun 07 US NYSE
Nov 07 US NYSE
Feb 07 US NYSE
Source: Bloomberg * Man Group performance measured against January 5, 2007 price as IPO date was in 1994.
24
expected to grow
Current vs. Projected LP Investment Strategy*
US
3.3%
Africa
30% 52%
Europe
1.7%
Middle East
11% 35%
3.2x
Improvements in political and economic risk More qualified GPs Portfolio diversification Institutional familiarity with risks and opportunities Corporate governance standards
Asia
0.4%
LatAm/Carib.
40% 65%
Russia / CEE
0.2%
Russia/CEE 57% 75%
Latin America
0.1%
Asia (Ex-JANZ) 83%
89%
Middle East
0.04%
Projected Strategy (3-5 Years) Current Strategy
*May 2008
25
Impact on MENASA
26
Population (million)
1,294
119
157
Algeria
Libya
Egypt
Middle East
India
North Africa
South Asia
Oman
Significant cultural, political, and economic synergies have led to strong intra-regional trade links, labor mobility and investment opportunities
426
Middle East
North Africa
South Asia
Source: Economist Intelligence Unit (November 2008) Note: Middle East includes GCC states, Jordan, Lebanon and Turkey. North Africa includes Egypt, Libya, Algeria, Morocco, and Tunisia. South Asia includes India and Pakistan.
27
- Very Strong
- Strong
- Moderate
- Weak
28
Challenging the notion of de-coupling Impact on public equities Impact on the banking sector Impact on oil prices Impact on real estate Impact on real economies
Global
Demographic forces Role of governments (reform and diversification) Infrastructure investment and oil Regional
29
1999
2007
U.K. 5,460
U.S. 38,444
U.K. 11,055 Emerging Asia 4,585 Japan 17,129 U.S. 61,194 Western Europe 52,435
Hong Kong, Singapore, Taiwan 1,901 Australia, New Zealand, and Canada 3,125 Latin America 5,939
Hong Kong, Singapore, Taiwan 4,379 Australia, New Zealand, and Canada 8,530
*Includes total value of cross-border investments in equity and debt securities, lending and deposits, and foreign direct investment. Source:McKinsey Global Institute Cross-Border Investments Database
30
168% 47% 137% 30% 27% 47% 76% 54% Emerging Markets Developed Markets
Debt Securities
4.5% 3.0% 1.5% 0.0%
FDI
Equity Securities
The current financial crisis has led to forced de-leveraging of Western financial institutions and resulted in a large out-flow of capital, negatively impacting the region
Regional public equities down significantly year-to-date Domestic bank liquidity has tightened in line with other markets Drying up of liquidity has forced local governments to intervene Increasing pressure on asset prices including the real estate markets
Source: McKinsey Global Institute, Economist Intelligence Unit
31
105
24x 22x
90
75
(33%)
60
(46%) (54%)
10x
45
30 Jan-08
May-08
Jul-08
Sep-08
Nov-08
MSCI GCC
Egypt Oct-08
Turkey
32
Regional governments have acted swiftly to address the fallout resulting from the international financial crisis Saudi Arabia injected US$ 3 billion into the banking system UAE injected US$ 13.6 billion into the local markets in September followed with an additional US$ 19 billion in October and implemented a 3 year deposit guarantee QIA plans to buy stakes of up to 20% in troubled banks Oman central bank offered US$ 2 billion to local banks affected by the current crisis Kuwait government guaranteed bank deposits The federal government announced a EGP15 billion (c. US$ 2.5 billion) stimulus package including a EGP12 billion increase in public expenditure and subsidies on sales tax and exports The Turkish central bank cut the benchmark borrowing rate 50 bps to 16.75% and also cut the overnight lending rate by 100 bps to 18.75%
14.0
12.0
10.0
8.0
6.0
4.0
2.0
Jun-00 Jun-02 Jun-04 Qatar (24%) Saudi (12%) Egypt (16%) Jun-06 Jun-08 Kuw ait (17%) Oman (12%)
The government is reportedly working on a stimulus package including potential for funding from the IMF RBI made c.$12.4 billion available through a repurchase facility, reduced the government repurchase rate by 150bps to 6.5% and reduced the bank cash reserve ratio to 5.5% RBI also increased funds available for banks to refinance export credit to bring liquidity to the countrys $43.7 billion of outstanding trade finance
33
liquidity ratios
Loans-to-Deposits Ratio (%)
13
15
228 157
3x
87 76 79 57
US
G7
Global
GCC
India
Turkey
Egypt
US
G7
Global
GCC
India
Turkey
Egypt
China
BH KU IN
EG TR OM
KSA
UK
UAE
QA
US
Low Risk
...[RBI will pay] particular attention to maintain the viability if sectors that contribute significantly to employment and exports. Reserve Bank of India
34
Oil price forecast between US$60-80 per barrel in 2009-2010 World Bank: 2009 US$75, 2010 US$76 Bloomberg consensus: 2009 US$75, 2010 US$97
2003-2007 Average
Global oil demand growth down due to recession in western markets and sharp slowdown in China Risk of longer recovery if China cannot pull out of slump relatively quickly However, oil demand expected to rebound in 2010 Chance of global demand rebound in 2010 by c. 1 million bpd, driven exclusively by non-OECD economies Non-OPEC supply not robust more reliant on mature (and hyper mature) basins than in previous demand slowdowns (early 1990s and early 2000s). Non-OPEC supply growth is virtually non-existent
OPEC announced cuts of 1.5million bpd in order to support oil prices Reduction in surpluses expected in GCC due to sharp reduction in oil prices, reduction in production volumes and continuing high levels of government spending and capital investments and the GCC has sufficient liquidity to ride out the crisis Fiscal breakeven price for GCC economies 2008: US$30-55 per barrel 2009: US$55-70 per barrel
Furthermore, GCC countries have accumulated sufficient surpluses and reserves over the past few years to fund continued government spending and capital investment even if prices fall lower than expected
35
Factors that will lead to price correction Reduction in speculative activity Reversal in sentiment due to global financial crisis Government reforms have been put in place to limit speculative investment in certain markets Restricted access to credit Loan-to-value ratios have decreased due to liquidity crunch
Dubai property price index
Interest rates on new home mortgages have increased Negative wealth effect Substantial declines in most global asset classes will negatively impact demand from domestic and international investors
Limited impact on financial and real economies Low level of mortgage activity
59%
Households in the region are not overly leveraged Contribution to consumption limited Lack of sophistication in the market has not enabled mortgage equity withdrawals to fuel consumer spending Exposure of financial sector
8%
6%
US
G7
UAE
India
Majority of lending to the real estate sector in the GCC has been to large government-backed local developers (implying sovereign risk)
36
10% 8% 7% 5% 4%
54% 35%
Estimated to be insignificant
India UAE KSA Egypt US
US
Europe
MENASA
A range of reforms are helping to institutionalize the real estate sector and attract foreign capital
1998
Turkey establishes its REIT structure Ayrimenkul Yat
2000-2003
New real estate law in KSA allowing nonSaudi residents to own land Dubai allows 100% foreign ownership in designated areas
2006
Dubai ratifies freehold ownership laws and DIFC establishes REIT law Oman allows foreigners to own land in certain designated areas
2007
Dubai introduces Escrow and Brokers laws Egypt allows foreign entities to establish REITs Pakistan REIT law established
The real economies within the MENASA region will continue to grow
Three main factors will continue to drive growth in the MENASA region
Favorable Demographics
MENASA Population
129 million 127 million
1,698
1,569
1,443
2002
2007
$2,048
2012
$3,096
$980
Based Liquidity
GCC Oil Revenues (US$ billion)
Oil P rice $ 1 00 Oil P rice $ 70 Oil P rice $ 50 Oil P rice $ 30
8,800
EM*
MENASA
LATAM
2020
The GCC nations will receive c.$5 trillion of revenue even if oil stays at an average of $50 per barrel over the next ten years
North America
EU-15
China
6,400
2,600
38
Favorable demographics
Young and growing population increasingly focused on realizing their full economic potential
The demographic shift in population
Mobile low cost workforce Young and Growing Population More than 50% of the regions population is under the age of 25 Immense Wealth Creation GCC GDP per capita to increase to over $30,000 by 2013 Burgeoning Middle-Class c. 31 million households are expected to join the middle class between 2006 and 2010 in India alone Urbanization Rapidly growing urban populations across the region
2008 South Asia 2009 GCC 2010 2011 2012 2013 $2.2 $2.0 $2.0
(trillions)
9.9%
$2.8 $2.5
$3.1
Private consumption to grow by US$1.2 trillion by 2013 Main sectors: Energy Food Infrastructure Healthcare Education Housing
North Africa
2%
Working Population 43%
3% 3% 4% 6% 8% 9%
3% 4% 5% 6% 9% 10% 15%
3% 4% 5% 6% 8% 9% 14%
3% 5% 6% 8% 10%
17%
Males Females
16% 0-14
Almost 175 million people expected to join the workforce in MENASA over the next decade
Source: EIU, McKinsey, Morgan Stanley, MEED projects, Abraaj analysis, United Nations
GCC
King Abdullah Economic City ($100 billion Saudi) Dubai World Central ($33 billion UAE) Al-Zour oil refinery ($15 billion Kuwait) Manifa oil field redevelopment ($9 billion Saudi) Makkah to Madinah rail link ($5.3 billion Saudi) / Dubai light rail transport ($4.2 billlion UAE) Abu Dhabi International Airport ($6.8 billion UAE) / Jebel Ali container port ($1.5 billion UAE) IGCC power plant ($6 billion UAE) / Aluminum Smelter ($6 billion UAE) Doha Airport ($5.5 billion Qatar) / Renovation of Seeb and Salalah Airports ($3 billion Oman) Kuwait to Oman rail ($5.5 billion Kuwait) / Tiran causeway Saudi to Egypt ($3 billion Saudi) Tiran causeway Saudi Arabia to Egypt ($3 billion Saudi) Bahrain Qatar bridge ($3 billion Bahrain/Qatar) / Industrial Wharf ($2 billion Bahrain)
North Africa
1,216 km East-West & 1,330km North-South motorways ($28 billion Algeria) Kafr-al-Shaikh Refining & Petrochemical Plant ($9.5 billion Egypt) Trans-Saharan gas pipeline ($8 billion Algeria) Great Man-Made River Project ($7.7 billion Libya) Tripoli International Airport ($3 billion Libya) Tangiers to Casablanca high-speed train ($2.7 billion Morocco) 1,320 MW thermal power plant, Bir El Har ($2.7 billion Morocco) 1,200 MW gas-fired plant ($2 billion Algeria) Expansion of El-Fateh University ($2 billion Libya) Source: Business Monitor International, Zawya
South Asia
35 greenfield airports ($35 billion India) Offshore container terminal, Mumbai ($12 billion India) India-Iran gas pipeline ($7-$8 billion India / Pakistan) Phase V of the National Highway Development ($8.8 billion India) Diamer-Bhasha Dam ($6.5 billion Pakistan) Baluchistan oil refinery ($4-$5 billion Pakistan) Priority line of the Lahore light rail project ($2.4 billion Pakistan) 2,000 MW power project in Tamil Nadu ($2.3 billion India)
41
1.6x
45%
1.0x 0.6x
28%
60
0.3x
22% 17% 12% 5% 9% 8%
MENASA
North America
Europe
South America
Break-Even Price
Oil Price US$100 Oil Price US$70 Oil Price US$50 Oil Price US$30
2.4 0.6 1.1 0.6 1.1 1.5 3.8 5.1 1.5 0.8 0.9 1.9 6.4 1.9 1.0 1.1 2.4 2016
8.8 7.6 2.6 2.2 1.3 1.3 2.8 2018 1.5 1.5 3.2
2007 2008 2010 2012 2014 Q4 2008 2009 2010 2011 2012 *based on official 2008 budget targets, **Kuwait announced one off budget transfer of US$ 20bn to capitalize social security system Source: Merrill Lynch, McKinsey, BP Statistical Review of World Energy 2007, Bloomberg
2020
42
600-900
Turkey
India
GCC
380
UK
266
43
37,374
50,629
13,827
MENASA 2007
15,834
MENASA 2017
MENASA Current
MENASA 2015
29%
Gap 13%
28%
6 3
15%
Egypt
Saudi Arabia
Europe
US
Source: World Bank, World Health Organization, McKinsey Note: Hospital calculation based on 1.2 & 4.1 beds / 1000 population in MENASA and OECD, respectively, as well as current MENASA beds / hospital ratio
44
4.8%
Gap 5.8%
1.8%
9% 4%
1.3%
0.8%
0.7% Pakistan
G7
World
India
UAE
Turkey
Egypt
USA
Europe
Asia-Pacific
MENA
142
(by 2017)
158
(by 2030)
50 44
(by 2015)
60 75
India / Pakistan
GCC
1996
2001
2005
2010F
Source: Swiss Re Sigma Report, McKinsey, Economist Intelligence Unit, Citi Research, Abraaj Capital Analysis
45
The outlook
MENASA will be the 2nd fastest growing region in the world over the next 5 years
2008-2013 Real GDP CAGR
8.2%
5.9%
3.8%
3.6%
1.6%
1.6%
1.5%
China
MENASA
EM*
LATAM
OECD
North America
EU-15
46
Investors / LPs
Increasing interest of regional money in staying local, e.g. SWFs Potential new external investors focusing on the region due to attractive risk / return proposition Continued value generation via growth capital opportunities Limited impact of credit crunch (on returns and deal sizes) as industry has had less reliance on debt / leverage
Deals
Valuations adjusting
Attractive public-to-private options as MENASA stock markets have been particularly hard hit
Impact of current crisis on industry - consolidation opportunities emerging in highly fragmented sectors
Exits
Increasing exit options via new regional private equity firms / SWFs / and MNCs seeking growth markets
47
Concluding Thoughts
48
Part of a pattern?
Paradigm shifts continue to alter the global economic landscape and have resulted in Asia regaining its position as the worlds dominant growth engine
Agricultural Productivity Industrial Productivity
Distribution of Global GDP
100%
80% 60%
40% 20%
0% 0 Europe
*Includes: USA, Canada, Australia and New Zealand Source: Sir Paul Judge
1000 1500 1600 1700 1820 1870 1913 1950 1973 1998 2025 2050 Western* L. Am/Africa Asia
49
60
40
20
Demographics a double edged sword Continuing reform balance between political, economic & social Conflict and geo-political instability Oil dependence / economic diversification Climate change
Source: Goldman Sachs * MENASA excludes Jordan, Lebanon, Libya, Algeria & Tunisia. Latin America includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Paraguay, Uruguay & Venezuela
50
51
32.0
30.0
16.2
Kuwait
UAE
Saudi Arabia
Qatar
Oman
Bahrain
Brazil Saudi Arabia Thailand Malaysia Turkey Russia Oman Argentina India Bahrain UAE Kuw ait China Qatar
4.7% 5.0% 5.1% 6.0% 6.6% 7.2% 8.3% 8.4% 8.8% 9.1%
Source: Bloomberg, HSBC, Passport Capital, Economist Intelligence Unit, Merrill Lynch
10% 8% 6% 4% 2% 0%
Oil Price US$100 Oil Price US$70 Oil Price US$50 Oil Price US$30
2.4 0.6 2007 1.1 0.6 2008 1.1 2010
8.8 7.6 2.6 2.2 1.3 1.3 2.8 2018 1.5 1.5 3.2
1.5 2012
2005
2006
2007
2008
2009
2010
2011
2020
2025
% of Total
14
17
33%
1.4%
57%
20 1
31 62% 3
China GCC EM* OECD EU-15 United States
53
2%
65+
5%
*Excludes China
Outlook Saudi is the largest economy in the GCC, both in terms of GDP and population Rapidly growing population of c. 25 million, growing at 2.4% pa (median age 22) GDP base of US$ 382 billion with real GDP growth of 3% in 2007
Saudi is well positioned to weather the current financial crisis Current account balance of 23% of GDP in 2007 Government budget estimated to breakeven at oil price of US$ 45 / bbl in 2008; US$ 700 billion of infrastructure projects expected to continue over the next 10 years
% GDP Contribution
2.7% 3.8% 4.8% 6.1% 7.2% 8.2% 17.3% 9.7% 10.7% 2.8% 26.6%
Crude Oil & Natural Gas Government Services' Producers Finance, Insurance, Real Estate and Business services Other minning and manufacturing Wholesale & Retail Trade & Restaurants & Hotels Construction Transport & Storage & Communication Agriculture Forestry & Fishing Community & Social & Personal services Oil Refining Other
Saudi has initiated a significant reform campaign to attract foreign investment and increase the countrys global competitiveness 2008 World Investment Report highlighted Saudi as the regions most attractive destination for investment Increase in net FDI inflows from US$ 1 bn in 2004 to projected US$ 24 bn by 2008
Despite potential slowdown, Saudi still seen as attractive market Revised GDP growth of 08-13 CAGR 4.6% still well above global average
Source: Economist Intelligence Unit, CIA Factbook, Saudi Arabian Monetary Agency, Credit Suisse
54
Outlook The UAE has emerged as the 2nd largest economy in the GCC and one of the most important in the region GDP growth has averaged just under 10% over the past 5 years Diversified economic base with non-oil sector contributing 65% of total GDP, with growth driven by services sector The UAE has become a regional hub for finance, tourism and logistics
$28,684 $34,548 $37,690 4.6 7% $11 12% 4.9 7% $13 14% 5.3 7% $13 13%
The UAE is well positioned to weather the current crisis Current account balance of 20% of GNP in 2008F Government budget estimated to breakeven at oil price of US$ 40 / bbl in 2008 UAE sovereign wealth funds have accumulated c. US$ 600-900 billion in assets
% GDP Contribution
Crude Oil and Natural Gas
25.0% 35.0%
Robust banking sector Strong profitability and balance sheets, with industry ROE of 21% and capital adequacy ratio of 13% (as of Jun-08)
Impact of potential correction in real-estate prices and strengthening US$ expected to ease inflationary pressure Inflation expected to decrease from 13% in 2008 to less than 10%
13.0%
Others
Source: Economist Intelligence Unit, Central Bank of UAE, Merrill Lynch, Morgan Stanley, Global Research, UBS
55
With a macro perspective, and seeing Dubai and Abu Dhabi as part of UAE, rather than two independent states, this widening [of Dubai CDS spreads over Abu Dhabi spreads] is difficult to justify, in our view. CDS levels of Aa2/AA rated Abu Dhabi and Qatar.. trade wider than Polandrated up to three notches lower. While our estimated Dubai external debt/GDP ratio of 6570% may raise some concerns, our economist and head of credit research believe market sentiment is over-exaggerated
Abu Dhabi
we believe this significant widening in CDS spreads for Dubai-based institutions (which effectively imply a 34% probability of sovereign default) is unwarranted and current concerns over Dubais level of indebtedness to be significantly overblown. We see little to suggest that this debt level is either unmanageable or unsustainable. Dubai Government Official Dubais sovereign debts represent only a fraction of the assets of the government and affiliate companies, and the emirate will meet all its refinancing obligations. While financing conditions are becoming more challenging, we dont consider that the creditworthiness of rated domestic entities will be affected. we feel refinancing risks will remain manageable despite reports of a sharp reduction in international syndications
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Dubai
Residential Occupancy: 93% Commercial Occupancy: 98% Supply > Demand (year): 2009-10
Riyadh
Residential Occupancy: 92% Commercial Occupancy: 91% Supply > Demand (year): 2014-15
Abu Dhabi
Residential Occupancy: 99% Commercial Occupancy: 99% Supply > Demand (year): 2012-13
Source: Occupancy & Capacity Estimates - Colliers, Price Expectations- Morgan Stanley
60,000 40,000
20,000
Source: EFG, Morgan Stanley, Citi Research, company reports/filings, Colliers *Indirect ownership through other semi-govt. entities
Government
Quasi-Government
2,200 1,800 1,200 800 NA 2004 2005 2006 2007 1H08 600 715 800 1,200
Mid-end Residential
High-end Residential
Banks not over exposed to the real-estate sector Banks able to sustain a downturn in current prices due to the significant run-up as of late Mortgage exposure in UAE banking system is relatively small - 5.4% of total assets in 1Q 2008 - 8% of GDP According to banks 90% of real-estate related lending is to top-tier clients, including largely govt. or semi-govt. entities Loans to real-estate developers far more important; however, UAE central bank considering steps to support real-estate relating lending UAE government has a 20% limit in place (total assets) on real-estate exposure for banks
Source: Morgan Stanley, Sico Research, CBRE
3%
8%
15%
Industry (ex. Construction) Services (ex. RealEstate) Construction Real Estate Oil & Agriculture
53%
58
Diversified economy
% GDP Contribution
3.4% 3.6% 3.7% 3.7% 4.1% 4.3% 6.2% 11.2% 6.9% 8.4% 9.1% 13.2% 3.2% 2.7%
Oil and Other Manufacturing Industries Agriculture, Forestry and Fishing Wholesale & Retail Natural Gas General Government Oil Others Construction and Building Transport and Warehousing Financial Services Tourism Insurance Suez Canal Communication Real Estate
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16.3%
Rising commodity prices, particularly food and oil have resulted in high inflation which peaked at 23.7% in August 2008; however inflationary pressures have eased as commodity prices have come down
Source: Economist Intelligence Unit, Central Bank of Egypt, Global Research, Capital Research
32 26 11 4
36 37 18 7
36%
38%
45-64 65+
18%
5%
8%
1.4%
China
Egypt
EM*
OECD
EU-15
*Excluding China and Egypt Source: Capital Research, United Nations, Economist Intelligence Unit, Colliers International
United States
60
Public Consumption 4%
However, Turkey has relied increasingly on external financing to fund its external deficit
Share of GDP (%) The role of energy in the current account
resulting in a slowdown of growth estimates in the face of the global financial crisis
2008 and 2009 GDP Growth Forecasts
3.8%
3.5% 3.0% 3.0% 2.1% 1.7% 0.9% 3.0% 2.7% 2.5% 2.5%
2.6%
JP Morgan
IMF
Morgan Stanley
Citi
61
80 70 60 50 40 30 20 10 0 Mexico US Brazil UK Germany Italy Philippines Venezuela Japan Indonesia Nigeria India Iran Vietnam Turkey Saudi S. Africa Egypt France Canada Korea Thailand Russia China Spain
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Demographics. Turkey benefits from one of the youngest populations of any emerging market with a median age of 27 and a labor force of 50 million. Productivity. 25% of Turkeys labor force is still employed in the agricultural sector; however, a period of increasing urbanization (from 25% in mid-1900s to 70% today) will lead to further increases in productivity and employment in key sectors such as manufacturing and services. Reform. Turkeys economy is well positioned long-term due to a range of successful economic policies enacted after the 2001 crisis and political reforms executed in pursuit of EU membership. Future business-friendly reforms are expected to continue going forward, including reform of pension schemes and rigid labor laws.
Source: Goldman Sachs, HSBC
as India is impacted by the global nature of the current crisis Liquidity crunch due to global crisis - Reversal in short term foreign capital inflows from US$108bn in 2008 to US$ 29 billion expected in 2009 - High level of dependence on foreign funding with 30% of corporate borrowing from foreign sources in 2008 - RBI intervention to support weakening INR, causing further tightness in domestic liquidity Exports - 34% of GDP from exports, mainly to recession-impacted economies such as US / Western Europe Negative wealth effect - Recent stock market and real estate price corrections will have negative impact on consumer spending
However India remains well positioned to weather the storm Fundamentally strong banking sector - Stable with relatively low levels of leverage - Proactive government support through cuts in Cash Reserve Ratio and repo rate, with further easing expected Robust domestic demand - Growth in income expected to support consumer spending (double-digit growth in private sector pay and 20% increase in public sector salaries) - Substantial portion of consumption is essential 70% of rural and 61% of urban consumption Easing pressure on inflation due to fall in oil, commodities, and food prices
*Excluding China and India Source: RBI, SEBI, CEIC, Goldman Sachs, Economist Intelligence Unit
China
India
EM*
OECD
EU-15
488 590 56
483
75%
853 112
2010
Low
Middle
Middle-Upper
High
Large and growing consumer base - The population in the age group of 20-64 will grow by 260 million between 2005 and 2025 - c. 31 million households are expected to join the middle class between 2006 and 2010
Gross capital formation (GCF) has been a major driver of economic growth in the last decade - Dramatic increase in GCF driven by increased FDI - Highest growth among the major Emerging Asian economies
will make India the 3rd largest economy in the world by 2050 GDP In 2050 (US$ trillions at 2007 prices)
80 60 40 20 0
U K Tu rk ey Ja pa n Fr an ce G er m an y N ig Ph eri a i li pp in es C an ad a In di a Br az il R us si a In do ne si a M ex ic o Sa ud S. i A fri ca Vi et na m Th ai l Ve and ne zu el a Eg yp t Sp ai n hi na Ita ly Ko re a C Ir a n U S
Source: Goldman Sachs, Morgan Stanley, CLSA, McKinsey, CMIE, Edelweiss, United Nations, Economist Intelligence Unit
hi na Th ai la nd M al ay si Ph a i li pp in es
64
In di a In do ne si a
Households:
188 mm
222 mm
Mar-00
Mar-08
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