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Strictly Private & Confidential

Abraaj Capital
A Period of Consequences
How we see the world and where its going
Arif Masood Naqvi Founder and Group CEO November 2008

Global Context: Taking Stock

The four most expensive words in the English language are, This time its different.
Sir John Templeton (1912-2008)

He who fails to learn from history is condemned to repeat it.


A Wise Person

The world has seen many asset price bubbles before


Each successive group of speculators is able to persuade itself that its own situation is unique in history.(1) There usually follows a period of consequences
1980-1990 Savings and Loans Crisis
- Housing Bubble - Financial deregulation in the 1980s allowed savings & loans (S&Ls) to engage in more complex financial transactions to compete with banks - Resulted in closing of over 1,000 S&L institutions with assets of over $500 billion - By 1985, many S&Ls were bankrupt - Primary cause of the 1990-91 US recession

1997 Asian Financial Crisis


- Equity / Asset Bubble caused by excessive country and company level borrowing and large flows of foreign capital - Resulted in deep recessions for many Asian countries (GDP contractions; Indonesia -13.7%, Thailand -8.0%, South Korea -5.5%, Hong Kong -5.1%) - Collapse of Thai Bhat - Significant inflation and unemployment - Spread to Brazil and Russia and contributed to collapse of LTCM(2)

1636-1637 Tulip Bubble (Tulipomania)


- Asset Bubble - Irrational run-up in prices of tulip bulbs - Considered the first recorded speculative bubble - At the height of the bubble, in February 1637, tulip contracts sold for 20% the annual income of a skilled craftsman

1840s Railway Mania


- Equity Bubble - In 1825 the government repealed the Bubble Act and adopted a laissez-faire attitude, resulting in wide speculation on new railway companies - Speculative investment facilitated by reduced interest rate from Bank of England, emergence of newspapers and stock markets - Rise in BoE interest rates triggered capital outflow and collapse of bubble

1636-1637

1720

1840s

1929

1980

1986-1990

1997

2000

2008

1720 South Sea Bubble


- Equity Bubble - Speculative frenzy facilitated by false rumors - Share price increased from 128 in January 1720 to c.1,000 in August and dropped back to c.100 by yearend - Thousands bankrupted - Parliamentary investigation found fraud among board and cabinet members - Resulted in enforcement of Bubble Act; limiting formation of new business ventures and number of investors

1929 Wall Street Crash (The Great Depression)


- Equity Bubble - Resulted in enormous financial losses - Black Thursday 13% fall in market - 90% loss in equity market value by 1932 - Massive global economic slowdown 45% decline in US economy from 1929-1933 and 1/3 of non-farmer workforce unemployed in 1933 - Led to establishment of the SEC(3), FDIC(4) and Glass Steagall Act

1986-1990 Japanese Asset Bubble (The Lost Decade)


- Housing Bubble - Caused by unfounded optimistic expectations, inadequate risk management and aggressive lending - To this day, the Japanese economy has not recovered fully - Enormous government debt (currently 182% of GDP) - GDP growth stagnated at 1.7% throughout the 90s - Stock prices bottomed in 2003

2000 Dot-Com Bubble


- Tech Stock Bubble - Climate of low interest rates, excess optimism and dismissal of traditional business models resulted in increased speculative investment - Resulted in a $5 trillion loss in market value - 78% drop in NASDAQ index - Caused 2001 US recession

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

and the latest bubble is considered to be the mother of all crises(1)


The greatest housing boom in US history, with prices increasing by 12% per annum from 2001 to 2006 (3x the growth rate from 1987 to 2001)

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

S&P Case-Shiller U.S. National Home Price Index

Source: S&P (1) Paul Volcker (inter alios)

driven by the ultimate economic paradox


The unique combination of cheap money and artificially low inflation (due to cheap imports) resulted in unrestrained debt-fuelled consumption and unsustainably high domestic asset prices

Low Interest Rates (US)

High Economic Growth (US)

Increasing Wealth (US)

Disproportionate Rise in Asset Prices Recycling Surplus into US Treasuries Improved Productivity in Emerging Asia

Increased Leverage

Suppressed Inflation

Increased Savings in Emerging Asia


The China Effect

Increased Imports from Emerging Asia


US action/impact

Increased Consumption & Low Savings

Abraaj analysis

facilitated by a toxic combination of


excessive leverage, irresponsible short-termism, and inadequate regulation

y y b ts ilit n ib ipa rt ns tic ho po ar f s es t p t o s Irr rke sui gain r a m pu rm in te

Ex fro cess iv m low che e le ap ver s co aving mon age ns um s / h ey / pti igh on

Inadequate regulations and over-sophistication of market players

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

supported increasing household leverage and consumption


Total US Household Debt and Private Consumption (both as % of GDP)

100% 80% 60% 40%


1984 1987 1990 1993 1996 1999 2002 2005 2008

2x

72% 68% 64% 60%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 US Household Debt (LHS) Consumption (RHS)

US CPI Index YoY % Change

Fed Funds Rate

Global banks became highly levered


Bank Leverage (Tangible Asset / Tangible Equity)
35x 30x 25x 20x 15x 10x 5x 0x Citi MS HSBC* ML BofA JPM

Unchecked increase in derivative instruments


Outstanding OTC Derivatives(1) (US$ trillion)
OTC Derivatives ballooned to c. 11x world GDP

European banks, Barclays, CS, UBS and RBS averaged 46x

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

As per 3Q 2008 *As per 2Q 2008

Outstanding OTC Derivatives (LHS)

Outstanding OTC Derivatives / GDP (RHS)

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 (%)

Risk reward ratio for senior loans deteriorating


Weighted Average Pricing per Turn of Senior Leverage (Bps)

100 80 60 40 20 0 Subprime Alt-A 2002 Prime Conforming 2006 Prime Jumbo Government
4.0x

75

60

45

30 2001 2002 2003 2004 2005 2006 2007

Increase in securitized products


US Asset Backed Securities Outstanding (US$ trillion)

False sense of security through opaque hedging instruments


Credit Default Swap Market(1) (US$ trillion)
CDS market reached 4x US GDP in 2007

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

Self Regulation Delusion

The bubble burst when the sub-prime mortgage sector imploded


The combination of increasing interest rates and the largest ever resetting of adjustable rate mortgages in US history triggered the sub-prime mortgage collapse
With adjustable rate mortgages resetting delinquencies began to rise
Delinquency Rates (LHS)
25%
Subprime variable

Sub-prime as % of Total Delinquencies (RHS)


93% 91% 90%

20% 15%
Subprime fixed

10%
Subprime as % of total

88% 87%
Prime variable Prime fixed

5% 0% Jan-01

85% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07

at higher interest rates


Fed Funds Rate
7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jan-01

causing a sharp drop in housing prices


YoY % Change in US and UK house prices
30% 20% 10% 0% Jan-01 -10% -20% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

S&P Case-Shiller Index

UK Nationwide Building Society Index

Source: CIBC, Bloomberg, U.S. Treasury, Federal Reserve

11

The sub-prime crisis led to the broader financial crisis


The sub-prime defaults and US housing market crash triggered wider market dislocations
High Spread between Fed Funds Rate & Inter-bank Overnight Rate highlights the freezing up of liquidity
8.0 6.0 4.0 2.0 0.0 -2.0 Nov-06
Central banks coordinate efforts to increase liquidity (Fed: $43 bn, ECB: $214.6 bn, BoJ: $8.4 bn) President Bush announces bailout of US homeowners Troubled Asset Relief Program passed in Congress Fed makes emergency move to buy and support commercial paper market

Bear Stearns bought by JPMorgan

Lehman Brothers files for bankruptcy

Feb-07

May-07

Aug-07

Nov-07

Global markets collapse


World Equity Markets and Commodity Prices

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

300 250 200 150 100 50 0

Equity markets have lost US$ 29 trillion over the last 12 months

600 500 400 300 200 100 0

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-06 Nov-07 Nov-08 WCAU World Index (LHS)

0 Jan-90 May-92 Sep-94 Jan-97 May-99 Sep-01 Jan-04 May-06 Sep-08


12

Source: Bloomberg, Bureau of Economic Analysis

pushing many financial institutions to the brink of bankruptcy


Total losses estimated at US$ 2.8 trillion(1)
Too big to fail theory tested
Lehman Brothers declares bankruptcy Bear Stearns purchased in a fire-sale WaMu the largest bank failure in US history Northern Rock, RBS, Bradford & Bingley & IndyMac taken into state ownership Partial nationalization of Fortis AIG taken over by US government in a bailout totaling US$138bn Ukraine, Hungary and Iceland have resorted to IMF loans for funding Fannie Mae and Freddie Mac nationalized The unthinkable: Citi bailed out

Massive asset write-downs across banking sector


Banks have reported over $690 billion in write-downs and credit losses(2) Ten worst hit banks accounted for $430 billion in losses(2) Losses at Wachovia and Citi alone amounted to over $150 billion(2)

Reassessment of global financial services (especially investment banking) business models


Merrill Lynch sold to Bank of America Goldman Sachs and Morgan Stanley in the process of becoming bank holding companies, instantly changing the face of bulge-bracket investment banking American Express approved to become a bank holding company
(1) Estimated by the Bank of England (as of October 2008). Source: The Economist; (2) Barclays
13

and is now beginning to impact the real economy


with reduced consumer expenditure causing declining earnings and increased unemployment
Earnings are down 18% on estimates made 12 months ago
S&P 500 Rolling Earnings Surprise % (12mo Fwd Estimates vs. Actuals)
7

Unemployment rate in the US is reaching its highest in 16 years


Unemployment Rate (%)

Grey shading represents US recession

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

The spent US consumer


The current financial crisis has resulted in a massive loss of wealth that will severely impact US consumption, which currently accounts for c. 18% of global GDP and 70% of US GDP
Despite a period of modest wage increases
Real Private Compensation
133 130 127 124 121 118 115 112 109 106 103 100 0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 months after trough
81-month shortfall: $771.3 billion or 8.9% of real disposable personal income

US consumption hit record levels


US Consumption as a % of US GDP
72%

Real Private Compensation Index=100 at Business Cycle Troughs Average of Past 4 Cycles Current Cycle

70% 68%

00-08 Avg: 70%

90-99 Avg: 67%


66% 64% 62% 60% 1980 1984 1988 1992 1996 2000 2004 2008

80-89 Avg: 64%

driven in part by a maturing population


Propensity to Spend Expenditure per Capita by Age

that has recently lost a a significant portion of its wealth


The Wealth Effect

5,500

Stock market US households have lost


US median age of 37 yrs

5,000

US$ 7 trillion US$ 7 trillion


15

4,500

in wealth due to decline in the stock market (Oct-07 to Oct-08)

4,000

3,500

3,000

House prices US households projected to lose


20 30 40 50 60 70 80 90

2,500

2,000

in wealth due to the drop in home prices by the end of 2008

Source: Economist Intelligence Unit, Morgan Stanley, CEPR, NBER, Center for Economic and Policy Research, Center for Retirement Research, Federal Reserve, NAR Estimate, Dean Baker

What do public markets tell us?


October saw two of the greatest one-day gains since the Great Depression, but where are we headed?
Of the past seven one-day gains of 10% or more, four occurred during the Great Depression
Dow Jones Industrial Average October Performance Ten biggest % gains in the Dow Jones Industrial Average
Mar 15,1933 15.3% 14.9% 12.3% 11.4% 11.1% 10.9% 10.2% 9.5% 9.5% 9.4%

11,000
Oct 6, 1931

10,000

11.1% 10.9%

Oct 30, 1929 Sep 21, 1932

9,000

Oct 13, 2008 Oct 28, 2008

8,000

Oct 21, 1987 Aug 3, 1932 Feb 11, 1932

7,000 10/1/08

Nov 14, 1929

10/7/08

10/13/08

10/19/08

10/25/08

10/31/08

P/E ratio for the S&P 500 historical context


50 45 40 Price-Earnings Ratio 35 30 25 20 15 10 5 0 1860 Long-Term Interest Rates
1921 1981

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

Where are long-term interest rates going?

Where are earnings going?

Are equities cheap?


16

1880

1900

Source: Bloomberg, Wall Street Journal, Robert Shiller

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

The known unknowns


however, downside risks continue to pose a threat to global economic recovery; for example,
China Growth Any serious threat to Chinese growth will have dramatic impact on global economic outlook - The best thing China can do [about the global slowdown] is maintain policies that support its own growth," - Robert Zoellick, World Bank president Social unrest could be a serious threat to continuing growth - Laid-off workers in factories in southern China have staged protests that had to be contained by riot police. - ..the economic crisis of 2009 could pose the toughest tests that the Chinese government has faced since the student uprisings of 1989. - Gideon Rachman, Financial
Times

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

Cooperation of global leadership


Unprecedented circumstances pose a test of global leadership whose actions will determine the outcome of the current crisis

are they good enough? Is there a Churchill, FDR, Mandela in the making?
19

An evolving world order


As the world emerges from the current crisis, players need to be aware of a potential change in the global fabric

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

Comparing risk at Home and Abroad


The current crisis is leading to a rethinking of the traditional risk paradigm

Emerging Markets Risks

Developed Markets Risks

Political instability
Pre-Crisis Thinking

Market fundamentals

Emerging Markets

Legal / Regulatory

High risk High growth

Low Risk Low Growth

Structural issues

Developed Markets

Currency (F/X)

Environmental

High Risk High growth

High Risk Low Growth

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

Impact on Private Equity Globally

22

The private equity industry in the current crisis


The conventional private equity model continues to be impacted by the deteriorating economic situation...
Fundraising conditions more difficult Slowdown in capital distributions (and capital calls?)

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

Conventional Private Equity Industry Impact Analysis

Deals

Decreasing returns due to increasing equity requirement Decreasing deal sizes Increasingly attractive public-to-private opportunities

Valuations adjusting

Increasing focus on creating value through portfolio management

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

Public markets / recapitalization route closed Longer holding periods


23

An industry in turmoil
as evidenced by the significant drop in the share prices of leading publicly traded alternative asset managers

Partners Group 25% 16%

Ashmore

Oaktree

Man Group

GLG Partners

Blackstone Group

Och-Ziff Cap Mgmt

Fortress Investment

Investcorp

Gottex Fund Management

0%

(25%) (26%)

(50%) (58%) (75%) (79%) (80%) (85%) (92%) (95%) (96%) (60%)

(100%)

IPO Date Country Exchange

Mar 06 Switzerland SIX

Oct 06 UK LSE

Jan 07* UK LSE

May 07 US GStrUE

Dec 06 US NYSE

Jun 07 US NYSE

Nov 07 US NYSE

Feb 07 US NYSE

Dec 06 Bahrain LSE (GDR)

Nov 07 Switzerland SIX

Source: Bloomberg * Man Group performance measured against January 5, 2007 price as IPO date was in 1994.

24

Shifting trends in asset allocation


which may influence a shift in long term asset allocation strategies towards emerging markets
Under penetrated industry
PE Investments as a % of GDP (2006-2007)

expected to grow
Current vs. Projected LP Investment Strategy*

due to attractive nature of risk adjusted returns


Reasons LPs Choose to Increase Investment in Emerging Markets PE*

US

3.3%

Africa

30% 52%

Attractive riskadjusted returns

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%

More attractive valuations Recent improvements in performance

Latin America

0.1%
Asia (Ex-JANZ) 83%

89%

Middle East

0.04%
Projected Strategy (3-5 Years) Current Strategy

Source: Goldman Sachs, Emerging Markets Private Equity Association Survey

*May 2008

25

Impact on MENASA

26

Introduction to MENASA (1/2)


MENASA has a combined GDP of US$ 3.2 trillion growing at 5.9% p.a., and a population of 1.6 billion

The MENASA Region

Population (million)
1,294

Turkey Morocco Tunisia Lebanon Jordan Bahrain Saudi Arabia

Kuwait Qatar Pakistan UAE

119

157

Algeria

Libya

Egypt

Middle East
India

North Africa

South Asia

Oman

Nominal GDP (US$ billion)


1,512 1,277

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

Introduction to MENASA (2/2)


Key drivers of the MENASA economies include demographics (large and low-cost workforce, domestic demand growth), reform / diversification (including infrastructure investment) and hydrocarbon liquidity
Low Cost Workforce Domestic Demand Reform Infrastructure Investment Hydrocarbon Liquidity

- Very Strong

- Strong

- Moderate

- Weak
28

MENASA in a global context

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

Challenging the notion of de-coupling


Globalization has led to increased financial coupling between the major global economies, including MENASA
Cross border investments
Lines show total value of cross-border investments between regions*, 1999 / 2007 Figures in bubbles show size of total domestic financial assets, $ billion, current exchange rates
0.5-1% of world GDP 1-5% of world GDP 5-10% of world GDP

1999

2007

10%+ of world GDP

U.K. 5,460

U.S. 38,444

Western Europe 20,886 Russia, Eastern Europe 738

U.K. 11,055 Emerging Asia 4,585 Japan 17,129 U.S. 61,194 Western Europe 52,435

Russia, Eastern Europe 5,070

Emerging Asia 21,782 Japan 20,089

Latin America 1,860

Middle East, rest of world 1,710

Hong Kong, Singapore, Taiwan 1,901 Australia, New Zealand, and Canada 3,125 Latin America 5,939

Middle East, rest of world 5,524

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

Volatility of capital flows and impact on the real economy


Impact on the real economy has been exacerbated by volatile capital flows in previous financial crisis, particularly in Emerging Markets
Real GDP growth and volatility of capital flows
Global Capital Flows (US$ trillions) and Real GDP Growth (%)
12.0 10.0 8.0 6.0 4.0 2.0 0.0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Global Capital Flows World Real GDP Growth EM Real GDP Growth
Asian Financial Crisis; Russian Crisis Dotcom Collapse; post 9/11

Change in absolute capital inflows, 1996-2006 % average capital flows


9.0% 7.5% 6.0%

Lending and Deposits

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

Impact on public equities


Reversal of global capital flows, forced deleveraging and regional anxieties have resulted in a collapse of regional equity markets
Equity markets have declined significantly
Equity Market Performance (YTD) P / E for Select Indices

105

24x 22x

90

21x 19x 19x 17x

75
(33%)

14x 13x 10x 9x 6x

60
(46%) (54%)

10x

45

(56%) (58%) (63%)

30 Jan-08

Mar-08 Dow Jones MSCI GCC Egypt CASE

May-08

Jul-08

Sep-08

Nov-08

MSCI GCC

India 2006 2007

Egypt Oct-08

Turkey

MSCI Emerging Markets Sensex India Turkey ISE

Source: Bloomberg, DataStream

32

Impact on the banking sector (1/2)


Concerns over liquidity in the banking system have largely been offset by support from government institutions
Increasing reliance on international financing exposed MENASA economies to the global liquidity crunch
Index of international claims on domestic entities and 00-08 CAGR (%)

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%)

Bahrain (20%) UAE (37%) Turkey (15%)

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

Source: Bank for International Settlements

33

Impact on the banking sector (2/2)


Regional banks in good financial health
Strong solvency and
Capital to Risk Weighted Assets (%)
18 17
358

liquidity ratios
Loans-to-Deposits Ratio (%)

13

Average of regional banks


12 12 13

15
228 157

3x
87 76 79 57

US

G7

Global

GCC

India

Turkey

Egypt

US

G7

Global

GCC

India

Turkey

Egypt

resulting in low risk rankings


Global Leverage Risk (Debt Levels + Ratings) Loans / Deposits (Risk Ranking) Low Risk High Risk

and high degree of confidence by the central banks


[Qatari banks are] solid, highly capitalized and liquid. Qatari central bank Governor Sheikh Abdullah bin Saud al-Thani The effects on the Egyptian banking sector, however, have been minimal in light of prudent regulations and comfortable domestic liquidity conditions Central Bank of Egypt ...banks in the UAE had a very small and insignificant 1.2 per thousand exposure [to sub-prime mortgage loans and related structured products]. H.E. Governor of Central Bank of the UAE Sultan Bin Nasser Al-Suwaidi They don't need any assistance, they are highly liquid and have good capitalization. Saudi Arabian central bank Governor Hamad Saud al-Sayyari

China

BH KU IN

EG TR OM

KSA

UK

UAE

QA

US

High Risk Private Credit / GDP (Risk Ranking)


Source: Merrill Lynch

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

Impact on oil prices


Sharp drop in oil prices due to global recession and resulting demand contraction will have a short-term impact on the GCC economies
2009 to witness sharpest drop in oil demand since 1982
Oil Demand Growth Y-o-Y (thousand barrels per day)
2,000 Y-o-Y Oil Demand Growth (Bbl / day in 000s) 1,500 1,000 500 0 -500 North America Other OECD China Other Asia Middle East 2009 2010 Other World

resulting in significant drop in oil prices


OPEC Reference Basket Price (US$ per barrel), 1996-2008

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

Source: Merrill Lynch, Citigroup, Credit Suisse, World Bank, Bloomberg

Impact on real estate (1/2)


A short-term correction in real estate prices is not expected to have a major impact on regional economies
Significant run-up in prices
Property Price Appreciation
Abu Dhabi 52% increase in property prices from Jan-Jun 2008 Cairo 100% increase in land prices in 2007 Mumbai 45-50% increase in commercial property prices in 2007

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

Impact of real estate correction on regional economies will be manageable


Mortgage Penetration (% of GDP)
80%

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%

Banking sector not heavily exposed to real estate price correction


4% Turkey 2% Qatar 1% Saudi Arabia 0% Egypt

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

Source: Morgan Stanley, Global Investment House, Merrill Lynch, CBRE

Impact on real-estate (2/2)


The evolution of the regions real estate sector will lead to creation of a new asset class
The region has been undergoing a boom in construction
Construction industry as % of GDP (2007)

however, the real estate industry has yet to institutionalize


Institutional Ownership of Commercial Real Estate (2007)
Institutional ownership comprised of REITs, PE, insurance companies and pension funds

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

Idea Assessment 2004-2005


Bahrain, Qatar, and Abu Dhabi allow 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

Position 2008 Exit


New Saudi mortgage law to be announced shortly Kuwait revises the build, operate and transfer law

Source: EIU, NAREIT, Abraaj analysis, DTZ, Bloomberg


37

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

Creates demand, facilitates production growth, encourages reform

1,698

1,569

1,443

2002

2007
$2,048

2012
$3,096

Creates wealth, facilitates economic growth, and infrastructure expenditure Hydrocarbon

Nominal GDP / Cap

$980

Leading to Continued Growth


2008-2013 Real GDP CAGR
8.2% 5.9% 3.8% 3.6% 1.6% OECD 1.6% 1.5%

Facilitates economic growth, and creates investor / business friendly environments

Based Liquidity
GCC Oil Revenues (US$ billion)
Oil P rice $ 1 00 Oil P rice $ 70 Oil P rice $ 50 Oil P rice $ 30

Government Reforms & Diversification


Reform agenda is being used to establish sustainable growth Thirteen MENASA countries are now part of the WTO Governments across the region have emphasized non-oil sector diversification within their economies Governments are looking to encourage greater private sector participation The privatization pipeline in the region is expected to exceed US$ 900 billion in the next ten years

8,800

EM*

MENASA

LATAM

3,800 700 2007 2012 2016

1,500 1,500 3,200

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

Source: Economist Intelligence Unit, McKinsey

*Excluding MENASA countries & China

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)

has unleashed consumption-led growth


Nominal Private consumption growth

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

Other Middle East

...matched by a growth in working population


2005 Est. total population: 1,562 million 2015 65+ 55-64 45-54 35-44 25-34 15-24 Est. total population: 1,800 million

... and supported by government reform and investments


Significant governmental investment and reform efforts High levels of infrastructure investment in attempt to diversify economies and facilitate job creation More than US$ 2.9 trillion worth of projects planned in the GCC alone King Abdullah Economic City in Saudi Arabia to create 800,000 jobs with seaport, light industries, tourism and financial services Move to knowledge-based economies Monitory and structural support for knowledge economy sectors (healthcare, information technology, media, telecommunications etc.) Set up of specialized infrastructure: Dubais Knowledge City, Jordans Education initiative, and over 400 SEZ in India primarily catering to IT and related sectors High level of investment in primary and secondary education (e.g. 25% of UAE budget allocated to education spending)
39
Working Population 47%

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

Government reform & diversification


Government action has played an important role in supporting regional growth
A generational change in the leadership of GCC countries has set the stage for the modernization of local economies Significant liberalization and privatization efforts in the banking, telecom and real-estate sectors have taken place Independent capital market regulators have been established and formal partnerships with leading global exchanges have been developed Additionally, low tax rates, increased foreign ownership and over 60 economic free zones have further encouraged private sector investment Over the past 6 years, the Egyptian government has launched a series of reforms to stimulate the economy A new taxation law has lowered corporate taxes from 42% to 20% The establishment of numerous economic free-zones and increased privatizations efforts have caused FDI flows to grow 20x between 2002 and 2007 The Turkish government has taken several steps to promote the private sector and increase foreign investment, including an overhaul of monetary policy aimed at controlling inflation, a reduction in corporate and income tax rates and an increase in privatization efforts The Indian government has made efforts to improve the business environment and encourage foreign investment in the country. These include: The elimination of many bureaucratic processes required for doing business The reduction of import tariffs and tax rates The creation of over 400 special economic zones
Source: McKinsey
40

will continue to drive investment in infrastructure


Large infrastructure projects have driven and will continue to drive growth in the region
Turkey
South Eastern Anatolia Project for construction of dams and power plans on the Euphrates and Tigris rivers ($32 billion) Construction of power plants across Turkey ($6.5 billion) Nabucco oil pipeline ($4.6 billion) and Ceyhan oil refinery ($4.9 billion) Bosphorus underwater tunnel ($3.1 billion) Sakarya Ankara power grid ($2 billion) Izmir Port ($1.3 billion) Istanbul Metro expansion ($1.2 billion)

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

Hydrocarbon based liquidity will continue to support growth


Fundamental regional advantage due to high hydrocarbon reserves remains strong despite oil prices coming off peak levels
Highest reserves to production ratio in the world
Reserves and production as a % of global total
Oil Reserves Oil Production

with budgets balancing at US$50 per barrel or less


GCC breakeven budget* oil price

Reserves / Production Ratio


80

1.6x
45%

1.0x 0.6x
28%
60

0.3x
22% 17% 12% 5% 9% 8%

40 20 0 KSA UAE QA OM BH KW**

MENASA

North America

Europe

South America

Budgeted Oil Price

Break-Even Price

and consensus oil price forecasts above US$ 80 per barrel


Consensus Oil (Brent) Price Forecast (US$ per barrel)
96.5 75.0 66.4 98.0 95.0

resulting in continuing hydrocarbon driven liquidity


Cumulative GCC Oil Revenues (US$ trillions)

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

and has resulted in fundamentally sound regional balance sheets


MENASA is characterized by low budget deficits and a ready source of home grown capital that can be deployed to support the finance infrastructure and provide liquidity

FX Reserves and Current Account Balance (US$ billion)


GCC economies are generating healthy current account and foreign exchange surpluses Non-GCC economies have accumulated sufficient foreign exchange reserves to cover current account deficits

Sovereign Wealth Funds (US$ billion)


With US$ 1.5 trillion at their disposal and their announced strategy to refocus on the region, SWFs have the capacity and desire to fund any shortfall in liquidity

Current Account Balance (4-Quarter Sum) FX Reserves


Egypt

600-900

Turkey

India

GCC

380
UK

266

US (1000) (500) 0 500

65 ADIA SAMA KIA QIA

Source: Merrill Lynch, Gulf Research Center

43

Structural demand-driven opportunity (1/2)


MENASA has experienced historic under-development in key sectors, creating pent up demand and high growth potential
Healthcare (Total Hospitals Required)
At OECD Levels of Beds / 1,000 of Population MENASA Level of Beds / 1,000 of Population
Gap 39,000 Hospitals Gap 7,000 Schools

Education (Total Schools Required)


57,230

37,374

50,629

13,827
MENASA 2007

15,834
MENASA 2017

MENASA Current

MENASA 2015

Medical Labs (Lab Tests per Capita)


22 16

Oil & Gas (Global Production % vs. Global Reserve %)


45%
Gap 16%

Gap 1.5 B Tests

Gap 400 M Tests

29%
Gap 13%

28%

6 3

15%

Egypt

Saudi Arabia

Europe

US

MENASA Oil Production

MENASA Oil Reserves

MENASA MENASA Gas Production Gas Reserves

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

Structural demand-driven opportunity (2/2)


MENASA has experienced historic under-development in key sectors creating pent up demand and high growth potential
Insurance Penetration: Premiums % of GDP (2007)
9.2% 7.5%

Low Cost Carrier Market Share of Short-haul Market


26% 24%
Gap 22% Average Regional Economies

4.8%

Gap 5.8%
1.8%

9% 4%

1.3%

0.8%

0.7% Pakistan

0.6% Saudi Arabia

G7

World

India

UAE

Turkey

Egypt

USA

Europe

Asia-Pacific

MENA

Power Generation Capacity (Gigawatts)

Petrochemicals (MENA % of world Ethylene Capacity)


17.0%

142
(by 2017)

Investment requirement US$ 90bn

Investment requirement US$ 50bn

2005-2010 CAGR 14%

10.0% 7.4% 5.4%

158

(by 2030)

50 44

(by 2015)

60 75

India / Pakistan

North Africa Installed Gigawatt Capacity Required

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

Source: Economist Intelligence Unit (November 2008)

*Excluding MENASA countries & China

North America

EU-15
46

The private equity industry in MENASA


Private equity in MENASA has been less impacted in the current crisis due to a focus on growth capital opportunities, minimal use of leverage and an increase in home-grown capital
Fundraising conditions more difficult

Investors / LPs

Increase in default rate of 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

MENASA Private Equity Industry Impact Analysis


Portfolio Companies

Attractive public-to-private options as MENASA stock markets have been particularly hard hit

New, untapped sectors emerging: infrastructure, real estate, SME


Increasing focus on creating value through portfolio management Reassessment of business plans

Impact of current crisis on industry - consolidation opportunities emerging in highly fragmented sectors

MENASA attracting world-class management on an unparalleled basis


Exit multiples impacted significantly Public markets / recapitalization route closed

Exits

Longer holding periods

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%

Information Age Human Resources

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

MENASA in the long term


The MENASA region is projected to overtake the US as the worlds 2nd largest economy by 2050 GDP (US$ trillions at 2007 prices)
80

60

The world in 2050

40

20

0 China MENASA* US EU 15 Latin America* Southeast Asia Japan

GDP (US$ trillions) 18


15 12 9 6 3 0 EU 15 US Japan China Latin America* MENASA* Southeast Asia

however, challenges lie ahead


The world in 2007

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

Appendix: Country Specific Outlook

51

Outlook on the GCC (1/2)


High oil prices have allowed the GCC to build a sustainable future

High oil prices and prudent budgets have


Historical vs. GCC Budgeted Oil Prices

resulted in significant accumulated surpluses


Fiscal Balance (% of GDP)

32.0

30.0

16.2

13.2 9.6 7.0

Kuwait

UAE

Saudi Arabia

Qatar

Oman

Bahrain

Growth has been driven by consumption and investment


GCC Consumption and Investment

Diversification initiatives are beginning to bear fruit


GCC Real Non-Hydrocarbon GDP Growth vs. EM Real GDP Growth
Average 2004-2008

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%

GCC non-hydrocarbon growth outpacing hydrocarbon growth

10.1% 10.4% 10.7% 17.2%


52

Source: Bloomberg, HSBC, Passport Capital, Economist Intelligence Unit, Merrill Lynch

Outlook on the GCC (2/2)


The region will continue to grow at a robust pace of over 5% despite the short term effects of the global financial crisis and drop in oil prices
Short-term decrease in oil prices will have a temporary impact on GCC growth rate
Oil Price and Real GDP Growth Outlook (US$ / Bbl)
Even if oil drops to $30/bbl, the GCC will be able to maintain current investment rates of 6.1%

However, long term hydrocarbon liquidity outlook remains positive


Cumulative GCC Oil Revenues (US$ trillions)
Consensus oil price estimates are projected above US$ 95 per barrel for 2010, 2011 and 2012
6.4 5.1 3.8 1.5 0.8 0.9 1.9 2014 1.9 1.0 1.1 2.4 2016

120 100 80 60 40 20 0 2004

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

2012 Real GDP

2020

EIU Projected Oil Price

Consensus Oil Price

Demographics remain a key growth driver in the region


GCC Population Breakdown by Age (millions)
Increased working age population will result in greater domestic consumption and investment
40%

resulting in healthy long-term GDP growth


2008-2013 Real GDP CAGR
8.2% 5.6%

2005 0-19 20-64

2025

% of Total

4.3% 1.6% 1.5%

14

17

33%

1.4%

57%

20 1

31 62% 3
China GCC EM* OECD EU-15 United States
53

2%

65+

5%

Source: Bloomberg, McKinsey, Economist Intelligence Unit, United Nations

*Excludes China

Outlook on Saudi Arabia


Reform lead growth continues to drive the largest GCC economy

Macro Economic Data


2005 GDP (US$ billion) Real GDP Growth (% pa) GDP / Capita (US$) Population (m) Population Growth (% pa) Inflation (% pa) $316 6% 2006 $357 3% 2007 $382 3%

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

$13,650 $15,061 $15,698 23.1 3% 1% 23.7 2% 2% 24.3 3% 4%

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 on the UAE


One of the fastest growing economies in the world, the UAEs growth is increasingly being driven by the services sector with non-oil sector accounting for 65% of GDP
Macro Economic Data
2005 GDP (US$ billion) Real GDP Growth (% pa) GDP / Capita (US$) Population (m) Population Growth (% pa) Foreign Direct Investment (US$ billion) Inflation (% pa) $132 8% 2006 $170 9% 2007 $199 8%

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%

Manufacturing Wholesale, Retail trade and Repairing services

Robust banking sector Strong profitability and balance sheets, with industry ROE of 21% and capital adequacy ratio of 13% (as of Jun-08)

8.0% 8.0% 11.0%

Real Estate and Business Services Construction

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

Revised GDP growth of c. 6% still well above global average

Source: Economist Intelligence Unit, Central Bank of UAE, Merrill Lynch, Morgan Stanley, Global Research, UBS

55

Key perceived risk: Dubais leverage


Recent concerns over Dubais leverage and debt servicing ability are misguided
CDS for Debt Issued by Local Players
600 500 400 300 200 100 0 Apr-07 Aug-07 Dec-07 Apr-08 Dubai Aug-08

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
56

Key perceived risk: GCC real-estate sector (1/2)


Short term price correction expected to be most severe for Dubai, with the government attempting to ensure a soft landing for the sector
Long-term outlook generally favorable for the GCC
Doha
Residential Occupancy: 99% Commercial Occupancy: 95% Supply > Demand (year): 2013

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

Most large developers in Dubai are government backed


Developer Govt. Ownership

providing a mechanism to control new supply


Upcoming Supply of Housing Units by Ownership (Dubai)
80,000
By monitoring supply and sales, the Council is managing this [real-estate] key sector and ensure that new supply is properly managed. - Mohamed Alabbar

Emaar Deyaar Union Tatweer Sama Dubai Nakheel Dubai Properties

32% 41%* 48%* 100% 100% 100% 100%

60,000 40,000

20,000

0 2008 2009 2010 2011 Private 2012 2013 2014 2015


57

Source: EFG, Morgan Stanley, Citi Research, company reports/filings, Colliers *Indirect ownership through other semi-govt. entities

Government

Quasi-Government

Key perceived risk: GCC real-estate sector (2/2)


Impact of downturn in UAE real-estate market expected to be manageable on the downside while also helping to ease inflationary pressures
There has been significant run-up in prices as of late
Dubai Residential Apartment Prices (AED / sq ft)
3,800
14% 12% 10%

A correction of real-estate prices will help ease inflationary pressures


Contribution to CPI inflation (UAE)
Other Expenditures House Rent & Related Housing Expenses Foodstuff, beverages, tobacco

2,200 1,800 1,200 800 NA 2004 2005 2006 2007 1H08 600 715 800 1,200

8% 6% 4% 2% % 2003 2004 2005 2006 2007 2008E

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

The impact of real-estate workforce on the economy is small


UAE Employee Breakdown by Sector (2007)
Consisting primarily of low cost labor; low contribution to GDP
20%

3%

8%

15%

Industry (ex. Construction) Services (ex. RealEstate) Construction Real Estate Oil & Agriculture

53%
58

Outlook on Egypt: The short term view


Egypt has witnessed significant growth in the recent past, however, exposure to external factors is expected to cause growth to slow in the short term
Short-term outlook GDP/capita of US$ 1,719 grown at 16% pa over past 3 years Significant regulatory reform initiatives to attract FDI Inflows reached US$ 11 billion in 2007 The banking sector remains strong in the face of the global credit crisis. As a result of reforms implemented during the last economic slowdown it is tightly regulated with no significant liquidity crunch in the domestic banking sector In the short term GDP growth to decline from 7.2% in 2008 to 5.7% and 5.1% in 2009 and 2010 due to: Real fixed capital formation expanding at a slower pace due to tightening of global liquidity, including in the Gulf Slowdown in FDI, given that 70% of FDI inflows come from US and EU Slowdown in global trade: c.30% of exports are to US Italy and Spain; a large part of tax receipts is derived from either the Suez Canal or custom duties -Slow down in export growth will have a knock-on effect on the domestic manufacturing sector Inability to rely on fiscal spending to promote growth due to the prevailing fiscal deficit Tourism expected to slow with 69% of international tourist arrivals represented by Europeans
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F

Short term slowdown in growth


Real GDP Growth

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
59

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

Outlook on Egypt: The long term view


yet, with the largest population in the Arab World and favorable demographics, Egypt is poised to continue its growth
Long-term outlook is strong Moderate set back in growth to be limited to the short term due to diversified GDP, liquid banking system and an under leveraged economy Egypt is a consumer led economy, stimulated by investments, with its long term prospects assured by demographics and strategic location c.75% of economic growth driven by local demand The domestic consumer is largely un-levered with low penetration rates of consumer finance products, credit cards and mortgages (1% of GDP) Declining inflation will enhance purchasing power and drive up domestic demand Favorable factors of production will allow Egypt to attract FDI in the long-term leading to healthy long-term GDP growth
2008-2013 Real GDP CAGR
8.2% 5.9% 4.3% 1.6% 1.5%
15% 44% 36%

with demographics a key growth driver


Egypt Population Breakdown by Age (millions) 2005 2025 0-19 20-44 % of Total

32 26 11 4

36 37 18 7

36%

38%

45-64 65+

18%

5%

8%

resulting in increased consumption


Private consumption (% of GDP)
76.0% 75.0% 74.0% 73.0% 72.0% 71.0% 70.0% 2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F

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

Outlook on Turkey: The short term view


Although Turkey has grown significantly since 2001 it is still vulnerable to external shocks in the short term
Turkey has come a long way since the crisis of 2001
Real GDP Growth, Budget Balance and Inflation
15% 10% 5% 0% (5%) (10%) (15%) GDP Real Growth (LHS) Inflation (RHS) 2001 2002 2003 2004 2005 2006 2007 60% 50% 40% 30% 20% 10% 0% Budget Balance % of GDP (LHS)

with growth being driven by consumption and investment


Contribution to GDP Growth (2002-2007)
Net Exports 18% Inventory 2% Fixed Capital Formation 29% Private Consumption 47%

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

Raymond James 2008

Goldman Sachs 2009

Morgan Stanley

Citi

Source: UBS, Goldman Sachs, Economist Intelligence Unit

61

Outlook on Turkey: The long term view


however, underlying fundamentals ensure a strong long term outlook for Turkey, which is on track to become the 9th largest economy in the world by 2050
Turkey expected to emerge as the ninth-largest economy in the world by 2050
GDP In 2050 (US$ trillions at 2007 prices)

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
62

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

Outlook on India: The short term view


Growth in India expected to decelerate but still robust at 6%
Slowdown in GDP in the short-term
GDP Growth - Cyclical Slowdown In Activity

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

and will continue to be one of the fastest growing economies


Short Term Real GDP Growth (2009)
8.0% 6.1%

2.4% (0.0%) (0.0%) (0.4%) United States


63

China

India

EM*

OECD

EU-15

*Excludes China and India

Outlook on India: The long term view


Favorable demographics and a strong investment regime will make India worlds 3rd largest economy by 2050
Favorable demographic trends
Large Youth population
2005 2025

supported by continued capital formation and investment


Emerging Middle Class
Income by Household
100%

Gross Capital Formation (% GDP)


37% 26%

GCF Avg Growth, 2003-07 (%pa)


23% 21% 19% 12% 9% 7%

488 590 56

0-19 20-64 65+

483

75%
853 112

50% 25% 0% 2002 2006


204 mm

2010

Significant increase in the 20-64 bracket

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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65

Middle East Private Equity: Investing in Foresight

For Further Information Please Contact:


Tom Speechley Purshotam Ramchandani Abhinav Munshi Saqib Rashid Anuscha Ahmed Omar Alfi

ABRAAJ CAPITAL, LEVEL 7, EMIRATES TOWER OFFICES, P.O.BOX 504905, DUBAI, UNITED ARAB EMIRATES, TELEPHONE +9714 3191500 FACSIMILE +9714 3191600 www.abraaj.com E-MAIL info@abraaj.com

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