a period of consequence - how abraaj sees the world & outlook, dec 2008
TRANSCRIPT
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Arif Masood Naqvi Founder and Group CEO
November 2008
Abraaj Capital
A Period of ConsequencesHow we see the world and where its going
Strictly Private & Confidential
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Global Context: Taking Stock
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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
http://images.google.com/imgres?imgurl=http://www.sourcesofwisdom.org/john_t.gif&imgrefurl=http://www.sourcesofwisdom.org/jt_bio.html&usg=__33hjLmhxWwvIeVts0WDfUxTkMeI=&h=223&w=174&sz=22&hl=en&start=6&um=1&tbnid=mVH-j_oYv4AjRM:&tbnh=107&tbnw=83&prev=/images?q=sir+john+templeton&ndsp=20&um=1&hl=en&rls=com.microsoft:en-us:IE-SearchBox&rlz=1I7GPTB_enAE298&sa=N -
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50
75
100
125
150
175
200
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
The greatest housing boom in US history, with prices increasing by 12% per annum from 2001to 2006 (3x the growth rate from 1987 to 2001)
and the latest bubble is considered to be the mother of all crises(1)
Source: S&P
(1) Paul Volcker (inter alios)
1987-2001CAGR 4%
2001-2006CAGR 12%As per a story in the Economist in 2005,
the total value of residential property indeveloped economies rose by more than$30 trillion from 2000-2005 to reach $70trillion, an increase equivalent to 100% of
those countries combined GDP. TheEconomist observed In other words, itlooks like the biggest bubble in history
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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
driven by the ultimate economic paradox
Low InterestRates (US)
High EconomicGrowth (US)
IncreasingWealth (US)
IncreasedConsumption &
Low Savings
IncreasedImports from
Emerging Asia
IncreasedSavings in
Emerging Asia
The China Effect
ImprovedProductivity inEmerging Asia
SuppressedInflation
DisproportionateRise in Asset
Prices
RecyclingSurplus into US
Treasuries
IncreasedLeverage
US action/impactAbraaj analysis
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excessive leverage, irresponsible short-termism, and inadequate regulation
Inadequateregulations andover-sophisticationof market players
Exc
essive
lever
age
from
ch
eap
mone
y/
low
savin
gs/h
igh
consu
mpti
on
Irresponsibilityby
m
arketparticipants
inpursuitofshort
termgains
facilitated by a toxic combination of
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100
200
300
400
500
600
Jun '00 Jun '01 Jun '02 Jun '03 Jun '04 Jun '05 Jun '06 Jun '070x
2x
4x
6x
8x
10x
12x
Outstanding OTC Derivatives (LHS) Outstanding OTC Derivatives / GDP (RHS)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
US CPI Index YoY % Change Fed Funds Rate
0x
5x
10x
15x
20x
25x
30x
35x
Citi MS HSBC* ML BofA JPM
40%
60%
80%
100%
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
60%
64%
68%
72%
US Household Debt (LHS) Consumption (RHS)
Excessive leverage
across all areas of the financial markets due to protracted monetary easing
US CPI and Fed Funds Rate
An extended period of low inflation and interest rates supported increasing household leverage and consumption
Total US Household Debt and Private Consumption (both as % of GDP)
1. Notional amounts outstanding
Source: Bureau of Economic Analysis, Economist Intelligence Unit, Bank for International Settlements, Bloomberg, Company filings
Average 27x
OTC Derivativesballooned to c. 11x
world GDP
Bank Leverage (Tangible Asset / Tangible Equity)
Global banks became highly levered Unchecked increase in derivative instruments
Outstanding OTC Derivatives(1) (US$ trillion)
As per 3Q 2008 *As per 2Q 2008
2x
European banks,Barclays, CS, UBS and
RBS averaged 46x
I ibili
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14
20
29
43
58
2005 1H06 2H06 1H07 2H07
CDS marketreached 4x US
GDP in 2007
30
45
60
75
2001 2002 2003 2004 2005 2006 2007
0
20
40
60
80
100
2002 2006
Subprime Alt-A Prime Conforming Prime Jumbo Government
Irresponsibility
evidenced most clearly by a reduction in the quality of lending
US Asset Backed Securities Outstanding (US$ trillion)
Substantial increase in loans to high risk borrowers Risk reward ratio for senior loans deteriorating
Increase in securitized products False sense of security through opaque hedging instruments
Credit Default Swap Market(1) (US$ trillion)
Distribution of US$ Mortgage Originations (%) Weighted Average Pricing per Turn of Senior Leverage (Bps)
*End June
1. Notional amounts outstanding
Source: Sequoia Capital, Bank for International Settlements, Fitch Ratings, SIFMA
4.0x
I d t l ti
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Mark-to-model accounting:financial institutions able to bookprofits on CDS transactions
based on assumptions in theirown financial models rather thanmarket price (mark-to-market)
Ratings agencies: inadequatedue diligence led to flawed
ratings, creating a false sense ofsecurity for investors inderivative instruments
Off balance sheet: The off-balance sheet nature ofderivative contracts left theseinstruments virtually uncheckedin the financial system
Naked short selling: nakedshorting led to market-corneringoperations by mismatching longand short positions, therebygrossly inflating volumes
allowed leverage to increase to unsustainable levels, with insufficient checks onunderlying credit quality
Inadequate regulation
Glass-Steagall: Preventedcommercial banks from issuing /underwriting securities. Repeal ofthe Act in 1999 enabled commercial
banks to take on significantly morerisk
Basel II: allowed banks to self-regulate by determining theunderlying risk in their portfolios and
the capital required to be set aside
Leverage: significant increase inleverage at financial institutions, afterthe SEC abolished the net capitalrule for the largest banks, making
these firms more vulnerable tosystemic shocks
Irresponsible lending and absenceof regulatory oversight: allowedbanks and other lenders to issue
loans to individuals with poorcredit, and to use such loans ascollateral for structured products
Banking Sector Derivatives Industry
Self RegulationDelusion
Th b bbl b t h th b i t t i l d d
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-20%
-10%
0%
10%
20%
30%
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
S&P Case-Shi ller Index UK Nationwide Building Society Index
0%
5%
10%
15%
20%
25%
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
85%
87%
88%
90%
91%
93%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07
The combination of increasing interest rates and the largest ever resetting of adjustable ratemortgages in US history triggered the sub-prime mortgage collapse
The bubble burst when the sub-prime mortgage sector imploded
Source: CIBC, Bloomberg, U.S. Treasury, Federal Reserve
With adjustable rate mortgages resetting delinquencies began to rise
Delinquency Rates (LHS) Sub-prime as % of Total Delinquencies (RHS)
Subprime as % of total
Subprime variable
Subprime fixed
Prime variable
Prime fixed
at higher interest rates
Fed Funds Rate YoY % Change in US and UK house prices
causing a sharp drop in housing prices
The sub prime crisis led to the broader financial crisis
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0
23
45
68
90
Jan-90 May-92 Sep-94 Jan-97 May-99 Sep-01 Jan-04 May-06 Sep-08
0
50
100
150
200
250
300
Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-080
100
200
300
400
500
600
Dow Jones Commodity Index (LHS) WCAU World Index (LHS)
Crude Oil Index (RHS)
-2.0
0.0
2.0
4.0
6.0
8.0
Nov-06 Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08
The sub-prime crisis led to the broader financial crisis
The sub-prime defaults and US housing market crash triggered wider market dislocations
creating panic as the S&P Volatility Index witnesses itsgreatest rise over the past 18 years
Source: Bloomberg, Bureau of Economic Analysis
Volatility of the S&P 500
1.8x
Early 2000
recession;collapse of thedot-com bubble
Early 1990srecession
World Equity Markets and Commodity Prices
Equity markets
have lost US$ 29 trillionover the last 12 months
Global markets collapse
High Spread between Fed Funds Rate & Inter-bank Overnight Rate highlights the freezing up of liquidity
Central banks coordinateefforts to increase
liquidity (Fed: $43 bn, ECB:$214.6 bn, BoJ: $8.4 bn)
President Bushannounces bailoutof US homeowners
Bear Stearns boughtby JPMorgan
Lehman Brothers
files for bankruptcy
Fed makes emergencymove to buy and supportcommercial paper market
Troubled AssetRelief Program
passed in Congress
pushing many financial institutions to the brink of bankruptcy
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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$138bn
Ukraine, Hungary and Iceland have resorted to IMF loans for funding
Fannie Mae and Freddie Mac nationalized
The unthinkable: Citi bailed out
Too big to fail theory tested
Total losses estimated at US$ 2.8 trillion(1)
pushing many financial institutions to the brink of bankruptcy
(1) Estimated by the Bank of England (as of October 2008). Source: The Economist; (2) Barclays
Merrill Lynch sold to Bank of America
Goldman Sachs and Morgan Stanley in the process of becoming bank holdingcompanies, instantly changing the face of bulge-bracket investment banking
American Express approved to become a bank holding company
Reassessment of global financial services (especially investment banking) business models
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 $150 billion(2)
Massive asset write-downs across banking sector
and is now beginning to impact the real economy
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3
4
5
6
7
Nov-93 Jan-96 Mar-98 Apr-00 Jun-02 Jul-04 Sep-06 Oct-08
and is now beginning to impact the real economy
with reduced consumer expenditure causing declining earnings and increasedunemployment
S&P 500 Rolling Earnings Surprise % (12mo Fwd Estimates vs. Actuals)
Earnings are down 18% on estimates made 12 months ago Unemployment rate in the US is reaching its highest in 16 years
Unemployment Rate (%)
Several industry majors have already announced earnings declines, losses, job cuts or worse
Source: Sequoia Capital, Factset, Press releases, Administrative Office of the U.S. Courts, The Economist
Business bankruptcy filings have increased 41.6% from June 2007 to June 2008 after declining for three consecutiveyears between 2004 and 2007
As of October 2008, c. 1.2 million total job losses in the US this year
3 million jobs in the US could be lost if the big three US car makers were to fail (unlikely given government support)
Italy's Fiat said its global demand could drop 10% to 20% and profit could fall up to 65%
Hyundai and its Kia affiliate posted a 38% fall in third-quarter net profit
Circuit City filed for bankruptcy protection in November 2008
UK high street retailer Woolworths went into administration and plans to close all stores
Sonys net profit has declined 72% YoY for its fiscal second quarter ended September 30th
Neiman Marcus, J.C. Penney, and Gap reported double digit fall in sales in the year to October
General Electric has stated it is planning on cutting US$ 2 billion of costs next year
?
Grey shading represents US recession
The spent US consumer
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15
,000
,500
,000
,500
,000
,500
,000
,500
20 30 40 50 60 70 80 90
60%
62%
64%
66%
68%
70%
72%
1980 1984 1988 1992 1996 2000 2004 2008
Source: Economist Intelligence Unit, Morgan Stanley, CEPR, NBER, Center for Economic and Policy Research, Center for Retirement Research, FederalReserve NAR Estimate Dean Baker
US consumption hit record levels
The current financial crisis has resulted in a massive loss of wealth that will severely impactUS consumption, which currently accounts for c. 18% of global GDP and 70% of US GDP
The spent US consumer
US Consumption as a % of US GDP
80-89 Avg: 64%
90-99 Avg: 67%
00-08 Avg: 70%
100
103
106
109
112
115
118
121
124
127
130
133
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
Average of Past 4 CyclesCurrent Cycle
Index=100 at Business Cycle Troughs
81-month shortfall:
$771.3 billion or 8.9% of real
disposable personal income
Real Private Compensation
Despite a period of modest wage increases
Real Private Compensation
driven in part by a maturing population
Propensity to Spend Expenditure per Capita by Age
that has recently lost a a significant portion of its wealth
Stock market
US households have lostin wealth due to decline in the stock market (Oct-07 to Oct-08)
House prices
US households projected to lose
in wealth due to the drop in home prices by the end of 2008
The Wealth Effect
US median ageof 37 yrs
US$ 7 trillion
US$ 7 trillion
What do public markets tell us?
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9.4%
9.5%
9.5%
10.2%
10.9%
11.1%11.4%
12.3%
14.9%
15.3%
Nov 14, 1929
Feb 11, 1932
Aug 3, 1932
Oct 21, 1987
Oct 28, 2008
Oct 13, 2008Sep 21, 1932
Oct 30, 1929
Oct 6, 1931
Mar 15,1933
16
7,000
8,000
9,000
10,000
11,000
10/1/08 10/7/08 10/13/08 10/19/08 10/25/08 10/31/08
Of the past seven one-day gains of 10% or more, four occurred during the Great Depression
October saw two of the greatest one-day gains since the Great Depression, but where are weheaded?
What do public markets tell us?
Source: Bloomberg, Wall Street Journal, Robert Shiller
Dow Jones Industrial Average October Performance
11.1%10.9%
Ten biggest % gains in the Dow Jones Industrial Average
P/E ratio for the S&P 500 historical context
Where are long-term
interest rates going?
Where are earningsgoing?
Are equities cheap?0
5
10
15
20
25
30
35
40
45
50
1860 1880 1900 1920 1940 1960 1980 2000 2020
Price-EarningsRatio
0
2
4
6
8
10
12
14
16
18
20
Long-TermI
nterestRates
1901
1929
1966
2000
Price-Earnings Ratio
Long-Term Interest Rates
1981
1921
Looking ahead
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More SevereLess Severe
Looking ahead
The likely outcome is expected to be a deep recession, with emerging markets becomingthe new engine of global growth
Most Likely scenario (Abraaj view)
Financial crisis substantiallybehind us
Slight impact on real economyespecially in developed markets
Some sectors experience
consolidation/reorganizationGovernment intervention gains
traction
Market/consumer confidence dropis arrested
Recovery begins relatively quickly(4-5 quarters into slowdown?)
Increased level of governmentregulation and oversight goingforward
Emerging market growth
continues
Overall global economy emergesrelatively intact
Shallow Recession
Financial crisis more behind than ahead
Serious impact on real economy especially indeveloped markets
Further coordinated government interventionrequired to avoid escalation
Market/consumer confidence deeply hurt
Fundamental shift in risk perception, majorchanges in business models
Slow recovery (begins 6-7 quarters intoslowdown?)
Change in government policy mind-set, highlevels of intervention and regulation
Slow but sure transition towards Asia and theemerging markets as new engine of globalgrowth (consumption as well as production)
Deep Recession
Financial crisis lots more tocome
Catastrophic impact on financialand real economy
Massive government intervention
implemented to avert economicmeltdown will not be effective
Market/consumer confidencecrushed
Total shift in risk perception withcurrent business models
debunked
Long period of negative growth,major bankruptcies/failuresacross the board
Diminished drive for free markets
and globalization as governmentsmove towards controlledeconomies and protectionistpolicies
Paradigm Shift
The known unknowns
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The known unknowns
however, downside risks continue to pose a threat to global economic recovery; forexample,
Source: Sir Paul Judge, Sean Clarey , BIS, 1 Alan Mulally (Ford Motors CEO), Merrill Lynch
Other Loans
Commercial property: US$ 25 trillion
Global mortgages outstanding: US$22 trillion
Corporate Bonds: US$ 15 trillion
Credit Cards: US$ 2.5 trillion
Auto Industry
Global slowdown has substantially weakened the autoindustry
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 supplierimpact and consumer confidence in the US market
- Toyota US sales plunged 34% in November
GM and Chrysler face bankruptcy without federal support
Derivatives
Sub-prime loans that triggered the current crisis accountedfor 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+
China Growth
Any serious threat to Chinese growth will have dramaticimpact on global economic outlook
- The best thing China can do [about the globalslowdown] 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 havestaged protests that had to be contained by riot police.
- ..the economic crisis of 2009 could pose the toughesttests that the Chinese government has faced since thestudent uprisings of 1989. - Gideon Rachman, FinancialTimes
We believe the current economic deceleration in China isworse than that during the Asia financial crisis DeutscheBank
"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
Cooperation of global leadership
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p g p
Unprecedented circumstances pose a test of global leadership whose actions willdetermine the outcome of the current crisis
are they goodenough? Is there aChurchill, FDR,
Mandela in themaking?
An evolving world order
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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, realestate, equities etc..) given how contagious this round was
Gold
Future of Sterling
g
As the world emerges from the current crisis, players need to be aware of a potentialchange in the global fabric
Comparing risk at Home and Abroad
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The current crisis is leading to a rethinking of the traditional risk paradigm
p g
Political instability
Currency (F/X)
Market fundamentals
Counterparty
Market fundamentals
Structural issues
Legal / Regulatory
Emerging Markets Risks Developed Markets Risks
Low Risk
Low Growth
High risk
High growth
High Risk
Low Growth
High Risk
High growth
Pre-Crisis Thinking
Develo
pedMarketsE
mergingM
arkets
Post-Crisis Thinking
Legal / Regulatory
Environmental
Black Swan moment; risk came from where traditionally it was least expected; the model needsto be re-thought
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Impact on Private Equity Globally
The private equity industry in the current crisis
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Conventional
Private EquityIndustryImpactAnalysis
Exits
Exit multiples impacted significantly
Public markets / recapitalization route closed
Longer holding periods
PortfolioCompanies
Increasing focus on creating value through portfolio management
Reassessment of business plans
Impact of current crisis on industry - focus on survival?
Access to high quality management increasingly available due to downturn
Investors /LPs
Fundraising conditions more difficult
Slowdown in capital distributions (and capital calls?)
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?
Deals
Renewed focus on distressed opportunities and LBO debt to keep up return expectations
LBO model under stress as credit crunch impacts availability of leverage
Decreasing returns due to increasing equity requirement
Decreasing deal sizes
Valuations adjusting
Increasingly attractive public-to-private opportunities
The conventional private equity model continues to be impacted by the deterioratingeconomic situation...
An industry in turmoil
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16%
(26%)
(58%) (60%)
(79%) (80%)(85%)
(92%)(95%) (96%)(100%)
(75%)
(50%)
(25%)
0%
25%
Partners Group Ashmore Oaktree Man Group GLG Partners
Blackstone
Group
Och-Ziff Cap
Mgmt
Fortress
Investment Investcorp
Gottex Fund
Management
24
as evidenced by the significant drop in the share prices of leading publicly tradedalternative asset managers
Source: Bloomber * Man Group performance measured a ainst Januar 5, 2007 price as IPO date was in 1994.
IPO Date Mar 06 Oct 06 Jan 07* May 07
UK US
GStrUELSE
Country
Exchange
Dec 06 Jun 07 Nov 07 Feb 07 Dec 06 Nov 07
Switzerland UK US US US US Bahrain Switzerland
SIX LSE NYSE NYSE NYSE NYSE LSE (GDR) SIX
Shifting trends in asset allocation
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89%
75%
65%
35%
52%
83%
57%
40%
11%
30%
Asia (Ex-JANZ)
Russia/CEE
LatAm/Carib.
Middle East
Africa
Projected Strategy (3-5 Years) Current Strategy
0.04%
0.1%
0.2%
0.4%
1.7%
3.3%
Middle East
Latin
America
Russia /
CEE
Asia
Europe
US
which may influence a shift in long term asset allocation strategies towards emergingmarkets
Source: Goldman Sachs, Emerging Markets Private Equity Association Survey *May 2008
Under penetrated industry due to attractive nature of riskadjusted returnsexpected to grow
PE Investments as a % of GDP (2006-2007) Current vs. Projected LP InvestmentStrategy*
Reasons LPs Choose to Increase Investmentin Emerging Markets PE*
3.2x
Attractive risk-adjusted returns
Improvements in politicaland economic risk
More qualified GPs
Portfoliodiversification
Institutional familiaritywith risks andopportunities
Corporate governancestandards
More attractivevaluations
Recent improvementsin performance
25
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Impact on MENASA
Introduction to MENASA (1/2)
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SaudiArabia
Bahrain
1,512
426
1,277
Middle Eas t North Africa South As ia
MENASA has a combined GDP of US$ 3.2 trillion growing at 5.9% p.a., and a population of 1.6billion
119 157
1,294
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.
Significant cultural, political, and economic synergies have
led to strong intra-regional trade links, labor mobility and
investment opportunities
The MENASA Region Population (million)
Nominal GDP (US$ billion)
Qatar
Egypt
Turkey
Libya
Algeria
Tunisia
Jordan
Lebanon
Oman
UAEIndia
Pakistan
Kuwait
Morocco
Introduction to MENASA (2/2)
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Key drivers of the MENASA economies include demographics (large and low-cost workforce,domestic demand growth), reform / diversification (including infrastructure investment) andhydrocarbon liquidity
Low CostWorkforce
DomesticDemand
ReformInfrastructure
InvestmentHydrocarbon
Liquidity
- Very Strong - Strong - Moderate - Weak
MENASA in a global context
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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
Demographic forces
Role of governments (reform and diversification) Infrastructure investment
and oil
Global
Regional
Challenging the notion of de-coupling
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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 / 2007Figures 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
10%+ of world GDP
*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
Australia,
New Zealand,and Canada3,125
Russia,EasternEurope738
Middle East,rest of world1,710Latin America
1,860
U.K.5,460
Hong Kong,Singapore,Taiwan 1,901
U.S.38,444
Emerging Asia4,585
Japan17,129
WesternEurope20,886
Australia,New Zealand,and Canada8,530
Russia,EasternEurope5,070
Latin America
5,939
U.S.61,194
Japan20,089
WesternEurope52,435
U.K.11,055
Middle East,rest of world5,524
Hong Kong,Singapore, Taiwan4,379
EmergingAsia21,782
20071999
Volatility of capital flows and impact on the real economy
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0.0
2.0
4.0
6.0
8.0
10.0
12.0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
0.0%
1.5%
3.0%
4.5%
6.0%
7.5%
9.0%
Global Capital Flows World Real GDP Growth EM Real GDP Growth
Real GDP growth and volatility of capital flows
31
Impact on the real economy has been exacerbated by volatile capital flows in previousfinancial crisis, particularly in Emerging Markets
Change in absolute capital inflows, 1996-2006 % average capital flows
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
The current financial crisis has led to forced de-leveraging of Western financial institutionsand resulted in a large out-flow of capital, negatively impacting the region
Global Capital Flows (US$ trillions) and Real GDP Growth (%)
54%
47%
30%
47%
76%
27%
137%
168%
Equity Securities
FDI
Debt Securities
Lending and
Deposits
Emerging Markets
Developed Markets
AsianFinancial
Crisis;Russian
Crisis
DotcomCollapse;
post 9/11
Source: McKinsey Global Institute, Economist Intelligence Unit
Impact on public equities
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32
30
45
60
75
90
105
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08
Dow Jones MSCI Emerging Markets
MSCI GCC Sensex India
Egypt CASE Turkey ISE
24x
21x
19x
17x
14x
22x
19x
13x
10x 10x
9x
6x
MSCI GCC India Egypt Turkey
2006 2007 Oct-08
Equity markets have declined significantly
Reversal of global capital flows, forced deleveraging and regional anxieties have resulted in acollapse of regional equity markets
P / E for Select IndicesEquity Market Performance (YTD)
(33%)
(46%)
(58%)
(54%)
(63%)
(56%)
Source: Bloomber DataStream
Impact on the banking sector (1/2)
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-
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Jun-00 Jun-02 Jun-04 Jun-06 Jun-08
Bahrain (20%) Qatar (24%) Kuw ait (17%)
UAE (37%) Saudi (12%) Oman (12%)
Turkey (15%) Egypt (16%)
Increasing reliance on internationalfinancing exposed MENASA economiesto the global liquidity crunch
Concerns over liquidity in the banking system have largely been offset by support fromgovernment institutions
Index of international claims on domestic entities and00-08 CAGR (%)
Source: Bank for International Settlements
RBI made c.$12.4 billion available through a repurchase facility, reducedthe government repurchase rate by 150bps to 6.5% and reduced thebank cash reserve ratio to 5.5%
RBI also increased funds available for banks to refinance export credit tobring liquidity to the countrys $43.7 billion of outstanding trade finance
Saudi Arabia injected US$ 3 billion into the banking system
UAE injected US$ 13.6 billion into the local markets in Septemberfollowed 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 thecurrent crisis
Kuwait government guaranteed bank deposits
The Turkish central bank cut the benchmark borrowing rate 50 bps to16.75% and also cut the overnight lending rate by 100 bps to 18.75%
The government is reportedly working on a stimulus package includingpotential for funding from the IMF
The federal government announced a EGP15 billion (c. US$ 2.5 billion)stimulus package including a EGP12 billion increase in publicexpenditure and subsidies on sales tax and exports
Regional governments have acted swiftly to address the fallout resulting from theinternational financial crisis
Impact on the banking sector (2/2)
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13 12 12
18
13
17
15
US G7 Global GCC India Turkey Egypt
358
228
157
87 76 7957
US G7 Global GCC India Turkey Egypt
Strong solvency and
Regional banks in good financial health
liquidity ratios
Source: Merrill Lynch
Capital to Risk Weighted Assets (%) Loans-to-Deposits Ratio (%)
resulting in low risk rankings and high degree of confidence by the central banks
US
UK
China
High Risk Low Risk
HighRisk
L
ow
Risk
UAE QAOM
TRKSA
EG
IN
BH
KU
Global Leverage Risk (Debt Levels + Ratings)
Average ofregional banks
[Qatari banks are] solid, highly capitalized and liquid. Qatari central bankGovernor Sheikh Abdullah bin Saud al-Thani
The effects on the Egyptian banking sector, however, have been minimal inlight 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 thousandexposure [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 goodcapitalization. Saudi Arabian central bank Governor Hamad Saud al-Sayyari
...[RBI will pay] particular attention to maintain the viability if sectors thatcontribute significantly to employment and exports. Reserve Bank of IndiaPrivate Credit / GDP (Risk Ranking)
Loans/Deposits
(RiskRanking)
3x
Impact on oil prices
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Sharp drop in oil prices due to global recession and resulting demand contraction will have ashort-term impact on the GCC economies
2009 to witness sharpest drop in oil demand since 1982 resulting in significant drop in oil prices
Source: Merrill Lynch, Citigroup, Credit Suisse, World Bank, Bloomberg
Oil Demand Growth Y-o-Y (thousand barrels per day) OPEC Reference Basket Price (US$ per barrel), 1996-2008
Global oil demand growth down due to recession in westernmarkets and sharp slowdown in China
Risk of longer recovery if China cannot pull out of slumprelatively 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 (andhyper mature) basins than in previous demand slowdowns (early1990s and early 2000s). Non-OPEC supply growth is virtuallynon-existent
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 OPEC announced cuts of 1.5million bpd in order to support oil
prices
Reduction in surpluses expected in GCC due to sharp reductionin oil prices, reduction in production volumes and continuing highlevels 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 fundcontinued government spending and capital investment even ifprices fall lower than expected
-500
0
500
1,000
1,500
2,000
North
America
Other
OECD
China Other
Asia
Middle
East
Other World
Y-o-YOilDema
ndGrowth
(Bbl/dayin000s)
2003-2007 Average 2009 2010
Impact on real estate (1/2)
A h i i l i i d h j i
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Factors that will lead to price correction
A short-term correction in real estate prices is not expected to have a major impact onregional economies
Significant run-up in prices
Property Price Appreciation Reduction in speculative activity
Reversal in sentiment due to global financial crisis
Government reforms have been put in place to limitspeculative investment in certain markets
Restricted access to credit
Loan-to-value ratios have decreased due to liquidity crunch Interest rates on new home mortgages have increased
Negative wealth effect
Substantial declines in most global asset classes willnegatively impact demand from domestic and internationalinvestors
Abu Dhabi 52% increase in property pricesfrom Jan-Jun 2008
Cairo 100% increase in land prices in 2007
Mumbai 45-50% increase in commercialproperty prices in 2007
Dubai propertyprice index
Impact of real estate correction on regional economies will be manageable
Mortgage Penetration (% of GDP) Limited impact on financial and real economies
Low level of mortgage activity
Households in the region are not overly leveraged
Contribution to consumption limited
Lack of sophistication in the market has not enabledmortgage equity withdrawals to fuel consumer spending
Exposure of financial sector
Banking sector not heavily exposed to real estate pricecorrection
Majority of lending to the real estate sector in the GCC hasbeen to large government-backed local developers(implying sovereign risk)
80%
59%
8% 6%4% 2% 1% 0%
US G7 UAE India Turkey Qatar Saudi
Arabia
Egypt
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
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54%
35%
US Europe MENASA
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 however, the real estate industry has yet to institutionalize
Institutional Ownership of Commercial Real Estate (2007)
A range of reforms are helping to institutionalize the real estate sector and attract foreign capital
Construction industry as % of GDP (2007)
Estimated to beinsignificant
Source: EIU, NAREIT, Abraaj analysis, DTZ, Bloomberg
1998Idea Assessment Position
Exit2000-2003 2004-2005 2006 2007 2008
Turkeyestablishes itsREIT structureAyrimenkulYat
New real estatelaw in KSAallowing non-Saudi residents toown land
Dubai allows100% foreign
ownership indesignated areas
Bahrain, Qatar,and Abu Dhabiallow 100%foreign ownershipin designatedareas
Dubai ratifiesfreeholdownership lawsand DIFCestablishes REITlaw
Oman allows
foreigners to ownland in certaindesignated areas
Dubai introducesEscrow andBrokers laws
Egypt allowsforeign entities toestablish REITs
Pakistan REIT lawestablished
New Saudimortgage law to beannounced shortly
Kuwait revises thebuild, operate andtransfer law
10%
8%7%
5%4%
India UAE KSA Egypt US
Institutionalownership
comprised ofREITs, PE,insurance
companies andpension funds
The real economies within the MENASA region will continue to grow
Three main factors will continue to drive growth in the MENASA region
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1,443
1,569
1,698
2002 2007 2012
HydrocarbonBased Liquidity
The GCC nations will receive c.$5 trillionof revenue even if oil stays at an averageof $50 per barrel over the next ten years
700
3,800
6,400
8,800
2007 2012 2016 2020
Oil Price $100
Oil Price $70
Oil Price $50
Oil Price $30
GCC Oil Revenues (US$ billion)
3,200
1,500
1,500
2,600
Leading to Continued Growth
Government Reforms &Diversification
Reform agenda is being used toestablish sustainable growth
Thirteen MENASA countries are nowpart of the WTO
Governments across the region haveemphasized non-oil sector diversificationwithin their economies
Governments are looking to encouragegreater private sector participation
The privatization pipeline in the region is
expected to exceed US$ 900 billion inthe next ten years
Favorable
Demographics
Three main factors will continue to drive growth in the MENASA region
127million
129million
NominalGDP / Cap
$3,096
MENASA Population
$980 $2,048
2008-2013 Real GDP CAGR
Source: Economist Intelligence Unit, McKinsey *Excluding MENASA countries & China
Creates wealth, facilitateseconomic growth, andinfrastructure
expenditure
Facilitates economic growth,and creates investor / business
friendly environments
Creates demand,facilitates productiongrowth, encouragesreform
8.2%
5.9%
3.8% 3.6%
1.6% 1.6% 1.5%
China
MEN
ASA
EM*
LA
TAM
O
ECD
N
orth
Am
erica
E
U-15
Favorable demographics
Young and growing population increasingly focused on realizing their full economic potential
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$2.0 $2.0$2.2
$2.5
$2.8
$3.1
2008 2009 2010 2011 2012 2013
South Asia GCC North Af rica Other Middle East
39
9.9%
The demographic shift in population has unleashed consumption-led growth
... and supported by government reform and investments...matched by a growth in working population
Almost 175 million people expected to join the workforcein MENASA over the next decade
Mobile low cost workforce
Young and Growing Population
More than 50% of the regions population is under the age of25
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 classbetween 2006 and 2010 in India alone
Urbanization
Rapidly growing urban populations across the region
Main sectors:
Energy
Food
Infrastructure
Healthcare
Education
Housing
Nominal Private consumption growth(trillions)
Privateconsumption togrow by US$1.2trillion by 2013
Young and growing population increasingly focused on realizing their full economic potential
Source: EIU, McKinsey, Morgan Stanley, MEED projects, Abraaj analysis, United Nations
Significant governmental investment and reform efforts
High levels of infrastructure investment in attempt to diversifyeconomies and facilitate job creation
More than US$ 2.9 trillion worth of projects planned in the GCCalone
King Abdullah Economic City in Saudi Arabia to create 800,000 jobswith 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 primarilycatering to IT and related sectors
High level of investment in primary and secondary education (e.g.25% of UAE budget allocated to education spending)
Males Females
16%
9%
8%
6%
4%
3%
3%
17%
10%
8%
6%
5%
3%
2%
14%
9%
8%
6%
5%
4%
3%
15%
10%
9%
6%
5%
4%
3%
2005 2015Est. total population: 1,562 million Est. total population: 1,800 million
65+
55-64
45-54
35-44
25-34
15-24
0-14
Working
Population43%
Working
Population47%
Government reform & diversification
Government action has played an important role in supporting regional growth
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Government action has played an important role in supporting regional growth
Over the past 6 years, the Egyptian government has launched a series of reforms to stimulate theeconomy
A new taxation law has lowered corporate taxes from 42% to 20%
The establishment of numerous economic free-zones and increased privatizations efforts havecaused FDI flows to grow 20x between 2002 and 2007
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 withleading global exchanges have been developed
Additionally, low tax rates, increased foreign ownership and over 60 economic free zones havefurther encouraged private sector investment
The Turkish government has taken several steps to promote the private sector and increase foreigninvestment, 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 foreigninvestment 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: McKinse
will continue to drive investment in infrastructure
Large infrastructure projects have driven and will continue to drive growth in the region
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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)
North Africa
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)
South Asia
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)
GCC
South Eastern Anatolia Project for construction of dams and powerplans 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 ($4.9billion)
Bosphorus underwater tunnel ($3.1 billion)
Sakarya Ankara power grid ($2 billion)
Izmir Port ($1.3 billion)
Istanbul Metro expansion ($1.2 billion)
Turkey
Large infrastructure projects have driven and will continue to drive growth in the region
Source: Business Monitor International Zaw a
Hydrocarbon based liquidity will continue to support growth
Fundamental regional advantage due to high hydrocarbon reserves remains strong despite
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66.4 75.0
96.5 98.0 95.0
Q4 2008 2009 2010 2011 2012
0
20
40
60
80
KSA UAE QA OM BH KW**
Budgeted Oil Price Break-Even Price
45%
5%
12%9%
28%
17%
22%
8%
MENASA North America Europe South America
Oil Reserves Oil Production
*based on official 2008 budget targets, **Kuwait announced one off budget transfer of US$ 20bn to capitalize social security system
Source: Merrill Lynch, McKinsey, BP Statistical Review of World Energy 2007, Bloomberg
Highest reserves to production ratio in the world with budgets balancing at US$50 per barrel or less
resulting in continuing hydrocarbon driven liquidity
GCC breakeven budget* oil price
Fundamental regional advantage due to high hydrocarbon reserves remains strong despiteoil prices coming off peak levels
Reserves / Production Ratio
1.6x
0.3x
0.6x
1.0x
Cumulative GCC Oil Revenues (US$ trillions)Consensus Oil (Brent) Price Forecast (US$ per barrel)
and consensus oil price forecasts above US$ 80 per barrel
0.6 1.1 1.5 1.9 2.42.8 3.2
0.91.1
1.31.5
0.81.0
1.31.5
1.5
1.9
2.2
2.6
0.61.1
2.4
3.8
5.1
6.4
7.6
8.8
2007 2008 2010 2012 2014 2016 2018 2020
Oil Price US$100
Oil Price US$70
Oil Price US$50
Oil Price US$30
Reserves and production as a % of global total
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Structural demand-driven opportunity (1/2)
MENASA has experienced historic under-development in key sectors, creating pent up
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13,827 15,834
37,374
MENASA 2007 MENASA 2017
At OECD Levels of Beds / 1,000 of Population
MENASA Level of Beds / 1,000 of Population
3
6
16
22
Egypt Saudi Arabia Europe US
50,629
57,230
MENASA Current MENASA 2015
29%
45%
15%
28%
MENASAOil Production
MENASAOil Reserves
MENASAGas Production
MENASAGas Reserves
Education (Total Schools Required)
Medical Labs (Lab Tests per Capita) Oil & Gas (Global Production % vs. Global Reserve %)
Source: World Bank, World Health Organization, McKinseyNote: Hos ital calculation based on 1.2 & 4.1 beds / 1000 o ulation in MENASA and OECD res ectivel as well as current MENASA beds / hos ital ratio
p p y , g p pdemand and high growth potential
Gap16%
Gap7,000
Schools
Healthcare (Total Hospitals Required)
Gap39,000
Hospitals
Gap13%
Gap1.5 BTests
Gap400 MTests
MENASA has experienced historic under-development in key sectors creating pent up
Structural demand-driven opportunity (2/2)
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5.4%
7.4%
10.0%
17.0%
1996 2001 2005 2010F
26%24%
9%
4%
USA Europe Asia-Pacific MENA
9.2%
7.5%
4.8%
1.8%1.3%
0.8% 0.7% 0.6%
G7 World India UAE Turkey Egypt Pakistan Saudi
Arabia
158
4475
142
50
60
India / Pakistan North Africa GCC
Installed Gigawatt Capacity Required
Insurance Penetration: Premiums % of GDP (2007) Low Cost Carrier Market Share of Short-haul Market
Power Generation Capacity (Gigawatts) Petrochemicals (MENA % of world Ethylene Capacity)
Source: Swiss Re Sigma Report, McKinsey, Economist Intelligence Unit, Citi Research, Abraaj Capital Analysis
Gap22%
AverageRegional
Economies
Gap
5.8%
(by 2017)
(by 2030)
(by 2015)
Investmentrequirement
US$ 50bn
Investmentrequirement
US$ 90bn
2005-2010CAGR 14%
demand and high growth potential
The outlook
MENASA will be the 2nd fastest growing region in the world over the next 5 years
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8.2%
5.9%
3.8%3.6%
1.6% 1.6% 1.5%
China MENASA EM* LATAM OECD North
America
EU-15
Source: Economist Intelligence Unit (November 2008) *Excluding MENASA countries & China
2008-2013 Real GDP CAGR
Private equity in MENASA has been less impacted in the current crisis due to a focus on
The private equity industry in MENASA
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MENASAPrivate EquityIndustryImpactAnalysis
Exits
Exit multiples impacted significantly
Public markets / recapitalization route closed
Longer holding periods
Increasing exit options via new regional private equity firms / SWFs / andMNCs seeking growth markets
Portfolio
Companies
Increasing focus on creating value through portfolio management
Reassessment of business plans
Impact of current crisis on industry - consolidation opportunitiesemerging in highly fragmented sectors
MENASA attracting world-class management on an unparalleled basis
Investors /LPs
Fundraising conditions more difficult
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
Deals
Continued value generation via growth capital opportunities
Limited impact of credit crunch (on returns and deal sizes) as industry hashad less reliance on debt / leverage
Valuations adjusting
Attractive public-to-private options as MENASA stock markets have
been particularly hard hit
New, untapped sectors emerging: infrastructure, real estate, SME
growth capital opportunities, minimal use of leverage and an increase in home-grown capital
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Concluding Thoughts
Paradigm shifts continue to alter the global economic landscape and have resulted in Asiai i i i i h ld d i h i
Part of a pattern?
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0%
20%
40%
60%
80%
100%
0 1000 1500 1600 1700 1820 1870 1913 1950 1973 1998 2025 2050
Europe Western* L. Am/Africa Asia
regaining its position as the worlds dominant growth engine
Distribution of Global GDP
*Includes: USA, Canada, Australia and New ZealandSource: Sir Paul Judge
Agricultural Productivity
Industrial Productivity
Information Age
Human Resources
The MENASA region is projected to overtake the US as the worlds 2nd largest economy by2050
MENASA in the long term
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0
20
40
60
80
China MENASA* US EU 15 Latin
America*
Southeast
Asia
Japan
0
3
6
9
12
15
18
EU 15 US Japan China Latin
America*
MENASA* Southeast
Asia
2050
Source: Goldman Sachs* MENASA excludes Jordan, Lebanon, Libya, Algeria & Tunisia. Latin America includes Argentina, Brazil, Chile, Colombia, Mexico, Peru, Paraguay, Uruguay & Venezuela
The world in 2050
The world in2007
GDP (US$ trillions)
GDP (US$ trillions at 2007 prices)
however, challenges lie ahead
Demographics a double edged sword
Continuing reform balance between political, economic & social
Conflict and geo-political instability
Oil dependence / economic diversification
Climate change
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Appendix:Country Specific Outlook
High oil prices have allowed the GCC to build a sustainable future
Outlook on the GCC (1/2)
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32.030.0
16.213.2
9.67.0
Kuwait UAE Saudi
Arabia
Qatar Oman Bahrain
17.2%
10.7%
10.4%10.1%
9.1%
8.8%
8.4%
8.3%
7.2%
6.6%6.0%
5.1%
5.0%
4.7%
Qatar
China
Kuw aitUAE
Bahrain
India
Argentina
Oman
Russia
TurkeyMalaysia
Thailand
Saudi Arabia
Brazil
GCC Real Non-Hydrocarbon GDP Growth vs. EM Real GDP Growth
Source: Bloomber , HSBC, Passport Capital, Economist Intelli ence Unit, Merrill L nch
High oil prices and prudent budgets have
Growth has been driven by consumption and investment Diversification initiatives are beginning to bear fruit
Historical vs. GCC Budgeted Oil Prices
GCC Consumption and Investment
GCC non-hydrocarbongrowth outpacing
hydrocarbon growth
resulted in significant accumulated surplusesFiscal Balance (% of GDP)
Average 2004-2008
The region will continue to grow at a robust pace of over 5% despite the short term effects ofthe global financial crisis and drop in oil prices
Outlook on the GCC (2/2)
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53
0
20
40
60
80
100
120
2004 2005 2006 2007 2008 2009 2010 2011 2012
0%
2%
4%
6%
8%
10%
EIU Projected Oil Price Consensus Oil Price Real GDP
8.2%
5.6%
4.3%
1.6% 1.5% 1.4%
China GCC EM* OECD EU-15 United
States
0.6 1.11.5 1.9
2.4 2.83.2
0.91.1
1.31.5
0.81.0
1.31.5
1.5
1.9
2.2
2.6
0.61.1
2.4
3.8
5.16.4
7.6
8.8
2007 2008 2010 2012 2014 2016 2018 2020
Oil Price US$100
Oil Price US$70Oil Price US$50
Oil Price US$30
1
20
14
3
31
17
Source: Bloomber , McKinse , Economist Intelli ence Unit, United Nations *Excludes China
Short-term decrease in oil prices will have a temporary
impact on GCC growth rate
the global financial crisis and drop in oil prices
Oil Price and Real GDP Growth Outlook (US$ / Bbl)
However, long term hydrocarbon liquidity outlook remains
positiveCumulative GCC Oil Revenues (US$ trillions)
resulting in healthy long-term GDP growth
2008-2013 Real GDP CAGR
Demographics remain a key growth driver in the region
GCC Population Breakdown by Age (millions)
0-19
20-64
65+
20252005 % of Total
33%
62%
5%
40%
57%
2%
Increased workingage population will
result in greaterdomestic consumption
and investment
Consensus oil priceestimates are
projected above US$95 per barrel for 2010,
2011 and 2012
Even if oil drops to$30/bbl, the GCC willbe able to maintaincurrent investment
rates of 6.1%
Outlook on Saudi Arabia
Reform lead growth continues to drive the largest GCC economy
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26.6%
17.3%
10.7%9.7%
8.2%
7.2%
6.1%
4.8%
3.8%
2.7%
2.8%
Crude Oil & Natural Gas
Government Services' Producers
Finance, Insurance, Real Estate and
Business servicesOther minning and manufacturing
Wholesale & Retail Trade & Restaurants
& HotelsConstruction
Transport & Storage & Communication
Agriculture Forestry & Fishing
Community & Social & Personal services
Oil Refining
Other
2005 2006 2007
GDP (US$ billion) $316 $357 $382
Real GDP Growth (% pa) 6% 3% 3%
GDP / Capita (US$) $13,650 $15,061 $15,698
Population (m) 23.1 23.7 24.3
Population Growth (% pa) 3% 2% 3%
Inflation (% pa) 1% 2% 4%
Macro Economic Data Outlook
% GDP Contribution
Saudi is the largest economy in the GCC, both in terms ofGDP and population
- Rapidly growing population of c. 25 million, growing at2.4% pa (median age 22)
- GDP base of US$ 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 ofUS$ 45 / bbl in 2008; US$ 700 billion of infrastructureprojects expected to continue over the next 10 years
Saudi has initiated a significant reform campaign to attractforeign investment and increase the countrys globalcompetitiveness
- 2008 World Investment Report highlighted Saudi as theregions most attractive destination for investment
- Increase in net FDI inflows from US$ 1 bn in 2004 toprojected US$ 24 bn by 2008
Despite potential slowdown, Saudi still seen as attractivemarket
- Revised GDP growth of 08-13 CAGR 4.6% still wellabove global average
Source: Economist Intelligence Unit, CIA Factbook, Saudi Arabian Monetary Agency, Credit Suisse
Outlook on the UAE
One of the fastest growing economies in the world, the UAEs growth is increasingly beingdriven by the services sector with non-oil sector accounting for 65% of GDP
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2005 2006 2007
GDP (US$ billion) $132 $170 $199
Real GDP Growth (% pa) 8% 9% 8%
GDP / Capita (US$) $28,684 $34,548 $37,690
Population (m) 4.6 4.9 5.3
Population Growth (% pa) 7% 7% 7%
Foreign Direct Investment (US$ billion) $11 $13 $13
Inflation (% pa) 12% 14% 13%
Macro Economic Data Outlook
% GDP Contribution
driven by the services sector with non oil sector accounting for 65% of GDP
The UAE has emerged as the 2nd largest economy in the GCCand one of the most important in the region
- GDP growth has averaged just under 10% over the past 5years
- Diversified economic base with non-oil sector contributing
65% of total GDP, with growth driven by services sector
- The UAE has become a regional hub for finance, tourismand logistics
The UAE is well positioned to weather the current crisis
- Current account balance of 20% of GNP in 2008F
- Government budget estimated to breakeven at oil price ofUS$ 40 / bbl in 2008
- UAE sovereign wealth funds have accumulated c. US$600-900 billion in assets
Robust banking sector
- Strong profitability and balance sheets, with industry ROEof 21% and capital adequacy ratio of 13% (as of Jun-08)
Impact of potential correction in real-estate prices andstrengthening US$ expected to ease inflationary pressure
- Inflation expected to decrease from 13% in 2008 to lessthan 10%
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
35.0%
13.0%11.0%
8.0%
8.0%
25.0%
Crude Oil and Natural Gas
Manufacturing
Wholesale, Retail trade and Repairingservices
Real Estate and Business Services
Construction
Others
Recent concerns over Dubais leverage and debt servicing ability are misguided
Key perceived risk: Dubais leverage
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While financing conditions are becoming more challenging, we dont consider that the credit-
worthiness of rated domestic entities will be affected.we feel refinancing risks will remain manageable despite reports of a sharp reduction in
international syndications
With a macro perspective, and seeing Dubai and Abu
Dhabi as part of UAE, rather than two independentstates, this widening [of Dubai CDS spreads over Abu
Dhabi spreads] is difficult to justify, in our view.
CDS for Debt Issued by Local Players
0
100
200
300
400
500
600
Apr-07 Aug-07 Dec-07 Apr-08 Aug-08
Abu Dhabi Dubai
we believe thissignificant 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.
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 65-
70% may raise some concerns, our economist and
head of credit research believe market sentiment is
over-exaggerated
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.
Dubai GovernmentOfficial
Key perceived risk: GCC real-estate sector (1/2)
Short term price correction expected to be most severe for Dubai, with the governmentattempting to ensure a soft landing for the sector
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0
20,000
40,000
60,000
80,000
2008 2009 2010 2011 2012 2013 2014 2015
Government Private Quasi-Government
Long-term outlook generally favorable for the GCC
Most large developers in Dubai are government backed
p g g
Doha
Residential Occupancy: 99%
Commercial Occupancy: 95%
Supply > Demand (year): 2013
Riyadh
Residential Occupancy: 92%
Commercial Occupancy: 91%
Supply > Demand (year): 2014-15
Dubai
Residential Occupancy: 93%
Commercial Occupancy: 98%
Supply > Demand (year): 2009-10
Abu Dhabi
Residential Occupancy: 99%
Commercial Occupancy: 99%
Supply > Demand (year): 2012-13
Developer Govt. Ownership
Emaar 32%
Deyaar 41%*
Union 48%*
Tatweer 100%
Sama Dubai 100%
Nakheel 100%
Dubai Properties 100%
Source: EFG, Morgan Stanley, Citi Research, company reports/filings, Colliers*Indirect ownershi throu h other semi- ovt. entities
Source: Occupancy & Capacity Estimates - Colliers, Price Expectations- Morgan Stanley
providing a mechanism to control new supply
Upcoming Supply of Housing Units by Ownership (Dubai)
By monitoring supply andsales, the Council is
managing this [real-estate]key sector and ensure that
new supply is properlymanaged. - Mohamed
Alabbar
Impact of downturn in UAE real-estate market expected to be manageable on the downsidewhile also helping to ease inflationary pressures
Key perceived risk: GCC real-estate sector (2/2)
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Consisting primarily
of low cost labor;low contribution
to GDP
The impact of real-estate workforce on the economy is small
A correction of real-estate prices will help ease inflationarypressures
p g y p
Source: Morgan Stanley, Sico Research, CBRE
There has been significant run-up in prices as of late
UAE Employee Breakdown by Sector (2007)
Dubai Residential Apartment Prices (AED / sq ft) Contribution to CPI inflation (UAE)
%
2%
4%
6%
8%
10%
12%
14%
2003 2004 2005 2006 2007 2008E
Other Expenditures
House Rent & Related Housing Expenses
Foodstuff, beverages, tobacco
15%
53%
20%
3% 8% Industry (ex.Construction)
Services (ex. Real-Estate)
Construction
Real Estate
Oil & Agriculture
Banks able to sustain a downturn in current prices due to thesignificant 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 totop-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
Banks not over exposed to the real-estate sector
600 715800800
1,200
1,800
2,200
3,800
1,200
NA
2004 2005 2006 2007 1H08
Mid-end Residential High-end Residential
Outlook on Egypt: The short term view
Egypt has witnessed significant growth in the recent past, however, exposure to externalfactors is expected to cause growth to slow in the short term
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3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F
Short-term outlook Short term slowdown in growth
Diversified economy
Source: Economist Intelli ence Unit Central Bank of E t Global Research Ca ital Research
16.3%
13.2%
11.2%
9.1%8.4%6.9%
6.2%
4.3%
4.1%
3.7%
3.7%
3.6%
3.4%
2.7%3.2%
Oil and Other Manufacturing Industries
Agriculture, Forestry and Fishing
Wholesale & Retail
Natural GasGeneral Government
Oil
Others
Construction and Building
Transport and Warehousing
Financial Services
Tourism
Insurance
Suez Canal
Communication
Real Estate
GDP/capita of US$ 1,719 grown at 16% pa over past 3 years
Significant regulatory reform initiatives to attract FDI Inflowsreached US$ 11 billion in 2007
The banking sector remains strong in the face of the globalcredit crisis. As a result of reforms implemented during the last
economic slowdown it is tightly regulated with no significantliquidity crunch in the domestic banking sector
In the short term GDP growth to decline from 7.2% in 2008 to5.7% and 5.1% in 2009 and 2010 due to:
- Real fixed capital formation expanding at a slower pacedue to tightening of global liquidity, including in the Gulf
- Slowdown in FDI, given that 70% of FDI inflows comefrom US and EU
- Slowdown in global trade: c.30% of exports are to USItaly and Spain; a large part of tax receipts is derived fromeither 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 dueto the prevailing fiscal deficit
- Tourism expected to slow with 69% of international touristarrivals represented by Europeans
Rising commodity prices, particularly food and oil haveresulted in high inflation which peaked at 23.7% in August2008; however inflationary pressures have eased ascommodity prices have come down
% GDP Contribution
Real GDP Growth
Outlook on Egypt: The long term view
yet, with the largest population in the Arab World and favorable demographics, Egypt ispoised to continue its growth
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8.2%
5.9%
4.3%
1.6% 1.5% 1.4%
China Egypt EM* OECD EU-15 United
States
70.0%
71.0%
72.0%
73.0%
74.0%
75.0%
76.0%
2005 2006 2007 2008F 2009F 2010F 2011F 2012F 2013F
Moderate set back in growth to be limited to the short termdue to diversified GDP, liquid banking system and an underleveraged economy
Egypt is a consumer led economy, stimulated by investments,with its long term prospects assured by demographics andstrategic location
- c.75% of economic growth driven by local demand
- The domestic consumer is largely un-levered with lowpenetration rates of consumer finance products, creditcards 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
4
11
26
32
7
18
37
36
*Excluding China and EgyptSource: Capital Research, United Nations, Economist Intelli ence Unit, Colliers International
Long-term outlook is strong with demographics a key growth driver
resulting in increased consumption leading to healthy long-term GDP growth
2008-2013 Real GDP CAGR
Egypt Population Breakdown by Age (millions)
0-19
45-64
65+
20252005 % of Total
38%
18%
8%
36%
15%
5%
Private consumption (% of GDP)
20-44
44% 36%
Although Turkey has grown significantly since 2001 it is still vulnerable to external shocksin the short term
Outlook on Turkey: The short term view
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3.5%
3.0% 3.0%2.7%
2.5%
3.8%
0.9%
2.5%
1.7%
2.1%
3.0%
2.6%
JP Morgan IMF RaymondJames
GoldmanSachs
MorganStanley
Citi
2008 2009
(15%)
(10%)
(5%)
0%
5%
10%
15%
2001 2002 2003 2004 2005 2006 2007
0%
10%
20%
30%
40%
50%
60%
GDP Real Growth (LHS) Budget Balance % of GDP (LHS)
Inflation (RHS)
Private
Consumption
47%
Fixed Capital
Formation
29% Public
Consumption
4%
Net Exports
18%
Inventory
2%
Source: UBS, Goldman Sachs, Economist Intelligence Unit
Turkey has come a long way since the crisis of 2001 with growth being driven by consumption and investment
However, Turkey has relied increasingly on external financingto fund its external deficit
resulting in a slowdown of growth estimates in the face of
the global financial crisis
Real GDP Growth, Budget Balance and Inflation
2008 and 2009 GDP Growth Forecasts
Contribution to GDP Growth (2002-2007)
Share of GDP (%) The role of energy in the current account
however, underlying fundamentals ensure a strong long term outlook for Turkey, which ison track to become the 9th largest economy in the world by 2050
Outlook on Turkey: The long term view
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Turkey expected to emerge as the ninth-largest economy in the world by 2050
Source: Goldman Sachs HSBC
GDP In 2050 (US$ trillions at 2007 prices)
0
10
20
30
40
50
60
70
80
China
US
India
Brazil
Russia
Indonesia
Mexico
UK
Turkey
Japan
France
Germany
Nigeria
Philippines
Canada
Italy
Korea
Iran
Saudi
S.Africa
Vietnam
Thailand
Venezuela
Egypt
Spain
Demographics. Turkey benefits from one of the youngest populations of any emerging market with a median age of 27and a labor force of 50 million.
Productivity. 25% of Turkeys labor force is still employed in the agricultural sector; however, a period of increasingurbanization (from 25% in mid-1900s to 70% today) will lead to further increases in productivity and employment in keysectors such as manufacturing and services.
Reform. Turkeys economy is well positioned long-term due to a range of successful economic policies enacted after the2001 crisis and political reforms executed in pursuit of EU membership. Future business-friendly reforms are expected tocontinue going forward, including reform of pension schemes and rigid labor laws.
Outlook on India: The short term view
Growth in India expected to decelerate but still robust at 6%
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8.0%
6.1%
2.4%
(0.0%) (0.0%)
(0.4%)China India EM* OECD EU-15 United
States*Excluding China and IndiaSource: RBI SEBI CEIC Goldman Sachs Economist Intelli ence Unit *Excludes China and India
GDP Growth - Cyclical Slowdown In Activity
Fundamentally strong banking sector
- Stable with relatively low levels of leverage
- Proactive government support through cuts in CashReserve 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% ofrural and 61% of urban consumption
Easing pressure on inflation due to fall in oil, commodities, andfood prices
Liquidity crunch due to global crisis
- Reversal in short term foreign capital inflows from US$108bnin 2008 to US$ 29 billion expected in 2009
- High level of dependence on foreign funding with 30% ofcorporate 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-impactedeconomies such as US / Western Europe
Negative wealth effect
- Recent stock market and real estate price corrections will
have negative impact on consumer spending
Short Term Real GDP Growth (2009)
and will continue to be one of the fastest growing economies
as India is impacted by the global nature of the current crisisSlowdown in GDP in the short-term
However India remains well positioned to weather the storm
Favorable demographics and a strong investment regime will make India worlds 3rd largesteconomy by 2050
Outlook on India: The long term view
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23%21% 19%
12%
9%7%
India
Indone
sia
China
Thailand
Malaysia
Philip
pines
56
488
590
112
853
483
Source: Goldman Sachs, Morgan Stanley, CLSA, McKinsey, CMIE, Edelweiss, United Nations, Economist Intelligence Unit
Large Youth population
Large and growing consumer base
- The population in the age group of 20-64 will grow by 260million between 2005 and 2025
- c. 31 million households are expected to join the middleclass between 2006 and 2010
Gross capital formation (GCF) has been a major driver ofeconomic growth in the last decade
- Dramatic increase in GCF driven by increased FDI
- Highest growth among the major Emerging Asianeconomies
Emerging Middle Class Gross Capital Formation (% GDP) GCF Avg Growth, 2003-07 (%pa)
will make India the 3rd largest economy in the world by 2050
Significant increase in the 20-64 bracket
65+
20-64
0-19
2005 2025
26%
37%
Mar-00 Mar-08
Favorable demographic trends supported by continued capital formation and investment
0
20
40
60
80
China
US India
Brazil
Russia
Indone
sia
Mexico UK
Turkey
Japan
Fran
ce
Germany
Nige
ria
Philip
pines
Canada Ita
ly
Korea
Iran
Saudi
S.Africa
Vietnam
Thailand
Vene
zuela
Egypt
Spain
GDP In 2050 (US$ trillions at 2007 prices)
Income by Household
0%
25%
50%
75%
100%
2002 2006 2010
Low Middle Middle-Upper High
Households: 188 mm 204 mm 222 mm
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