IMPACT OF SUBPRIME IMPACT OF SUBPRIME

ON UAE ON UAE

NAVIN BAFNANAVIN BAFNAGMBA Batch Jan’08GMBA Batch Jan’08Investment BankingInvestment Banking

‘When the United States sneezes, the rest of the world may well catch

a cold’

– By Rich Miller

The Current ScenarioThe Current Scenario

GLOBAL FINANCIAL MARKETSGLOBAL FINANCIAL MARKETS

US ECONOMY - RecessionUS ECONOMY - Recession

LIQUIDITY CRISISLIQUIDITY CRISIS

Liquidity crisis in financial MarketsLiquidity crisis in financial Markets Weak US $Weak US $ Growing Inflation Growing Inflation Interest rate hikeInterest rate hike Slump in the US Housing marketSlump in the US Housing market Loan DefaultsLoan Defaults Huge write – off’sHuge write – off’s

SUBPRIMESUBPRIME

What is SUBPRIME ?What is SUBPRIME ?

‘‘Subprime’ loan is a general term Subprime’ loan is a general term that refers to the loans giventhat refers to the loans given to to borrowers with less market borrowers with less market credibility or low credit scores. credibility or low credit scores.

The loan can be of any formThe loan can be of any form Subprime mortgages Subprime mortgages Subprime auto loans Subprime auto loans Subprime credit cards Subprime credit cards

SUBPRIME – TECHNICAL SUBPRIME – TECHNICAL TERMINOLOGYTERMINOLOGY

Subprime refers to the credit worthinessSubprime refers to the credit worthiness Subprime doest not mean Interest rateSubprime doest not mean Interest rate Fannie Mae or Freddie Mac guidelines Fannie Mae or Freddie Mac guidelines Scale of 300 – 850Scale of 300 – 850 Subprime refers to credit score below Subprime refers to credit score below

620 620

IMPACT OF SUBPRIMEIMPACT OF SUBPRIME

Reported loss of 190 bn US $Reported loss of 190 bn US $ Estimation of loss up to 350 bn US $Estimation of loss up to 350 bn US $ Total mortgage market in US is around Total mortgage market in US is around

$10.5 tn$10.5 tn 13 percent, about $1.35 trillion, is 13 percent, about $1.35 trillion, is

subprimesubprime 14 percent is delinquent 14 percent is delinquent 5 percent is actually in foreclosure, 5 percent is actually in foreclosure,

approximately $67 bn approximately $67 bn

How a problem in US How a problem in US Housing Market cause Housing Market cause Global liquidity Crisis ?Global liquidity Crisis ?

GlobalizationGlobalization

"Every action has an equal "Every action has an equal and opposite reaction“and opposite reaction“

- Sir Issac NewtonSir Issac Newton

Third law of motion Third law of motion

PROCESSPROCESS

The process of conversion of The process of conversion of Subprime loan into structured Subprime loan into structured InvestmentsInvestments

SECURITIZATION

IMPACT ON UAEIMPACT ON UAE

IMPACT IMPACT

Minimum impact on UAE directlyMinimum impact on UAE directly Rising inflationRising inflation Weak US $ has been a major Weak US $ has been a major

concern concern Hurts UAE appeal to foreigners Hurts UAE appeal to foreigners Safeguarded by OIL boomSafeguarded by OIL boom Investment - Surplus PetrodollarsInvestment - Surplus Petrodollars

Impact - Sector Impact - Sector EvaluationEvaluation ECONOMICECONOMIC BANKINGBANKING REAL ESTATEREAL ESTATE

ECONOMICECONOMIC

Fed's interest rate cuts are Fed's interest rate cuts are putting expansionary pressureputting expansionary pressure

Raising reserve requirementsRaising reserve requirements Investments in the global market Investments in the global market

are expected to transfer their are expected to transfer their losses into the domestic losses into the domestic economy.economy.

BANKINGBANKING

The vulnerability of banks to the The vulnerability of banks to the crisis is limited. crisis is limited.

Exposure in the subprime assets Exposure in the subprime assets which is not more than 1% of the which is not more than 1% of the total assets of the top 10 banks total assets of the top 10 banks

One of the negative impacts is One of the negative impacts is the postponement in issuing the postponement in issuing Sukuk (Islamic bonds). Sukuk (Islamic bonds).

REAL ESTATEREAL ESTATE

Only Dubai's Emaar Properties, is directly Only Dubai's Emaar Properties, is directly exposed to the US mortgage market exposed to the US mortgage market

Government makes sure that Government makes sure that underwriting standards are strict and underwriting standards are strict and borrowers undergo background checks borrowers undergo background checks before they are issued credit. before they are issued credit.

Domestic PE firms engaged in cross Domestic PE firms engaged in cross border deals are expected to experience border deals are expected to experience the quandary of the crisis. the quandary of the crisis.

PERSPECTIVESPERSPECTIVES

COMMON MANCOMMON MAN UAE GOVERNMENTUAE GOVERNMENT

Common man - UAECommon man - UAE

70 % of the UAE population are immigrants 70 % of the UAE population are immigrants US $ is depreciated almost 10.9 % to INR in US $ is depreciated almost 10.9 % to INR in

20072007 6% – 10% against Asian countries6% – 10% against Asian countries Rising inflation Rising inflation Inflation raises the cost of living for the Inflation raises the cost of living for the

expatriatesexpatriates Rising costs of imports and decline in Rising costs of imports and decline in

purchasing power purchasing power UAE may loose its attractiveness to other GCC UAE may loose its attractiveness to other GCC

countries such as Kuwait and Omancountries such as Kuwait and Oman

UAE GovernmentUAE Government

‘‘The Chinese use two brush strokes The Chinese use two brush strokes to write the word 'crisis'. One to write the word 'crisis'. One

brush stroke stands for danger; brush stroke stands for danger; the other for opportunity. In a the other for opportunity. In a

crisis, be aware of the danger but crisis, be aware of the danger but recognize the opportunity’recognize the opportunity’

By - John F. KennedyBy - John F. Kennedy

UAE GovernmentUAE Government

Hedge against the future restrain in oil Hedge against the future restrain in oil prices prices

Opportunity to diversify their investments in Opportunity to diversify their investments in US and European marketUS and European market

Increased activity of sovereign wealth Increased activity of sovereign wealth funds. funds.

Funds under management $2.9 trillion Funds under management $2.9 trillion

According to a January 2008 report According to a January 2008 report in the Economist, the magazine in the Economist, the magazine stated,stated,

"They have deftly played the role of "They have deftly played the role of savior just when Western banks savior just when Western banks

have been exposed as the Achilles have been exposed as the Achilles heel of the global financial system."heel of the global financial system."

Worse Case ScenarioWorse Case Scenario

Liquidity CrisisLiquidity Crisis

Financial crisisFinancial crisis

Economic crisisEconomic crisis

SolutionSolution

““The formulation of the problem is The formulation of the problem is often more essential than its often more essential than its

solution”solution”

- Albert Einstein

Q & AQ & A

Thank You !!Thank You !!