Impact Of Subprime On Uae Imt


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Impact Of Subprime On Uae Imt

  1. 1. IMPACT OF SUBPRIME ON UAE NAVIN BAFNA GMBA Batch Jan’08 Investment Banking
  2. 2. ‘ When the United States sneezes, the rest of the world may well catch a cold’ – By Rich Miller
  3. 3. The Current Scenario <ul><li>GLOBAL FINANCIAL MARKETS </li></ul><ul><li>US ECONOMY - Recession </li></ul><ul><li>LIQUIDITY CRISIS </li></ul>
  4. 4. <ul><li>Liquidity crisis in financial Markets </li></ul><ul><li>Weak US $ </li></ul><ul><li>Growing Inflation </li></ul><ul><li>Interest rate hike </li></ul><ul><li>Slump in the US Housing market </li></ul><ul><li>Loan Defaults </li></ul><ul><li>Huge write – off’s </li></ul>
  5. 5. SUBPRIME
  6. 6. What is SUBPRIME ? <ul><li>‘ Subprime’ loan is a general term that refers to the loans given to borrowers with less market credibility or low credit scores. </li></ul><ul><li>The loan can be of any form </li></ul><ul><li>Subprime mortgages </li></ul><ul><li>Subprime auto loans </li></ul><ul><li>Subprime credit cards </li></ul>
  7. 7. SUBPRIME – TECHNICAL TERMINOLOGY <ul><li>Subprime refers to the credit worthiness </li></ul><ul><li>Subprime doest not mean Interest rate </li></ul><ul><li>Fannie Mae or Freddie Mac guidelines </li></ul><ul><li>Scale of 300 – 850 </li></ul><ul><li>Subprime refers to credit score below 620 </li></ul>
  8. 8. IMPACT OF SUBPRIME <ul><li>Reported loss of 190 bn US $ </li></ul><ul><li>Estimation of loss up to 350 bn US $ </li></ul><ul><li>Total mortgage market in US is around $10.5 tn </li></ul><ul><li>13 percent, about $1.35 trillion, is subprime </li></ul><ul><li>14 percent is delinquent </li></ul><ul><li>5 percent is actually in foreclosure, approximately $67 bn </li></ul>
  9. 12. <ul><li>How a problem in US Housing Market cause Global liquidity Crisis ? </li></ul>
  10. 13. Globalization <ul><li>&quot;Every action has an equal and opposite reaction“ </li></ul><ul><li>Sir Issac Newton </li></ul><ul><li>Third law of motion </li></ul>
  11. 14. PROCESS <ul><li>The process of conversion of Subprime loan into structured Investments </li></ul>
  13. 18. IMPACT ON UAE
  14. 19. IMPACT <ul><li>Minimum impact on UAE directly </li></ul><ul><li>Rising inflation </li></ul><ul><li>Weak US $ has been a major concern </li></ul><ul><li>Hurts UAE appeal to foreigners </li></ul><ul><li>Safeguarded by OIL boom </li></ul><ul><li>Investment - Surplus Petrodollars </li></ul>
  15. 20. Impact - Sector Evaluation <ul><li>ECONOMIC </li></ul><ul><li>BANKING </li></ul><ul><li>REAL ESTATE </li></ul>
  16. 21. ECONOMIC <ul><li>Fed's interest rate cuts are putting expansionary pressure </li></ul><ul><li>Raising reserve requirements </li></ul><ul><li>Investments in the global market are expected to transfer their losses into the domestic economy. </li></ul>
  17. 22. BANKING <ul><li>The vulnerability of banks to the crisis is limited. </li></ul><ul><li>Exposure in the subprime assets which is not more than 1% of the total assets of the top 10 banks </li></ul><ul><li>One of the negative impacts is the postponement in issuing Sukuk (Islamic bonds). </li></ul>
  18. 23. REAL ESTATE <ul><li>Only Dubai's Emaar Properties, is directly exposed to the US mortgage market </li></ul><ul><li>Government makes sure that underwriting standards are strict and borrowers undergo background checks before they are issued credit. </li></ul><ul><li>Domestic PE firms engaged in cross border deals are expected to experience the quandary of the crisis. </li></ul>
  19. 24. PERSPECTIVES <ul><li>COMMON MAN </li></ul><ul><li>UAE GOVERNMENT </li></ul>
  20. 25. Common man - UAE <ul><li>70 % of the UAE population are immigrants </li></ul><ul><li>US $ is depreciated almost 10.9 % to INR in 2007 </li></ul><ul><li>6% – 10% against Asian countries </li></ul><ul><li>Rising inflation </li></ul><ul><li>Inflation raises the cost of living for the expatriates </li></ul><ul><li>Rising costs of imports and decline in purchasing power </li></ul><ul><li>UAE may loose its attractiveness to other GCC countries such as Kuwait and Oman </li></ul>
  21. 26. UAE Government <ul><li>‘The Chinese use two brush strokes to write the word 'crisis'. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger but recognize the opportunity’ </li></ul><ul><li>By - John F. Kennedy </li></ul>
  22. 27. UAE Government <ul><li>Hedge against the future restrain in oil prices </li></ul><ul><li>Opportunity to diversify their investments in US and European market </li></ul><ul><li>Increased activity of sovereign wealth funds. </li></ul><ul><li>Funds under management $2.9 trillion </li></ul>
  23. 28. <ul><li>According to a January 2008 report in the Economist, the magazine stated, </li></ul><ul><li>&quot;They have deftly played the role of savior just when Western banks have been exposed as the Achilles heel of the global financial system.&quot; </li></ul>
  24. 29. Worse Case Scenario <ul><li>Liquidity Crisis </li></ul><ul><li>Financial crisis </li></ul><ul><li>Economic crisis </li></ul>
  25. 30. Solution <ul><li>“ The formulation of the problem is often more essential than its solution” </li></ul><ul><li>- Albert Einstein </li></ul>
  26. 31. Q & A
  27. 32. Thank You !!