Impact of the Global Crisis on the MENA Region Henry Azzam CEO Middle East

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Impact of the Global Crisis on the MENA Region
Henry AzzamCEO Middle East North Africa
RegionDeutsche Bank
22nd / 23rd April, 2009
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Ripple Effect of Global Economic Crisis on the
Region

• The claim that the regions is decoupled from the
  rest of the world has been proven wrong. The
  region is quite interlinked with the global
  economy through
• Exports, which account for more than 50 of the
  regions output, are very much dependant on
  external demand.
• The Gulf currencies, pegged to the US dollar
  since the mid 1980s, move in tandem with dollar
  exchange rates. Level and direction of domestic
  interest rates are similar to those of the US
  currency.
• The region is an active participant in world
  financial markets.
• SWFs have around 1.3 trillion invested abroad.
• The regions private sectors are believed to hold
  around 1.8 trillion of foreign assets.
• What happens in the international markets has a
  considerable impact on the net worth of nationals
  and expatriates living in the region.

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• Foreigners can now purchase equities on all the
  regions stock markets. Five out of the six GCC
  countries now allow foreign ownership of property
  in designated areas.
• Strong correlation between oil prices and
  domestic stock markets, as well as, between the
  international markets and the local ones.
  Performance abroad influence the confidence of
  consumers and investors living in the region.

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Weakening of the Economic and Business Environment

• Reduction in GDP growth rates, because of lower
  oil production for the GCC and drop in domestic
  demand for the rest of MENA.
• Slowdown / delays in infrastructure and real
  estate projects.
• Fall of stock markets (prices and volumes) since
  the start of the crisis.
• Real estate prices are trending downwards.
• Lower business volumes and decline in imports.
• Tighter liquidity conditions and higher cost of
  funding.
• For the non-GCC Arab countries decline in FDIs,
  tourism, workers remittances, and exports of
  goods and services to the Gulf countries.
• The regions primary capital markets (IPOs,
  Sukuk, bonds) remain virtually closed, with one
  IPO in the first quarter this year, no bonds or
  sukuk.

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Oil Prices in the Range of 40 - 50 a barrel
with 35 a barrel as a lower base
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The MENA Region Has Not Been Immune to the Global
Crisis
Oil price 71 down
Slowing growth
Real GDP growth 2008E

• Brent Crude, USD/ Barrel
• After dropping by 200,000 b/d in 2008,world Oil
  demand is forecast to decline by 1.5 mb/d this
  year . Oil prices are projected to average 45 a
  barrel in 2009, down from 100 in 2008, current
  account surpluses of 340b for GCC in 2008 will
  turn into a deficit of 2b in 2009

Real GDP growth 2009E
1st Jan 2007
15 April 2009
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Strong Correlation Between Oil Prices and Index
of Saudi Stocks
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Strong Correlation Between Oil Prices and /Euro
Exchange Rates
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Regional Stock Markets Under performance is not
Explained by Economic Fundamentals
2008

• Lack of transparency (macro Micro levels), and
  absence of proper corporate governance.
• Quarterly results frequently late and often brief
  and only in Arabic.
• Access to executives is generally negligible.
• Quarterly financials hide more than they reveal.
• Only one IPO in Q1 2009, that of Itihad Atheeb
  Telecom Company in Saudi Arabia which raised 80
  million, compared to 9 IPOs in the GCC in Q1 2008
  which raised 3.9 billion.

2009 YTD
10
SWF and Official Reserves ( billion)
Estimates
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(No Transcript)
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1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
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Loans to Deposit Ratios (2008)
120
115
120
112
110
110
105
93
100
90
90
80
65
70
60
50
40
30
20
10
0
Egypt
Jordan
KSA
Kuwait
Qatar
Bahrain
Oman
UAE
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Saudi Arabia Commercial Bank Holdings of Saudi
Treasury Bills on the Risc
Saudi Arabia Credit to The Private Sector on the
Decline
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Saudi Arabia Private Sector Imports Financed
Through Commercial Banks
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Government Support to the Banking Sector

• Governments showed willingness to provide support
  when needed
• Sharp contrast in terms of capacity between GCC
  and other MENA governments.
• Two types of Support
• System wide
• Guaranteeing deposits (legal framework?).
• Reduction in reserve requirement.
• Relaxation of loan to deposit ratio.
• Broader range of securities eligible for repo.
• Incentives for mergers and acquisitions.
• Strict control (Governance, Risk Management, NPLs
  etc.)
• Bank Specific
• Capital injection (ABC, GIB, GIC, Gulf Bank
  Kuwait, 5 banks in Abu Dhabi)
• Injection of liquidity through central banks.
• Intervening to reduce credit default swaps rates.

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Lower Profitability Expected for the Regions
Commercial Banks

• Slowdown in business volumes, varying from one
  country to another.
• Higher cost of funding as banks compete to
  attract deposits.
• Non-performing loans on the rise leading to
  higher loan-loss provisions.
• Good-will impairment for recent acquisitions
  (mark to market).
• Areas of Concern
• Banks with large exposure to real estate sector
  (Islamic Banks) and other illiquid
  investments (hedge funds, private equity, etc.)
  and those with wholesale funding profiles.
• Banks who lack proper governance and risk
  management culture.

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Investment Banking Institutions

• Their business model is not sustainable.
• Excessive leveraging.
• Investing borrowed money in illiquid assets.
• Proprietary trading and investing (similar to
  private equity funds).
• Their main sources of revenues have been on the
  decline.
• The regions primary capital markets continue to
  be virtually closed (IPOs, bonds, sukuks, etc.).
• MA deals are scarce.
• Assets under management have shrunk in value.
• Mark to market losses on their illiquid
  investments.
• Declining trading volumes, brokerage and advisory
  fees.
• Some are unable to refinance their maturing debt.

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Islamic Banks

• Growth rate of 20 per annum in the last 10 years
  with total assets exceeding 800 billion in 2008.
• The market potential for Islamic banks is
  estimated by SP at 4 trillion.
• Total Sukuk outstanding reached 75 billion in
  2008.
• Islamic banks were not affected directly by the
  crisis because they are prohibited from investing
  in structured products (only asset base finance)
  and no leveraging / speculation.
• However, they have been affected by the smaller
  liquidity and funding pool, as well as, because
  of their asset base finance, where prices of the
  cyclical underlying assets (real estate,
  commodities, stocks, imports/exports) have been
  on the decline.
• Lack of liquidity and risk management tools
• No overnight interbank market that is Sharia
  compliant.
• No hedging or risk management tools that are
  Sharia compliant.
• Cannot draw on funds made available by central
  banks because of the interest element attached.

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Risk Factors

• The biggest risk is for oil prices to drop below
  the 35 a barrel and stay low (as in the early
  1980s) due to weaker growth in China (4 instead
  of 8), and the recession worldwide proves to be
  more severe (world GDP growth -5 instead of -2
  as estimated now).
• The collapse of euro zone would leave its
  negative impact on EUs economic growth
  prospects, leading to a weaker euro vis-à-vis the
  US dollar. This will in turn bring forth lower
  oil prices given the strong historical
  relationship between /euro exchange rates and
  oil price per barrel.
• Deflation taking hold would reflect negatively on
  commodity prices including oil.
• Protectionism will very much affect the regions
  non-oil exports especially petrochemicals,
  aluminum and pharmaceuticals.
• With more public ownership, similar to elsewhere
  in the world, this could tilt the balance of
  power to the old guard, those who want to see
  less liberalization and more government control.
  This could undermine the entrepreneurial spirit
  of the region.
• Deteriorating conditions in one or more of the
  hot spots in the region Iraq, Palestine,
  Lebanon, Sudan and Iran.

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Conclusion The Economic and Business Environment

• The tightening of liquidity and credit
  conditions in the region and the loss of consumer
  and business confidence will impact private
  sector activities.
• Economic growth will slow this year, but
  government support will ensure that the non-oil
  economic activities do not slip into outright
  recession.
• The regions governments and central banks have
  been quite interventionist, they responded
  swiftly and strongly to provide liquidity, and
  they have the resources to do more if necessary.
• The worry about the Euro zone and the
  strengthening of the dollar would remove any
  lingering possibility of depegging the regions
  currencies from the US dollar.
• Dubai and Kuwait will face the most testing time.
  The 20 billion bond program provided assurance
  to capital markets that Dubai will be able to
  meet its financing requirements this year.
• The conservative approach of Saudi Arabia
  towards liberalization of capital markets,
  maintaining the US pegg and concentrating on
  liquid foreign investments has been validated by
  the crisis. The Saudis are likely to become more
  influential as the region moves towards a
  monetary union by 2011.