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					Roller Coaster Markets




Nov 22 ‘08               Adnan Afaq
                         MD - PACRA
                                 1
PAKISTAN CREDIT RATING AGENCY

1. 1st Rating Agency of Pakistan

2. Set up in 1994 - JV between IFC+ Fitch + L.S.E

3. Credit Rating – Bonds Rating – Developers Grading

4. We quantify and grade risk
   Prerequisite of Good Governance – public investment /funding involved




                                                                   2
Types of Markets
1. Commodities – Oil, Gold, Grains…
2. Capital Markets – Equity & Debt
3. Inter Bank – Interest Rates
4. Currencies
5. Real Estate
6. Job Market



                                      3
Relationship of Markets
NORMAL TIMES

  Inter Bank Rates
                      Equity Markets

      Debt, Equity and Inter Bank Markets
            complement each other
  by providing alternate sources of funding



                                              4
  StrEsS CoNdiTioNs
   Sentiments drive all markets in the same direction
   LIQUIDITY PANIC IMPACT
  Income Funds                            NBFCs
  Invested by Banks            90         Funding by Banks              70
  Invested in Investment Banks 30         Funding by Mutual Funds       30
                                          Other sources                 30
                                                                       130
  Customers withdrew from Banks                                             170 b
  Banks withdrew from Mutual Funds                                           45 b
  Panic redemptions from Mutual Funds - (50% reduction since March ’08)      80 b
  MF bond portfolio losses its liquidity – 35 b
  Banks and Mutual Funds forced to withdraw from FIs

MF & FIs – Both in Stress                      Banks face Credit Default
                                                                                5
KIBOR
                                6-Months KIBOR (Average)
18
                                                                                                             Years   KIBOR
16

14
                                                                                                              ’98    16%
12                                                                                                            ’01    10%
10                                                                                                            ’03    2%            6%
8                                                                                                             ’06    10%
6
                                                                                                              ’08    16%
4

2

0
                                                                                                           Mortgage Burden
     Jun-98

              Jun-99

                       Jun-00

                                  Jun-01

                                            Jun-02

                                                     Jun-03

                                                              Jun-04

                                                                       Jun-05

                                                                                Jun-06

                                                                                         Jun-07

                                                                                                  Jun-08

                                                                                                           At 6% = 30% of Income

                                           6-M onths KIBOR (Average)                                       At 16% = 50% of Income
                                                                                                                              6
    LIBOR
                           6-Months US LIBOR
                                                                            Simplistic
6
                                                                              Years      LIBOR
                                                                              Jan’01     5.5%
5


4                                                                              Jul’03    1.0%
3                                                                              Jul’06    5.5%
                                                                               Jul’08    2.75%
2

                                                                        In 2 ½ years rates swing 5.5 times
1


0
Jan-01   Jan-02   Jan-03   Jan-04   Jan-05   Jan-06   Jan-07   Jan-08

                              6-Months US LIBOR


                                                                                                  7
      Oil
                            NYMEX Light Sweet Crude

160
                                                                           Years Prices
140
                                                                                 in $
120
                                                                           Jan’01   30
100
                                                                           Nov’04   45
80
                                                                           Jul’06   75
60
                                                                           Jul’08   140
40                                                                         Nov’08   45
20

 0
 Jan-01   Jan-02   Jan-03     Jan-04   Jan-05   Jan-06   Jan-07   Jan-08

                               NYMEX Light Sweet Crude
                                                                                          8
   Dow Jones
                          Dow Jones Industrial Average

15000

14000
                                                                                 Years Value
13000
                                                                                 Jan’01 11,000
12000                                                                            Jan’03    8,000
11000                                                                            Jul’05 10,500
10000                                                                            Jul’07 14,000
9000                                                                            Nov’08 8,000
8000
                                                                                Interest Rates have shown
7000                                                                            strong correlation with
   Jan-01   Jan-02   Jan-03   Jan-04    Jan-05    Jan-06      Jan-07   Jan-08   Stock Markets till now
                               Dow Jones Industrial Average



                                                                                                   9
   KSE
                                   KSE 100


18000
                                                                              Years    Index
16000
                                                                              Jan’01     1500

14000
                                                                              Jul’03     3500
                                                                              Feb’05     7,000
12000                                                                         Apr’08    15,000
                                                                               Now       7,000
10000


8000
                                                                            Had the floor NOT
6000                                                                        been placed…..Stock
   Jan-05   Jul-05   Jan-06   Jul-06   Jan-07    Jul-07   Jan-08   Jul-08   Market might have
                                                                            come down to 7000
                                       KSE 100
                                                                            points
                                                                                            10
The Story
 1.     2001 – Economies in Bad Shape
             KSE       1800          Real GDP Growth – Pak 1.86%
             Dow Jones 8000                          – US 0.75%



 2.     Interest Rates pushed down –             2001     2003
                                        KIBOR     10%,     2%
                                       LIBOR      6.5%,    1%

          Low                                           Innovation
        Interest           Compressed                      for
         Rates               Margins                     Volumes

                                                                 Thank you
Party                                                              India
Time               Low Inflation Cheap Credits                       &
                                                                   China
                                                                        11
Innovate for Volumes
A.   SUB PRIME – MBS

SPV – Low Quality Mortgages (Sub prime)                          $1000 m


                              1st right to cash flows    AAA     $50 m

                              2nd right to cash          AA      $100 m
                              flows
                                                          A      $100 m

                                                         BBB     $100 m




                             Last right to cash flows   Equity   $50 m
                                                                     12
Innovate for Volumes
 B.     CDO
SUB PRIME – MBS
                                        1st right to cash flows
       AAA                                                            AAA
                                        2nd right to cash flows
       AA                                                             AA

        A                                                              A

       BBB        MBS - A   MBS - B   MBS - C   MBS - D    MBS – E    BBB




                  CDO                       CDO 2
      Equity                                                         Equity



                                                                     13
Innovate for Volumes
Credit Default Swaps         Negligible sum soared   $ 55.0 t
Mortgage Backed Securities   More than doubled          6.6 t
Asset Backed Securities      More than doubled          2.5 t



Great Rating
Great Returns




                                                         14
 Goodbye PAPA it’s HARD to DIE…
 When all the Birds are Singing in the Sky
            195                                                                                     6
            190
                                                                                                    5
            185
            180                                                                                     4
            175
                                                                                                    3
            170
            165                                                                                     2
            160
                                                                                                    1
            155
            150                                                                                     0
                    Q1      Q2   Q3    Q4    Q1   Q2    Q3   Q4    Q1      Q2   Q3   Q4   Q1   Q2

                              2005                  2006                    2007           2008

                         S&P Case-Shiller U.S. National Home Price Index        6-Months US LIBOR




Property Prices                                                                            Extraordinary high
                               Housing Inventory               Interest Cost                 rates & Weak
  fell by 20%                  Increased to Over             went up 5 Times              Collateral collapsed
 (‘06: 190 – ‘08: 155)
                                  ONE Million                from the Bottom                 price of ‘paper’

                                                                                                        15
Goodbye PAPA it’s HARD to DIE…
When all the Birds are Singing in the Sky

     High leveraging cost could NOT be
        sustained by the Balance Sheet




     FI Losses: $1 t    Equity Erosion: $27 t

                                            16
Role of Rating Agencies
Whistle Blower – Let the buyers be aware of RISK

Rating Downgraded – Bonds            7.8%
                    High Rated Bonds 8.5%

Rating Agencies came under criticism – Mainly for Timeliness & Magnitude

PACRA’s Experience
                PACRA's Upgrade & Downgrade
 35%

 30%

 25%

 20%

 15%

 10%

 5%

 0%
       FY03   FY04           FY05   FY06        FY07        FY08

              Upgrade Rate                 Downgrade Rate
                                                                     17

				
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