March 2013
2013- A Strategic and Thematic View of the World Economic Outlook Emerging Markets Continue to Drive Growth and Capital Flows
William Lee Managing Director [email protected] +1-212-816-2621
See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures Published: 3/6/2013 Citi Research is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Table of Contents
Global Growth Remains Tepid 4
High Leverage and Weak Housing Markets Continue to Dampen Growth 9
UK and Ireland Recoveries Stall 14
US Recovery Coming Despite Fiscal Cliffs 21
Euro Area Uncertainties Heighten Global 28 Macro/Financial Risks and Vulnerabilities Banking Sector Crisis 33
External Imbalances Crisis 36
Selected Policy Prescriptions for Euro Area 40
Middle East North Africa—Tale of Two Regions 42
Global Capital Flows, Dutch Disease, 47 and Capital Controls
2 Global Growth Modest as Risks and Vulnerabilities Persist UK recovery stalls • Headwinds from de-leveraging and the EMU crisis • Monetary policy limited by inflation targeting objective US growth strengthens despite high unemployment and fiscal uncertainties • Housing and consumer spending (autos) respond to Fed easing • Low energy prices and prospective energy independence spur optimism and investment spending Euro Area complacency rampant despite structural vulnerabilities • Italian elections dampen upbeat mood from “Draghi Put” (Outright Monetary Transactions) • High debt burdens press on domestic demand as de-leveraging stalls • Structural and Political Impediments to viable currency union loom large Emerging Market growth model shifts focus to domestic demand • China’s transformation slows GDP growth and changes Asian supply chain • Smart urbanization helps overcome demographic drag • Surging capital inflows fan EM policymakers’ fears of “Dutch Disease” and raise prospects of more capital controls
3 Source: Citi Research Improving Global Indicators Point to Modest Global Growth
Exports and Mfg Turning Up (?) Moderate Growth for US and China
Global Export Volume
China
6.0 10
Global PMI:Manufacturing
Percent, YoY United States Oct 4.0 7.5
30 Dec 68 Expansion =
20 62 Percent, YoY
50+ 2.0 5 m onth Change Percent - 10 56 12
0 50
0.0 2.5 -10 44 Euro Area
-20 38
-2.0 0 -30 32 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: Netherlands Bureau for Economic Policy Analysis, Markit, and Citi Research. 11:Q1 11:Q2 11:Q3 11:Q4 12:Q1 12:Q2 12:Q3 12:Q4 13:Q1 13:Q2 13:Q3 13:Q4 14:Q1 14:Q2 14:Q3 14:Q4
4 Bank Credit Supports Emerging Market Growth
5 Global Growth Leadership Continues to Rely on China and EM
Contributions to Global GDP Growth, Annual Real GDP Growth By Region, 2000-17F Averages, 1998-2017F
6 Global Economic Forecasts Overview
GDP Growth (%) CPI Inflation (%) 2012 2013 2014 2012 2013 2014 Global 2.5 2.6 3.2 2.8 2.8 3. 0
US 2.2 1.9 3.1 1.7 1.5 2.1 Japan 2.0 1.3 1.2 0.0 -0.3 1.9
Euro Area -0.5 -0.6 -0.4 2.5 1.8 1.5 y Germany 0.9 0.5 0.5 2.0 2.0 2.3
y France 0.0 -0.2 0.2 2.2 1.3 1.7 y Italy -2.1 -1.4 -1.4 3.3 2.1 1.3
y Spain -1.4 -2.2 -2.0 2.4 1.1 0.3 y Greece -6.1 -6.5 -11.5 1.0 0.3 16.8
y Ireland 0.5 0.5 1.5 2.3 1.2 1.4 y Portugal -3.1 -3.7 -2.8 2.8 1.7 0.9
y Netherlands -1.0 -0.9 0.3 2.5 2.6 1.7 UK 0.1 0.4 0.7 2.8 2.9 2.3
Switzerland 1.0 1.4 1.2 -0.7 -0.9 -0.6 Sweden 1.1 1.0 2.5 0.9 0.4 1.7
Emerging Markets 4.7 5.2 5.5 4.4 4.6 4.7 China 7.8 7.8 7.3 2.6 2.8 3.6
India 5.4 6.2 6.9 7.5 7.0 6.0
7 Source: Citi Research Market Rates Forecasts
Avge Avge Avge Current Mid-13 End-13 2014 2015 2016
US Fed Funds 0.25 0.25 0.25 0.25 1.10 2.10
ECB Refi Rate 0.75 0.50 0.25 0.25 0.25 0.31 Japan Call Money 0.10 0.10 0.10 0.13 0.10 0.10
UK Base Rate 0.50 0.50 0.50 0.50 0.50 0.50
10 Yr US Treasury 1.82 1.95 2.50 2.80 3.25 3.50 10 Yr Euro (Bund) 1.55 1.55 1.50 1.44 1.50 2.00
10 Yr BTP-Bund (bp) 266 350 375 350 400 300 10 Yr OAT-Bund (bp) 57 70 100 90 120 80
10 Yr JGB 0.73 0.95 1.05 1.00 1.38 1.50 10 Yr Gilt 2.00 1.80 1.80 1.75 1.75 2.50
USD/EUR 1.33 1.34 1.32 1.31 1.32 1.35
YEN/USD 90 95 95 92 88 86 EUR/GBP 0.84 0.83 0.82 0.81 0.80 0.80
USD/GBP 1.59 1.61 1.61 1.62 1.65 1.69 USD/CNY 6.22 6.14 6.09 6.07 6.05 6.06
8 Source: Citi Research EM Fiscal Easing Helps Sustain Domestic Spending
Fiscal stance in EM is relatively loose, and generally …and despite expansionary fiscal positions since 2007 (upper looser than it was a year ago… right quadrant) modest debt levels suggests more room to ease
Much Tighter Public debt and deficits: 2012 vs 2007
Czech R Higher debt (ppt S. Africa Hungary25.0 Romania Somewhat Taiwan Poland GDP) RO Ti 20.0 ghter CZ 5 Sri Lanka15.0 PE Argentina ZA 10.0 HU TW PO TH 4 Unchanged MX Philippines 5.0 KO Colombia IL RU CL 0.0 India Brazil 3 BR TU CN Mexico Chile -5.0 Russia PH Somewhat China IN HK Looser -10.0 ID PE 2 Indonesia Korea Israel -15.0 Thailand Kazakhstan AR
Fiscal Stance TodayFiscal vs A Year Ago Venezuela 1 Peru -20.0 Turkey -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 Much Ukraine Bigger deficits Looser Vietnam 0 (ppt GDP) 012345
Current Fiscal Stance
Very Somewhat Neutral Somewhat Very ExpansionaryExpansionary ContractionaryContractionary
Source: Citi Research Source: Haver Analytics, Citi Research
9 High Leverage and Weak Housing Markets Dampen Growth in Advanced Economies
10 Private Sector Leverage Remains High
Percent of GDP
% Change Since 2006-10 Peak 200 175 Change From 2001 to 2006-10 Peak 150 125 Total Change 2001-12 100 75 50 25 0 -25 -50 -75 US UK Italy Neths Spain Latvia Czech Ireland Poland France Austria Greece Cyprus Finland Norway Estonia Sweden Lithuani Belgium Bulgaria Slovakia Portugal Hungary Slovenia Romania Denmark Germany
11 Sources: Eurostat and Citi Research Private Sector Deleveraging Has Stalled in Europe and UK
Change in Private Debt/GDP Ratios In This Shortfall in Real GDP Versus Pre-Crisis Trend Crisis After Banking Crises Compared to Historical Experience
% %
US EMU Average +/- 100 UK one standard 10 Shaded area denotes interquartile deviation range of historic output losses 5 80 0 60 -5
40 -10 EMU
-15 20 Average in 12 Countries With Systemic US Banking Crisis* -20 Historic Average Output Loss for UK 0 Banking Crisis Countries -25
-20 -30 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7-101234567 8 Distance in Years from First Year of Crisis Distance in Years from First Year of Crisis
Note: We date start of current crisis for EMU, US, UK as Q4-08. Sources: IMF and Citi Research * These crisis are: (Chile 1981, Finland 1991, Indonesia 1997, Japan 1997, Malaysia 1997, Mexico 1994, Nicaragua 2000, Norway 1991, Philippines 1997, Sweden 1991, Thailand 1997, Uruguay 2002) Sources: Datastream and Citi Research
12 150 Deleveraging145 is a Drag on the Recovery GDP In Recessions and Recoveries 140 (Indexed to 100 at the Start)
Stylised Normal Trend GDP 135 Growth of 2.5% YoY
130 Stylised Normal Recession 125 120 . 115 Typical Path for Countries With Systemic Financial 110 Crisis 105 100 -8-6-4-202468 Distance in Years from First Year of Crisis Note: We date start of current crisis for EMU, US, UK as Q4-08. * These crisis are: (Chile 1981, Finland 1991, Indonesia 1997, Japan 1997, Malaysia 1997, Mexico 1994, Nicaragua 2000, Norway 1991, Philippines 1997, Sweden 1991, Thailand 1997, Uruguay 2002) Sources: Datastream and Citi Research
13 Weak Housing Markets Slow Consumption Spending
Selected Countries: Real House Prices, Selected Countries: Correlation between (Index, 1Q 1997=100) House Prices and Private Consumption
300 SPA UK US IRE NL 280 90% 260 80% 240 70% 60% 220 50% 200 40% 180 30%
160 20% 10% 140 0% 120 US UK ITA IRE SPA FRA AUS DEN GER NOR 100 SWE NETH 1997 1999 2001 2003 2005 2007 2009 2011
Sources: Eurostat, Citi Research 14 UK and Ireland Recoveries Stall
15 U.K. Recovery Elusive as GDP Underperforms MPC Forecasts
(Indexed to Q1-2005 = 100)
Nov 09 IR Nov 10 Nov 08 IR 118 IR Nov 11 IR 116
114
112 Nov 12 IR 110
108
106
104 Actual and Citi Forecast 102
100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Citi Research
16 U.K.: Changes in Economic Activity from 2008-Q1
Percent
IP Construction Services GDP 4 2 0 -2 GDP Still Weak -4 -6 -8 -10 -12 -14 -16 -18 -20 2008 2009 2010 2011 2012
Source: Citi Research
17 U.K. Household Leverage Still High
Source: IMF 2012 Article IV Staff Report for United Kingdom
18 U.K.: Inflation Limits Monetary Policy Support Average Inflation Rate, and Effect on CPI, for Utilities, Education, Food, Drink and Tobacco, 1997-2012
Source: Citi Research
19 Cumulative Export Growth From 2007-Q1 to 2012-Q3
Percent
40 35 30 25 20 15 10 5 0 -5 -10 US UK Italy EMU Neths Spain Swiss Ireland France Austria Iceland Finland Sweden Belgium Portugal Denmark Germany
20 Source: Citi Research Ireland: Growth Inadequate for Job Growth and Debt Reduction
Source: IMF Staff calculations as reported in IMF 2012 Article IV Staff Report for Ireland
21 US Recovery Coming Despite Fiscal Uncertainty
22 6
Why has the U.S. Recovery been so Weak? 4
% YY
2 Strong Headwinds
● Housing Collapse
0 ● High Unemployment -8-6-4-20 2 4 6 8 101214161820 ● Household leverage
-2 ● Bank lending for SME Quarters from trough and households curtailed -4
-6 2 7:Q 4 0 :Q 07 2 8:Q 4Current Business Cycle 0 8:Q 2 0 Previous:Q Cycles since 1970 (Average) 09 4 9:Q 2 0 :Q 10 4 Sources: Bureau of Economic Analysis and0: QCiti Research.2 1 :Q 11 4 1:Q 2 1 :Q 12 4 23 2:Q 2 1 :Q 13 4 3:Q 2 1 :Q 14 2.5 2.5
2 2 US Housing Recovery is Evident
1.5 1.5 Total Housing Starts
1 1 s 20 20 illion M
0.5 0.5
10 Single Family Housing Starts 10 Real Residential Investment
0 0 1995 19960 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0
Y -10 -10 House Prices*
o -20 -20 e, Y g an h t C ercen P
-30 -30 2 4 2 4 2 4 2 4 2 4 2 4 2 4 2 05:Q 05:Q 06:Q 06:Q 07:Q 07:Q 08:Q 08:Q 09:Q 09:Q 10:Q 10:Q 11:Q 11:Q 12:Q
*S&P/Case-Shiller Composite 20 Index, BEA, and US Census .
24 Corporate Profits and Balance Sheet Supportive of Expansion
Private Employment (Six-Month Smoothed Annualized Nonfinancial Corporate Debt Percent Change) and Corporate Profit Margins (Percent of GDP)
15
6%
200 200 16 6
175 175 4
Japan 2 150 12 150
0 125 125 Euro -2 U.K. 100 8 100 -4
75 U.S. 75 -6
-8 50 4 50 90 92 94 96 98 00 02 04 06 08 10 12 95 97 99 01 03 05 07 09 11 13 Private Employment (Left) Corporate Profit Margin (Right)
Note: Shaded regions denote recessions. Sources: Bureau of Economic Analysis and Bureau of Labor Statistics
25 Natural Gas Discoveries Lower US Energy Costs
Natural Gas Prices by Region in US Dollars Per Million BTU
18 18 Japan
16 16
14 14
12 12
Euro Area 10 10
8 8
6 6 United States 4 4
2 2
0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: World Bank and Citi Research.
26 Troublesome Status of Fiscal Negotiations ● Fiscal cliff avoided—but just barely – Increased tax rates for high-income earners. – Payroll tax cut expires. ...Higher taxes to produce roughly 1 percentage point of drag in 2013. ● Little done to curtail entitlement spending and long-term debt sustainability. ● Sequester arrived (March 1) with much smoke but little fire; Continuing appropriation (March 27) non-event(?) points to debt ceiling debate (May 19) and heightened political tensions throughout… – Republicans will continue to demand substantial entitlement reforms. – The President (and other Democrats) will want more revenue hikes. – Inadequate political capital on either side may cause impasse through summer 2013 ... when debt limit becomes binding
Unaddressed Expenditure Drivers Preclude Fiscal Sustainability: ● Aging Population. Over-65 population increases by about one-third in the next ten years. ● Rising Costs for Health Care. Per-capital health care spending grows two percentage points faster per year than per-capita GDP. ● Discretionary Spending. All spending apart from Social Security, the major health care programs, and interest, expected to drop to 7.8% of GDP in 2022 – two thirds of its 40-year historicalSource: Citi Researchaverage
27 30 30 All Fiscal Plans Exceed Historical Revenue and Spending Shares 30% 30%
Revenue 25 Expenditure 25 Average levels for 1972-2008
20 20
15 15 Obama Admin Bowles-Simpson Ryan Budget CBO Current Law CBO Current Policy
Notes: “Current law” assumes that the fiscal balance will be determined by existing and scheduled tax laws, rules and formulas governing spending programs even though those laws might represent a significant departure from recent policies. “Current policy” baselines show how the fiscal position would evolve if instead of implementing laws, recent policies were extended. For example, current law sets a formula that would reduce reimbursements for Medicare physicians’ services, but each year current policy has overridden those cuts through legislation in favor of higher payments. Lines represent average of revenues and expenditures from 1972-2008. Sources: Congressional Budget Office, Office of Management and Budget, House Budget Committee, and Moment of Truth Project.
28 Growth Differential Projected to Widen between the US and EA
6 5 4 3 2 1 0 US-EMU Gap -1 -2 US -3
-4 Euro Area -5 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
29 Source: Citi Research Euro Area Uncertainties Heighten Global Macro/Financial Risks and Vulnerabilities
30 Euro Area Crisis: Confluence of Multiple Headwinds
● Sovereign Debt Crisis – Decade of Increased Leverage “Artificially” Boosted Expenditures and Growth – Fiscal Austerity Necessary to Deleverage (and maintain sustainable debt/GDP) • Deleveraging is Drag on Economic Growth • Slow Growth Worsens Sovereign Crisis ● Banking Crisis – Adverse Feedback Loops Between Sovereign Debt and Banking Risks – Markets Tank Bank Share Prices, Limit Debt Issuance, Deposit Outflows ÆBanks Rely More on ECB Funding – De-Leveraging and Recapitalizing Banks Required to Restore Lending Capacity – Global Contagion Effects Euro Area Banking Crisis – Global GDP Effects of Euro Credit Crunch • Largest for Europe (Advanced and Emerging) • Least for North America and Asia ● External Balance Crisis: Tearing Apart Euro Area – Structural Causes for Loss of Competitiveness Require Structural Solutions – ECB Liquidity Buys Time as does Fiscal Compact – Structural Policies to Improve Competitiveness Required for Durable Solution
31 Source: Citi Research Government Debt and Fiscal Balances for Select Countries
2011 Deficit 10.7 9.4 8.3 13.0 8.9 4.5 5.2 9.1 4.2 1.0 3.9 Source: IMF WEO database, Citi Research calculations
32 Sovereign Debt Ownership—Domestic and Foreign Shares
Note: Data are 2011Q2 for Greece, Ireland, United States, 2011Q1 for Japan, 2010Q4 for Portugal, France, Italy, and Germany For US and Japan, Non-Resident holders include foreign official holdings, and for Greece, Ireland, Portugal ECB holdings
Source: IMF Fiscal Monitor, September 2011 and Eurostat
33 When and At What Levels Will AE Debt/GDP Ratios Peak?
Source: IMF Fiscal Monitor Update July 16, 2012
34 Banking Sector Crisis
35 Euro Area Banks Still Leveraged and Vulnerable
Dependence on Wholesale Funding and Deposit Outflows Risks Credit Crunch Bank Leverage Bank Loan-to-Deposit Ratio (Adjusted tangible assets to Tier 1 Capital) (in percent)
Cumulative Euro Area Deposit Flows 2011-12 (Billions of Euros)
Source: IMF Global Financial Stability Report, April 2012
36 Euro Area Banks Cut Lending to Private Sector
20 20
Nonfinancial Corporations 15 15
10 10
5 5 Percent Change, YoY Change, Percent
Households (non-mortgage) 0 0
-5 -5 2005 2006 2007 2008 2009 2010 2011 2012
Note: Loans to households adjusted for methodological changes in June 2010. Sources: ECB and Citi Research.
37 Contagion From Intensified Euro Sovereign/Bank Crisis
Sharp drop in EA credit growth slows GDP globally through trade and bank linkages Trade Linkages Banks raise capital buffers with less lending and asset sales Feedback loops raise risk spreads, bank funding costs, fiscal vulnerabilities, and slow domestic demand in Euro Area Trade linkages strongest within Europe, then EEMENA. Links relatively weak for Asia, the U.S., and LATAM Euro Area banks and their central and eastern European subsidiaries constitute most of the financial transmission
Banking Linkages
Source: IMF World Economic Outlook April 2012
38 External Imbalances Crisis
39 Economic Divergence Highlights Imbalances Among Euro Area Countries
Change in Real GDP Since Q1-2002 Current Account Balances as Pct GDP
% % 12 Greece Greece Portugal Ireland 10 Portugal Italy Spain Germany 8 35 Ireland 6 30 Italy 4
25 Spain 2 Germany 0 20 -2 1999 2002 2005 2008 2011
15 -4 -6 10 -8 5 -10 -12 0 -14 -5 -16 2002 2005 2008 2011 Sources CIRA, Eurostat
40 Range of Competitiveness Among Euro Area Countries
Euro Area Countries — Unit Labour Costs Relative to Euro Area Avg.
40% 40%
40 40
30 30
20 20
10 10
0 0
-10 -10
-20 -20
-30 -30 1999 2001 2003 2005 2007 2009 2011
Germany Ireland Greece Spain Portugal Italy
Source: ECB and Citi Research
41 Impact of Alternative Structural Reforms on Euro Area Growth Immediate and Cumulative Effect on GDP (in percent)
Source: “Fostering Growth in Europe Now” IMF Staff Discussion Paper SDN 12/07 June 2012
42 Selected Policy Prescriptions for Euro Area
43 ECB to the Rescue with OMT: Outright Monetary Transactions “Safeguard Monetary Policy Transmission” and “Singleness of Monetary Policy”
● Unlimited ECB purchases to “correct” market distortions in secondary market of sovereign borrower (ESM responsible for primary market purchases)
● EFSF/ESM programme requirements must be met by sovereign borrower after request for assistance
● Transactions expected to be in short-term (1-3 year) portion of sovereign yield curve
● OMT will be fully sterilized, leaving no net increase in Euro Area liquidity— i.e., no monetary-policy-based inflation fears.
● More “financial patching” still needs to be done…including bank recapitalization, debt restructuring regime (with haircuts likely), lender and market-maker of last resort for sovereigns.
● Fundamental structural reforms beyond the province of the ECB
Source: Citi Research
44 Near- and Medium Term Risks in the Euro Area Euro Area
● Political Risks Rise: Italy: Inconclusive election yields a hung Parliament. o The outcome reflects two macro-political trends: the rise of anti- establishment sentiment, and reluctance to meet increased European obligations in the midst of a no-growth economic environment. o Without an operational government, it may be difficult to implement an ESM program to meet the necessary condition for OMT activation. Spain: Corruption scandal involving ruling Party Popular may delay structural reforms and budget measures Germany: A political stalemate in German elections will likely delay important decisions at the European level (e.g., Single Supervisor) ● Banking Sector Weakness Persists: Weak loan growth owing to: o tightened lending standards o balance sheet shrinkage and o increased liquidity demand
Source: Citi Research
45 Emerging Markets: China’s New Growth Model
46 China’s Next Transformation: 12th Five-Year (Strategic) Plan Investment-Driven Exporter Shifts Toward More Domestic Consumption
● New Growth Drivers – Domestic Engines: Raise wages to promote consumption, facilitate social harmony, and improve quality of life with more “green” activities – Restructure and Reinvent Traditional Industries: Low-end production pressured to innovate by higher wages, and stricter energy efficiency and emissions standards – 7 Strategic Industries: Become global leader in Environmental Protection, Energy Conservation, New Energy Sources, Biotech, Environment-Friendly Transportation, New Materials, Advanced Manufacturing
● Structural Reform Agenda and Leadership Transition – Financial Reforms: Coordinated interest rate, exchange rate, and regulatory regime changes (including liberalizing capital account) – Spread Benefits of Growth: Reduce income inequality and improve access to opportunities from more job-creating inclusive growth – Balanced Urban and Rural Growth: East and the West China – Leadership Mandate and Credibility: Dampens implementation speed. Changes implemented slowly to ensure continuity and stability. Seven out of nine politburo standing committee members to take office after the Party Congress in November 2012
Source: Citi Research
47 China’s Growth Momentum Diminishes As Per Capita GDP Rises
China GDP per capita and GDP 16 GDP Growth %YoY Growth Follows South Korea’s China India Trajectory South Korea Malaysia Taiwan Japan 14 Australia Brazil Mexico Germany 12 United Kingdom United States
10
8
6
4
2
0 GDP per Capita $ -2 300 500 1,000 2,000 3,000 4,000 6,000 8,000 10,000 20,000 30,000 40,000 50,000
Source: Haver, CEIC, IMF, BEA, Federal Statistical Office of Germany and Citi Research
48 China’s Growth Is Distorted with Too Low Consumption
Private Consumption Share GDP in G20 Service Sector As Share of GDP in G20 (percent) (percent) 90
80 81 71 71 79 70 80 66 65 73 73 61 60 59 59 58 72 60 58 58 58 57 57 57 70 53 67 70 5267 51 64 50 63 60 59 40 60 35 56 33 55 30 50 48 47 45 20 43 40 40
30 23
20 U.S U.K Ita ly U.S U.K India Italy India Korea Korea Brazil Brazil Japan China China Turkey Mexico France Turkey Japan* France Mexico Canada Russia S.Arabia Germany Australia Russia** Indonesia Argentina Canada S.Arabia Germany Euro Area16 Euro Australia South Africa* Argentina In d on e sia Note: * for 2010; ** for 2007. Euro Area16 Euro South Africa South Source: Haver, CEIC and Citi Research . Source: Haver, CEIC and Cit Research.
49 China’s Demographic, Urbanization Trends May Limit Growth
25 1450
20 Population Growth 1400 15
10 1350 5
0 1300 Total pop (mill)
Working pop (mill) -5 1250 -10
-15 1200 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050
Ru r a l Ur ban Tot p o p
90
80 Dependency Ratio 70
60
50
40
30 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Dependency Ratio (Ratio of population age 0-14 and 65+ per hundred population age 15-64) Source: UN forecasts and Citi Research.
50 Urbanization and Per-Capita GDP: Exponential Growth
51 Urbanization Leads to Emerging Megaregions
Source: US Regional Plan Association (2008), Citi Research
Source: CEIC and Citi Research
52 China’s Shadow Banking Sector Could Pose Systemic Risks Size of Shadow Banking Total Social Financing Alternative Estimates
Source: CEIC and Citi Research
53 China’s Transformation Has Global Effects
54 Strategic Opportunities from China’s Transition to Consumption
China Rebalancing Away from Investment and Net Exports ●More consumption of domestic services – Require secure distribution and payment networks – Health care, environmental improvement, and related technology
●Consolidation in traditional manufacturing and investment goods sectors – spurs demand for innovations and new technology to keep costs low – partnerships with foreign companies
●Internationalization of Renminbi to promote trade and financial flows – Capital account liberalization will follow more financial reforms – Intermediate goal targets using Rmb for invoicing and settlement
●Greatest risk is investment falls but consumption does not grow
Source: Citi Research
55 Intra-Asia Trade Fastest Growing Spurred by China Exports
Intra-Asian trade grows faster than NAFTA and EU15
Source: Citi GPS: China and Emerging Markets July 2012
56 China’s Intra-Asia Supply Chain Is Large
2010 data % of GDP Exports to China 18 17.5
15
12
9 8.5
6
3.2 3.2 3 2.2 2.3 1.7 1.9 1.2 1.2 0.4 0.5 0.7 0.7 0.7 0 Spain UK France Italy US EU-17 South CEEMEA Latam Aust. Germany Japan Swiss ASEAN-6 KR & TW Asia
Source: Citi Research, Haver, CEIC
57 China’s Cost and Logistical Advantages Are Unequalled
Lower cost than China
Logistically better than China
58 Winners and Losers From China’s Transformation
Domestic Implications for China Export-related materials and capital goods industries may lose. Health care, telecom, and environmental (“green”) sectors should gain. We also expect gains for “mass luxury” segment, transportation, and financial services (asset management and insurance) from rising wages, urbanization, and income redistribution. Geographic and Sectoral Impact Losers: Global China-commodity complex, especially commodity producers in LATAM (Brazil, Chile, and Peru) and Australia. Gains for: Asian intermediate and final consumption goods producers (high tech), producers in Eastern Europe (middle and low tech) and potentially some LATAM (e.g. Mexico) manufacturers. Asia gains the most: production relocation, tourism, hospitality, and transportation (especially from rising intra-regional trade).
59 Source: Citi Research Global Capital Flows, Dutch Disease, and Capital Controls
60 Rebound in Global Capital Flows
Source: IMF, World Economic Outlook April 2011
61 Emerging Market Capital Flows
100 100 m 80 80
60 60 Bond Funds 40 40
20 20
0 0
-20 -20
Billions of US$, 12-month Moving Su 12-month US$, of Billions -40 -40 Equity Funds -60 -60 2005 2006 2007 2008 2009 2010 2011 2012
Note: Includes flows for all fund types (mutual funds, ETFs, and non-categorized funds) that invest in emerging market equities (bonds). Sources: EPFR Global and Citi Research.
62 LATAM and Dutch Disease
Latam: Manufacturing output is stagnating …and the region's current account is widening
63 The Beginning of a Long Journey — Thank You
Source: Quah Danny, "The Global Economy's shifting centre of Gravity", Global Policy, vol.2, issue 1, January 2011, pp.3-9
64 Appendix A-1
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65 Relative three-month ratings: Citi Research may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under- performance (least preferred) versus the geographic and industry sector over a 3 month period. The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration, explaining the basis for this short-term view. This three-month view may be different from and does not affect a stock's fundamental equity rating, which reflects a longer-term total absolute return expectation. 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