april 23, 2013 - docs.hedgeye.comdocs.hedgeye.com/emecrises_04.23.13.pdfemerging market crises:...

EMERGING MARKET CRISES: IDENTIFYING, CONTEXTUALIZING AND NAVIGATING KEY

RISKS IN THE NEXT CYCLE APRIL 23, 2013

4/23/2013 © HEDGEYE RISK MANAGEMENT 2

DISCLAIMER • Hedgeye Risk Management is a registered investment adviser, registered with the

State of Connecticut.

• Hedgeye Risk Management is not a broker dealer and does not make investment recommendations. This presentation does not constitute an offer to sell, or a solicitation of an offer to buy any security.

• This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice.

• This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information.

• For more information, including Terms of Use of our information, please go to www.hedgeye.com

http://www.hedgeye.com/�


SUMMARY CONCLUSIONS • We currently see a pervasive level of risk across the emerging

market space at the country level and have quantified which countries are most vulnerable – Generally speaking, the famed “BRICS” economies screen very poorly on

our model

– China is particularly vulnerable to a financial crisis, which is a scenario we debate later in the presentation

• As such, we find it prudent for investors to reduce their allocations to emerging market equity and currency risk in favor of US equity and US dollar exposure – SHORTS: iShares MSCI EM Index Fund (EEM), Freeport-McMoRan (FCX),

Latin American and African commodity currencies (PEN, CLP, COP, ARS, NGN, DZD)

– LONGS: US Dollar (UUP), Healthcare SPDR (XLV) and Consumer Discretionary SPDR (XLY)

• #StrongDollar and commodity price deflation have been and should continue to be a key catalyst for EM underperformance


KEY RISK: COMMODITY EXPOSURE

Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle


IMPLICATIONS OF A STRONGER USD


RESPECT HISTORY

EMERGING MARKET CRISES 101

THEORETICAL FRAMEWORKS

1. Exchange rate overvaluation

2. Nonperforming loans

3. Fiscal sustainability

4. Balance sheet mismatches

5. Corporate insolvency

6. Financial contagion

HISTORICAL EXAMPLES

1. Mexico (1994); Thailand (1997)

2. Malaysia (1997)

3. Brazil (1999); Argentina (2000-01)

4. Turkey (2000)

5. Indonesia (1997); Korea (1997)

6. Turkey (2000); Uruguay (2002)


***For a more in-depth review on emerging market crises, please refer to slides 64-73 in Appendix A.


DÉJÀ VU?

***For a deeper review of the factors driving speculation in EMEs, please refer to slide 74 in Appendix A.


“HOT MONEY”, IN CHART FORM


MODELING RISK


METHODOLOGY • Using previous crises as a guidepost, we carefully indentified ten key

economic indicators across four key categories (i.e. “Pillars”) • We used trailing 5Y average values to smooth out one-offs and/or lack of

recent data (these are emerging markets – many of which report annual data on serious lags)

• At the single indicator level, each country is ranked according to its length of standard deviations from the sample average

• A higher deviation always indicates greater risk, so for indicators where a higher value is healthy (like a current account or budget balance), we inverted the signs

• Each country’s deviations are then averaged and multiplied by a constant to produce a composite score at the Pillar level

• Certain indicators were given a higher weighting in the average based on both historical precedent and what we viewed as the eminent areas of risk in the current cycle

• The aggregate risk score is a simple mean of the four Pillar-level scores


THE SAMPLE THE 21 MSCI EMERGING MARKETS INDEX CONSTITUENTS (EX-TAIWAN, DUE TO A LACK OF CROSS-COUNTRY COMPARABLE DATA) PLUS: ALGERIA, NIGERIA, PAKISTAN, ROMANIA, SAUDI ARABIA, UKRAINE, VENEZUELA AND VIETNAM.


PILLAR I: BOP/CURRENCY RISK


PILLAR II: FISCAL SUSTAINABILITY RISK


PILLAR III: FINANCIAL CRISIS RISK


PILLAR IV: POLITICAL/REGULATORY RISK


AGGREGATE RISK


RISKS ARE PERVASIVE. . .


. . . AND GETTING EXPOSED


A SIMPLE TAKEAWAY


RESPECT MR. MARKET


INTRODUCING: THE “TRIGGER”

“Although mismatches may represent important sources of vulnerability, they do not imply that the country will necessarily experience a crisis. In particular, crises require some triggering event.”

– IMF 2010


THE US DOLLAR IS A KEY FACTOR


FOR THE DIRECTION OF THE “FLOWS”

***For a more in-depth discussion of external environment dynamics, please refer to slide 75 in Appendix A.


STRONG DOLLAR PAINS


WEAK DOLLAR GAINS


YEN WEAKNESS CAN PLAY A ROLE


JAPAN TAKING MARKET SHARE. . .


. . . AND IMPOSING BOP RISKS


COMMODITIES CRASHING HURTS


LAT.AM. IS VERY EXPOSED HERE


COMMODITY CURRENCY CRASHES


THE BOAT HAS LEFT THE DOCK


BUT IS THIS TIME IS DIFFERENT? VULNERABILITIES ARE GENERALLY PERCEIVED TO BE BENIGN BY INVESTORS… UNTIL THEY ARE NOT.

“A crash in one country can induce speculators to

reevaluate their perceptions regarding others.”

– Caves, Frankel and Jones 2010

• Noteworthy examples: – 1997 Thai and Korean Crises caused a reevaluation of the Asian Tiger “Growth Miracle” view, which was

ultimately replaced with the “Crony Capitalist” view and proliferated throughout the region

– The 1998 Russian default defeated the widely-held view at the time that the IMF would always backstop major debtor nations and forced a strong reevaluation of sovereign credit risk across EMEs


RE-STATING THE OBVIOUS


CHINA’S KEY ISSUE: IN CHART FORM

***For a critical review of China’s unstable financial footing, please refer to slide 76 in Appendix A.

CHEAP FACTORS OF PRODUCTION

LOW-COST RESOURCES EXCESS LABOR



FUELS SYSTEMIC OVERINVESTMENT


THIS FUELS EXCESS CAPACITY. . .


. . . AND EXCESS CREDIT


VIA MOSTLY BANK INTERMEDIATION


. . . PERPETUATING ASSET BUBBLES


CHINA = USA?


CAPITAL CHASES YIELD. . .


. . . INTO THE “SHADOWS”. . .


TURNING ON THE “LIGHTS”


HIT ‘EM WHERE IT HURTS THE LATEST CLAMPDOWN ON LGFV DEBT IS QUITE POSSIBLY THE CHINA BANKING REGULATORY COMMISSION'S (CBRC) MOST STRINGENT YET.

• For LGFVs with lower than 100% cash coverage ratio (CAR) or asset-liability ratio of above 80%, their borrowings as a percentage of banks’ total issued loans must not exceed the level in the previous year;

• Commercial banks should gradually reduce lending to such LGFVs while looking to recover loans (i.e. clamping down on refinancing/rollovers);

• Commercial banks and regulatory bodies at all levels are to monitor LGFV loans in all forms (~10 trillion yuan outstanding or 19.1% of GDP or 7.4% of Total Assets of the Chinese Banking System) – which include bank loans, corporate bonds, medium-term notes, short-term financing notes, trust products, and wealth management products;

• Commercial banks should hand over the approval authority of LGFV bonds up to their head offices; and

• Commercial banks will no longer be allowed to provide guarantees for LGFV bonds.


REGULATION IS A HEADWIND FOR FAI


SUSTAINABLY SLOWER FAI


= SLOWING DEMAND FOR COMMODITIES


MAJOR REFORMS ARE NEEDED NOW THE SLOWER CHINESE GROWTH GETS, THE HARDER IT WILL BE FOR AUTHORITIES TO IMPLEMENT GAME-CHANGING REFORMS.

• Key avenues for new and continued reforms: – Interest rate liberalization

• Remove deposit rate ceiling and lending rate floor

– Financial deepening • Targeting a short-term repo rate to smooth volatility in money-market rates

• Improved supervision and regulation of nonbank financial intermediation

• Accelerated capital markets development

• Establishing a crisis policy framework and clear chains of credit risk (to address the issue of moral hazard)

– Exchange rate liberalization • Widening the CNY trading band

• Promoting incremental cross-border yuan settlement (up from the current 12%)

– Capital account liberalization • Dramatic increase in QFII and QDII quotas

• Opening offshore investments up to Chinese individual investors

***For a deeper discussion of China’s financial sector reform outlook, please refer to slide 77 in Appendix A.


WHAT TO WATCH CHINESE OFFICIALS ALMOST ALWAYS DO WHAT THEY SAY, SO A RIGOROUS MONITORING OF OFFICIAL RHETORIC SHOULD ALLOW INVESTORS TO FRONT-RUN ANY PENDING CHANGES.

“Responding to foreign demand for renminbi products would be the best way of maintaining momentum for capital market and capital account reforms. The [PBOC] is very worried about opening up the capital account because when it does, it knows anything could happen.”

– Anonymous former top official in the PBOC’s International Division (MAR 3, 2013)

“China’s easier reforms have been accomplished and only harder ones remained… Right now, Chinese banks are pretty strong, but the capital markets are pretty weak. Just opening up the capital account without developing the capital markets would lead to problems, so there is much reform to do.”

– Finance Minster Lou Jiwei (NOV ‘12)


LET THE MARKET BE YOUR GUIDE

CAN CHINA “THREAD THE NEEDLE”?

HISTORICAL PRECEDENTS IMF MODEL SAYS, “YES”



CAUTION IS A MUST, HOWEVER

“The consequence is that financial liberalization may make countries

more prone to crises…” – Federal Reserve Bank of Atlanta 1999


CAPITAL OUTFLOWS A’COMETH?


WATCH THE CURRENCY MARKET


WORKS CITED & OTHER REFERENCES • Ahuja, Ashvin and Alla Myrvoda. "The Spillover Effects of a Downturn in China's Real Estate Investment". IMF Working Paper 12/266. (2012).

• Ahuja, Ashvin and Malhar Nabar. "Investment-Led Growth in China: Global Spillovers". IMF Working Paper 12/267. (2012).

• Ahuja, Ashvin, Nigel Chalk, Malhar Nabar, Papa N'Diaye and Nathan Porter. "And End To China's Imbalances?". IMF Working Paper 12/100. (2012).

• Ahuja, Ashvin. "China: Property Bubble in the Making?". IMF Survey Magazine. Washington, DC. 10 December 2010.

• Bussiere, Matthieu. "Balance of Payment Crises In Emerging Markets: How Early Were the "Early" Warning Signals?". ECB Working Paper Series 713. (2007).

• Caves, Richard, Jeffrey Frankel and Ronald Jones. World Trade and Payments: An Introduction (Chapter 24: Crises In Emerging Markets). New Jersey: Pearson Education Inc. 1995-2010.

• Chamon, Mike, Atish Ghosh and Jun Kim. "Are All Emerging Market Crises Alike?". IMF Conference on Global Economic Crisis: Impacts, Transmission and Recovery Paper Number 9. (2010).

• Chancellor, Eward and Mike Monnelly. "Feeding the Dragon: Why China's Credit System Looks Vulnerable". GMO White Paper. (2013).

• Chang, Roberto. "Understanding Recent Crises in Emerging Markets". Federal Reserve Bank of Atlanta Economic Review. (1999).

• Dornbusch, Rudi. "A Primer On Emerging Market Crises". NBER Working Paper 8326. (2001).

• Feldstein, Martin. "Economic and Financial Crises in Emerging Market Economies: Overview of Prevention and Management". NBER Working Paper 8837. (2002).

• Ghosh, Atish, Anton Korinek and Jonathan Ostry. "Multilateral Aspects of Managing the Capital Account". IMF Staff Discussion Note (SDN/12/10). (2012).

• Goldstein, Morris. "Emerging Market Financial Crises: Lessons and Prospects". Peterson Institute for International Economics. Washington, DC. 20 October 2007.

• International Monetary Fund. "People's Republic of China: 2012 Article IV Consultation". IMF Country Report 12/195. (2012).

• Lee, Il Houng, Murtaza Syed and Liu Xueyan. "Is China Over Investing and Does It Matter?". IMF Working Paper 12/277. (2012).

• Lee, Il Houng, Murtaza Syed and Liu Xueyan. "China's Path to Consumer-Based Growth: Reorienting Investment and Enhancing Efficiency". IMF Working Paper 13/83. (2013).

• Liu, Zhao and Ronald McKinnon. "Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People's Republic of China: The Consequences of Near Zero US Interest Rates". ADB Working Paper Series on Economic Integration 107. (2013).

• Ma, Guonan and Wang Yi. "China's High Savings Rate: Myth and Reality". BIS Working Paper 312. (2010).

• Roache, Shaun K. "China's Impact on World Commodity Markets". IMF Working Paper 12/115.(2012).

• Roadlauer, Markus. "Global Downturn Contributes to China Slowdown". IMF Survey Magazine. Washington, DC. 24 July 2012.

• Sedik, Tahsin S. and Tao Sun. "Effects of Capital Flow Liberalization: What Is The Evidence From Recent Experience of Emerging Market Economies?". IMF Working Paper 12/275. (2012).

• Sun, Tao and Bin Wang. "How Effective are Macroprudential Policies in China?". IMF Working Paper 13/75. (2013).

Appendix A:


CRISIS-CALLING IS A FOOL’S ERRAND • “The older conventional wisdom held that crises were ultimately linked to fiscal imbalances in the

form of government budget deficits, which caused the loss of international reserves until governments were unable to defend exchange rates. But, while that wisdom was largely consistent with the currency crises of the eighties, the crucial fiscal deficits were notoriously absent in the recent episodes of Mexico and Asia.” (Federal Reserve Bank of Atlanta 1999)

• “The fact that the crises of the 1990s were caused by different conditions than those that caused the crises of the 1980s should, in itself, be a warning that conditions that we do not now anticipate may cause crises in the future.” (NBER 2002)

• “All this suggest the need for a more unified approach to understating ‘EME’ crises (some of which, recently, have occurred in advanced economies)… this paper proposes a general framework for modeling crises – as the confluence of an underlying vulnerability plus a specific crisis trigger. The vulnerability is typically a balance sheet mismatch (maturity, currency, capital) the may persist for many years until a crisis is triggered by a particular event. Such vulnerabilities can therefore be readily identified. By contrast, the event that triggers the crisis may take many different forms – economic or political, domestic or external – and is likely to be highly unpredictable… ‘calling crises’ is a ‘fool’s errand’ because the specific events that trigger the crisis… are likely impossible to predict.” (IMF 2010)


LET’S BEHAVE “FOOLISHLY” ANYWAY “Several conclusions can arise from this analysis. First, the early

indicators used to detect crises ahead of time seem to perform relatively well if the purpose is to predict crises in a given time window; however, they are much less efficient in predicting the exact starting date of the crisis. Overall, the main economic variables that are found to predict crises are the ratio of short-term debt to international reserves, the growth rate of credit to the private sector, the over-appreciation of the nominal effective exchange rate (with respect to trend) and contagion from other countries… different indicators signal crises at different lags, some being very short-term (e.g. the short-term debt to reserves ratio or financial contagion), others with a longer lag (e.g. the lending boom variable or the degree of exchange rate over-appreciation).”

– ECB 2007


TWO FRAMEWORKS; MANY GUISES • “… the bad policy view, argues that inappropriate government

intervention, in particular government guarantees to domestic private borrowing, provided incentives for the private sector to borrow too much and to invest in socially unproductive or excessively risky activities. This mechanism, according to the bad policy view, led to an accumulation of implicit government obligations and, ultimately, to the collapse of the regime.” (Federal Reserve Bank of Atlanta 1999)

• “… the financial panic view, argues that the key issue was a maturity mismatch of assets and liabilities. According to this view, countries that went into crises had banks and other financial institutions that borrowed at short maturities in order to finance projects that, while expected to be profitable in the long run, were costly to liquidate in the short term. This strategy would have been successful if short-term creditors had remained confident and rolled over their loans. Crises erupted, however, when creditors panicked and demanded that their claims be honored in the short term, each expecting others to do the same. Faced with the sudden need for liquidity, the financial system was forced to liquidate long-run projects at a loss, a process that ended in bankruptcy.” (Federal Reserve Bank of Atlanta 1999)


REVIEWING VULNERABILITIES

“There are three primary sources of vulnerability: a substantially misaligned exchange rate, balance sheet problems in the form of nonperforming loans, and balance sheet problems in the form of mismatched exposures. The last of these sources includes maturity mismatches leading to liquidity issues as well as currency mismatches.”

– NBER 2001

1. EXCHANGE RATE OVERVALUATION

THEORETICAL FRAMEWORK

“… it is safe to say that a rapid real appreciation – say over 2 or 3 years – amounting to 25% or more, and an increase in the current account deficit that exceeds 4% of GDP, without the prospect of correction takes a country into the red zone.” (NBER 2001)

HISTORICAL EXAMPLES “Mexico [‘94] with its recurrent end of

sexennio currency collapses is an example where the exchange rate and the current account are in foreground and where concern about the possibility of devaluation (or the fact of a small devaluation) triggers massive capital flight.” (NBER 2001)

“Eventually, however, the bhat became overvalued, reflecting rising domestic prices in Thailand and an appreciating dollar, particularly relative to the Japanese yen… At that point, the Thai government had no choice but to stop pegging the value of the currency. The bhat floated to nearly 50 bhat to the dollar, half of its pre-crisis value.” (NBER 2002)


2. NONPERFORMING LOANS


“Consider next a balance sheet with substantial nonperforming loans. Nonperforming loans (or vulnerable loans not quite gone yet) limit the room for higher interest rates and hence are a major problem for an interest rate defense. If interest rates are lowered, the currency comes under attack. If interest rates are raised, the loan portfolio goes even further under water.” (NBER 2001)

HISTORICAL EXAMPLES

“Thailand and Malaysia in 1997 had substantial nonperforming loans; in Thailand they were in real estate and consumer finance, in Malaysia they included stock market loans that hand financed a market boom. Protracted unwillingness to raise mandated lending rates brought about a ‘carry trade’, which created an offshore market, put pressure on the currency, and ultimately led to crisis.” (NBER 2001)


3. FISCAL SUSTAINABILITY


“A large budget deficit and a large short-term public debt are both sources of vulnerability. A change in the growth prospects undermines the sustainability of debt, as does an increase in world interest rates; both undermine the willingness to hold and add to the portfolios of lenders… The result is a flight from public debt and that flight, invariably, is into foreign assets.” (NBER 2001)

HISTORICAL EXAMPLES

“Brazil’s crisis [‘99] centered on a large short-term debt, a portion of which was dollar-linked; the prospect of depreciation put debt service into the express lane and actual depreciation complicated the picture. Argentina in late 2000 is another case in point. A deteriorated growth outlook put in question the financing of budget deficits and the rollover of the public debt by external creditors.” (NBER 2001)


4. BALANCE SHEET MISMATCHES


“When creditors of short-term interbank loans or depositors withdraw from suspect banks, the resulting flows tend to go offshore, thereby translating into reserve losses, depreciation, or both. The worse the NPL situation, the larger the maturity mismatching on the balance sheet, and the more significant the mismatching of denominations on the asset and liability side, the more likely the situation is to become a banking and foreign exchange crisis.” (NBER 2001)

HISTORICAL EXAMPLE

“The Turkish crisis of December 2000 is a great example. In a situation involving a large number of bad banks (though not the major part of the banking system) a withdrawal of credit lines triggered a banking crisis. The central bank financed the run on the banks by pumping in credit, only to repurchase the liquidity by selling foreign exchange.” (NBER 2001)


5. CORPORATE INSOLVENCY


“The corporate sector, like the banking system, has balance sheets that are vulnerable to mismatch with respect to both maturity and denomination. The larger the corporate sector’s short-term debt in the national balance sheet, the more vulnerable the country is to a funding crisis, which then becomes a currency crisis. Once again, in emerging markets, when credit to a particular sector is withdrawn, it is a capital outflow rather than a substitution into other assets.” (NBER 2001)

HISTORICAL EXAMPLES “Indonesia and Korea [’97] are examples

where markedly bad balance sheets – huge debt/equity ratios [310% and 518%, respectively] and large foreign exchange exposure – were a major part of the crisis situation... The Asian economies which experienced crises had bad corporate financial structures… and a high ratio of short-term external liabilities to reserves [177% and 193%, respectively].” (NBER 2001)

“The crisis in Korea occurred when foreign investors recognized that the sum of the short-term dollar liabilities of the Korean public and private sectors exceed the country’s foreign exchange reserves. They worried correctly that if any of the country’s credits chose not to roll over the loans and the bond debt that were coming due in the next year, the remaining creditors could no all be paid.” (NBER 2002)


6. FINANCIAL CONTAGION


“A relatively minor event might upset a precarious refinancing scheme, or a suspicion raised in one part of the world might cause creditors to kick the ties in another part of the world. Importantly, changes in the relative attractiveness of domestic and foreign assets or in the growth scenario bring sudden tests of the balance sheet, and with them the move to crisis.” (NBER 2001)

HISTORICAL EXAMPLES

“Turkey had long been on the short list of countries likely to experience a crisis, without actually experiencing one. However, the failure of a Romanian subsidiary of a bad Turkish bank, in an environment of political agitation about a sleazy banking system, got the stone rolling and within days reach the prospect of immediate currency collapse.” (NBER 2001)

“… the sharp decline of the Brazilian real has caused a major increase in Argentina's current account deficit, thereby putting substantial downward pressure on its currency.” (NBER 2002)



DÉJÀ VU? WHILE WE AGREE THAT EME VULNERABILITIES ARE GENERALLY SOFTER THIS TIME AROUND, A REVERSAL OF GARGANTUAN “HOT MONEY INFLOWS” HAS THE POTENTIAL TO CREATE AN EVEN BIGGER BANG(S) THIS TIME AROUND.

• “Low rates of return in industrialized countries: U.S. interest rates fell in 1990–1993, as the result of a U.S. recession. Investors who had become accustomed to high interest rates in the 1980s looked around for new places to put their money. High rates of return in the emerging markets caught their attention.” (Caves, Frankel and Jones 2010)

• “Financial innovations to enhance the availability of funds: Innovations such as country funds and American Depository Receipts (ADRs) have made it easier than previously for investors in rich countries to buy securities in emerging markets. Country funds offer foreign investors a selected basket of securities in a particular country, even when the local stock market in general has not been opened up to them directly.” (Caves, Frankel and Jones 2010)

• “Moral hazard: Some critics argue that capital flows to emerging markets in the 1990s were encouraged by moral hazard: Borrowers and lenders believed that the IMF or G7 would “bail them out” in the event of a crisis, and thus lacked the incentive to be sufficiently careful. Some, for example, believe that the enlarged amount of money used to save Mexico in January 1995 encouraged reckless capital flows to East Asia and Russia thereafter.” (Caves, Frankel and Jones 2010)

• If any of this sounds familiar, it should: record-low US interest rates, country-level index ETF proliferation and IMF bailouts of ailing Eurozone economies have all contributed to potentially-destabilizing capital inflows into emerging market economies over the past 5-10 years.


THE EXTERNAL ENVIRONMENT IS KEY

“A shift in the external environment – G3 exchange rates, Fed interest rates, a slump in new commodity exports – all can work as [crisis] triggers.”

– NBER 2001 “A country that has dollar denominated liabilities but that earns yen

or euros from its exports could see its ability to service its debts suffer if the dollar appreciates relative to the other currencies. The rise of the dollar in the 1980s hurt Latin American economies, the fall of the yen in the mid-1990s hurt the economies of south east Asia, and the decline of the euro exacerbated Argentina's trade deficit. Similarly, a country that imports dollar denominated products (like oil) but exports to Europe or Japan would have difficulty paying for its imports if the dollar appreciates relative to the other G3 currencies.”

– NBER 2002


CHINA’S KEY ISSUE: IN TEXT “Households see a deposit interest rate below the rate of inflation – a

form of taxation that reduces household income and consumption… At this centrally mandated low lending rate, the state-owned banks pick just the safest borrowers, which are large state-owned enterprises (SOEs). Because the official lending rate is significantly lower than the market clearing rate, there is excess demand for bank credit in the PRC’s robust economy… Of course, private SMEs (small and medium sized enterprises) get rationed out altogether when official loan rates are set at a low level… Savers disappointed with negative returns on deposits, together with lenders [and borrowers] turned down by the formal banks, comprise the underground or ‘shadow’ financial system in the PRC… The biggest of the non-bank institutions are trusts, companies akin to hedge funds. They cater to rich investors and promise high returns by lending to risky customers, especially property developers. A range of industrial companies, from shipbuilders to oil majors, also engage in shadow banking as a side business.”

– Asian Development Bank 2013


CHINA’S ROADMAP FOR REFORM

Appendix B:


REAL EFFECTIVE EXCHANGE RATE


SHORT-TERM EXTERNAL DEBT/INT’L RESERVES


INTERNATIONAL RESERVES/IMPORTS


TOTAL EXTERNAL DEBT/EXPORTS


CURRENT ACCOUNT BALANCE/GDP


COMMODITIES AS A % OF EXPORTS


SHORT-TERM EXTERNAL DEBT


EXTERNAL DEBT SERVICE/INT’L RESERVES


TERMS OF TRADE RATIO NOTE: HIGHER VALUES ASSUME GREATER MEAN REVERSION RISK


ADJ. CURRENT ACCOUNT BALANCE/GDP NOTE: NORMALIZES THE CURRENT ACCOUNT BALANCE FOR A BALANCED TERMS OF TRADE ENVIRONMENT

Appendix C:


SOVEREIGN DEBT/GDP


BUDGET BALANCE/GDP


WEIGHTED AVERAGE DEBT MATURITY


REFINANCING RISK


SOVEREIGN EXTERNAL DEBT/GDP


SHORT-TERM EXTERNAL SOVEREIGN DEBT


SUBSIDIES/TOTAL EXPENDITURES


EXPOSURE TO ASSET PRICES


TAX CODE


CORPORATE TAX RATE

Appendix D:


BANK CAPITAL RATIO


BANK NPL RATIO


BROAD MONEY/GDP


PRIVATE SECTOR CREDIT/GDP


MARKET CAPITALIZATION/GDP NOTE: HIGHER VALUES ASSUME FINANCIAL BUBBLE RISK


FIXED INVESTMENT/GDP


MONEY SUPPLY GROWTH


REAL INTEREST RATES NOTE: LOWER VALUES ASSUME RISK OF ADVERSE SELECTION


EQUITY MARKET TURNOVER RATIO NOTE: HIGHER VALUES ASSUME RISK OF SPECULATIVE ACTIVITY


DEVIATION FROM TREND GROWTH

Appendix E:


EASE OF DOING BUSINESS


GINI COEFFICIENT


SHARE OF INCOME EARNED BY TOP 10%


HEADLINE UNEMPLOYMENT RATE


YOUTH UNEMPLOYMENT RATE


POVERTY RATIO AT $2/DAY PPP


PROPERTY RIGHTS


CONTRACT ENFORCEMENT


OPPORTUNITY COST OF DOING BUSINESS


OPPORTUNITY COST OF INSOLVENCY

FOR MORE INFORMATION AND A COMPLETE LISTING OF RESEARCH PLEASE VISIT: WWW.HEDGEYE.COM

OR EMAIL: [email protected]

THIS PRESENTATION WAS PREPARED BY THE HEDGEYE MACRO TEAM.

INITIAL PUBLICATION: APRIL 23, 2013

april 23, 2013 - docs.hedgeye.comdocs.hedgeye.com/emecrises_04.23.13.pdfemerging market crises:...

Documents