ictf conference, barcelona, 13 may 2014 bart poublon – head of risk asia pacific...

ICTF Conference, Barcelona, 13 May 2014

Bart Poublon – Head of Risk Asia Pacific

[email protected]

Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

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ONCE UPON A TIME…

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OOOPS


AGENDA

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Hot in Asia

China

Abenomics

The Fragile 5


CHINA – WHAT IS HAPPENING?

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■New Leaders – Though

■Growth Target 7.5%

■HSBC PMI Index contracts for 4th straight month at 48,3

■Fitch China downgrade to A+ : high debts & Shadow financing

■China debt 61% of GDP and Foreign currency reserves of USD 3,8 trillion

■China`s Third Plennum

■H1 2014: First Bankruptcy of Listed Company, Run on a bank, first bond defaults

CHINA MACRO ECONOMIC RISKS – THE REAL ESTATE BUBBLE

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CHINA MACRO ECONOMIC RISKS - SHADOW BANKING & HIGH CORPORATE DEBTS

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CHINA MACRO ECONOMIC RISKS – OFFSHORE BORROWING AND A WEAKER RENMINBI

■Mid 2010 Beijing allowed the Renminbi to start rising again

■Chinese corporates saw an opportunity to take advantage of Renminbi appreciation and interest rate differentials by borrowing abroad (eg Hong Kong)

■Exposure from Hong Kong banks on Mainland banks and non- banks has tripled since 2010 to USD415 billion

■Experts estimates the Renminbi is currently between 15 to 25% above fair value

■ Issues:

●Renminbi depreciation will make Chinese exports cheaper but will makes offshore loan repayments more expensive

●Potential issues in Shadow Banking Channels may cause panic and a scramble for liquidity

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CHINA MICRO ECONOMIC RISKS

■Reliability financial information poor

■Poor legal framework for recoveries

■Moral hazard and weak corporate governance

■Deleveraging of banks and Cross-guarantees widespread

■Atradius` Claims experience on China

■ Sectors (Steel, Coal, Solar, Paper)

■ Peer to peer lending (form of Shadow banking)

■ Traders

■ Cross-guarantees

■ Fraud9


CHINA – CONCLUSION

■Chinese Government takes the right steps: fight the excessive credit and debt growth – Take the pain now, accept lower growth and avoid bigger problems in the future

■No doubt we will see more negative news: slowdown in growth, more defaults and insolvencies, more issues with shadow banking products and unwillingness from government to bail investors out

■President Xi: `The Third Plenum aims to give market forces a greater role in the economy. Corporate failure is a hallmark of capital markets – Investors need to price the risk properly` - Eg China Vanke bonds vs Brazil Government bonds

■Likelihood of a stimulus plan looks low at this point in time

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CHINA – CONCLUSION

■NO FINANCIAL MELTDOWN EXPECTED as China has ammunition if needed

■ Gigantic Foreign Currencies reserves of China at US$ 3,8 trillion

■ Low Government debt – Government can take action or absorb shocks

■ Closed Capital Account – Money can not flee out of China

■ Banks are State-Owned if the People`s bank of China tells them to lend they will follow orders

■ GDP Growth slowing but still above 7%

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THEY ARE BACK

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ABENOMICS

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ABENOMICS

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■What is it all about?

3 pronged attack to achieve 2% inflation within 2 years time

■Loose monetary policy – BOJ is buying USD 583 bn to 680 bn of Japanese Government Bonds per year

■Increased public spending

■Structural reform of Japanese economy


JPY/USD Exchange Rate 1990-2014

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NIKKEI ON TESTOSTERONE

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ABENOMICS AND IT`S EFFECT ON THE JAPANESE ECONOMY

■After 15 years of deflation core consumer prices start to rise +1,3%

■Consumption Tax (VAT) increase from 5% to 8% - Remember 1997

■Salary growth crucial for Abenomics to succeed – if not discretionary spending squeezed

■The missing J-curve - Japans trade deficit widened to $134bn

■Bank of Japan forecasts real GDP growth at end of 2014 at +1,4%

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WILL IT WORK IN LONG TERM?

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This is what the critics say:

■Bank of Japan unable to achieve 1% inflation in past – Will they be able to get to 2%

■Bubble trouble

■Currency wars

■Risky Fiscal Policy:

■ Highest public debt in the world at 250% of GDP

■ Target to cut budget deficit by 50% in 2015 and to be in surplus in 2020


THE FRAGILE 5

■Who: South-Africa, Turkey, Brazil, India and Indonesia

■Why are they fragile:

■ These counties run large current account and fiscal deficits and are most reliant on outside financing to finance their growth and investment

■ They also have just one year of Forex reserves to cover their GEFR

■ Due to the US taper markets are worried that capital flows towards emerging markets will reduce or reverse

■ What happened in H2 2013:

■ Large outflows of money from emerging markets and turbulence on EM Stock Exchanges

■ Strong currency depreciation reduces ability to meet foreign debt repayments

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THE FRAGILE 5

■How is Indonesia faring in 2014: No longer fragile

■ GDP growth in Q4 2013 remains strong at 5,7% and better then analysts expectations

■ Rupiah is recovering due to 175bp interest rate hike

■ Current account deficit shrank to below 3% - in the right direction

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ASIA CRISIS REDUX FOR INDONESIA?

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No – Market thinks it is a correction

What is different with 1997?

■Government debt low at 31% of GDP (similar in 1997)

■Household debt low at 17% of GDP

■70% of Bond Market is in Indonesian Rupiah – was not the case in 1997

■Foreign Exchange Reserves are larger then in 1997 – protects against panic sales of the currency (1997 US$17bn – Now US$113bn)

■No currency pegs in place like in 1997 – adjustments are spread – no sudden shocks in currency rates


INDONESIA TODAY

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■Largest Economy in SE Asia and 16th in the world

■GDP growth 5,78%

■4th largest population in the world at 250m

■80% of population younger then 40

■Natural resources: oil, gas, tin, copper, gold


…AND IN 2030

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■Market opportunities triple to 1.5 trillion

■Not your typical Asian Tiger - Growth driven by domestic consumption

■90m Indonesians will join the consumer class between now and 2030

■Only India and China will add more consumers

■Will be 7th largest economy behind China, USA, India, Japan, Brazil and Russia


AGENDA

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Hot in Asia

China

Abenomics

The Fragile 5


ICTF Conference, Barcelona, 13 May 2014

Bart Poublon – Head of Risk Asia Pacific

[email protected]

ictf conference, barcelona, 13 may 2014 bart poublon – head of risk asia pacific...

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