pbec macro presentation - kuala lumpur conference -oct 2012

Global Economic Trends and OutlookPBEC Malaysian Business Roundtable

Sean Maher PBEC Consultant Economist

Mandarin Oriental, Kuala Lumpur

October 16th, 2012

PBEC Malaysian Roundtable - Oct 16, 2012 2

Capital Flowed from EM to US via Reserves, and Portfolio/FDI Flowed BackEM FX Reserves peaking at current $9trn - Set to Reverse on Demographics, Terms of Trade

Cap

ital Flo

ws

1976

1981

1986

1991

1996

2001

2006

2011

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

US External Balance Sustained by EM Reserve Flows into Treasuries

Foreign Holdings of US Treasury Securities

Net International Investment Position of the US

% G

DP

• Shortage of Safe Assets/Collateral To Absorb Reserve Flows• China ($3.2trn in reserves) trade surplus from almost 11% to sub 3% of GDP since 2007• Russia ($0.5trn) forecast to see current account deficit by 2015• Less FX Sterilisation a withdrawal of liquidity across GEM – key driver of Chinese M2

MexicoBrazil

Malaysia

Philippines

IndonesiaChina

Korea

Russia

-5

0

5

10

15

20

25

FX Reserve Growth Slumps in 2012

2011 % y/y 2012 YTD % y/y


US Energy Balance Undergoing Radical Shift on Booming Shale Gas/Oil OutputLNG Exports to Asia by 2016, US Coal Exports Surge as Power Plants Switch to NG

US

En

ergy

Sep-0

6

Mar

-07

Sep-0

7

Mar

-08

Aug-0

8

Feb-

09

Aug-0

9

Feb-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jun-

12

7000

8000

9000

10000

11000

12000

13000

14000

15000

1000

1300

1600

1900

2200

2500

2800

3100

3400

US Net Oil Imports Down 40% Since 2006

Balance (lhs) Imports (lhs) Exports (rhs)

Imp

ort

s, B

alan

ce (

ths

bl/

d,

4wk

avg

)

Exp

ort

s (t

hs

bl/

d,

4wk

avg

)

• Fuel Efficiency Driving Strong US Auto Demand – Consumer Less Sensitive to $4 Gasoline• Coal Exports up 24% y/y in H1 – Set to Exceed 1981 Record – Exacerbating China Demand Slowdown• US Thermal Coal Prices Down 60% Since 2008 Peak, NG Down 80%

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

1

3

5

7

9

11

13

15

1.50

2.00

2.50

3.00

3.50

4.00

4.50

Gasoline Less of a Consumption Drag

Henry Hub Gulf Coast Natural Gas Spot Price ($/MMBTU) (lhs)

US Average Retail Gasoline Price ($/gallon) (rhs)

4

GEM Hit by Credit Slowdown in 2012, ASEAN Performance ResilientBoosted by Domestic Consumption Bias, Lower Funding Costs and Fiscal Expansion

PBEC Malaysian Roundtable - Oct 16, 2012

Asia

n M

acro

Indi

a

Indo

nesi

a

Thai

land

Philip

pine

s

Mal

aysi

a

Korea

China

Taiw

an

0%

100%

200%

-50%

0%

50%

100%

150%

Indonesia/Philippines Least Leveraged

Government Debt 2012 (% GDP) Private Sector Credit (% GDP)

Net External Assets (% GDP) rhs

Indi

a

Mal

aysi

a

Thai

land

Philip

pine

s

China

Taiw

an

Indo

nesi

a -10%

-5%

0%

5%

10%

Fiscal Policy Expansionary Across Asia

2012 Fiscal Balance (% GDP) 2012 Current Account (% GDP)

Indi

a (2

011)

Korea

(199

7)

Mex

ico (1

994)

Brazil

(201

1)

Japa

n (1

991)

Philip

pine

s (19

97)

Thai

land

(199

7)

China

(201

1)

China

(TSF

Basis

2011

)25

75

125

175

225

275

10

20

30

40

50

60

1012

15

17

23

26

30

31

60

China Credit to GDP Surge Double Levels Triggering Prior EM Crises

Total Credit to GDP % 3-yr Growth in Credit to GDP % (rhs)


Asian Demographic Decline Key Economic ThemeLow Pension Coverage, Weak Funding and Excessive Retirement Length (21 years for men, 26 for women)

Asia

n D

emo

grap

hics

• Today, 3.5 workers pay the pension benefits of every Chinese retiree; by 2035, that ratio will fall toward 2:1 unless the retirement age rises substantially; the pension funding gap versus implied future liabilities is likely to reach over 40% of GDP by late decade.

• By 2020 China will have the same demographic profile as Korea now, but a fraction of Korean GDP (and even lower pension assets) per capita. Average pensioner in Beijing receives $360 a month, half of the average working wage in the city, on official figures retirement age sub 60 in SOEs

• Need to rapidly expand pension systems across Asia to cope with demographic decline will support domestic institutional inflows. Singapore, Malaysia and HK pension fund systems advanced – Thailand faces biggest Emerging Asian demographic challenge after China

• Malaysia’s EPF already allocates a significant portion of AUM to local equities (and the KLSE has shown the lowest volatility in the region over the past 5 years and the highest risk-adjusted returns alongside Thailand, Indonesia and the Philippines).

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000

0.0

0.2

0.4

0.6

0.8

1.0Asian Pension Coverage Low Relative to Income

National Income per Capita (2010 USD)

Philippin

esIn

dia

Mal

aysi

a

Indones

ia

Vietn

am

Thaila

nd

China

HK

Singap

ore

S. Kore

a

Japan

0

10

20

30

40

50

60

Old Age Dependency Surging Across Asia

2010 2025 2035

Old

-Ag

e D

ep

en

de

ncy

Ra

tio

6

China Faces Medium Term Deleveraging and Shrinking WorkforceExcess Capacity Implies Asset Write-offs/Defaults – Industrial Utilization Rate Down to 60%

Peak in China Workforce Means Emerging Asia Can Raise Minimum Wages, Boost Domestic Consumption


Ch

ina

• Excess capacity in auto manufacture 6m units end 2011, likely to reach 9-11m by 2016 • China has lost 2% of US import market share to Mexico since 2008 - Mexican factory wages in 2011

only 28% higher than Chinese compared to 4.5x higher in 2001 – has to move up value chain• While weak productivity growth/investment remains a constraint across the smaller Asian economies , real

wages can be expected to increase at maybe a third to a half of Chinese rates over the next few years.

Taiw

an

Korea

Mal

aysi

a

Brazil

China

Thai

land

Indo

nesi

a

Philip

pine

sIn

dia

0

10

20

30

40

50

60

70

80

90

Asian Productivity as % of US Rising Slowly

2000 2011

China

Singa

pore

Mal

aysi

a

South

Kor

ea

Thai

land

Indo

nesi

a

Brazil

Indi

a

Vietn

am US

Philip

pine

s

10%

20%

30%

40%

50%

60%

70%

80%

China Investment Levels Extreme

Consumption Investment

% G

DP

7

Enormous Rebalancing Challenge To Boost Consumer/SMEsBank LTD ratio at 70% Forced Interest Rate Spread Widening – RMB Deposits Under Intense Pressure

Investment/GDP Ratio at Almost 50% Destabilising - Rebalancing Implies Huge Wealth Transfer from SOEs/State

• China transition to consumer driven economy necessary to drive flagging productivity but a zero sum game – implies huge wealth transfer from state/SOEs including banks

• Sustained bounce in real estate activity is unlikely to occur until H2 2013 when excess inventories are eroded – material price gains will attract further restrictions

• Impact via industrial commodity markets will undermine terms of trade for other big EMs such as Brazil – China will slow more than expected but also attract more capital as returns and transparency improve

• Investment/GDP 49.5% in 2011 from 41.7% in 2007 - can’t increase bank credit or investment to GDP ratios without further inflation/NPL negative feedback.

• Capital and credit use must become more efficient. PBoC facing less constraint from FX sterilization - interest rate/financial market liberalization finally practical - positive real funding rate would restrict corruption opportunities/reallocate capital


Ch

ina

Reb

alancin

g

Consumption Growth Needs to Exceed GDP Growth by 3-5% to Rebalance

Target Consumption

Share of GDP in 2021

Required Consumption Growth Premium over GDP Growth

5% GDP y/y 7% GDP y/y 9% GDP y/y

45%

3.1 3.0 2.850%

4.1 4.0 3.955%

5.1 5.0 4.9

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

Year 1

0

Year 1

1

20%

25%

30%

35%

40%

45%

50%

Investment as % of GDP Unprecedented

China 2002-11 Japan 1966-75 Korea 1988-98

Singapore 1978-88 Thailand 1989-99

% G

DP


China Productivity Growth Slowing to Sub 8% in 2012 From Over 10% in 2010‘Extensive’ Growth Model of Rising Labour and Capital Inputs Now Exhausted

Capital spending accounted for 54% of China’s GDP growth in 2011

• HK listed Chinese companies have issued a record number of profit warnings during 2012, surpassing the peak reached during the height of the 2008-2009 crisis

• In the three years post-crisis, total credit expanded by 22.7% a year, generating nominal GDP growth of 14.1% on average – i.e. productivity of capital slumped – a new stimulus that restored that trend would be self-defeating, and probably impossible given deteriorating credit dynamics

• Reform implies rapid de-regulation of financial and state enterprise sectors to improve capital allocation (bank NIM squeeze a start) alongside investment in social, education and health care support systems

• Rationalisation/consolidation of current off-balance sheet SOE and provincial debt and closing the funding cost divergence between the SME sector and SOEs. If reform doesn’t accelerate in 2013/14, growth rates will slide to sub 5% by mid-decade.

Asia

n P

rod

uctivity

Italy

Mexico

France

Germany UK

Japan

Philippines

Malaysia USBrazil

Thailand

IndonesiaKorea

IndiaChina

0

2

4

6

8

10

12

ASEAN Productivity Weak, China Slowing

2000-10 CAGR in GDP PPP per hour worked

China GDP Drivers (% Growth)

1997-2002 2003-7 2008-11 2012-17

Capital 3.5 4.3 3.9 2.5 - 3

Labour (Quality Adjusted)

1.6 1.3 1 0 - 0.5

TFP 2.5 6.6 4.8 2.5 - 3

GDP 7.6 12.1 11.5 6 - 7.5

TFP as % of GDP Growth

33 54 51 35 - 40

9

Even With Reforms, China Trend Growth Unlikely to Exceed 7%Total Credit Growth Picks Up in Q3, But Banks Constrained by Weak Deposit Growth


Ch

ina

Cred

it

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

H1

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Credit Growth 90% of GDP in 2008-10

Total Social Financing (lhs)

Nominal GDP (lhs)

Total Social Financing to Nominal GDP Ratio (rhs)

RM

B b

n

Jan-1

1

Mar

-11

May

-11

Jul-1

1

Sep-1

1

Nov-11

Jan-1

2

Mar

-12

May

-12

Jul-1

2

-40%

-20%

0%

20%

40%

60%

80%

100%

0

2000

4000

6000

8000

10000

12000

14000

16000

Credit Trend Reaccelerating

RMB Lending New Bank AcceptanceCorporate Bond New Trust LoansNew Entrusted Loans New Foreign Currency LoansStocks of Non-financial Enterprises TSF Monthly Growth 3mma

% o

f M

on

thly

Cre

dit

Gro

wth

RM

B 1

00

m

• RMB1.3trn of bonds in Jan-Aug, up 90% y/y – 80% of new issuance was via the interbank market• TSF has been higher than in 2011 in July/Aug – reflecting infrastructure project funding• Deleveraging/inventory destocking cyclical drag on growth• Reverse repos reflect policy ‘normalisation’ by PBoC, but interbank liquidity shortage structural

10

US Structural Economic Challenges Require Political Rather Than Fed Action Healthcare at 20% of GDP by 2020, Entitlement Spending Driving 70% of Deficit Growth

Lower Fiscal Deficit Allows Greater Investment and Trend Growth


US

Stru

ctural T

he

mes

1968

Q1

1970

Q4

1973

Q3

1976

Q2

1979

Q1

1981

Q4

1984

Q3

1987

Q2

1990

Q1

1992

Q4

1995

Q3

1998

Q2

2001

Q1

2003

Q4

2006

Q3

2009

Q2

2012

Q1

44%

46%

48%

50%

52%

54%

2%

4%

6%

8%

10%

12%

Wage Share of US GDP Has Slumped to 44%

Wage and Salary Disbursements (% GDP 12mma) (lhs)

Corporate Profits After Tax (% GDP 12mma) (rhs)

Jun-

94

Jun-

96

Jun-

98

Jun-

00

Jun-

02

Jun-

04

Jun-

06

Jun-

08

Jun-

10

Jun-

12

-5%

0%

5%

10%

15%

20%

US Gross Savings Barely Cover Depreciation

Net Saving (% GDP) Gross Saving (% GDP)

Depreciation (% GDP)

% G

DP

• Collapsing Wage Share of GDP Key Driver of 2003-8 Credit Boom to Sustain Living Standards

• Low US Savings Means Capital Has To be Imported to Grow Investment i.e. bigger CA Deficit

11

US Deleveraging Proceeds in Orderly FashionAggregate Debt Down to 330% of GDP From 360% - Private Sector Borrowing Down by $4trn

Foreclosures at 5yr Low, Inventories Down Almost 30% y/y in September


US

Deb

t

Jun-92

Jun-94

Jun-96

Jun-98

Jun-00

Jun-02

Jun-04

Jun-06

Jun-08

Jun-10

Jun-12

50%

100%

150%

200%

250%

300%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Household Debt Down By 14% of GDP From Peak, Aggregate by 30%

Nonfinancial businessConsolidated governmentsFinancial businessHouseholds and nonprofit organizations (line, rhs)

Sep-2

007

Mar

-200

8

Sep-2

008

Mar

-200

9

Sep-2

009

Mar

-201

0

Sep-2

010

Mar

-201

1

Sep-2

011

Mar

-201

2

Sep-2

012

100

300

500

700

900

1,100

1,300

1,500

0

5

10

15

20

25

30

35

40

US Housing Construction Bottoming as Foreclosure Trend Improves

Foreclosure Filings (000)

New Housing Permits

Wells Fargo - NAHB Index (rhs)

• Since end 2007, US household total financial obligations down from 19% of disposable income to 15.8%• Construction subtracted 3.4% from GDP 2006-11 as housing starts slumped 75%, now bottoming.• Household financial obligation ratio tumbles from record high of 19% in 2008 to 15yr low of 16% • 15yr fixed mortgage at record low of 2.7%

12

Will US Republicans Jump Off the ‘Fiscal Cliff’?Delay to Mid 2013 or Fiscal ‘Bungee Jump’ i.e. All Tax Breaks Expire –Some Reinstated via Tax Cuts in January


US

‘Fis

cal Cliff’

5000

6000

7000

8000

9000

10000

11000

12000

13000

14000

420%

460%

500%

540%

580%

620%

660%Consumer Balance Sheets Recovering

Household Real Estate Equity (bn USD) (lhs)Net Worth (% Disposable Income) (rhs)

• 16.4trn debt ceiling limit hit in Q4 – repeat of mid 2011 political brinkmanship/rating downgrade? If no offsetting action, $600bn in tax and spending changes – uncertainty already reducing corporate investment - taxes would go up for 2013 by average of almost $3,500 per household if all tax breaks actually expire as scheduled and are not partially reinstated in Q1.

• Tax rate on dividends for individual investors, will revert back to the ordinary income tax rate. At the margin, for investors earning more than $85k if single ($142k married joint income) that rate will be close to 35% - high yielding stocks vulnerable to precautionary selling in Q4

• A typical middle class household (income up to $64k) would see taxes go up by about $2k. Households in the top 1% – with income of over $506k upward would see an average increase of more than $120k

• M2 and commercial lending growth still healthy, but losing momentum since Q1 - student loans are the only part of consumer credit that has expanded post-2008. As % of consumer credit, student loans are up from 4% to 18% today.

Sep-00

Sep-01

Sep-02

Sep-03

Sep-04

Sep-05

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

-6%

-4%

-2%

0%

2%

4%

6%

8%US Real Income Growth Leads Employment

Total Nonfarm Employment (% y/y 3m lead)Real Personal Consumption Expenditures (% y/y 3mma)Real Disposable Personal Income (% y/y 3mma)

13

Respite From Solvency Crisis – Spanish Bailout and Banking Union Key TestsECB Intervention Buys Time for Fiscal Union – But Bond Buying Conditional Ahead of German Elections

Eu

rozo

ne


Ger

man

y

Nether

lands

France

UK

Italy

Spain

Gre

ece

Irela

nd

Portugal

-150%

-50%

50%

150%

250%

350%

Peripheral Net External Balances a Risk

Government Debt 2012 (% GDP) Private Sector Credit (% GDP)

Net External Assets (% GDP)

Ger

man

y

Nether

lands

France

UK

Italy

Spain

Gre

ece

Irela

nd

Portugal

-10%

-6%

-2%

2%

6%

10%As are Persistent Twin Deficits…

2012 C/A (% GDP) 2012 Government Budget Balance (% GDP)

• Eurozone 6mth real narrow money growth at highest since February 2010

• 3mth Euribor interbank funding rate down from 150bps in November 2011 to 15bps

• Bank funding spread over non-financial IG issuers down from 115 to minus 10bps

• Capital starting to flow back to the periphery post ECB effort to stem convertibility risk - eases funding pressures on peripheral banks, reflected in borrowing from the ECB down €38bn in September

• Spanish bank bad loan level at almost 10%, but real estate correction only half complete - Italy’s debt/GDP 120% (€1.9trn) but financial sector has assets in excess of €8.4trn, mortgage/GDP ratio under 20% –Italy more like Japan than Spain

• Italian/Spanish banks overleveraged – Loan to Deposit ratio 180% in Italy, 135% in Spain versus 70% in Asia/US. Modest recession (0.5%) in 2012, flat to similar in 2013.


India Trapped in Stagflation – State Banks Face Rapid NPL RiseCorporate Capex 11% of GDP from 17% in 2008 – RBI Easing Constrained by Fiscal Deficit

Ind

ia

• Industrial Output Set to Grow Just 2% this FY – Chronic Supply Side Inflation Bottlenecks• State banks (75% of total lending) Risk 15% Peak NPLs – Restructured Debt Over 6% of Loans• Power Distributors in Crisis - $35bn Debt Bailout – But No Pricing/Payment Enforcement Reform

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

-10%

-5%

0%

5%

10%

15%

20%

-30%

-15%

0%

15%

30%

45%

60%

Capital Goods Output Trend Reflects Weak Private Investment

Capital Goods (3mma) (rhs) Basic Goods (3mma)

Intermediate Goods (3mma)

IIP C

om

po

ne

nts

(%

y/y

)

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

50.0

53.0

56.0

59.0

62.0

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Industrial Output Growth Remains Weak, and Inflation Persistent

Manufacturing PMI (lhs)

WPI Growth (rhs)

Industrial Production Growth (3mma) (rhs)

Ma

nu

fac

turi

ng

PM

I

% y

/y

15

‘Washboard’ Post-Crisis Recovery Continuing – 3% Trend Global GrowthOnly in Germany and Canada Has Real GDP Exceeded 2007 levels

‘Austrian’ Debt Solution Incompatible With Democracy – Sustained Financial Repression/Inflation Instead


Glo

bal O

utlo

ok

• Trade growth just 2.5% this year, compared to 5% in 2011 and almost 14% in 2011 - one percentage point drop in GEM equivalent to a 1.7 point fall in US growth- Brazil, India and China have slowed simultaneously YTD, largely structural

• Exports have accounted for almost 50% of US growth during this recovery, compared with an average of 12% in recoveries since 1970 – now slowing, but construction/autos positive

• Taiwanese exports grew by over 10% y/y in September led by electronics, Korea down 1.8% after 6.2% fall in August – low base effect flatters, but no free-fall

• Japan’s Tankan survey showed big Japanese manufacturers more pessimistic, for the September quarter, core machinery orders weak in August (China/Eurozone impact)

• Overall, new orders versus inventory ratios suggest momentum is levelling out as worst of EM slowdown over – but no ‘V’ shaped rebound

• China can’t delay RRR cuts much longer - reverse repos ineffective in supressing Shibor

• ASEAN challenge to boost productivity via higher investment and thus real wages to drive domestic consumption

Sep-0

6

Mar

-07

Sep-0

7

Mar

-08

Sep-0

8

Mar

-09

Sep-0

9

Mar

-10

Sep-1

0

Mar

-11

Sep-1

1

Mar

-12

Sep-1

2

0.5

0.75

1

1.25

1.5

1.75

2

Orders/Inventory Ratios Bottoming in US and China

PMI New Orders/Inventory Ratio US

PMI New Orders/Inventory Ratio China

pbec macro presentation - kuala lumpur conference -oct 2012

Documents

us energy3

us energy balance

us coal exports surge

gdp rhs1712526

leveraged china credit

china workforce

us net oil imports

fiscal balance