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A World View – with a fix on the Americas
Market commentary
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Summary
A ‘broad brush’ view of the global economy in 2016:
 Sluggish GDP growth, with risks seemingly to the downside
 Soft/falling commodity prices
 Low inflation – deflation in some
 Low interest rates – more countries with negative rates
 Increasingly ineffective monetary policies
 Governments unable or unwilling to commit to fiscal expansion
 Stock markets on edge/erratic policy making in China
…………a far from encouraging picture!
Contents
 Global growth trends
 China: slowdown & financial
market instability
 The collapse of global
commodity prices
 ‘Old’ geopolitics vs. ‘new’ socioeconomics
Global growth trends
GLOBAL GDP GROWTH
7%
6%
 Not nearly as positive
as it appears
5%
2001-07
2015
2016
2017
4%
3%
2%
1%
0%
Advanced economies
Source: IMF World Economic Outlook, October 2015; Citi Global Economic Outlook & Strategy, February 2016.
Emerging markets
Global growth trends
IMF 2016 GDP GROWTH FORECASTS
Per cent
7%
6%
 Not as good as it looks or as stable as
it appears
5%
 EM overstated by China?

4%
3%
If Chinese growth is overstated by
2% pts then global growth overstated
by 0.3-0.4% pts.
 AE disguises an earlier forecast of
stronger growth in the interim
2%
1%
 Much of the data are out-of-date
Advanced econs
Emerging markets
Source: IMF World Economic Outlook database; ‘Asia’s Prospects in a World with No Growth Engine’, Johanna Chua, Citi, February 16, 2016
Global growth trends
Advanced economies: A slow growth equilibrium…………
Weak recovery
Weak
productivity
growth
Weak investment
Weak
consumption
growth
……….seemingly immune to monetary policy changes
Weak growth
in wages
Global growth trends
?
Winners
Weak recovery
Increasing
inequality
Losers
……….A rising tide lifts all boats?
Political risk
Global growth trends
Negative impact on: FX rates, balance of
payments, GDP growth, budget balance,
credit/debt servicing & confidence
Slowdown +
economic
rebalancing
China
Commodity
demand
Rest of the
world
The United States is not strong enough to compensate
Commodity
producers
Global growth trends
Percent, year-on-year
GROWTH IN EXPORT VOLUMES
30%

Headline numbers – in nominal terms
– sharply negative
20%

Trade no longer driving global growth
10%

Countries must now depend more on
domestic demand
0%
-10%
-20%
-30%
Advanced economies
Source: Netherlands Central Planning Bureau, Citi
Emerging markets
FX
Index, Dec ‘13 = 100
U.S. DOLLAR – TRADE-WEIGHTED INDICES
130
 Strong dollar? Yes
125
 But strong against what?
120
115
110
105
100
95
|
'14
|
vs. Major currencies
Source: U.S. Federal Reserve, Citi
'15
|
'16
|
vs. Emerging markets
FX
THE WORST PERFORMERS: End-2014 to present
Per cent change vs. U.S. dollar
10%
0%
-10%
-20%
-30%
-40%
2016
2015
-50%
-60%
UZS
CAD
MYR
MMK
DZD
MGA
MXN
TMT
SRD
PYG
UGX
GHS
TRY
KGS
TZS
MDL
RUB
UYU
ZAR
GEL
COP
MZN
BRL
TJS
AOA
VEF
MWK
UAH
ARS
ZMW
BYR
KZT
AZN
Depreciation relative to December 31, 2014. Latest data: February 22, 2016. Source: Reuters, Bloomberg, Citi, various central bank websites. Excluding the South Sudanese pound.
FX
Trend toward
 Payment delays
Which currencies are on the chart?
 Commodity currencies
+
 Currencies linked to commodity currencies
Which currencies are not on the chart?
 Four currencies that appreciated against the U.S.
dollar
 Currencies of commodity consuming countries
 Blocked funds
 ‘Sand in the wheels’ of international
transactions
 Taxes on outflows
 Capital controls
 Higher interest rates – particularly
where depreciation  sharply higher
inflation
Commodities
U.S. dollars per barrel
BRENT CRUDE OIL
 United States absorbing most of the excess
supply so far this year – stocks up 22 mbd
140
120
 Saudi Arabia vs. Iran?
100
 Non-OPEC output now falling
80
60
40
20

Declining in China, Mexico, Colombia, United
States

Cuts anticipated in Algeria, Nigeria & Venezuela
 OPEC supply still increasing
0
|
'12
Source: Bloomberg for history; Citi for forecasts
|
'13
|
'14
|
'15
|
'16
|
'17
|
Commodities
U.S. dollars per metric tonne
IRON ORE
 Not just oil…………
160
140
120
100
80
60
40
20
0
|
'12
Source: Bloomberg for history; Citi for forecasts
|
'13
|
'14
|
'15
|
'16
|
'17
|
Commodities
SOYBEANS
1,900
900
U.S. dollars per bushel
U.S. dollars per bushel
CORN
800
1,700
700
1,500
600
1,300
500
1,100
400
300
900
700
200
|
'12
Source: Bloomberg for history; Citi for forecasts
|
'13
|
'14
|
'15
|
'16
|
'17
|
|
'12
|
'13
|
'14
|
'15
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'16
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'17
|
Commodities
Key point:
Commodity prices are not
forecast to return to previous
levels even over the mediumterm
 A strategy of borrowing/drawing on reserves is not
sustainable over the medium-term
 A strategy of not allowing currency adjustment/
delaying payments/allowing a black market to
flourish is also not viable in the medium-term
 Governments – and companies – will need to
reassess their business models in commodity
producing countries
 But what then are the implications for political &
social stability?
China
GROWTH IN NOMINAL GDP (US$ billion)
1,500
1,200
Why is China important?
 Impact on commodities
900
 Impact on the global & regional
economies
600
 Impact on global financial markets
300
0
-300
|
2000s
China
Source: IMF World Economic Outlook through 2010; Citi for 2011-2016
|
United States
2010s
|
China
CHINA: GDP Growth
CHINA: GDP Growth
10%
8.0%
Per cent, year-on-year
Per cent, year-on-year
8.5%
7.5%
7.0%
6.5%
6.0%
5.5%
9%
8%
7%
6%
5%
4%
3%
2%
Agriculture
 ‘New’ China versus ‘Old’ China
Source: Bloomberg for history; Citi for forecasts
Industry
Services
China
 Equity market declines
China
Global financial
market instability
 Currency depreciation
 Capital outflows
 New payments controls
 Concerns about debt
 More policy missteps?
 China wants the renminbi to be a ‘normal’ currency, but it is too significant to be ‘normal’
China
CHINA: Change in FX reserves
Billions of U.S. dollars
150
 Chinese reserves down US$762 billion in 19
months
100
50
0
-50
-100
-150
|
Source: Bloomberg
'12
|
'13
|
'14
|
'15
|
'16
|

More than any other country’s total except Japan

‘Speed kills’ – how much before they reach a
limit?
China
Large capital outflows
CNY
Previously
Incentive to issue
U.S. dollar debt
CNY
Now
Incentive to switch
to renminbi debt
China
Renminbi per U.S. dollar
CHINESE RENMINBI: 2015-2016
6.8
Focus now on restoring financial market
stability……
6.7
 Informal capital controls
6.6
 Restrictions on fixing rate
6.5
 PBOC intervention
6.4
…..but aim to revert closer to a marketdetermined rate once stability restored
6.3
6.2
6.1
Source: Thomson Reuters, Citi
CNY
CNH
China
CHINESE RENMINBI: 2015-2016
Daily per cent change
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
Source: Thomson Reuters, Citi
 Nowhere near a market-determined
currency

Average absolute change since August
13 = 0.10%

USDBRL = 1.0%

USDMXN = 0.6%
The shift away from emerging markets
• Slowing growth
• Deterioration in
outlook
Momentum has shifted away from emerging markets
….. which will continue throughout 2016
• When do
commodity markets
turn around?
• Widespread FX
depreciation
• A rapid appreciation
of the most
oversold
currencies?
• Capital outflows
• Falling equity
markets
• Growing
debt/credit
concerns
• Impact of plunging
commodity prices
• China
Key area of
uncertainty:
Emerging markets
Developed markets
The shift away from emerging markets
What does this entail?
 Outflows of portfolio capital – both debt & equity – from emerging
markets
 Countries will face greater difficulty financing current account deficits
 Greater differentiation between ‘good’ and ‘bad’ credits
 Greater exchange rate volatility
 Greater resort to capital controls – formal & informal
 A return to the IMF?
The shift away from emerging markets
EMERGING MARKETS: Capital Inflows
 IIF data on 30 emerging
markets
US$ bn, 4-qtr mvg avg
1,600
 As bad as 2009?
1,200
800
Other
400
Debt
Equity
0
-400
-800
Source: Institute of International Finance
FDI
Risks?
Economics
Politics
Global political risk
“Old” geopolitical risks are rising……………
40 armed
conflicts in 27
locations in
2014, the
highest
number since
1999
Source: Global Political Risk, Citi GPS, Tina Fordham et al, January 2016
The Middle
East now the
most violent
region based
on organized
violence
Battle-related
deaths
currently
highest in
post-Cold War
period
13/40 conflicts
are “internationalized”,
highest
proportion in
post WW2
period
High number
of fragile/
failing states –
137/178
considered to
be ‘less stable’
to ‘high alert’
Global political risk
“New” socio-economic risks are on the rise……………
More
referenda/
constitutional
crises in
systemically
significant
countries
Source: Global Political Risk, Citi GPS, Tina Fordham et al, January 2016
Nonmainstream
political
parties gaining
support
Only 6/27
countries with
trust in
institutions
greater than
60%
43% of U.S.
aggregate
income went
to middle
class
households
during 2014,
down from
70% in 1970
Global political risk
“New” socio-economic risks are on the rise……………
Poor economic
performance
Destabilization
of markets &
business
environment
Dissatisfaction
with political
mainstream
Populist policies
Concluding thoughts
 Bad news: the global outlook is far from promising
 Good news: there is a growing recognition of the need
for policy changes – at the G-20 level if not at the level
of individual governments
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