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A World View – with a fix on the Americas Market commentary Information contained in this document may not be reproduced or disseminated without the prior written consent of Citi 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 AE disguises an earlier forecast of stronger growth in the interim 2% 1% Much of the data are out-of-date Advanced econs Emerging markets Source: IMF World Economic Outlook database; ‘Asia’s Prospects in a World with No Growth Engine’, Johanna Chua, Citi, February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 | '16 | '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 Disclaimer In any instance where distribution of this communication is subject to the rules of the US Commodity Futures Trading Commission (“CFTC”), this communication constitutes an invitation to consider entering into a derivatives transaction under U.S. CFTC Regulations §§ 1.71 and 23.605, where applicable, but is not a binding offer to buy/sell any financial instrument. 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