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Financial globalisation: Retreat or reset? McKinsey Global Institute TASE, 12th London Investor Conference June 2013 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited ? McKinsey & Company | 1 Global financial assets have grown to $225 trillion, but growth has slowed since 2007 Global stock of debt and equity outstanding1 $ trillion, end of period, constant 2011 exchange rates Compound annual growth rate (%) 1.9 8.1 206 165 64 47 119 37 32 29 225 54 47 50 Equity 8.0 -5.5 36 48 47 Government bonds 8.3 9.2 Financial bonds 10.7 1.5 Corporate bonds 5.1 9.1 35 39 43 42 42 41 46 42 42 56 11 9 3 82 23 75 18 14 11 3 3 26 18 19 5 5 30 7 9 42 46 50 54 54 57 60 35 1990 95 2000 2005 06 2007 08 09 10 11 2Q12 345 355 307 339 335 312 312 35 7 11 13 8 1.9 218 30 39 8.1 219 56 7.8 2007– 2Q12 206 189 185 2000– 07 14 8 14 9 10 11 11 13 13 13 Securitized 15.9 loans 62 Non-securitised 5.5 loans -0.7 4.8 Financial depth (% of GDP) 263 256 310 331 1 Based on a sample of 183 countries. SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis McKinsey & Company | 2 There are pockets of growth: Corporate bond issuance averaged $1.4 trillion since 2009, double pre-crisis levels China Value of non-financial corporate bond issuances per region $ trillion, nominal exchange rates Other developed Developing countries Western Europe United States 1.7 0.3 76 1.3 0.2 13 0.2 0.2 22 0.5 19 0.6 9 1.4 0.1 0.1 0.1 0.8 0.1 0.3 0.4 2000 0.7 0.1 0.2 0.4 01 0.7 0.1 0.1 0.6 0.4 0.1 0 0 0.2 0.1 0.5 0.5 0.1 0.1 0.1 0.1 0.1 0.2 0.3 0.2 0.2 02 03 04 05 0.2 0.8 0.1 0.1 0.2 0.7 0.1 1.2 0.1 0.1 Compound annual growth rate, 2007–12 (%) 0.2 0.1 0.1 0.3 0.3 0.5 0.5 0.5 09 10 11 0.5 0.1 0.2 0.3 0.4 0.3 06 07 08 2012E1 1 Annualised from data through September 11, 2012. NOTE: Numbers may not sum due to rounding. SOURCE: Dealogic; McKinsey Global Institute analysis McKinsey & Company | 3 The decline in financial depth matters: GDP growth is correlated with private-sector financing Correlation Slope of regression line X axis: Household and corporate debt and equity as a share of GDP annual change (t-1) Y axis: Nominal GDP growth (t) (%) World 6 4 2 0 0.83 -2 0.13 -4 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 United States 8 6 4 2 0 -2 -4 -50 -40 -30 0.70 0.07 -20 -10 0 10 20 30 40 Emerging markets1 Western Europe 6 20 4 15 2 0 0.64 10 0.81 -2 0.09 5 0.23 0 -4 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 1 Emerging markets excluding China shows correlation of 0.66 and a slope of 0.20. NOTE: Not to scale. SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis McKinsey & Company | 4 Cross-border capital flows fell sharply in 2008 and today remain more than 60 percent below their pre-crisis peak Global cross-border capital flows1 $ trillion, constant 2011 exchange rates 11.8 12 10 -61% 8 6.1 6 4.9 4.6 5.3 4 2 0.5 % of global GDP 2.2 1.0 1.7 0 1980 1990 2000 2007 4 5 13 20 2011 2012E2 8 6 1 Includes foreign direct investment, purchases of foreign bonds and equities, and cross-border loans and deposits. 2 Estimated based on data through the latest available quarter (Q3 for major developed economies, Q2 for other advanced and emerging economies). For countries without quarterly data, we use trends from the Institute of International Finance. SOURCE: International Monetary Fund (IMF) Balance of Payments; Institute of International Finance (IIF); McKinsey Global Institute analysis McKinsey & Company | 5 All types of capital flows have declined since 2007, and cross-border lending accounts for half the total Change in total cross-border capital flows, 2007–11 $ trillion, constant 2011 exchange rates Foreign direct investment -0.5 -0.1 -0.6 Equity securities Debt securities Western Europe and United Kingdom Rest of the world Total change, 2007–11 Loans1 -0.3 -0.5 -0.8 -1.4 -4.8 (72%) -0.4 -1.9 -2.6 -1.8 (28%) -0.7 Capital flows, 2011 $ trillion 2.0 0.1 0.8 -3.3 -6.6 2.2 5.3 1 Includes primarily loans, currency and deposits, as well as a small share of trade credit. Excludes operations of foreign affiliates. NOTE: Numbers may not sum due to rounding. SOURCE: IMF Balance of Payments; McKinsey Global Institute analysis McKinsey & Company | 6 Since 2007, Eurozone banks have reduced foreign claims by $3.7 trillion, $2.8 trillion of which was intra-European Consolidated foreign claims of Eurozone reporting banks (includes loans and other foreign financial assets)1 By counterparty location, constant 2011 exchange rates Change 4Q99–4Q07 Eurozone bank claims on: Compound annual growth rate (%) $ billion 1,732 GIIPS2 1,609 United Kingdom 5,665 Total Western Europe 1,382 United States Other developed 509 1,182 Developing countries Total 8,737 -1,176 -14 12 -665 -5 16 -771 -9 11 291 Compound annual growth rate (%) $ billion 17 2,033 Other Eurozone Other Western Europe 4Q07–2Q12 14 13 6 13 13 -7 -140 -8 -2,752 -9 -781 -9 -438 240 -3,732 3 -7 1 Includes banks from Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, and Spain. 2 GIIPS comprises Greece, Ireland, Italy, Portugal, and Spain. SOURCE: Bank for International Settlements; McKinsey Global Institute analysis McKinsey & Company | 7 Capital inflows to developing economies totaled $1.5 trillion in 2012 and are near the pre-crisis peak Global capital inflows to developing countries, by region $ trillion, 2011 constant exchange rate Compound annual growth rate (%) 1.8 1.6 2000–07 2007–12E 1.6 1.5 1.4 1.4 1.5 1.2 1.0 1.0 1.0 0.8 0.7 0.8 0.6 30 11 Other emerging Asia 64 2 CEE and CIS 39 -16 Middle East 31 -25 Latin America 23 4 China 24 8 0.5 0.4 0.2 0.3 0.2 0.2 % of global flows Africa 0 2000 05 07 09 11 2012E1 5 9 14 46 27 32 1 Estimated based on data through Q2 2012. For countries without quarterly data, we use trends from the Institute of International Finance. SOURCE: IMF Balance of Payments; Institute of International Finance; McKinsey Global Institute analysis McKinsey & Company | 8 Foreign direct investment continued through the crisis and now accounts for 38 percent of total global capital flows Total global capital flows $ trillion, constant 2011 exchange rates 11.8 9.1 7.8 9.2 6.1 5.9 4.2 Equity, bonds, and loans 3.3 3.4 2.5 FDI FDI share of total flows % 1.7 5.3 7.2 4.9 3.2 2.2 4.6 6.3 4.4 5.0 2.2 0 3.4 1.9 2.6 2.1 3.2 2.9 1.7 0.2 1.4 1.7 2.0 1.7 0.9 1.0 0.8 0.9 1.5 2000 01 02 03 04 05 06 07 08 09 10 11 2012 34 27 31 18 14 19 21 22 98 86 28 39 38 1 Estimated based on data through the latest available quarter: Q3 for major developed economies, Q2 for other advanced and emerging economies. For countries without quarterly data, we use trends from the Institute of International Finance. SOURCE: IMF Balance of Payments; Institute of International Finance; McKinsey Global Institute analysis McKinsey & Company | 9 FDI is the least volatile type of capital flow; short-term lending is the most volatile type of capital flow Coefficient of variation of inward cross-border flows by maturity1 1Q00–4Q11 Emerging markets 2.4 1.8 1.7 1.7 0.7 Developed markets 6.0 Higher value implies higher volatility 3.2 0.7 0.9 Short-term Long-term Bonds 2 3 bank claims bank claims Equity Short maturity 0.5 FDI Long maturity 1 Coefficient of variation defined as standard deviation normalised by the mean; calculations are made on quarterly data. 2 Maturity less than or equal to two years. 3 Maturity more than two years. SOURCE: Bank for International Settlements; IMF; McKinsey Global Institute analysis McKinsey & Company | 10 After strong financial deepening from 1995 to 2007, financial deepening decreased since then Israel’s stock of financial assets has grown quickly… Total financial assets, $ billion, constant 2012 exchange rates …but the share owned by foreigners has fallen % of Israel’s financial assets owned by foreigners1 607 556 551 208 476 573 576 148 148 Equity … 35 185 411 244 137 148 240 69 136 58 31 8 1 37 0 0 103 69 93 104 26 23 34 14 40 20 93 135 152 176 30 118 31 46 178 Total financial assets owned by foreign residents, $ billions 130 124 Gov bonds 33 51 38 47 40 45 192 209 219 Loans 123 1995 2000 2005 2007 2008 2009 2010 2011 2012 -6.7 29 Fin bonds Corp bonds 2000 2006 2011 85 143 164 Financial depth (% of GDP) 169 177 249 321 232 282 293 230 230 1 Calculated as foreign liabilities of portfolio bonds, portfolio equity, and cross-border loans to the non-financial sector from BIS reporting banks. SOURCE: McKinsey Global Institute Financial Assets Database; IMF Balance of Payments; Bank for International Settlements; McKinsey Global Institute analysis McKinsey & Company | 11 Israel’s financial markets are deeper than emerging markets, but lag advanced economies Equity Financial depth, 2Q121 % of regional GDP Financial bonds Government bonds Corporate bonds Securitized loans 463 116 453 Nonsecuritized loans 61 Percentage point change, 2007-2Q12 369 59 87 218 63 99 113 36 25 2 16 12 14 333 107 46 44 3 19 66 131 108 115 60 United States Japan -37 15 230 226 57 47 19 18 9 52 16 0 19 86 Western Other Israel Europe developed 15 -30 132 -53 153 151 148 42 58 60 5 33 70 China -105 2 29 7 6 48 Middle Other East emerging Asia -61 -13 131 126 56 40 26 34 5 3 33 14 4 2 3 54 35 35 India Africa -67 -24 108 28 21 5 1 53 Latin CEE/CIS America -6 -23 1 Calculated as total regional debt and equity outstanding divided by regional GDP SOURCE: McKinsey Global Institute Financial Assets Database; McKinsey Global Institute analysis McKinsey & Company | 12 Capital flows to Israel peaked in 2006, but have since fallen, and now mostly comprise FDI flows Total capital inflows $ billion, constant 2011 exchange rates Cumulative capital inflows by type, 2008-2012E $ billion, constant 2011 exchange rates 35 30 52 FDI 25 20 10 Portfolio debt 15 Ø 11 10 Portfolio equity 6 Loans and deposits 5 5 0 -5 2000 2002 2004 2006 2008 2010 2012E1 SOURCE: McKinsey Global Institute Global Capital Flows database; McKinsey Global Institute analysis McKinsey & Company | 13 How will the global financial system evolve from here? 1 ? 2 ? SOURCE: McKinsey Global Institute Financial globalisation retreats ▪ More balkanised, domestic driven financial systems arise: – Global financial assets grow very slowly; deleveraging across sectors prevails in advanced economies – Western Europe’s cross-border flows do not recover; regulation and shareholders drive a retrenchment in foreign banking operations more generally – Emerging markets can’t fill the gap: their financial systems and cross-border flows remain constrained. ▪ More stable financial system, but slower economic growth. Reduced access to credit, fewer opportunities for savers and investors, and more concentrated risks Financial globalisation resets ▪ Healthier, globally integrated financial systems arise while avoiding excessive leverage and risk of the past: – Private sector financing expands, with safety limits – Eurozone builds institutional framework to allow financial integration to resume – Emerging markets accelerate the development of their capital markets and banking systems – More stable cross-border flows, as FDI or portfolio equity and debt make up a greater share ▪ Providing financing for investment without sacrificing safety and prudence results in more robust economic growth McKinsey & Company | 14 Achieving a healthy revival of global financial markets will require policy actions 1 Complete the current agenda for global regulatory reform 2 Consider the hidden costs of closed door policies 3 Build robust debt and equity capital markets in countries that lack them 4 Create new financing mechanisms for constrained borrowers 5 Promote stable flows of cross-border capital 6 Build more robust monitoring mechanisms McKinsey & Company | 15 Thank you Download our reports: www.mckinsey.com/mgi Follow us on Twitter: @mckinsey_mgi McKinsey & Company | 16