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ICTF Conference, Barcelona, 13 May 2014
Bart Poublon – Head of Risk Asia Pacific
[email protected]
ONCE UPON A TIME…
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
OOOPS
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
AGENDA
Hot in Asia
China
Abenomics
The Fragile 5
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
CHINA – WHAT IS HAPPENING?
■ 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
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
CHINA MACRO ECONOMIC RISKS – THE REAL ESTATE BUBBLE
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
CHINA MACRO ECONOMIC RISKS - SHADOW BANKING & HIGH
CORPORATE DEBTS
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
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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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
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
■ Fraud
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
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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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
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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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
THEY ARE BACK
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
ABENOMICS
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
ABENOMICS
■ 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
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
JPY/USD Exchange Rate 1990-2014
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
NIKKEI ON TESTOSTERONE
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
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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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
WILL IT WORK IN LONG TERM?
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
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
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
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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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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
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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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
ASIA CRISIS REDUX FOR INDONESIA?
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
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
INDONESIA TODAY
■ 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
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
…AND IN 2030
■ 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
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
AGENDA
Hot in Asia
China
Abenomics
The Fragile 5
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Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific
ICTF Conference, Barcelona, 13 May 2014
Bart Poublon – Head of Risk Asia Pacific
[email protected]