Download Slide 0 - Indian Banks` Association

Just When You Thought That It Was
Safe To Get Back In The Water...
The Crisis is not over—just reaching the next stage
The fundamental reasons for the crisis—mainly excessive credit and
global imbalances—have
not been addressed
Global
Economic Outlook:
Opportunities and Challenges for Indian
Governments
and Unfolding
Central banks
will come
up with even more
Economy
in the
Global
Crisis
aggressive measures
Emerging Markets (including India) seem to be decoupled—but risks
remain
September 2010
Like all crisis this one offers huge opportunities for companies and
countries to improve their competitive position
Very quick recovery of emerging markets
signaling the end of the great recession...
Solid recovery for GDP growth of
emerging markets ...
real GDP growth (%)
China
12
10
India
8
6
4
Brazil
• Recovery of India albeit only small
governmental intervention/stimulus
• India with strong domestic market
• No Double-Dip expected
Russia
2
0
-2
... even as the risks remain
-4
-6
-8
-10
-12
Q1
200
8
... especially India and China
with positive outlook ...
Q1
200
9
Q1
201
0
• India's inflation at ~10%
• Slow pace of business reforms
– India only 133th on Doing-Business
Ranking (after Yemen, Nigeria, ...)
– Drop in foreign direct investments
... but what about the rest of the world?
One year ago: On the brink of
Great Depression II
World industrial output,
2009 versus then
World stock markets,
2009 versus then
Volume of world trade,
2009 versus then
%
%
%
100
110
110
95
100
90
90
85
80
80
70
75
60
70
50
65
40
60
30
100
90
80
70
60
0 10 20 30 40 50
0 10 20 30 40 50
0 10 20 30 40 50
Months since peak
Months since peak
Months since peak
"We are in the midst of a once-in-a-century credit
tsunami." (Alan Greenspan)
Source: Barry Eichengreen and Kevin H O'Rourke, "A Tale of Two Depressions", April 2009
June 1929 = 100
April 2008 = 100
Avoided thanks to unprecedented stimulus
Total US government bailout exposure is $8.2T (Dec.
2009)
Fannie, Freddie,
AIG, Bear Stearns
Treasury Troubled
Asset Relief Program
Federal Deposit Insurance
Corp. bank guarantees
Fed Mortgage-backedSecurities Program
Fed Asset-backed
Debt Program (TALF)
Fiscal stimulus
HUD1
$8.2 trillion total
(as of Dec. 23, 2009)
Other Fed lending and
government commitments
= $100 billion
In June 2009 bailout and stimulus peaked
at $13.2T
1. U.S. Department of Housing and Urban Development
Note: Consists of government investments, loans, loan programs, debt guarantees, and securities purchases
Source: Bloomberg estimate, December 23, 2009
Seems to work
“
—really?
Yes, the recession is over.
“
The recession is over.
“
The recession is over.
“
“
Tuesday's figures…mean that the
UK is now out of recession.
Is the global recession really over?
Absolutely!
Note: Five statements made in February 2010, one made in December 2009 (Börsenzeitung)
Source: Press research
“
I believe that the
worst is over.
Problem No. 1: Start feeding the pig
Reverting US household debt to long-term averages means
decrease of ~ $2.0–5.5T in debt
US household debt/GDP (%)
Currently ~ 95%
of GDP
80% of GDP
69% average
1980–2008
56% average
1952–2008
Deleveraging need
100
$13,500B
90
80
– $2,000B
70
– $3,600B
60
– $5,500B
50
40
30
20
10
0
1952
1960
1970
1980
1990
2000
2009
US consumption share of world GDP 17.5%—China's entire
GDP merely 8.5% of global GDP1
1. Year end 2009 when using average market exchange rates
Source: Thomson Financial Datastream; Federal Reserve; Bureau of Economic Analysis; Barron's; Elliot Wave International, The Gabelli Mathers Fund,
Financial Times, BCG estimate
Problem No. 2: Banks—the new healthy
One year
…
Facts
and later
figures
• Common
equity towritedown
total assets:
4%
ECB estimates
volume
• Tierof1€195B
capitalfor
to eurozone
RWA: 7% banks
• Two-thirds of outstanding loans are to
Worst-case
estimatesaccounting
expect
consumers,
mortgages
writedowns
of €800B
for further
25%, credit
cards for
10% for
German
only
• NPL
ratio ofbanks
12% for
mortgages,
increased
by almost
250banks
bp versus
BIS warns
of zombie
everprevious
quarter
greening bad loans instead of
• Off-balance
sheet
writing them
off risk
– $93B exposure to off-balancesheet
investment
BIS
estimates
highvehicles,
refinancing
eclipsing
equity$3T
needs
withcommon
bonds worth
– maturing
"Level-three"
assets—cannot
in next
2 yrs and 60%beof
valued using
inputs
long-term
debtobservable
due over next
3 yrs
—are equivalent to 126% of
BIS
doubts
sustainability
tangible
common
equity of current
bank profits
Source: FT Lex Column, 11 June 2009; NY Times; Wall Street Journal; FT; FTD; BIS, ECB
Problem No. 3: Deleveraging is deflationary
Deflationary risk levers
• High debt levels and fundamental
deleveraging needs
• Excess capacity and supply of goods
• Low growth of broad money
aggregates
• Global imbalances requiring real
exchange rate adjustments in deficit
countries via lower inflation levels than
in surplus countries
• Lower cross-border capital flows
• Austerity programs: lower unit labor
costs and demand
• Potential slowdown in China would
further drag demand
• Limited measures to stimulate
aggregate demand
Source: BCG analysis
Inflationary risk levers
•
•
•
•
•
Government bailouts, fiscal stimuli
Expansive monetary policy
Historically low interest rates
Surging commodity prices
Depreciation of currency leading to
higher import prices
• Lack of credible exit strategies by
monetary and fiscal authorities
• Push to inflate away high debt levels
Problem No. 4: Rebalancing of trade flows
Current-account
balances of deficit
countries (%)
Alternative scenarios for rebalancing
of deficit countries
1 Slow rebalancing
0
-5
-10
-5
-2
(rate of inflation only)
0
4
1
-10
-20
4
Current-account
balances of surplus
countries (%)
10
5
0
Japan's currentaccount surplus
turns negative
-3
-14
2 Moderately paced rebalancing
15
Implications
10
10
6
(2% current-account surplus plus inflation)
2
2
2
-2
-5
3 Quick rebalancing
(4% current-account surplus plus inflation)
4
3
-1
Oil exporters
Deficit countries
-4
-7
-1
Japan's and
Germany's
current-account
surpluses turn
negative
All surplus
countries'
current-account
balances turn
negative
Oil exporters
1. Canada, Kuwait, Norway, Russia, Saudi-Arabia, United Arab Emirates
Note: Changes in deficit countries' current-account balances are allocated to surplus countries in proportion to their GDP; All figures represent currentaccount balances relative to GDP (2008 data)
Source: Economist Intelligence Unit; International Monetary Fund; BCG analysis
Problem No. 5: Not addressing the problem
€750B debt stabilization fund on top of
rescue package for Greece
€60B exceptional financing
€440B SPV
€250B IMF
ECB ready to purchase public and
private debt
“
EU bailout spurs moral
hazard fears.
“
Call it the Troubled
Conscience Relief
Program.
“
If there was not a
euro crisis before the
weekend bailout plan,
there is now.
Facility of at least €2T required to cover any conceivable
combination of EU defaults1
1. Willem Buiter
Implication: Executives skeptical about EMU
Already before the recent turmoil
Expectations about EMU breakup
%
100
90
2
11
16
5
9
2
10
10
36
34
8
14
9
9
80
70
40
60
40
46
38
37
45
50
40
30
28
29
27
28
36
25
22
28
20
10
19
16
13
22
19
26
19
21
0
Global
No opinion
EMU breakup
Exit of weaker countries
Split into stronger and weaker parts
EMU will not be harmed
Source: BCG survey "Companies in the Downturn: Expectations, Actions and Preparedness", March 2010, n = 440
Problem No. 6: Reindustrialization—easier
said than done
The US needs to
reindustrialize ...
... but lacks the required skills
Manufacturing output (as % of GDP)
50
Respondents who see moderate to serious
shortage across all skills by industry (%)
Aerospace & defense
63
40
Life sciences &
medical devices
63
30
Energy & resources
20
43
23
21
Industrial products
18
13
10
45
31
Consumer products
27
Automotive
0
3
All other
Overall
32
0
25
"It's difficult to find people for jobs that require math
skills and the ability to read technical blueprints."2
1. Based on a survey of 779 individuals 2. Owner of motor manufacturer quoted in Financial Times
Source: United Nations, Deloitte, Oracle and Manufacturing Institute
50
75
Protecting climate or industries?
New US law on maximum fuel
consumption
“
This is close to
economic
warfare!
Michael Macht, Porsche
CEO
Source: Press research
• Calculation of thresholds based on
wheel base and track width
• Formulae are calibrated in such a way
that large US manufacturers exactly
meet the guidelines
• Porsche achieved special approval until
2015
• By then Porsche needs to increase
cruising range from 27 to 41.1 miles per
gallon
Problem No. 7: Government credit
not unlimited
Public-sector debt and deficits
Outstanding government debt (% GDP)
210
Debt too high
Government
gross financial
liabilities
(US$2,500B)
Japan
180
More dangerous
150
120
Eurozone
90
60
30
Maastricht
criteria
0
0
1
2
Deficit too high
3
4
5
6
7
8
9
10
11
12
13
14
15
Deficit 2010 (% GDP)
Note: All data are forecasts for 2010. They include the accounts of central, state, and local governments, social security funds; and non-market, non-profit
institutions controlled by and primarily financed by government units
Source: OECD
What are the options?
Post
deleveraging
Frequency Effectiveness growth
“
Austerity
High
inflation
Massive
default
Rapid
Niall Ferguson
growth
Note: Based on episodes of deleveraging since 1950
US government
Will it work?
debt is a safe
 Rigorous, simultaneous austerity
programs could reignite recession
haven
the way
Pearl Harbor
 Requires weak or nonindependent central banks was
a safe
unlikely option for Eurozone
haven in 1941.
 Usually follows a currency crisis
 Likely to trigger a domino effect
given the inter-connectedness of
eurozone
 Impossible to achieve under
current circumstances
Problem No. 8: Demographics
Rapidly aging populations in
Western economies ...
Old-age population1
0,8
Increase in age-related government
expenditure 2011–20502
Spain
Italy
Greece
UK
Japan
Germany
USA
France
0,7
0,6
0,5
0,4
0,3
... will lead to rising and largely
unfunded age-related spending
15
10
13.5
8.1
7.1
5.9
0,2
4.5
5
0,1
2.7 3.1
1.4
0,0
1970
1990
2010
2030
2050
0
Spending on promised retirement/healthcare for elderly will
increase but there will be fewer workers to pay for it
1. Ratio between population of age 65+ and working-age population ( between 15 and 64 years) 2. In percentage points of GDP; age-related spending
refers to public pensions and health care
Source: United Nations Population Perspectives, "The future of public debt: prospects and implications", BIS Working Paper, March 2010
Implication: By 2040 public debt burden
unsustainable
Public debt per capita of total
population (K$)
Public debt per capita of working age
population (K$)
639
567
1,229
1,107
778
662
1,633
1,162
959
PIIGS
389
Note: All data based on BIS baseline scenario. All forecasts assume a constant fertility rate
Source: BIS; UN; EIU; BCG analysis
1,684
735
Problem No. 9: It is close to impossible to stop
BIS: "Drastic measures are necesary."
Public debt/GDP projections 1980–2040
600
400
200
1980
2000
2020
2040
Baseline scenario
Gradual adjustment, age related spend held constant
Source: "The future of public debt: prospects and implications", BIS Working Paper, March 2010
Implication: "We need a Plan B to curb the
debt headwinds."
Deleveraging has slowly begun
US public debt continues to grow
% of nominal GDP
400%
350%
300%
250%
Total
Non-financial business
Households
Public sector
Financial sector
Beginning of
the crisis
! Increase public and
private saving rates
! Increase potential
growth through
structural reforms
200%
! Reduce debt levels
150%
through bankruptcies
or negotiated
workouts
100%
50%
! Inflate debt away
0%
Q1
1952
Q1
2010
Problem No. 10: Empirical evidence
not encouraging
Global recessions preceded by
financial crises are longer, deeper ...
Change in real GDP (%)
Peak to trough)
Quarters (#)
... and slower to recovery
Quarters to hit
previous peak (#)
Increase in real GDP
after 1 year (%)
1.4x
5
5
5
2.1×
5
2.1×
1.6×
0
0
0
0
-5
-5
-5
-5
-10
-10
-10
-10
Crisis associated with financial stress and highly synchronised¹
1. Highly synchronized: 10 or more of the 21 examined advanced economies in recession at the same time
Source: IMF World Economic Outlook, April 2009
All crises
Implication: Only emerging markets return to
pre-crisis trend
Simulation of future growth based on IMF research
Output
gap (%)1
-4.32
10
9
8
7
6
5
4
3
2
1
0
-2.52
+2.12
-12.8
-10.4
-16.7
-8.7
-11.7
-13.9
-15.7
9.5
7.7
7.3
6.4
3.33.1
 pre-crisis
trend
growth3
2.6
1.1
2.6
1.9
1.1
1.0
1.8
1.0
1.6
0.7
1.6
0.7
1.6
0.6
Eurozon e
Near pre-crisis growth
Below pre-crisis growth
1. Post-crisis GDP / GDP calculated as an extrapolation of pre-crisis trend growth 2. Cushioned by positive output gaps in 2008 3. CAGR
Note: Trend calculated as a various-length OLS regression spanning at least ten years before the crisis
Source: Economist Intelligence Unit; Bloomberg; IMF; OECD; BCG analysis
 growth
2010–
20153
Executives do not believe in a quick recovery
Survey respondents' forecast for the shape of the recovery
%
100
90
10
10
13
10
34
39
39
4
6
20
25
53
4
2
52
45
46
33
4
3
3
3
40
30
12
24
60
50
14
21
80
70
9
64
3
72
57
34
10
0
Global
Note: Because of rounding, numbers may not add to 100
Source: BCG survey "Companies in the Downturn: Expectations, Actions, and Preparedness", March 2010 N = 440
52
V shape
U shape
W shape
L shape
Emerging markets back to normal
Positive GDP growth of emerging
economies cushioned the drop in
world GDP
Forecasts for 2010 show strong
growth in emerging economies
Quarterly change from previous year (%)
Real annual GDP growth (%)
10
15
8
10.5
6
9.4
10
4
7.1
6.8
2
0
5
-2
-4
-6
0
2000 2002 2004 2006 2008 2010
Emerging
Advanced
World
Source: IMF World Economic Outlook, April 2010
Emerging &
developing
countries
4.3
Why worry?
The old world does still matter
• 61% of global GDP in 2009
• China (13%) and India (5%) gaining importance—but it will take time
• Key area for exports from the emerging markets
!
Protectionism is a real threat for China and therefore Asia
Inflation would affect Asia significantly: food and commodities
Investments in developed economies safe?
?
China: the next bubble waiting to burst?
?
What India should do...
Keeping a tight eye on inflation, especially food (social unrest), and
possible bubbles in real estate, micro finance, etc.
Economic reforms needed to attract long term Foreign Direct
Investment with sustainable impact on Indian real economy
• India only ranks 133th on World Banks "Doing-Business-Ranking" (behind
Yemen, Nigeria, Bangladesh, ...)
• Foreign direct investment decreased in H1 2010 by 18%
Corruption seen as major brake on growth and suffering reputation
• Extra 3% GDP growth expected by improving corruption from current level
(similar to Rwanda) to level of South Africa
Continue to master low cost models in various industries (cars, telco
...)
Strengthening exports, especially to Asia, to limit trade deficit due to
future rise in domestic demand
The years ahead?
Fact....or fiction?