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THE ECONOMIC & FINANCIAL MARKET
OUTLOOK INTO 2008:
The U.S. And Asia In The “New”
Pacific Rim Economy
A Presentation To The Asia/Pacific Business
Outlook 2007
Los Angeles, California
March 27, 2007
ASIA AND THE GLOBAL ECONOMY
* Still The Global Economy’s Star Performer:
--Economic Growth Of 7.2% A Year In 1998-2006 Vs. 5.7%
In All Emerging Markets, 3.9% Globally
* A Growing Presence In The Global Economy
--Asia’s Share Of World Output At 28% In 2005 Vs. 23% In
1996, 18% In 1990; Increased Role Of Domestic Spending
* Asia As An Increasingly Important Export Growth
Engine For The U.S.
--16% Of U.S. Exports, But Over 25% Of Our Past Year’s
Export Growth
ASIA'S IMPORTANCE IN DOLLAR
"RECYCLING"
MAJOR NET CAPITAL EXPORTERS, 2005
MAJOR NET CAPITAL IMPORTERS, 2005
Percent Of Total
Other
43%
Japan
14%
Percent Of Total
China
14%
Other
35%
Singapore
3%
Oil Exporters
26%
Source: International Monetary Fund
U.S.
65%
CURRENCY DIVERSIFICATION OF INTERNATIONAL
RESERVES MORE EVOLUTIONARY THAN
REVOLUTIONARY
* The Dollar Still The Dominant “Key Currency” In World
Trade And Finance
--Diminishes With U.S. Output Share, Euro Acceptance
* Potential Losses To Central-Bank Investment Portfolios
From An Abrupt Move Out Of The Dollar
--Implications For Exchange Rates, Trade Patterns
* Asset (Vs Currency) Diversification Potentially More
Significant
MOVE TOWARD NON-DOLLAR RESERVES MORE EVOLUTIONARY THAN
REVOLUTIONARY
Dollar Share Of Central-Bank Currency Reserves; In Percent*
72
70
68
66
9/06
64
62
60
1990
1993
1996
1999
* Excluding the effects of exchange-rate changes.
Source: International Monetary Fund
2002
2005
OTHER KEY FINANCIAL ISSUES IN
PACIFIC BASIN TRADE AND FINANCE
* Role Of Japan, China As A Source Of Global Liquidity
--Excessive Money Growth As The Main Engine Of More Rapid
Exchange-Rate Appreciation In China
* Impact Of Greater Exchange-Rate Flexibility On Local
Economies, Asian & U.S. Financial Markets
* Impact Of Global Interest-Rate Changes On Asian
Financial Stability
--The Flashpoint Shifts From Banks To Stock, Bond Markets
ASIAN BALANCE OF PAYMENTS FAR HEALTHIER THAN
DURING BEFORE THE 1990S GLOBAL FINANCIAL CRISIS
Values In Billions Of Dollars
350
300
250
200
150
100
50
0
-50
-100
Avg., 1993-96 Avg., 2000-03
2004
2005
2006
Sources: International Monetary Fund; Institute For International Finance
2007
ASIA STILL TILTED AWAY FROM
BANK FINANCING
Percent Of Private-Sector Financing
27%
127%
21%
115%
15%
9%
2006 Est.
103%
3%
-3%
-9%
Bank Lending, Ex.
Repayments
(Left Scale)
91%
Equity & Other Non-Bank,
Private Financing
(Right Scale)
-15%
79%
-21%
-27%
1993
1995
1997
1999
Source: International Monetary Fund
67%
2001
2003
2005
2007
THE CASE FOR AN EXTENDED
“PAUSE” BY THE FEDERAL RESERVE
* Economic Growth Strong Enough To Keep A
Lid On Unemployment
* Wage Pressures Counter Subdued “Core”
Inflation
* Financial-Market “Liquidity” Still Ample
* “Effective” Interest Rates Still Fairly Low
ARE INTEREST RATES VULNERABLE TO AN UPWARD "RE-PRICING?"
The Treasury Yield Curve, Selected Periods; Yields In Percent
5.4
5.2
Current Fed Funds Target Rate
(6/29/06)=5.25%
5.0
4.8
3/16/07
4.6
12/4/06
4.4
4.2
0
5
10
Source: Bloomberg Financial News, Inc.
15
20
25
Years To Maturity
30
35
40