ICTF Conference, Barcelona, 13 May 2014 Bart Poublon – Head of Risk Asia Pacific bart. poublon@atradius. com
ONCE UPON A TIME… 2 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
OOOPS 3 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
AGENDA Hot in Asia China Abenomics The Fragile 5 4 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 4 th 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 ■ H 1 2014: First Bankruptcy of Listed Company, Run on a bank, first bond defaults 5 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
CHINA MACRO ECONOMIC RISKS – THE REAL ESTATE BUBBLE 6 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
CHINA MACRO ECONOMIC RISKS - SHADOW BANKING & HIGH CORPORATE DEBTS 7 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 USD 415 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 8 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 9 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 10 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% 11 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
THEY ARE BACK 12 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
ABENOMICS 13 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 14 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
JPY/USD Exchange Rate 1990 -2014 15 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
NIKKEI ON TESTOSTERONE 16 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 $134 bn ■ Bank of Japan forecasts real GDP growth at end of 2014 at +1, 4% 17 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 18 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 ■ What happened in H 2 2013: ■ Large outflows of money from emerging markets and turbulence on EM Stock Exchanges ■ Strong currency depreciation reduces ability to meet foreign debt repayments 19 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 Q 4 2013 remains strong at 5, 7% and better then analysts expectations ■ Rupiah is recovering due to 175 bp interest rate hike ■ Current account deficit shrank to below 3% - in the right direction 20 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$17 bn – Now US$113 bn) ■ No currency pegs in place like in 1997 – adjustments are spread – no sudden shocks in currency rates 21 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
INDONESIA TODAY ■ Largest Economy in SE Asia and 16 th in the world ■ GDP growth 5, 78% ■ 4 th largest population in the world at 250 m ■ 80% of population younger then 40 ■ Natural resources: oil, gas, tin, copper, gold 22 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 ■ 90 m Indonesians will join the consumer class between now and 2030 ■ Only India and China will add more consumers ■ Will be 7 th largest economy behind China, USA, India, Japan, Brazil and Russia 23 Hot in Asia - Barcelona, 13 -05 -2014, Bart Poublon - Head of Risk Asia Pacific
AGENDA Hot in Asia China Abenomics The Fragile 5 24 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 bart. poublon@atradius. com
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