Australia financial & business risks 2012

AUSTRALIA – ‘

LUCKY

COUNTRY’ ?

P R E S E N T A T I ON F

I NA N C I A

L I NV E S T O R S

PA S C A L VA N D E R S

T R A E T E N – N O V E M B E R 2 0 1 3

P A S C A L N E WY O R K @

H O T M A I L. C O M

C O P Y R I G H T 2 0 1 2 BY PA S C A L VA N D E R S T RA E T E N

Copyright © 2012 by Pascal vander StraetenAll rights reserved. No part of this publication may be

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LUCKY COUNTRY Australia has been on a ride to the moon over the past few years with rising

stocks, Aussie Dollar, property … with couple of brief stops underway.

BUT: What is the impact for Australia of a change in China’s growth model? What if the QE (money printing) in USA and EU would fail and thus end

supporting economic growth? How are socio-demographic trends shaping Australia’s economic future? Is Australia at risk from the Dutch disease?

=> How will world events affect the investment climate in Australia?



WHAT SAVED AUSTRALIA LAST TIME? Australia dodged recession in 2008/09 courtesy of some good economic

management – and some luck. Good management:

effective policy stimulus; the flexible AUD; strong financial system and limited housing stress.

Good luck:China/Asia economic boom favorable demographics; the ‘capex’ pipeline; a rural bounce.


But the number of members is dwindling !!


AUSTRALIA MACRO RISK MAPPING Real issues facing Australia Macro-economic indicators: Aussie Dollar vs. FX Aussie interest rates Aussie commodities & agriculture Aussie Inflation & GDP Aussie FDI Real estate market Business risk radar for financial services sector China Risk Basel 3 Outlook 2012-2013


THE REAL ISSUES FACING AUSTRALIA TODAY


THE REAL ISSUES FACING AUSTRALIA TODAY

Australia = multi-speed economy with booming resources sector (but exposed to China economic growth) but many other sectors exposed to low growth and high labour costs.

Capital management is key concern given that sources of funding usually considered reliable and predictable are either restricted or not available.

• Negative effect on borrowing costs, but increased activity in hybrid and corporate bond markets.

Despite high Aussie dollar Australia attractive for inbound investment related to mining and farming due to:

• Investment in Australian assets seen as proxy for investment in China (but with greater transparency and lack of problems to bring money in/ out of China)

• Aussie has held its value for some time given outlook for period of extended low interest rates in other major economies such as the US.

Shortage in creation of high added-value - insufficient manufacturing & processing. Huge needs in relation to infrastructure & logistics related investments (PPP).


AUD: SAFE HEAVEN OR READY TO TUMBLE ? (1/4)

AUD against USD is climbing now to near $1.06 For 2013 the AUD will remain high due to:

Commodity exposureTerms of Trade @ 140-year highAsian exposureInterest rate differential (cf. carry trade)Stellar fiscal positionAAA-rating and sound financial system

Very fashionable today to refer to Aussie Dollar as a "safe haven" currency. Once the "Aussie" broke through parity – one for one with the US dollar – in 2011, the mainstream press saw it as a sign of Australia's economic health and vitality.

Hardly a week goes by where some columnist or economist doesn't refer to "our strong dollar" as evidence that everything in the economy is fine. Really look at it for a second and think about what it means.



What brought the AUD to today’s levels? Some of these are fundamentally driven, such as the relative stronger economic outlook for Australia,

while others have been more technical in nature (i.e, the interest rate differentials between Australia and the rest of the world):

① Despite both the global and domestic economic slowdown, the Australian economy continues to grow faster than the rest of the world, and has not suffered to the same extent as other developed markets through the global financial crisis and the painful recovery process. This has resulted in Australia benefitting as a place to invest for both domestic and offshore investors, resulting in an increased demand for the AUD.

② Australia continues to have higher relative interest rates compared to the rest of the world. Both the cash rate and 10-year bond yield in Australia is higher than other economies, which makes it attractive for investors seeking ‘yield’ in regard to their investments.

③ The ongoing demand for Australia’s mineral and energy resources (i.e, coal, iron ore, gas, etc.) continues at a strong pace. While these investments are traded in USD, the by-product of the resources demand assists in the ongoing demand for the AUD and its appreciation.

④ The demand for real assets (i.e, gold) by global investors has also resulted in the USD falling, and by default the AUD has appreciated against the USD. There is a strong inverse relationship between the price of gold and the movement in the USD. As concerns about the ongoing stability of the USD as the global reserve currency continue, this has directly benefited real assets such as gold, as well as other commodities.

⑤ The lack of demand for the USD on a global basis has seen the USD depreciate not only against the AUD but other currencies. With US cash rates close to zero (at 0.25 per cent), and the US Federal Reserve continuing to ensure a high level of monetary liquidity in the economy via its quantitative easing (QE) and other programs, this has led to the ongoing decline of the USD, despite the ongoing financial instability across Europe.



BUT:Actually AUD is volatile. Foreign money FLOWS IN TO and OUT OF Australia quickly. BUT: since 1901, the Aussie has spent 75% of the time above parityTHUS: the AUD above parity with the USD is the norm rather than the exception, ALBEIT during last 30 years it was below parity.

Maybe the days are back of Carry Trades where a trader buys AUD funded with a cheaper currency (Yen for example). Basically the trader goes long AUD/JPY in the hopes of earning daily rollover and capital appreciation. But three conditions need to be fulfilled: 1. low volatility; 2. investors confidence on recovery; 3. central banking need to talk about increasing interest rates.


AUD very volatile !! Look at 2008 !

When crash happened investors fled to USD


AUD movements strongly correlated with Asian (except Japan) economic and financial indicators.


AUSTRALIAN INTEREST RATES (1/4)

RBA recently cut cash rate by 25 bps down to 3.25%.

The labour market is a key driver of household incomes and job growth (or unemployment), and a rate cut would support job growth as well as consumer spending.

The objective of the (expected) rate cut would not be to bring down the AUD but instead to bring in the ST more oxygen into the economy.


AUSTRALIAN INTEREST RATES (2/4)BUT: Uncertainties persist in terms of global imbalances … And banks reluctant to reduce their interest margins and pass on any (future) cuts as

they struggle with their own funding and costs. Exceptionally low yields are cyclical Mood in investment markets might change with further QE and more sovereign debt

purchases, and in China with more monetary boost. QE has been at targeted at purchasing LT bonds driving prices up and yields down

Consequence: jump in ST bond yields and lower LT bond yields, and switchback from investment funds into stock and property.

Now, Fed is simultaneously buying LT bonds and selling ST bonds thereby resulting in lower LT yields and higher ST yields. Lower LT yields should help boost activities in LT investments such mortgages, project finance, buying cars, etc.


Aussie 10 yr. bond yield is higher than T-Bond (3% vs. 1.64%)

Cash rate is now @ 3.25% !!

This means that AUD is TODAY more attractive to foreign

investors than USD

Australian interest rates (3/4)


AUSTRALIAN INTEREST RATES (4/4)Country Cash rate 10 yr yieldAustralia 3.25% 3.19%USA 0.25% 1.77%United Kingdom 0.50% 1.82%EU (Germany) 0.75% 1.57%Japan 0.08% 0.77%


AUSTRALIA – COMMODITY – IRON ORE

Volatility iron ore price due to impact ST contracts and large share of iron ore traded at spot prices (50% of all Australian iron ore contracts)

Prices expected to remain at same low levels or even lower. Substantiated by large expansion projects abandoned by Fortescue Metal Group, BHP Billiton, etc

Over eight yrs average AUS price x8 !!!

-25%


AUSTRALIA – COMMODITY – COAL PRICE

Sep-07Dec-

07Mar-

08Jun

-08Sep

-08Dec-

08Mar-

09Jun

-09Sep

-09Dec-

09Mar-

10Jun

-10Sep

-10Dec-

10Mar-

11Jun

-11Sep

-11Dec-

11Mar-

12Jun

-12Sep

-120

50

100

150

200

250

Coal, Australian thermal coal Monthly Price - US Dollars per Metric Ton

Whether it is coking coal or thermal coal, prices are down by 25% compared to 12 months ago given lower manufacturing in the world and thus lower demand.

Since June ‘08: -50%


AUSTRALIA – COMMODITY - GOLD

0

500

1000

1500

2000 Investors are going for gold as their top commodities choice in what looks like a turbulent fourth quarter for the sector, planning for the possibility of a "fiscal cliff" that could shrink the U.S. economy and spur more money printing.

Gold price more than doubled (2.3x) since start GFC.

Back to same price level as early 80’s !!


AUSTRALIA - AGRICULTURESince record-breaking prices in 2008, global food prices began to subside. However, in October 2010, prices once again rose to new heights. FAO food price index

The worst drought in the US for almost a century, combined with droughts in South America and Russia => Hard impact on production of crops used in animal feed (corn and soybeans). Subsequently more pigs & cattle slaughtered increasing meat supply, and hence ‘temporarily’ depressed prices as the "slaughtered" stock clears the market. However once that is gone look for various food-related prices to soar: a process which will likely take place in early 2013, just in time to add to the shock from the Fiscal Cliff.


FOOD SECURITY Propelled by swelling and evolving populations, food security is the macro-driver

for a surge in interest and importance of the agribusiness, food and beverage industry.

Food security is not merely supply & demand of changing demographics, but also the impacted by the rise of the middle class & urbanisation.

Australia consumes only 40% of its agricultural produce. Key factor is also the availability of water (and in Asia – the whole problem of the

geopolitics of water). Major issue is shortage in skilled labor and ageing farming population. To bridge

this, build closer trade relations with Asia in turn providing perspectives for job security and business growth for local Australians.

Develop better sector and enterprise level promotional and market-development strategies to better position Aussie high-value products in domestic and foreign markets (build a stronger Aussie brand).

Put needs of agriculture high on list of investment priorities of (local) governments such as infrastructure. Without the latter output will be restricted and costs inflated.


CPI, GDP GROWTH, TERMS OF TRADE CPI is at around 1.2% down from 1.6% (and even 3.6% mid 2012). Carbon tax will boost CPI by 0.4 ppt but still unclear as the carbon tax is first impact

on the wholesale level and unclear how it will be transferred on the household levels. CPI should increase to around 2.% by 2013 due to impact of this carbon tax.

Structurally strong Terms-of-Trade (ToT = relative prices of exports and imports) underpins Australian economic activity. BUT: higher savings rate + slower credit growth will remain.

No real catalyst for household spending to re-accelerate despite rate cuts in late 2011…

Due to: Low risk appetite Banks + deleveraging processPlus households face too many uncertainties and refrain from spending.Basel 3 has also an effect !


Structurally strong ToT underpins Australian economic activity.

BUT: ‘higher’ savings rate and slow credit growth will remain.


EXPORTS OF GOODS AND SERVICES, 2010 - SHARE OF EXPORTS BY SECTOR

Top 10 Export markets:1. Asia: 55%2. USA: 5%3. UK: 4%4. NZ: 4%


AUSTRALIA'S INDUSTRY STRUCTURE 2010

Farm+Mining+Gold = 65% of exports but only:

13% of GDP 5% of jobs


Despite expensive AUD inbound FDIs have continued to increase (+6.5% in 2011)


REAL ESTATE MARKET (1/2)The Basil Fawlty approach - "Whatever you do, don't mention the war.” There is no property bubble, but price gains of early 2000s

should not be repeated. Usually cuts in RBA cash rates go hand-in-hand with

increase in home prices BUT ‘fortunately’:• Banks have less risk appetite

(Basel 3 impact). HOWEVER ‘unfortunately’:• Household indebtedness is

already very high.• Job market is showing signs of

weakness (impact GFC). AND ‘dilemma’ for RBA • if and when AUD would fall

adding inflationary pressures …

Failing to acknowledge the dilemmas won’t make the choices easier …


REAL ESTATE MARKET (2/2)Risk mapping:• Low LTV (around 70%)• Low proportion of ‘low doc’ loans• Solidity banks’ balance sheet

BUT:• Houses are overvalued (around 30-40% above fair value)• If hard landing in SE Asia (China), falling mineral exports, deteriorating terms of trade, and

reduced household incomes leading to fall in housing prices.• Value of LMI’s – in the event of market crash – is worthless due to small equity cushion of

LMI’s

AS OF TODAY - It’s a BUYER’s market and the market is showing signs of strengthening thanks to: Falling interest rates increasing buyers’ confidence Static prices allowing affordability factor to increase Positive employment prospects allowing people to remain confident on LT security Savings continue to rise Overall outlook on USA and EU is slowly improving

BUT if hard landing in Asia, then the worm may have turned …

AND risk for bubble …


AUSTRALIAN BANKING ASSETS VS GDP

In the USA, top six banks (*) represent 60% of US GDP.

In the UK, they represent close to 600% of GDP.

Here are the top six and their total assets:1. Bank of America Corp., $2.264 trillion2. J.P. Morgan Chase & Co., $2.246 trillion3. Citigroup Inc., $1.957 trillion4. Wells Fargo & Co., $1.260 trillion5. Goldman Sachs Group Inc., $937 billion6. Morgan Stanley, $831 billion

Aussie GDP in 2012 is $1.57 trillion (est.), and assuming stable banking assets, ratio falls to 127% !!


MARKET PERCEPTION OF AUSSIE RISKCDS spreads banks Itraxx Australia index

levels

CDS prices a proxy for the spread over swap that banks/ govt. will have to pay for 5 year unsecured debt


September 2012 and LT FC S&P rating


RISK RADAR OF AUSSIE BANKING INDUSTRY (1/4)

=> Australian banks did shield well from GFC thanks to more conservative lending policies as well as more solid capital ratios.1. Strong current profitability (in terms on RoE) … BUT in near future will be hurt through: Basel 3: requires a highly liquid balance sheet (lower yield) + higher capital base + focusing on

lower revenue source activities (higher (Stressed)VaR). Plus Low LT yield environment: banks typically make money by lending long and borrowing short. Aussie banks not very ‘international’ (except ANZ and NAB)

2. Asset quality – despite sound underwriting standards - might be hurt:

Exposure on China via resources sector.

Exposure on real estate (commercial and residential). Despite deleveraging and higher savings rate, household leverage is still high. Job employment is key !!

Watch out for LMI (Genworth, QBE LMI)

150% !!



3. Potentially a funding problem as:• End 2011, wholesale funding still represents approximately 40% of total funding (excluding

derivatives), and half of it is sourced from offshore markets (although importantly the lion share is long-term funding).

• According to the RBA, Australian financial institutions had offshore borrowings of just $40 billion in January 1990, $123.5 billion in January 2000, and $314 billion in January 2012. In the context of the GFC this reliance on international capital is considered a

weakness reason.Fortunately in 2012 deposit growth outpace credit growth making wholesale funding

needs more manageable.• Dominance of four majors with similar funding patterns expose them to contagion risk

due to:Subdued recovery in RMBS market adversely affecting smaller market participants

to raise funding at competitive rates.Foreign banks withdrawing or scaling back their Australian operations.Further consolidation in the Australian banking sector since GFC.



• FUNDING ALTERNATIVES:

① Fostering retail bond market w/ support distribution channels combined w/ finding ways to flow money from super funds to banks .

② Re-emergence of RMBS securitisation with support of AOFM as key investor.

③ Covered bonds issuance ($130bn cap for the Four Majors, and only $30bn has been used up now – depends on window of opportunity in market).



KEY IS: • Concept of SELF-FUNDING BANK.

Ideally grow a (OVERSEAS) business where a relevant commercial franchise makes sense, potential for profitable growth exists, and a source for tapping into local funding. Growing is not just focussing on the assets’ side but also on funding.

Not only the loans-to-deposits ratio should be monitored but also the funding of the securities portfolios (cf. 16% of B/S).

Keep permanent efforts to reduce reliance on wholesale funding (end 2011 still represented approximately 40% of total funding (excluding derivatives), and half of it was sourced from offshore markets (although importantly the lion share is long-term funding)).

BUT: Risk is also that as result of restricted bank lending => superannuation funds will start themselves providing capital and loan funding to real estate project => disintermediation


BASEL 3 = NEW RULES (1/2) BASEL 3 = foster a more stable banking environment and

avert future banking crisis. GFC started in 2007 with burst US housing bubble causing

domino effect in terms of defaults and losses for US and international banks.

Markets shut-down due to absence of confidence and banks overly reliant on wholesale debt markets (in~ or offshore) = LT assets financed with ST liabilities

Governments had to step in to increase capital buffer to re-establish trust towards financial institutions.

Then Euro-zone crisis starting with Greece and Ireland.Either bad public finances of a government affected the domestic

banking sector=> Greece, Portugal, Italy

Or, weak asset quality banks affected the public finances of the government=> Ireland and Spain


BASEL 3 = NEW RULES (2/2) Higher and more conservative capital ratios with Tier 1 +Tier 2

ratio @ 13% up from 8%: Aussie banks are OK. Liquidity Coverage Ratio: to ensure that sufficient high quality liquid

resources are available for one month survival in case of a stress scenario. Introduced 1 January 2015.

=> Shortage of liquid assets on Aussie market. Net Stable Funding Ratio: to promote resiliency over longer-term

time horizons by creating additional incentives for banks to fund their activities with more stable sources of funding on an ongoing structural basis.

=> 40% of funding is wholesale debt, of which 20% offshore. Leverage ratio: A supplemental 3% non-risk based leverage ratio

which serves as a backstop to the measures outlined above.=> Aussie banks are OK.


IMPACT BASEL 3 ON AUSSIE BUSINESSES More difficult credit conditions for SME, not only in terms of loans but also issuance of

equity and corporate bonds. Higher financing costs for off-balance sheet lending products such as letter of credits,

guarantees, credit facilities, liquidity lines, etc. Better focus on other forms of trade financing, such as overdraft, factoring, cash-in-

advance terms and export credit insurance. As trade financing costs are liable to rise => country risk information and market

intelligence increasingly important aiming at minimising costs and risks when dealing with foreign counterparties.

In the medium term, as banks increase their capital ratios by reducing lending, access to credit is likely to become more difficult and borrowing costs are liable to increase.

For bigger companies equally difficult but more affordable to go through raising equity or issuing debt (i.e. selling debt bonds on the open market to finance their operations).

Here we refer to what one might call shadow banking, meaning whereby banking services are being offered by for instance insurance companies, hedge funds, pension funds, brokers, investment banks, etc.

This reform also offers opportunities for companies providing services to banks, such as legal consultancies and IT firms.


HOW DOES BASEL 3 AFFECT ASIA? (1/2) Asia different from the West. Problems in the West = leverage and regulatory flaws, Problems in Asia = dependence on exports and exposure to

the volatility of international financial flows. Asia already began de-leveraging and tightening banking

regulations after the Asian Financial Crisis of 1997- 1998. Asian banking products are also deemed less complex and

less risky. US and EU natural drivers of financial reforms due to

absence of Asian position and under-representation of Australia, Korea, HK, Singapore, China, and India in international decision-making.


HOW DOES BASEL 3 AFFECT ASIA? (2/2) Basel 3 reforms not necessarily appropriate to Asia (& Australia)

context. Asian (& Australian) regulators adopt slightly different

approaches to innovation, regulation and liberalisation => ‘regulatory arbitrage’.

Ironically these new global regulations may see a lesser role for foreign banks in Asia.

European banks for example will be focusing on shoring up their capital, and may not have quite the appetite for Asian expansion.

All of which means that, over time, Asia’s banks will grow stronger


CHINA RISK (1/2) “First, China does not export revolution; Second, it

does not export famine and poverty; and Third, it does not mess around with you. So what else is there to say?”

China needs to re-balance its growth model: Until recently lower outbound foreign direct investments focusing on securing raw materials and energy.

Onwards (12th Five-Year Plan in 2011): focus on sustainable, renewable and broad investments will grow, as the focus of growth shifts towards increasing its domestic market and boosting home grown consumption, and away from an over-reliance on the exports industry.


CHINA RISK (2/2)Henceforth: • on the one hand the expected increase of Chinese capital

seeking investment opportunities requires:a clear China strategy is essential for the future growth of

all Australian businesses.joint ventures, partnerships and other innovative

arrangements with Chinese partners should be considered.

• on the other hand a broad range of Australian industries have been recipients of Chinese investment money in recent years, including manufacturing, transport, construction, business services, and wholesale and retailing, and these investments will potentially decrease.


OUTLOOK 2012 - 2013


FROM A MACRO PERSPECTIVE:INCREASE IN DOWNSIDE RISKS

Further weaknesses in advanced & emerging economies: USA: Initial improvement US economy tailed off + uncertainties fiscal cliff. Eurozone: (mild) recession in 2012-2013. BRICS: Hard landing or slowing growth momentum in emerging market

economies.

Energy + food prices will rise, but not commodities: Mid 2013 : Rise in energy prices (geopolitical reasons + improvement global

markets). Due to adverse weather conditions : upward pressure on agricultural and food

prices. Commodity prices will remain ‘depressed’.

Geopolitical flash points on the rise: South China Sea: China, Japan, and SE Asian countries => key zone for ToT. Middle East: Syria, Israel, Iran, Egypt => key zone for level oil price.


FROM A FINANCIAL MARKETS PERSPECTIVE:

MORE ‘’FAVOURABLE’ INDICATORSUSA: • Short-term interest rates @ zero. • Long term yields (10 yr bonds): equally low (at 1.6%) through

Quantitative Easing. • USD will remain low (fiscal cliff).• Probable additional QE to mitigate effects fiscal cliff

EU area: • Interest rate will remain unchanged at 0.75% (refinancing rate) and

1.50% (marginal lending facility). EONIA (overnight rate) average 0.25%.• Yields on AAA rated long-term government bonds - low at 1.9%.• EUR will remain undervalued.• Continued QE (buy-back sovereign bonds)


HOW WOULD AUSTRALIA BE AFFECTED? (1/3) AUD will continue to appreciate against USD and EUR due to too

many uncertainties facing USA and EU-zone. Flight to safety for investors, and hence higher demand for AUD.

Further cuts in cash rate by RBA down to probably 2.75%. However effect rate cuts on economy will remain limited due to banks unwilling to pass through in terms of lower mortgage rates, etc.

CPI will remain under control given slowing down of Asian economic engine, and hence spill-over effect on Australian GDP growth and prices.

GDP growth will decelerate slightly but remain strong comparatively (3.0% for 2013-2014 down from 3.5% in 2012).

Long term (10 yr) yields will remain very low. Cost of funding banks increasing and risk appetite decreasing.


HOW WOULD AUSTRALIA BE AFFECTED? (2/3)Spill-over effect from weakness of Western economies (EU and USA) through: Lower volume consumption & production EU & USA = lower Chinese

exports to EU & USA. In turn: slowing economy in China and SE Asia both in terms of

manufacturing leading to lower imports from Australia. Lower volume of investment from EU & USA in Asia. Deleveraging by EU & USA investors shoring up domestic activities

leading to drying up of financing sources for Asia & Australia. Higher demand for AUD (safe heaven in CGS) resulting in continued

expensive AUD fx rate.


HOW WOULD AUSTRALIA BE AFFECTED? (3/3)

• AUD remains overvalued hurting exports but stimulating imports.• Cost of Aussie labour is higher than rival economies; manufacturing

part of GDP is too low (below 15%).• Banks are reducing their risk appetite and hence lower/ weaker

financial conditions.Strongest growth Moderate growth Downside risk

Internet buying & imports

Staples (groceries, food, cosmetics)

Discretionary retail

LNG & iron ore mining +Infrastructure

Horeca Real Estate + Manufacturing

Outbound tourism Health, defence, education

Domestic & inbound tourism

Job losses in sectors exposed to high AUD, weak discretionary consumer spending, etc

Job gains in resources + infrastructure, government, horeca, and stapled.


INVESTMENT STRATEGY 2013 (1/2)Internationally, we all agree that:

Huge challenges and significant uncertainties, BUT …. On long run fundamentals will re-assert themselves.

Domestically:

Focus should be in traditional industrial businesses focussed on operating efficiency and strong market positions.

Focus on long term prospects for businesses considering a full business cycle. Look at how much cash flow a business can generate in average year.

Behavioural finance


INVESTMENT STRATEGY 2013 (2/2)In practice: Thanks to low interest rate environment: refinance & consolidate you

existing debt to reinforce balance sheet and improve cash flows. Let the banks work for you, and not vice versa. Despite low interest rate environment: avoid banking finance for NEW

capital expenditure projects as banking conditions will be harsher. Focus on AUTO-FINANCE new projects with operating cash flow. Banks are like an insurance policy: when you need it, they are not

there to help you. Now, obviously the more internal capital you generate, the lower the

return on this internal capital. BUT FOCUS on long-term returns instead of short-term profitability.


THE FUTURE IS YOURS (1/6)Australia has everything it needs to remain a ‘lucky country’: High quality of education ‘Stable’ political environment & sophisticated financial

sector Big country with easy access to commodities, agricultural,

and energy sources Located in booming region


THE FUTURE IS YOURS (2/6)So, while things are still booming Australia seize NOW the moment :AT THE GOVERNMENT – POLICY LEVEL: Become a real economic/ political partner of SE Asia (f. ex. Indonesia): built closer/ deeper

relations and invest massively in these countries (f. ex. role of Japan today in Burma). Particularly now that Australia is seating at UN Security Council. Obstacle: high Aussie dollar and competition from cheap imports.

Open-up ‘new’ markets for exports (South America) in addition to NE/ SE Asia. Brazil is a powerhouse with a huge domestic market Lots of potential for exploration and development companies

Sign more FTAs: Australia has only FTAs with six countries (New Zealand, Singapore, Thailand, US, Chile and ASEAN). The countries covered by these FTAs account for 28 per cent of Australia's total trade. Under negotiation: China, GCC, India, Japan, Korea, Malaysia, and Indonesia. They cover for a

further 44% of Australia’s trade. FTA’s give, amongst others, protection of intellectual property rights, access to local government

procurement and competition policy. Invest in domestic infrastructure projects through PPP such as airport, high way, ports,

railroads, river navigation … with help of Asian banks. Wagga Wagga: Riverina Intermodal Freight & Logistics Hub, Airport Master Plan.


THE FUTURE IS YOURS (3/6)AT THE GOVERNMENT – POLICY LEVEL: Put needs of agriculture & mining high on list of investment priorities of (local)

governments such as infrastructure. Without the latter output will be restricted and costs inflated.

Curtail red-tape and make Australia more business friendly (Government, Politics and Businesses should NOT be at odds). For Wagga Wagga: improve speed approval process and strengthen Council support to

businesses.

Both leading political parties should sit together and agree on a bi-partisan ‘Marshall’ plan to re-invigorate Aussie economy. In the case of Wagga Wagga: built more conference and storage facilities, increase reliability of

power supply, improve availability and pricing for residential and industrial land.

Improve industrial relations by looking at social model in Germany, Belgium, Scandinavia.

Create a R&D friendly environment as more R&D means a smarter country.


THE FUTURE IS YOURS (4/6)AT THE LEVEL OF THE INDUSTRY – COMPANY: At micro-level: reinforce bottom P&L in terms of cost control, efficiency, and

productivity outcomes. Expand R&D funding to provide higher-added value products

In Wagga Wagga/ NSW: more investments in agricultural R&D allowing productivity to grow further in the sector

Create more higher added-value products in Australia. For example: grow a local industry that converts its ore to alloy metal (f. ex. value of titanium

alloy is 100 times greater than titanium ore). Examples in Wagga Wagga: Riverina Oils & Bio-Energy, Renewed Metals Technology Sell solutions – products bundled with value-adding services (so transform yourself from just

a manufacturer or service provider to a total package problem-solver for your customers). Add new services to existing products => Thus ‘sell solutions’ instead of merely products

and services.


THE FUTURE IS YOURS (5/6)AT THE LEVEL OF THE INDUSTRY – COMPANY: Help create Asian market with domestic consumption, and partner-up

with Asian companies to gain access to capital and markets. Major issue is shortage in skilled labor and ageing farming

population. To bridge this, build closer trade relations with Asia in turn providing perspectives for job security and business growth for local Australians.

Develop better sector and enterprise level promotional and market-development strategies to better position Aussie high-value products in domestic and foreign markets (build a stronger Aussie brand).


THE FUTURE IS YOURS (6/6)AT THE LEVEL OF THE INDUSTRY – COMPANY: Involve universities in building a competitiveness cluster enabling a

collaborative research among R&D labs, the university and local companies.

Currently as example the National Wine and Grape Industry Centre To do: create a manufacturing excellence centre in relation to grain (production

of caramel, starches & flour, etc) and seed oils. Bridging funding needs of venture capital funds through superannuation

SUBJECT to more professionally run VCs (more selective, transparent and disciplined pickers & managers of early stage ventures, and higher capital commitment from the GP).

Capture ‘savings’ from household to drive further Aussie domestic consumption.



ATTACHMENTS


INTERNATIONAL POLITICAL AGENDA - REMAINING MONTHS 2012

October - China: change in leadership (fifth generation - Xi Jinping is anticipated to take over from President Hu Jintao)

November - USA: presidential elections + fiscal cliff

Nov/ Dec – Japan: new elections as govt just resigned

Oct/ Dec – EU: additional building blocks


EU & UK RISK Deeper recession/ slow growth Oversized governments in EU German constitutional court approved ECB tools Drive to build EU banking market under supervision ECB &

EBA Project to build an EU political federation, but will take time


USA RISK Oversized government and increase in gvt debt (now > 100%) Increasing government debt volume: private sector is in

better shape than public sector (manufacturing as well as financial services industries)

Deeper deficit – current account increase to $137 bn (up from $120 bn in June 2011)

Political antagonism between Democrats and GOP – debt ceiling & fiscal cliff

Stagnation unemployment and even slight increase unemployment rate => income growth remain weak.

It means that supply-side price shocks (oil and food) will put discretionary spending under pressure and also means that deleveraging of households will be more difficult.


EMERGING ASIA RISKGeopolitical flash points: China & South China Sea: Japan, Vietnam, Philippines Thailand & MalaysiaGlobal slowdown: Contraction in exports in the region Manufacturing inventory is down Industrial production and overall GDP decline A cyclical correction in China combined with sub-trend growth in

USA and EU will represent a huge challenge for East Asian countries

North Asia is struggling (Korea and Taiwan) ASEAN is also vulnerable except Philippines performing well

Date post:	20-Mar-2017
Category:	Economy & Finance
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Australia financial & business risks 2012

Economy & Finance