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The Changing Outlook for Emerging EconomiesPiero Ghezzi
Head of Economic and Emerging Market Research
March 2010
PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES AT THE END OF THIS PRESENTATION.
22
2009 was a milestone year
• The 2008-09 recession was the largest post-war downturn but EM economies held reasonably well
Note: GDP gap for past crises estimated using by gap between actual GDP and GDP assuming growth at the potential rate since the beginning of the recession. EM Crisis include Argentina, Brazil, Mexico, Thailand, Korea and Singapore. Source: Haver, Barclays Capital.
-6.0 -6.1
-8.1 -7.7
-4.8
-1.2-0.1
-10.9
-3.8
-12.6-14
-12
-10
-8
-6
-4
-2
0
US Euro Japan UK Brazil China India Russia Avg US Avg EM
% Estimated GDP gap in past crises
Estimated GDP gap (relative to trend) from 2Q08 to 2Q09
3
What was different in EM this time?
Source: World Bank, IMF, Barclays Capital
• Reduced dependence on external finance and large liquidity war chests have strengthened the ability to engage in countercyclical policies
• Embrace of macroeconomic stability by local governments after hard lessons from the 70s and 80s have resulted in more fiscal discipline and credible monetary policy
Building the liquidity war chest Low inflation and better fiscal ratios
Source: BIS, Barclays Capital
0
20
40
60
80
100
120
1985 1988 1991 1994 1997 2000 2003 20065
10
15
20
25
30
35
EM: inflation (lhs) EM: public external debt (rhs)
% y/ y % GNP
0%
4%
8%
12%
16%
20%
1993 1995 1997 1999 2001 2003 2005 20070%
10%
20%
30%
40%
50%
Reserves over GDP (median)Reserves over total external debt (median) RHS
4
EM was able to administer counter-cyclical policies
Source: National Central Banks, Haver Analytics, Barclays Capital
Note: For AEM Economies
• Improved fundamentals allowed EM to undertake counter-cyclical monetary (almost everywhere) and fiscal (in many cases) policies
Change in the cyclically adjusted fiscal deficit during the Asian and global financial crisis
Aggressive countercyclical monetary policies when they were needed the most
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
Change '96-'98 Change '00-'02 Change '07-'09
Fiscal deficit Cyclically adjusted fiscal deficit
% GDP0
1
2
3
4
5
6
7
8
9
01 02 03 04 05 06 07 08 09
US AEM
Policy rates (simple average %)
Source: National Treasury Offices, IMF, Haver Analytics, Barclays Capital
Note: For AEM Economies
5
Increased dependence on China also mattered..
• EM Growth (ex-China) is less sensitive to G7 growth, more to Chinese growth
___________________________Source: IMF, Barclays Capital.Note: EM growth was regressed on G7 and China GDP growth
Less Sensitivity to G7 Growth, More to ChinaChina’s share of global commodity
consumption growth
___________________________Source: Bloomberg, Barclays Capital
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
G7 ChinaEarly period EM betas (1993-99)Late Period EM betas (2001-09)
EM growth sensitivty to G7 growth decreases from early period to late while its sensitivty to China's growth
increases
0% 20% 40% 60% 80% 100% 120% 140%
Oil
Aluminium
Coal
Zinc
Copper
China's share of global consumption growth (2000-08)
6
…and China recovered extremely rapidly
Source: Bloomberg, Barclays Capital
A “V” shaped recovery in China End of recession timeline
6
7
8
9
10
11
12
13
14
2005 2006 2007 2008 2009
0.4
0.6
0.8
1.0
1.2
1.4
1.6
China GDP (% y/ y) China auto sales (mn)
2009 JanFeb Japan ChinaMar Brazil India Korea Indonesia Taiwan AustraliaApr Germany FranceMayJun US Chile MexicoJul Argentina
Aug ItalySep S Africa RussiaOct Canada TurkeyNov UK PolandDec
2010 JanFeb HungaryMarApr Spain
Source: Barclays Capital
7
Self-reinforcing negative EM dynamics of the past were avoided
___________________________Source: Bloomberg, Barclays Capital.
Value of $100 Invested in January 2004
0
50
100
150
200
250
300
350
2004 2005 2006 2007 2008 2009 2010
MSCI EM MSCI World (Developed)Reuters/ Jefferies CRB Barclays GEMS USD
8
It’s not only EM’s advance…
• … but also the decline of developed markets.
• EM countries economic “Sharpe ratios” have more than doubled
___________________________Source: IMF, Barclays Capital.
Better Relative “Growth Sharpe” in EM …
Early
Late
Early LateMea
n4.20%
3.68%
2.10%
1.20%Vol
.3.77%
3.17%
1.30%
2.24%
Sharpe Ratio
1.16
1.22
1.54
0.68
Period :
Growth Rate
(EM Median)
(G7 Median)
9
Many EM Countries show high growth and low volatility
___________________________Source: Barclays Capital.
Growth Sharpe Ratios (1997–2009)
Ven
USUK
Turkey
ThailandSwitz
Swe
S Africa
Singapore
S Ara
Russia
Romania
Portugal
PolandPI
Peru
Mexico
MalaysiaKorea
JapanIta
Israel
Ireland
Indonesia
India
HunGreece
Ger
Fra
Egypt
Czech
Col
China
Chile
CanBrazil
Bel
Nor
AustraliaArgentina
0
1
2
3
4
5
6
7
8
9
10
0 1 2 3 4 5 6 7 8Volatility %
Avg
annual
gdp g
row
th %
Taiwan
10
EM is getting a bigger slice of the GDP pie (I)
___________________________Source: IMF, Barclays Capital.
EM share of world GDP continues to increase
0
5
10
15
20
25
30
35
40
45
90 92 94 96 98 00 02 04 06 08 10 12 14
EM Asia Latam EM Europe & Africa
EM: USD based share of nominal world GDP%
11
EM is getting a bigger slice of the GDP pie (II)
___________________________Source: Barclays Capital.
EM Contribution to Global Growth
Contribution to GDP Growth (% y/ y)
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2007 2008 2009 2010 2011
EMEA LatAm EM Asia (ex China) China Developed Global
12
EM is getting a bigger slice of the AUM pie (III)…
There has been a structural reallocation of money into EM
___________________________Source: EPFR Global, ICI, Barclays Capital. Note: EM and Developed flows include both bonds and
equities
10%
-0.53%
-9.79%
-19%
8.29%
25.16%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Money Market AUM(% Chg)
Fund flows intoDeveloped Mkts (%
AUM)
Fund flows intoEmerging Mkts (%
AUM)
Aug-08 to Mar 09 Mar-09 to Present
13
…consistent with improved returns of including EM in Global Portfolios
___________________________Source: Bloomberg, Barclays Capital.Note: Median values in EM alphas and betas from country-by-country regressions against a short DXY position (FX) and MSCI World total returns. The equity sample
includes the top ten EM markets based on market cap. In Adding EM to the global portfolio: MSCI World includes developed countries. MSCI Global includes developed and emerging countries. Mean is the average of the m/m TR (capital return for equities) over the sample period (Jan 05 to Feb 10). Volatilities (non annualized) are the standard deviations of the return series over the same sample period
1. 70% of MSCI World and 30% of MSCI EM.2. G6 treasuries (G7 ex US)3. Equally weighted US corps, G6 tsy, G7 and EM Corp and Sov.4. Equally weighted long AUD-CAD-NZD-NOK position.5. 50% short DXY, 25% long G10 comm, and 25% long GEMS.
Risk Adjusted Emerging Markets Returns
Adding EM to the global portfolio:
FX Equity FX Equity FX Equity FX Equity
0.67 1.52 1.11 1.4 0.6 1.54 0.55 1.52
0.42% 1.00% 0.52% 0.91% 0.43% 0.56% 0.73% 1.80%
R2 0.27 0.61 0.53 0.78 0.44 0.74 0.24 0.73
EM Medians EMEA Asia LatAm
MSCI WorldMSCI Global Portfolio
(1)US Corps AGIPS
(2)
Portfolio(3)
Short DXY G10 Comm(4)
Portfolio(5)
Mean (0.09%) (0.02%) 0.17% 0.30% 0.40% 0.50% 0.13% 0.21% 0.28%
Vol 5.40% 5.60% 6.20% 1.00% 2.00% 1.80% 2.57% 3.54% 2.66%
Credit FXEquity
Risk Adjusted Emerging Markets Returns
Adding EM to the global portfolio:
FX Equity FX Equity FX Equity FX Equity
0.67 1.52 1.11 1.4 0.6 1.54 0.55 1.52
0.42% 1.00% 0.52% 0.91% 0.43% 0.56% 0.73% 1.80%
R2 0.27 0.61 0.53 0.78 0.44 0.74 0.24 0.73
EM Medians EMEA Asia LatAm
MSCI WorldMSCI Global Portfolio
(1)US Corps AGIPS
(2)
Portfolio(3)
Short DXY G10 Comm(4)
Portfolio(5)
Mean (0.09%) (0.02%) 0.17% 0.30% 0.40% 0.50% 0.13% 0.21% 0.28%
Vol 5.40% 5.60% 6.20% 1.00% 2.00% 1.80% 2.57% 3.54% 2.66%
Credit FXEquityEquity Credit FX
MSCI World MSCI Global Portfolio(1) US IGCorps
G6 tsy(2) Portfolio(3) Short DXY
G10comm(4) Portfolio(5)
Mean 0.12% 0.21% 0.34% 0.42% 0.38% 0.50% 0.05% 0.20% 0.25%
Vol 5.03% 5.26% 5.59% 2.10% 2.46% 2.28% 2.54% 3.44% 2.58%
14
Looking forward…
1. Important to continue limiting vulnerabilities
2. Some thoughts on growth
15
Limiting Vulnerabilities: Fiscal Policy
___________________________Source: IMF, Haver Analytics, Barclays Capital.
Increase in Public Debt (% GDP) from 2008 to 2009Commodity Revenue (% Total Gov. Revenue)
___________________________Source: Haver Analytics, Barclays Capital.
0
2
4
6
8
10
12
14
16
18
Japa US Euro Kore Maly Indo Arge Taiw Phil Vene Indi Braz
Difference (2009 minus 2008)
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Vene Mexi Indo Chil Peru Mala Rus Colo
Commodity Revenues (% Total Gov Rev.)
Multi yr average
• Fiscal deterioration has been greater in advanced economies but EM countries remain very dependent on commodities
16
Limiting Vulnerabilities: Monetary Policy
___________________________Source: IMF, Bloomberg, Barclays Capital.
Hitting inflation targets has been difficult Food weight in the CPI (%)
___________________________Source: Haver Analytics, IMF, Barclays Capital.
NB: max, min and mean of 6mma deviations of inflation from mid target. Lower and upper targets show the deviations to the limits of the inflation bands
-10
-5
0
5
10
15
20
25
30
SA Tur Pol Mex Bra Per Indo Kor Phil
max min mean Lower Target Upper Target
• Need to rethink inflation targeting regimes
0
10
20
30
40
50
60
Phill
ipin
es
Peru
Rus
sia
Chi
na
Arg
entina
Col
ombi
a
Pola
nd
Tur
key
Chi
le
Mex
ico
Braz
il
Sout
h A
fric
a
Hun
gary
Euro
zon
e
Kor
ea
USA
Food weight in the CPI, %
17
Limiting Vulnerabilities: Credit and Asset Prices
___________________________Source: Haver Analytics, Barclays Capital.
Excess money growth and the stock exchange Excess money growth and the property prices
___________________________Source: Haver Analytics, Barclays Capital.
-10
-5
0
5
10
1999 2000 2002 2004 2006 2007 2009
% y/ y
2.5
3.0
3.5
4.0Index
Excess money growthShanghai composite index (Log, RHS)
-10
-5
0
5
10
1999 2001 2003 2005 2007 2009-2
2
6
10
14Excess money growth (% y/ y)
Nationwide property price index (RHS, % y/ y)
• Correlation is too high to ignore
18
Limiting Vulnerabilities: Reserve accumulation
___________________________Source: IMF, Barclays Capital.
EM External debt and reserve accumulation… …but Global Imbalances a problem
___________________________Source: Barclays Capital.
-50
0
50
100
150
200
250
300
Chin Braz Indi Taiw Sing Kore Mexi Indo Colo Chil Vene Peru
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
5yr Reserve Accuml. (USD bn) Reserves to External Debt Ratio (RHS)
China $1.8trn Reserve Accuml.
-800 -600 -400 -200 0 200 400
Asia lenders ex-Ch-Jpn
Japan
Germany
Oil exporters
China
Italy
Australia
UK
Spain
US
USD bn Global Borrowers
Global Lenders
Current Account
• Accumulation of net foreign assets has worked well for individual countries although inefficient for the world
19
Growth: Difference between two regions is remarkable
___________________________Source: IMF, Haver Analytics, Barclays Capital.
Real GDP Growth (% y/y)… Savings and Investment (% GDP)
___________________________Source: IMF, Barclays Capital.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 00-04 05-09
LatAm EM Asia
5yr Avg Real GDP Growth (% y/ y)
10
15
20
25
30
35
40
45
50
1992 1996 2000 2004 2008
EM Asia Saving LatAm SavingEM Asia Investment LatAm Investment
20
Growth: Intra Regional differences key in Asia
___________________________Source: IMF, Haver Analytics, Barclays Capital.
Growth is now dominated by China and India… …And the recent increase in investment as well
___________________________Source: World Bank, Barclays Capital.
• Asia is not as homogeneous as one would think
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008
China India Korea Singapore Indonesia Other
0%
10%
20%
30%
40%
50%
60%
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006
Chin Indi Indo Mala Phili
Investment (% GDP)
21
Growth: Demographics will accentuate intra Asia differences
___________________________Source: CIA World Factbook, Barclays Capital
Outside South Asia birth rate below replacementBy 2020, populations in North Asia will have peaked
___________________________Source: United Nations, Barclays Capital.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
PK PH MY
BD IN
Wor
ld ID US LK VN
CN UK
TH GE
KR JP SG HK
Births/ woman (2009 est) Replacement rate
0
200
400
600
800
1000
1200
1400
1600
1800
1980 1990 2000 2010 2020 2030 2040 2050
0
20
40
60
80
100
120
140
China India Japan (RHS) Korea (RHS)
Millions
22
LatAm Growth: Brazil has gained weight relative to Mexico
Latin American growth composition
___________________________Source: IMF, Barclays Capital.
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008
Brazil Mexico Venezuela Colombia Chile Peru Argentina Other
23
Latam Growth: larger economies save too little…
___________________________Source: World Bank, Barclays Capital
Gross domestic savings in Latam (% GDP) Fixed Investment in Latam (% GDP)
___________________________Source: World Bank, Barclays Capital.
10%
15%
20%
25%
30%
35%
40%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Braz Mexi Chile Peru
Gross Domestic Savings (% GDP)
10%
15%
20%
25%
30%
35%
40%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Braz Mexi Chile Peru
Investment (% GDP)
24
.. and the region needs to live with worsening CA balances
___________________________Source: IMF, Barclays Capital
Latin American Current Account (% GDP)
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%19
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
E
2010
F
2011
F
LatAm CA (% GDP)
25
Latam: Composition of foreign liabilities is improving
___________________________Source: IMF, Haver Analytics, Barclays Capital.
LatAm Foreign Liabilities (USD bn)
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Foreign Direct Investment Portfolio Equity Portfolio Bond
Latam: Foreign Liabilities Breakdown (USD bn)
2626
Analyst Certification and Important Disclosures
Analyst Certification(s)
I, Piero Ghezzi, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.
Important Disclosures
For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi-bin/all/disclosuresSearch.pl or call 212-526-1072.
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2727
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US13418