See the Disclosure Appendix for the Analyst
Certification and Other Disclosures
Subprime Crisis and Global Economic Outlook
Cheng-Mount Cheng
Vice President
Taiwan Chief Economist
Asia Pacific Economic & Market Analysis
886-2-2777-7070
chengmount.cheng@citi.com
April 18, 2008
An Evolving View: Key Issues
• Real factors -- housing and energy--are combining with financial stress to slow the
U.S. economy sharply.
–The U.S. is probably in a recession.
– Financial stress remains intense.
– Looking ahead the critical issues are:
 The dynamics of the housing adjustment;
 The depth of the financial sector problems;
 How aggressive will the Fed be in trying to contain the impact of financial turbulence.
• Other industrial countries are facing different versions of the same problems.
– The U.K. is experiencing a housing-led slowdown.
– Europe may be vulnerable, but later.
• We expect only a modest slowdown for most emerging markets.
– But the EM countries are more vulnerable to downside scenarios.
2
US Subprime Woes
3
Subprime Money Trail
How subprime mortgage can end up in your investments
Mortgage
brokers
AAA
AABBB
Rating
companies
Rating
Securities
/CDOs
LOAN
DEBTS
MORTGAGE
MBS
WALL
ST
CDO
LOANS
Home
buyers
Subprime
lenders
Big banks
Securitization
manufacture of
CDOs
Investors
Source: Bloomberg Markets, July 2007
4
Financial Alchemy
Wall Street has a way to transform risky debt into CDOs rated AAA or Aaa.
1.The CDO
2.Multiply CDOs
A CDO is a company typically incorporated
offshore that buys collateral such as bonds,
mortgage-backed securities and loans and sells
debt securities with varying degrees of risk
A CDO with collateral consisting of pieces of
other CDOs is called a CDO squared. When a
CDO is built of CDO squareds, it’s called a CDO
cubed.
Interest payment
$
COLLATERAL
CDO squareds
SECURITIES
CDO
CDO
CDO
CDO
Bonds
CDO cubeds
Mortgage- Other assetbacked
Backed
securities
securities
Unrated equity(toxic waste)
Potential losses
$
Source: Bloomberg Markets, July 2007
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
CDO
5
Rapid Growth of Alternative Mortgage Products and Structured
Credit
Origintions of Sub-Prime Mortgages, Issuance of Sub-Prime Mortgage-Backed
Securities and Issunce of CDO's of Assets-Backed Securities
700
700
(U.S.$, billions, annual rates)
600
600
Sub-Prime Originations
Sub-Prime RMBS
CDO of ABS
500
500
400
400
300
300
200
200
100
100
0
0
2000
2001
2002
Sources: Inside Mortgage Finance, and Creditflux.
2003
2004
2005
2006
2007
6
Deterioration of Sub-Prime Mortgage Performance
Underwriting Charateristics for Sub-Pirme
Mortgages By Vintage
Percent of Sub-Mortgages
Securitized in:
2000
2002
2004
2005
Cumulative Deliquencies* for Sub-Prime Mortgages
Issued 2000-2007
(percent)
35
2007
30
Debt
Service/
Income
>45%
Coincident
Second
Lein
59
48
38
34
35
2006
2006
30
2005
25
FICO<600
34
25
20
20
34
35
37
40
45
15
15
10
2
4
20
28
10
32
Range for loans issued
2000-2004
5
Low Documentation
Source: Citi
40
25
32
40
44
46
5
0
0
0
6
12
18
24
Months Since Issuance
* More than 60 Days. Source Citi
30
36
7
Evolution of Prices of Sub-Prime Securities
Prices of Sub-Prime ABS (06-02, Percent)
InterMeeting
Cut
100
75
50
Bear
Stearns
Rescue
100
75
AAA
50
Bear Stearns
Problems First
AA
Reported
A
25
Discount
Rate Cut
BBB
25
Sept.
FOMC
Dec.
FOMC
0
Jan-07
Source: Citi
0
Apr-07
Jul-07
Oct-07
Jan-08
8
The additional problems with complicated structures
Typical Mezzanine CDO of ABS
Underlying
loans
Typical RMBS
AAA
Potential
loss 10%
AA
A
BBB
BBBUnrated
Underlying
AAA
AA
A
A
A
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
BBB
CDO
CDO of ABS
100%
90%
Potential
loss 75%
80%
Super
senior
70%
60%
50%
40%
AAA
30%
AA
20%
A
10%
Equity
0%
Source: Citi.
9
Sub-prime Woes as a Trigger of Credit Market Disruptions
• Sub-prime & Alter-A mortgages at end ’06
more than US$1 trillion outstanding
roughly one-third of total US mortgages
10% of bank assets
sub-prime delinquency ratio up to 13.8% in 1Q07 and 14.8% in 2Q07
US sub-prime related credit loss at around US$50-100 billion (Fed estimate)
• But sub-prime mortgages triggered confidence crisis & liquidity crunch
investors can’t assess the fair value of complicated and illiquid structured credit
securities backed by sub-prime mortgages
hedge funds dump leveraged buy-out (LBO) and corporate notes after losing heavily
in mortgage-backed securities and credit default swaps
confidence crisis spread to corporate note and inter-bank markets
10
Major Fund/Corporate Losses Leading up to ABCP Market Crisis
• Jun 20: Merrill Lynch seized assets from two Bear Stearns hedge funds that were
backed by sub-prime loans. Bear Steams froze withdrawals from a third fund on Aug 1.
• Jul 10: S&P put on Watch negative 622 sub-prime deals worth US$12.1 billion, with loss
expectations rising to 10-14%. (S&P subsequently downgraded 582 out the 622 deals for
a total of US$6.38 billion)
• Aug 6: American Home Mortgage Investment Corporation filed Chapter 11 bankruptcy
• Aug 10: BNP Paribas stopped valuing three of its funds and suspended all withdrawals
by investors
• Aug 14: Countrywide Financial, the largest mortgage lender in the US, said foreclosures
and mortgage delinquencies had risen to their highest levels since early 2002, raising
fears that the company could face bankruptcy.
• Sep 13: UK’s 5th largest mortgage lender Northern Rock asked the Bank of England for
emergency lending due to a "liquidity squeeze.“ Concerned customers produced an
estimated GBP2bn withdrawn in just three days.
11
A Mild Improvement of Credit Market Strain Following Fed 50bp
Rate Cut; Tightening in Credit Market Unlikely to Fully Reverse
• Contraction in commercial papers (CP) shows borrowers’ failure to roll over debts
• CP issuers draw down credit lines, reducing bank liquidity
• Corporate issuers face higher interest rates and shorter maturity
Commercial Paper Outstanding
(US$, bil.)
1,200
350
Asset-Backed (left)
1,100
Financial (left)
300
Non-financial (right)
1,000
900
250
800
200
700
600
150
500
400
100
2001
2002
2003
2004
2005
2006
2007
Sourece:
FederalReserve
Reserve Board, Hover Analytics, Bloomberg, Reuters
Source:
US Federal
12
Corporate Credit Spreads Have Widened
Spreads: Invest.Grade Corp. Bonds (basis points)
Change in Spreads: I.G. Corp. Bonds (Basis Points)
300
300
25th Percentile
250
250
Median
75th Percentile
200
60
150
100
50
20
0
0
-20
-20
100
-40
-40
50
-60
-60
1988 1989 1992 1993 1996 1997 2000 2001 2004 2005
Spreads: High Yield Copr. Bonds (basis points)
Change in Spreads: H.Y. Corp. Bonds (Basis Points)
1200
25th Percentile
Median
40
20
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
1000
+2StDev
-2StDev
40
200
150
1200
60
1000
250
200
150
250
200
+2StDev
-2StDev
150
800
100
100
50
50
600
600
400
400
0
-50
0
-50
-100
-100
-150
-150
-200
-200
-250
-250
800
75th Percentile
200
0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Citi
200
0
1994
1996
1998
2000
2002
2004
2006
13
Other Spreads Have Widened as Well
Spreads: Interest Rate Swaps (basis points)
Change in Spreads: I.R. Swaps (Basis Points)
120
110
25th Percentile
100
Median
90
75th Percentile
80
120
30
100
20
80
10
10
60
0
0
40
-10
-10
20
-20
-20
30
+2StDev
-2StDev
20
70
60
50
40
30
20
1990
1992
1994
1996
1998
2000
2002
2004
2006
1994
Spreads: Emerging Market Bonds (basis points)
1800
1600
1400
25th Percentile
Median
75th Percentile
1200
1000
800
600
400
200
0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: Citi
1996
1998
2000
2002
2004
2006
Change in Spreads: Emerging Market Bonds (Basis Points)
1200
1000
800
600
400
1000
1000
+2StDev
-2StDev
800
800
600
600
400
400
200
200
0
0
200
-200
-200
0
-400
-400
1994
1996
1998
2000
2002
2004
2006
14
International markets have entered a difficult period
15
Losses across the mortgage supply chain – who holds the risk?
16
Estimates of nonprime mortgage losses
17
There has been a parallel weakening of credit discipline in the corporate
segment
18
U.S. Financial Stress
19
Financial Stress Remains
Spread Between 3-mon. LIBOR and OIS Rates,
3 Months Forward (Basis Points)
CDS Spreads for Major Banks and
Broker-Dealers (Basis Points)
120
350
100
100
300
300
80
80
250
250
60
60
200
200
120
40
USD
Banks
Brokers
350
40
150
20
20
100
100
0
0
50
50
0
0
EUR
150
GBP
-20
Apr-07
-20
Jul-07
Source: Bloomberg and Citi
Oct-07
Jan-08
Jan-07
Apr-07
Source: Citi
Jul-07
Oct-07
Jan-08
Apr-08
20
Credit Tightening Across Loan Categories
Credit Tightening at Banks for Select Lending Categories, 1990-1Q 08 (Percent)
100
100
100
100
Other Consumer
80
Commercial Real Estate
80
Mortgages to
Individuals
80
C & I Loans
80
Prime
60
60
60
60
Non-traditional
40
40
40
20
20
20
20
0
0
0
0
40
Subprime
-20
-20
-20
-20
-40
1990
-40
-40
-40
1993
Source: Federal Reserve
1996
1999
2002
2005
2008
1990
1993
1996
1999
2002
2005
2008
21
Larger Haircuts and margins reduces leverage
Typical Haircut / Initial Margin Levels by Asset Class
(Percent, Approximate Estimates)
Product
AA corp bond
Mar08
Mar07
Product
0-3
8-12
BB lev loan
15-20
25-35
BB HY bond
10-155
25-40
15
20
1
5
Equities
IG CDS / derivs
Source: Citi.
Mar07
Mar08
AAA CDO of ABS
4
n/a
AAA CLO
4
10-20**
AAA RMBS
2
10-20*
Synth super snr
1
2
Source: Citi.
* May be difficult to find
** May be even more difficult to find.
22
Deleveraging is still having a deep impact on credit markets
Credit Spreads
Average Normalized Spreads
(basis points, figures in
parenthesises are percentiles)
(St. Dev.)
3
3
2.5
2.5
31-May
31-Mar
Corporate Bonds
2
1.5
1
Inestment Grade
90
(30)
270
(100)
1.5
High Yield
244
(10)
813
(94)
Swaps
49
(58)
84
(93)
Conventional MortgageBacked Sec.
57
(57)
115
(100)
Agency
22
(27)
61
(96)
Asset-Backed Sec.
56
(51)
91
(86)
Emerging Market Sov.
Bonds.
139
(0)
289
(17)
1
0.5
0.5
0
0
-0.5
-0.5
-1
-1
-1.5
1991
2
-1.5
1993
1995
1997
1999
2001
2003
2005
2007
Note: Average of normalized spreads for nvestment grade and high yield corporate bonds, conventional
mortgage and asset-backed securities, agencies and swaps. Sources: Citi
Source: Citi
23
U.S. Outlook
24
The Economy Now Shows the Effects of Earlier Tightengin
Citi Financial Conditions Index and Year-to-Year Percent
Change in Same Store Sales (13-Week Average), 1997-05 Apr 08
4
6%
3
5
2
4
1
3
0
2
-1
1
-2
0
-3
-1
97
99
01
FCI (Left)
03
05
07
Same-Store Sales (Right)
Note: Shaded region denotes recession.
Sources: Redbook Research and Citi.
25
Forecast Details
2007 2008F 2009F
SAAR
YoY
Consumption
SAAR
YoY
Business Investment
SAAR
YoY
Housing Investment
SAAR
YoY
Government
SAAR
YoY
Exports
SAAR
YoY
Imports
SAAR
YoY
CPI
YoY
Core CPI
YoY
Unemployment Rate
%
Govt Balance (Fiscal Year) % of GDP
Current Account
S&P 500 Profits (US$ Per
Share)
US$
1QF
0.5%
2.5
0.6
1.7
0.8
6.9
-24
-20.5
0.6
2.7
3.1
8.5
0.2
0.0
4.2
2.4
5
—
2008
2QF
3QF
4QF
-1.3% 0.1% -0.6%
1.2
0.0
-0.3
-0.8
1.3
-1.2
1.1
0.7
0.0
-4.1
-4.7
-5
3.1
-0.4
-3.3
-20.5 -13.9
-7.0
-22.6 -21.0 -16.6
-0.2
1.1
1.2
1.6
0.9
0.7
4.0
4.2
4.2
7.6
4.0
3.9
-2.1
0.3
-3.3
0.1
-0.9
-1.2
3.8
3.7
2.9
2.4
2.4
2.3
5.3
5.7
6.1
—
—
—
109.2 106.1 104.7
2.2%
0.8%
0.9%
2.9
0.9
0.4
4.8
1.5
-2.6
-17.0
-20.3
-4.9
2.0
1.4
1.2
8.0
5.9
4.6
1.9
2.9
2.3
4.6
-1.1
-0.5
3.7
2.4
5.5
-3.0
-1.0
1.9
1.9
6.7
-3.0
72.3 104.8 102.3
65
75.5
90.9
99.3
GDP
Assumed WTI Spot Price
2007
3Q
4Q
4.9% 0.6%
2.8
2.5
2.8
1.9
3.0
2.5
9.3
6.9
5.1
7.3
-20.5 -25.2
-16.5 -18.6
3.8
2.2
2.7
2.4
19.1
4.8
10.3
7.9
4.4
-1.9
1.7
0.9
2.4
4
2.1
2.3
4.7
4.8
—
—
2Q
3.8%
1.9
1.4
2.9
11
4.1
-11.8
-16.5
4.1
1.9
7.5
7.1
-2.7
2.0
2.6
2.3
4.5
—
US$bn
-747
-734
-622
-756
-714
-732
-760
-749
-735
-694
% of GDP
-5.4
-5.2
-4.3
-5.5
-5.1
-5.2
-5.4
-5.3
-5.1
-4.8
YoY
-1.7
-0.6
5
9.4
-5.7
-19.2
-9.7
-11.5
1.8
22.4
Notes: F Citi forecast. YoY Year-to-year percent change. SAAR Seasonally adjusted annual rate.
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, I/B/E/S, Treasury Department, Wall Street
Journal, and Citi.
26
Small Business Sector Retreats Sharply
Manpower Employment Current Quarter Outlook
(Inverted), Unemployment Rate and Percent of
Small Businesses Planning to Increase
Employment (Inverted), 1988-Mar 08
Percent of Small Businesses Reporting
Higher Earnings this Quarter vs. Year-toYear Percent Change in Nominal GDP, 1986Mar 08
9%
8.0 %
8
7.5
7
7.0
6
6.5
-15
5
6.0
-20
4
5.5
3
5.0
2
4.5
1
4.0
0
3.5
0%
-5
-10
-25
-30
-35
86
88
90
92
94
96
Higher Current Earnings (Left)
98
00
02
04
06
Nominal GDP (Right)
Sources: National Federation of Independent
Businesses and Bureau of Economic Analysis
08
0%
5
10
15
20
25
88
90
92
94
96
98
00
02
04
06
08
Unemployment Rate (Left)
Manpower (Right)
NFIB Employment (Right)
Notes: Manpower results are plotted in the quarter the
survey was taken. Shaded regions denote recession.
Sources: National Federation of Independent
Businesses, Manpower Inc., and Bureau of Labor
Statistics.
27
Housing Markets Reveal Only Tentative Signs of Reviving Investor
Confidence
NAHB Housing Market Index and Michigan Consumer Assessments on Current
Conditions for Buying Houses, 1992-Apr 08
90
190
80
180
70
170
60
160
50
150
40
140
30
130
20
120
10
110
92
94
96
HMI (Left)
98
00
02
04
06
Buying Conditions (Right)
08
Sources: National Association of Home Builders and University of Michigan.
28
Home Prices Most Vulnerable In Nonprime/Nonconforming Properties
The Ratios of House Prices to Disposable Income Per Household
(Percent)
140
140
OFHEO
130
130
Census Constant-Quality
S&P/Case-Shiller
120
120
110
110
100
100
90
90
80
1975
80
1980
1985
1990
Sources: Office of Federal Housing Enterprise Oversight and BLS.
1995
2000
2005
2010
29
Rate/Price Balance Needed to Maintain Housing Adjustment
Percent
14
Ratio of Standard Mortgage Payment to Household Income
and Mortgage Rate
Mortgage Rate (left)
Mortgage Payment/Income (right)
12
Percent
22
21
20
19
10
18
17
8
16
15
6
14
13
4
1985
1990
1995
Note: Standard interest payment based on 80% loan to value ratio.
Sources: OFHEO, BEA, National Association of Realtors, and Citi.
12
2000
2005
30
Commercial Starts, moderate downside risk.
Commercial Construction Starts
(2006=100)
180
180
Aggregate
Office
Industrial
160
160
140
140
120
120
100
100
80
80
60
1997
60
1999
Source: Census Bureau, McGraw-Hill, and Citi.
2001
2003
2005
2007
31
Corporate Spreads Have Over-shot Fundamentals
Normalized Spreads and Corporate Default Rates
St.Dev.
4.5
Percent
14
Investment Grade Spreads (left)
12
High Yield (left)
3.5
S&P Default Rate (right)
10
2.5
8
1.5
Forecast
6
0.5
4
-0.5
-1.5
1985
2
0
1987
Sources: S&P and Citi
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
32
Softening Demand Should Moderate Price Pressures
Percent
3.5
Alterantive Measures of Long-term
Inflation Expectations
Percent
3.5
3.3
3.3
3.1
3.1
2.9
2.9
2.7
2.7
2.5
2.5
2.3
2.3
2.1
2.1
1.9
1.9
1.7
1.7
1.5
1999
1.5
2000
2003
2004
2007
5yr5ry Forwards (from TIPS)
Forecasters (10 years, median)
Consumer (5-10 years, median)
Sources: Federal Reserve, University of Michigan, Federal Reserve
Bank of Philadelphia, and Haver.
Nominal Final Domestic Demand (y/y Percent
Change, Four-Quarter Lag) and Chg. in Two-Year
Annualized Core CPI (Percent)
9
1.2
Final Demand (Left)
8
Core CPI (Right)
0.8
7
0.4
6
0.0
5
4
-0.4
3
f
2
1
1990
-0.8
-1.2
1993
1996
1999
2002
2005
2008
Source: BEA, BLS, and Citi
33
The Fed is still trying to stabilize financial conditions
Movement of Citi Financial Conditions Index in Fed Easing Cycles
(Standard Devations)
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
Current Cycle
-2.5
Extreme Average
-2.0
Mild Average
-3.0
-2.5
-3.5
-3.0
-12
Source: Citi
-8
-4
0
4
Months from Start of Easing
8
12
16
34
Financial Conditions Have Not Responded Normally to Policy
Action
Twelve-Month Change in Fed Target Rate and Citigroup Financial Conditions
Index, 1988-Mar 08
-5%
-5
3
3
-4
2
-3
-2
1
-1
0
0
1
-1
2
3
-2
4
5
-3
88
90
92
94
96
98
Fed Funds Target (Left, Inverted)
00
02
04
06
08
FCI (Right)
Note: Shaded regions denote recession.
Sources: Federal Reserve Board and Citi.
35
Outlook For Policy
2
Economic Surprises: United States
and G-10 (St.Dev.)
1.5
1.5
1
6
6
Federal Funds Effective
Target
5
5
Forecast
1
0.5
0.5
0
0
-0.5
4
4
Market Expectations as of:
March 28, 2008
3
-0.5
-1
-1.5
2
Federal Funds Rate: Effective, FOMC Target,
Expectations and Citi Forecast (Percent)
-1
United States
G-10
2
2
1
1
0
Jul-07
Oct-07
Source: Citi
0
-1.5
-2
-2
-2.5
Jan-07
Apr-07
Source: Citi
3
-2.5
Jul-07
Oct-07
Jan-08
Apr-08
Jan-08
Apr-08
Jul-08
Oct-08
36
Outlook For Euro and Yen
2.5
Economic Surprises: Eure Area, and G-10 (St.Dev.)
2
1.5
1
1
0.5
0.5
0
0
-0.5
-1.5
-0.5
Euro Area
-1
G-10
-1.5
-2
Jan-07
-2
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Source: Citi
2.5
Economic Surprises: Japan, and G-10 (St.Dev.)
2.5
1.6
1.6
1.5
1.5
1.4
Spot
Forwards
1.4
1.3
Forecast
1.3
1.2
Jan-07
1.2
Jul-07
Jan-08
Jul-08
130
Jan-09
Jul-09
JPY/USD
1.5
G-10
1
120
1
0.5
0.5
0
0
-0.5
-0.5
-1
-1
-1.5
130
Spot
Forwards
2
Japan
1.5
120
Forecast
110
110
100
100
90
Jan-07
Jul-07
Jan-08
Sources: Bloomberg and Citi
90
-1.5
-2
Source: Citi
1.7
Sources: Bloomberg and Citi
2
Jan-07
USD/EUR
1.7
2
1.5
-1
2.5
-2
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Jan-09
Jul-09
37
Global Economic Outlook
38
A Global Slowdown
Contributions to Global Growth
(Percentage Points)
4.5
Global — Forecasts for Growth and Inflation,
Changes Since February 2008 GEOS
4.5
F
4
4
March 2008 GEOS Forecasts
GDP Growth
3.5
3.5
3
3
2.5
2.5
2
2
Change from February 2008 GEOS
Inflation
GDP Growth
Inflation
2008
2009
2008
2009
2008
2009
2008
2009
0.8%
0.9%
3.7%
1.9%
-0.8%
-1.2%
0.1%
-0.1%
Euro Area
1.3
1.1
2.5
1.7
-0.4
-0.7
0.2
-0.1
Japan
1.7
1.0
0.7
0.2
-0.2
-0.7
0.0
-0.1
United Kingdom
1.4
1.3
2.8
2.7
-0.3
-0.6
0.3
0.7
Canada
1.2
1.4
1.4
2.0
0.2
-0.1
0.0
0.0
Australia
2.6
3.4
3.4
2.6
-0.1
0.0
0.1
0.0
-0.5%
0.0
0.0%
-0.1
-0.1%
0.5
Industrial Countries
United States
Emerging Markets
1.5
1.5
1
1
0.5
Brazil
4.6%
3.5%
4.7%
4.4%
Russia
6.6
6.5
12.8
9.4
0.2%
0.0
India
7.7
8.3
4.3
4.0
-0.6
-0.2
0.0
0.0
China
9.8
9.3
5.8
3.0
-0.7
-0.7
0.8
-1.0
0.5
0
0
2000
2002
Emerging Markets
2004
2006
2008
Sources: Citi.
Industrial Countries
Source: IMF and Citi
39
Spillovers from U.S. slowdown should increase
Change in Imports (y/y, percent) and the Average
of ISM New Orders and Imports (6-mon. lag)
Deviations of U.S. Non-Oil Imports from Trend
0.8
(Percent of R.O.W. GDP)
0.8
25
70
Growth of Imports (Left)
0.6
0.6
0.4
0.4
0.2
0.2
20
Imports&Orders (Right)
65
15
60
10
5
0
55
0
0
-0.2
50
-0.2
-5
-0.4
-0.4
-0.6
-0.6
1970 1975 1980 1985 1990 1995
Sources: BEA, IMF, and Citi calculations.
2000
2005
45
-10
-15
1996
40
1998
2000
2002
2004
2006
Sources: Bureau of Economic Analysis and ISM
40
Re-Distribution of Economic Activity in Favor of Germany
Euro Area — Manufacturing PMI (Diffusion Index),
2004-Mar 08
Sources: NTC Economics Limited.
Euro Area — Real Exports of Goods and Services
(Index 1Q 1999 = 100), 1999-4Q 07
Sources: Eurostat
41
Business Confidence Among Large Manufacturers Fell More Than
Expected
Japan — Proportion of Companies Reporting
Business Conditions Are “Unfavorable” (Large
Manufacturing), 1980-March 2008 (Percent)
Note: There is a break in the data at the end of 2003.
Japan — Business Investment Plans (Including
Software Investment but Excluding Land
Purchases), FY2007-2008 (Yr-Yr-CHg, Percent)
Sources: Bank of Japan, Nikko Citigroup.
Sources: NTC Economics Limited.
42
The Central Bank Response
Global — Forecasts for Key Policy Rates and FX Rates (End-Quarter),
Changes Since GEOS of February 2008
March 2008 GEOS Forecasts
2Q
3Q
4Q
1Q
2008
2008
2008
2009
Policy Rates
United States
Euro Area
Japan
United Kingdom
Canada
Australia
China
Foreign Exchange
Yen/USD
USD/Euro
USD/GBP
Change from February 2008
GEOS 4Q
2Q
3Q
1Q
2008
2008
2008
2009
1.5%
3.75
0.5
4.75
3.0
7.5
7.75
1.0%
3.5
0.5
4.5
3.0
7.5
7.75
1.0%
3.25
0.5
4.25
3.0
7.5
7.75
1.0%
3.0
0.5
4
3.0
7.5
7.5
-0.5%
–
–
–
–
–
–
-1.0%
–
–
–
–
–
–
-1.0%
-0.25
-0.25
–
–
–
–
-1.0%
-0.5
-0.25
-0.25
–
–
-0.25
98
1.60
1.96
95
1.65
1.98
95
1.60
1.92
98
1.55
1.93
-7
0.07
–
-14
0.14
–
-17
0.12
–
-14
0.1
–
Source: Central banks and Citi.
43
The Details of Vulnerability
Vulnerability Indicators: 1998 and Current
30
30
20
20
10
10
0
0
-10
-10
-20
-20
Current
1998
Russia
CPI
Current
1998
Korea
Public Debt
Current
1998
China
Fiscal Balance
Current
1998
Current
Brazil
Current Account
1998
Mexico
Current
1998
South Africa
Reserves/S.T.Debt
Current
1998
Poland
FDI
Current
1998
Turkey
(Exp.+Imp)/GDP
The index is a ranking of internal and external cyclical and structural measures: inflation, fiscal balances, public debt-to-GDP ratios, current account balances,
net international reserves to short term debt, trade as a share of GDP and foreign direct investment as a share of GDP. For each indicator we split the range
between the minimum and maximum into ten levels, assigning numbers from -5 to +5, with the negative number associated with more international exposure
or a greater vulnerability. The numbers are summed to give the overall vulnerability index.
44
Source: Citi
Monetary Tightening Likely Will Continue on Strong Growth
and Rising Inflation
China -- 1Q GDP Growth Slows
1Q GDP Growth (% yoy)
March CPI (% yoy)
March Retail Sales (% yoy)
March Fixed Asset Investment (YTD, % yoy)
March Industrial Production (% yoy)
Actual
10.6%
8.3
21.5
25.9
17.8
Previous
11.2%
8.7
19.1
24.3
15.4
Source: National Statistics Bureau and Citi.
China – Summary of Production Cost Distributions
China – Uneven Squeeze: Industrial Profit Growth
by Type of Enterprise
Source: National Statistics Bureau and Citi.
Source: Citi.
45
The Gov’t Regards Current Inflation as Structural Price Increases
China’s Inflation – Headline, Food and
Non-Food CPI, January 2001 –
March 2008 (%)
China’s Export Growth and Headline
CPI Inflation, 1997-2007 (%)
6
25
CPI Headline
CPI Food
CPI Non-Food
5
20
40
CPI (LHS)
Exports (RHS)
35
4
30
15
3
25
10
2
20
1
15
0
10
-1
5
5
0
-2
-5
Jan-01
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Jan-02
Jan-03
Jan-04
Jan-05
Source: CEIC Data Company and Citi.
Jan-06
Jan-07
Jan-08
Source: CEIC Data Company and Citi.
46
Cautious Outlook for RMB
China -- RMB/USD Exchange Rate: Actual,
Forward Markets and Citi Forecast, May 2007April 2008
China -- Annualized Monthly Appreciation Rate of RMB
Against US Dollar, November 2005 – March 2008 (%)
20
8.0
Actual
15
Forward
Citi
7.5
10
7.0
5
6.5
0
6.0
-5
Jan-06 Apr-06
Jul-06
Oct-06 Jan-07 Apr-07
Source: Chicago Board of Trade and Citi .
Jul-07
Oct-07 Jan-08
May-07
Aug-07
Nov-07
Feb-08
May-08
Aug-08
Nov-08
Feb-09
Source: CEIC Data Company and Citi.
47
Strong demand, limited excess capacity, and Geopolitical risk
Change in Supply and Demand for
Petroleum Products
OPEC Excess Capacity and Ratio of Inventories
to Consumption
Percent
(y/y, million barrels per day)
1.5
1.5
Percent
18
8.8
16
8.6
1
1
14
12
0.5
0.5
8.4
10
8.2
8
6
0
8.0
0
4
7.8
2
-0.5
-0.5
2005
2006
2007
0
7.6
World Demand
Non-OPEC Supply
91 93 95 97 99 01 03 05
Excess Capacity as % of Supply (Left)
OPEC Capacity
OPEC Supply
Inventory/Consumption (Right)
Sources: Department of Energy, Haver, Bloomberg
85
87
89
Sources: Oil and Gas Journal, Department of Energy.
07
48
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