Directional Economics
Emerging and Converging Markets
Analysing the credit crunch
Charles Robertson
Head of Research and
Chief Economist, EEMEA
2009
charles.robertson@uk.ing.com
+44 20 7767 5310
Is this as bad as it gets?
• In every market sell-off, HY spreads reach 1100bp – we hit this level on 3 October 2008. It
peaked at over 1,900bp in December – implying .. total default in the US? Or more
accurately, a clear out of positions and no bid – the market barely existed.
• The real economy only recently began to exhibit real pain. Unemployment may not peak until
2010 with 9-11% looking a plausible range (10.8% in 1982).
• EM fundamentals are better than in the 1990s, but relative value trades mean EM spreads
have widened and currencies may continue to face pressure.
HY spreads over UST
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
9
The HY market is the worst in 22 years
8
7
6
5
4
3
86
87
88
89
90
91
92
93
94
95
96
97
HY spreads over UST (lhs)
98
99
00
01
02
03
04
US unemployment (rhs)
Page 1
05
06
07
08
09
The 5 great crashes 1929-2009
Largest US bank failure
(to date) late 1974
Apr 74
Sep 02
Bear
Sterns
Jan 09,
Jun 38
F Mae
First year
Lehmans
Third year
Dec 30
Second year
73
95
11
7
13
9
16
1
18
3
20
5
22
7
24
9
27
1
29
3
31
5
33
7
35
9
38
1
40
3
42
5
44
7
46
9
49
1
51
3
53
5
55
7
57
9
60
1
62
3
64
5
66
7
68
9
71
1
73
3
75
5
100
90
80
70
60
50
40
30
20
10
7
29
51
(%ch)
Measured by working days from the peak
Sep 1929+
Mar 1937+
Jan 1973+
Page 2
May 2001+
Oct 2007+
ING global forecasts
US, Eurozone, Japan – GDP %ch
US
Japan
4.0
US Fed funds and ECB refi rate
Eurozone
Weighted total
5.50
5.00
4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
3.0
2.0
1.0
0.0
-1.0
2001
2003
2005
2007
2009F
1Q06
4Q06
3Q07
2Q08
1Q09F
-2.0
20
18
16
14
12
10
8
6
4
2
0
29
/0
1/
19
29
71
/0
1/
19
29
73
/0
1/
19
29
75
/0
1/
19
29
77
/0
1/
19
29
79
/0
1/
19
29
81
/0
1/
19
29
83
/0
1/
19
29
85
/0
1/
19
29
87
/0
1/
19
29
89
/0
1/
19
29
91
/0
1/
19
29
93
/0
1/
19
29
95
/0
1/
19
29
97
/0
1/
19
29
99
/0
1/
20
29
01
/0
1/
20
29
03
/0
1/
20
29
05
/0
1/
20
07
(%)
US Fed Funds vs Unemployment
Fed funds
Page 3
US unemployment
4Q09F
3Q10
The World Economy – Nominal GDP in 2008 (2007 in
grey and only 2007 for 21-40th)
Political freedom ratings by Freedom House
Emerging markets remain small players in the US$52tr 2008 global economy
14497
US bigger than next 3 economies
14,000
3300
8,000
Not Free
6,000
5129
Not Free
2314
2300
1685
1800
1603
1597
1508
Partly Free
1369
1109
1300
1069
861
4330
3669
4,000
859
758
800
536
2859
513
509
iu
lg
Be
Sw
m
en
ed
nd
la
Po
rk
ey
Tu
N
et
he
rla
nd
s
th
,S
ou
ea
ic
tra
Au
s
ex
M
Ko
r
374
315
312
300
294
283
260
250
259
246
245
236
223
207
200
193
186
175
150
In 2007, California was $1.8tr, Africa $1.28tr, Texas or New York at $1.1tr, Florida $0.75tr, Illinois $0.6tr.
Page 4
U
AE
M
al
C
ay
ze
si
ch
a
R
ep
ub
lic
All EUR-linked economies may look smaller
in USD terms in 2009.
350
Partly Free
Not Free
381
Af
ric
a
Ar
ge
nt
in
a
Ire
la
n
Th d
ai
la
nd
Fi
nl
an
Ve
d
ne
zu
el
a
Po
rtu
ga
H
on
l
g
Ko
ng
Poland is now in the top 20
383
So
ut
h
between Brazil
430
Sw
itz
er
la
nd
In
do
ne
si
a
Ta
iw
Sa
an
ud
iA
ra
bi
a
Au
st
ria
G
re
ec
e
D
en
m
ar
k
G-8 member Canada is
and India
424
400
GDP (US$bn)
China is now the 3rd biggest economy in the
world
450
Ira
n
Russia is now a G-8 member, de facto and
de jure
11th
lia
o
a
di
In
Br
a
Sp
ai
n
si
a
us
R
Ita
U
Fr
an
ce
G
er
m
an
y
hi
na
C
pa
n
Ja
U
S
K
2,000
zi
l
C
an
ad
a
300
ly
GDP (US$bn)
Eurozone = US$12.1tr 2007, US$13.6tr in 2008
10,000
GDP (US$bn)
12,000
Africa in 2007 =
US$1282bn
2719
2800
U
K
Ko
re
a
C
a
H na
on da
g
Ko
ng
G
C
C
M
ex
Si
i
ng co
ap
or
R e
us
si
a
In
di
Ta a
iw
a
Tu n
rk
e
Po y
la
Au nd
st
ra
Th lia
ai
la
nd
Br
az
M
al il
C ays
ze
i
ch a
R
H ep
un
g
In ary
do
So n e
s
ut
h ia
Af
ric
a
So
ut
h
U
S
C
hi
na
Ja
pa
n
Eu
ro
zo
ne
(US$bn)
Total imports of merchandise goods
Total imports of merchandise goods in 2008 – we need US and Eurozone demand
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Page 5
Eurozone import growth boomed (for energy)
But will collapse in 2009 due to currency effects
100
300
250
200
150
100
50
0
-50
-100
-150
-200
-250
-300
-350
-400
-450
-500
Countries ordered by 2008 import demand
GCC biggest in the world in 2009 ?
80
60
(US$bn)
40
20
0
-20
C
C
us
si
a
Br
az
il
In
Si
d
ng ia
ap
or
Po e
la
Th nd
ai
la
n
Tu d
rk
e
Ta y
iw
a
M n
ex
i
In
do co
n
H
on esia
g
C Kon
ze
ch g
Re
p
-40
R
G
(US$bn)
Import growth (US$bn) – Global and emerging markets comparison
Eurozone
China
US
Japan
Korea
Additional in 2006
Additional in 2007
Additional in 2006
Additional in 2007
Additional in 2008F
Additional in 2009F
Additional in 2008F
Additional in 2009F
• In USD terms, trade value is on course to collapse. As recently as July 2008, the stronger euro
meant that a good priced in euros was valued at 15% more US dollars than in July 2007. By
September, it was worth about 1% less than a year before. In October 2008, it was 12% less
than a year before. The US dollar value of total trade is about to shrink dramatically
Page 6
When German confidence collapsed in 3Q08 – so
did the world economy
Germany in 2007/1H08 – never better but Germany in late 2H08/1H09 – never worse ?
Until June 2008 - the IFO w as w ell above
long-term averages, from July it plunged.
Avg current conditions Jan 91-Nov 08 = 96.5
Avg expectations Jan 91-Nov 08 = 96.6
Ifo
Ifo current conditions
Ja
n08
Ja
n07
Ja
n06
Ja
n05
Ja
n04
Ja
n03
Ja
n02
Ja
n01
Ja
n00
Ja
n99
Ja
n98
Ja
n97
Ja
n96
Ja
n95
Ja
n94
Ja
n93
Expectations fall
to recession territory - Jul 08
Ja
n92
Ja
n91
120
115
110
105
100
95
90
85
80
75
Ifo expectations index
• Current conditions fell below the long-term average in Nov-08 (94.8) having been an
incredibly strong 108.3 as recently as June. In Dec-08 they were 88.8.
• Expectations (76.8, Dec-08) are the lowest since German re-unification. This is negative for
global exports, central European investment and isn’t great for Germany either.
Page 7
Who does China need?
China’s main export markets in 2007
250
EU
21%
200
India
2%
Taiwan
2%
150
100
50
US
19%
Japan
8%
0
EU
H
on U
g S
Ko
n
Ja g
pa
So AS n
E
ut A
h
Ko N
r
R ea
us
si
a
In
di
Ta a
iw
C an
an
Au a d
st a
ra
li
O a
th
er
Sth Korea
5%
ASEAN
8%
90
80
70
60
50
40
30
20
10
0
HK
15%
In 2006 (lhs)
Extra in 2007 (lhs)
%ch (rhs)
• Exports rose 30% to the EU in 2007, pushing the US into second place.
• While Chinese exports are booming to Russia (+80%) and India (+70%), the absolute
amount of exports remains small.
Page 8
(%ch YoY)
Russia
2%
Other
15%
(US$bn)
Canada,
Australia and
NZ
3%
Chinese exports and exports growth
China’s growth – more export-dependent
China lending data
• China’s growth was investment-led until 200405. Banks injected the equivalent of up to 20%
of GDP, to produce annual economic growth of
roughly 10%.
20
15
10
5
0
95
96
97
98
99
00
Real GDP %YoY
01
02
03
04
05
06
07
• Since 2004, China’s trade surplus has exploded
from US$50bn to over US$250bn now, helping
drive economic growth.
Change in lending as % of GDP
China trade
40
Chinese exports as % of GDP (lhs)
35
China's trade balance (US$bn, rhs)
350
300
250
30
200
25
150
100
20
50
• Meanwhile, China has become ever more
export-sensitive. Exports to GDP has nearly
doubled from 18% in 1998 to 20% in 2001 to
around 35% in 2006-07.
• Low ratios in 1998-2001 help explain China’s
escape from the worst of the Asian crisis and
the aftermath of the tech bubble in 2001.
20
07
20
08
F
20
06
20
05
20
04
20
03
20
02
20
01
20
00
0
19
99
19
98
15
• This resulted in booming exports, but also
booming imports to feed the investment and
export story.
Page 9
Korean and Chinese trade data
Korean trade data
China's trade data
• Korea provides the most recent trade data
of a major economy. Nov-Dec data were as
terrible as the German IFO or oil prices
suggested they would be. Worse still, Dec09 data were flattered by +3 working days.
Jan 09 data could be -40% due to negative
working day effects.
45
50
35
40
25
30
15
Exports
12m exports
Imports
12m imports
Exports
Page 10
Imports
12/08
6/08
12/07
6/07
12/06
6/06
12/05
6/05
12/04
6/04
12/03
6/01
10/08
7/08
4/08
1/08
10/07
7/07
4/07
1/07
-45
10/06
-30
7/06
-35
4/06
-20
1/06
-25
10/05
-10
7/05
-15
4/05
0
6/03
-5
12/02
10
5
6/02
20
12/01
(%YoY)
60
1/05
(%YoY)
• China’s exports have now begun their
decline. Worse still for the world economy,
import value is collapsing, down roughly
20% YoY in Nov-Dec 08. CNY depreciation
is plausible to support jobs in China (at the
expense of jobs elsewhere in EM).
Exports in 2001 – a rapid decline
• US imports fell by roughly 5% in 2001. A fall in US demand and a Eurozone slowdown meant
many countries saw exports decline sharply after strong growth in 2000.
• Today it is clear that after a strong 1H in 2008, the outlook has dramatically worsened in late
2008 and into 2009.
Exports % ch in 2000-01
40
30
20
10
0
-10
2000
Page 11
2001
R
us
si
a
H
un
ga
ry
C
P
ze
ol
an
ch
d
R
ep
ub
lic
Tu
rk
ey
U
K
U
S
Eu
ro
zo
ne
Ja
pa
n
In
di
a
C
hi
H
on na
g
Ko
ng
In
do
ne
si
a
M
al
ay
si
Si
ng a
ap
or
St
e
h
Ko
re
a
Ta
iw
an
Th
ai
la
nd
Br
az
il
M
e
Ph xico
ilip
pi
ne
s
-20
What happened in the last recession
Falling Down
Misery and Happiness
9
7
4
GDP (%YoY)
GDP (%YoY)
5
3
2
1
5
3
1
-1
0
2000
2001
2002
-3
2000
US
Eurozone
Mexico
Deep impact
2002
Israel
Poland
Czech Rep
Hungary
Romania
Apocalypse Now
12
10
8
6
4
2
0
-2
-4
10
GDP (%YoY)
GDP (%YoY)
2001
Japan
5
0
-5
-10
-15
2000
Hong Kong
2001
Singapore
2002
Malaysia
2000
Taiwan
2001
Turkey
Page 12
Argentina
2002
Venezuela
Bulgaria
What happened in the last recession
Shallow Hal
Unbreakable
15
8
GDP (%YoY)
GDP (%YoY)
10
6
4
2
0
5
0
2000
Thailand
10
Indonesia
2001
South Korea
2002
Philippines
2000
South Africa
India
2001
Russia
China
2002
Ukraine
Kazakhstan
• In 2000-02, the CIS was coming up from the very low base of 1998. Today the base has been
much higher, so the downturn will be more severe.
• In central Europe, Hungary spent heavily ahead of 2002 elections, widened the fx bands and
cut interest rates despite high inflation. Hungary will not outperform this time.
• Poland had 19% interest rates but much lower now. Exports/GDP are just 33% vs 68% in
Hungary and the Czech Republic. Czech and Polish loan to deposit ratios are better than
most, so banks might be able to support growth.
• Bulgaria and Romania were still recovery from the crises of 1996/97 and 1999 respectively,
so were rising from a low base. This is not the same story today.
Page 13
The experience in previous recessions
The mid-70s saw a coordinated recession in developed markets with little
impact on EM. Slow years saw Turkey at 3%, Mexico at 4% and Brazil at
4% or Korea at 5%.
16.0
14.0
12.0
The early 1990s was the most prolonged series of recessions, and came
during political crises in China and the former Soviet bloc. It hid Brazil hard
at -4%, Mexico 1%, China 4%, Turkey 1%.
10.0
8.0
6.0
4.0
2.0
0.0
SS
R
U
Tu
rk
ey
Ko
re
a
Br
az
il
M
ex
ico
Ja
pa
n
er
m
an
y
G
U
SA
-2.0
The early 1980s were the world’s worst recession and came after an EM
boom and as oil prices fell significantly. EM was hit hard and dramatically.
Brazil went from +9% to -5%, Korea from +7% to -2%, Turkey had two
years of recession and China slowed to 5%. Poland had its own crisis.
1972
1973
1974
1975
1976
1977
12.0
10.0
15.0
8.0
10.0
6.0
4.0
5.0
2.0
0.0
0.0
-5.0
-2.0
-10.0
-4.0
USA
Germany Japan
Brazil
Mexico
Korea
China
Ja
pa
n
Br
az
il
M
ex
ico
Ko
re
a
C
hi
na
Po
la
nd
Tu
rk
ey
R
us
si
a
1979
G
U
SA
er
m
an
y
-15.0
1989
1990
1991
1992
1993
1994
Page 14
1980
1981
1982
1983
Turkey
USSR
What happens now to oil
Global oil demand (rhs, %YoY)
19
1/
/3
US oil demand (rhs, %YoY)
120
100
80
60
40
20
0
71
/
19 199
72 9
/
19 200
73 0
/
19 200
74 1
/
19 200
75 2
/
19 200
76 3
/
19 200
77 4
/
19 200
78 5
/
19 200
79 6
/
19 200
80 7
/
19 200
81 8
/
19 200
82 9
/
19 201
83 0
/2
01
1
82
2
2
98
/1
30
9/
12
6/
30
/1
98
2
81
98
3/
31
19
1/
/3
12
/1
1
1
9/
30
/1
98
1
98
98
/1
30
/1
3/
31
19
1/
/3
6/
0
80
0
98
30
/1
12
0
98
/1
30
6/
31
3/
Oil prices 12-mo average
9/
79
98
19
1/
/3
/1
9
9
97
/1
28
9/
12
9
97
97
/1
/1
29
30
3/
6/
8
78
/2
9/
19
97
/1
29
9/
Spot oil
12
8
97
6/
30
/1
97
/1
3/
31
19
0/
8
8
6
4
2
0
-2
-4
-6
-8
-10
77
(US$/bbl)
45
40
35
30
25
20
15
10
5
0
/3
12
Oil price now vs 1970s
19
Oil: demand destruction and price
1970s
2000s
• US oil demand is down 5-6%. This is roughly between the 1.7% fall in 1979 and the 7.5%
decline in 1980. World demand, given the German current IFO conditions and Chinese/Korean
export growth would appear to be in positive territory, similar to 1979. Oil began falling in mid1980. It appears the oil markets have priced in prospective price declines before 1980 levels of
demand destruction as the market is more liquid and developed than in 1980.
• Note that based on 2007 oil prices, the rise and prospective fall of oil prices could be very
similar to the 1970-1980s period.
Page 15
Food – how neither China nor India play a big role
Meat trade (000m tonnes)
BEEF
PORK
Importers
Exporters
POULTRY
Importers
Exporters
Importers
Exporters
US
1,471
Brazil
2,400
Japan
1,200
US
1,373
Russia
1,245
Brazil
3,068
Russia
1,050
Australia
1,450
Russia
855
EU
1,270
Japan
675
US
2,732
1,040
EU
725
Other Asia
824
US
456
Canada
EU
655
EU
810
Japan
715
US
650
South Korea
450
Brazil
715
Mexico
612
China
353
Mexico
400
Argentina
525
Mexico
435
China
440
China
513
Thailand
315
South Korea
315
New Zealand
515
HK
293
Mexico
70
Saudi Arabia
440
Egypt
250
Canada
480
Canada
160
Other N Africa, M East
397
Canada
225
EU
175
China
130
Cent America/Carib
310
Philippines
160
Hong Kong
233
Taiwan
105
Canada
150
Note: italics indicates major exporter and importer
Source: USDA
Per capita meat consumption
(kg annually)
United States
Hong Kong
Argentina
Brazil
European Union
Mexico
China
Russia
Japan
South Korea
India
Beef
Poultry
Pork
Total
43
16
64
37
18
23
6
16
9
10
2
46
39
28
36
16
28
8
17
15
11
2
29
60
N/A
12
42
15
39
18
19
29
N/A
118
115
N/A
85
76
66
53
51
44
51
N/A
Source: USDA
Page 16
Trade ties – Latam for China, EEMEA for Eurozone
Trade ties reveal the potential origin of FX threat (2006 data unless otherwise stated)
Exports/ US
EU (%)
Other significant
GDP (%) (%)
(-27 if 2007)
Argentina (2007)
21
7
17
Brazil 19%, China 9%, Chile 7%, Mexico 3%, Vene 2%
Brazil
13
18
22
Mercosur 10%, Other Latam 12%, Asia 15%
Chile
41
17
27
Japan 12%, China 10%, S Korea 7%, Mercosur 7%
Colombia
17
40
14
Venezuela 11%, Ecuador 5%, Peru 3%
Mexico (2007)
30
83
6
South America 4%
Peru
26
24
>9%
China 9%, Switz 7%, Canada 7%, Chile 6%, Japan 5%
Uruguay
21
22
17
Brazil 14%, Argentina 8%, Mexico 4%, China 4%
Venezuela
40
59
10<
Colombia 5%, Mexico 5%
Bulgaria (2007)
47
2
61
Turkey 12%, Serbia 5%
Croatia (2007)
24
3
60
Bosnia and Herzegovina 14%, Asia 5%
Czech Rep (2007)
68
2
85
Russia 2%, Switz 1%, Ukraine 1%, China 1%,
Estonia (2007)
52
4
67
Russia 9%, Norway 3%, Togo 3%
Hungary (2007 data)
68
2
79
Russia 3%, Ukraine 2%, Turkey 2%, China 1%
Kazakhstan (2007)
46
1
58
Switzerland 16%, China 12%, Russia 10%
Latvia
30
2
73
Russia 9%, Belarus 2%, Other CIS 3%, Norw 2%
Lithuania (2007)
45
3
63
Russia 15%, Belarus 4%, Other CIS 5%, Norway 2%
Poland (2007)
34
2
79
Russia 5%, Ukraine 4%
Romania (2007)
24
2
72
Turkey 7%
Russia (2007)
28
2
53
Turkey 5%, Belarus 5%, Ukraine 5%, China 5%,
Serbia (2007)
16
1
56
Bosnia-Herz 12%, Montenegro 11%, Russia 5%
Slovakia (2007)
77
2
84
Russia 2% Ukraine 1%, Turkey 1%
Turkey (2007 data)
18
3
56
Russia 4%, Iran 3%, Oman 3%, Palestine 2%
Ukraine (2007)
35
2
28
Russia 25%, Other CIS 12%, Turkey 7%, Egypt 2%
Egypt (2007)
22
32
32
Asia 14%, Arab countries 12%
Israel (2007)
33
35
30
Hong Kong 6%, India 2%
Nigeria (2005 data)
43
38
22
India 10%, Brazil 7%, Japan 4.0%
South Africa (2007)
23
11
30
Japan 10%, China 6%, Switz 2% (Zimb 2% in 2006)
China (2007)
35
19
21
Hong Kong 15%, Japan 8%, South Korea 5%
Hong Kong (2007)
9 or 167
22
15-20est
China 37%, Taiwan 4%, Japan 3%, Australia 2%
India (2006-07)
13
15
17
UAE 10%, China 7%, Singapore 5%
Indonesia
28
11
12
Japan 22%, Singapore 9%
Malaysia
103
19
13
Singapore 15%, Japan 9%, China 7%, Hong Kong 5%
Pakistan
12
23
22
UAE 7%, Afghanistan 5%, HK 5%, Saudi Arabia 2%
Philippines
40
59
18
Japan 17%, China 10%, HK 8%, Singapore 7%
Singapore
172
10
11
Malaysia 13%, HK 10%, China 10%, Indonesia 9%,
South Korea
37
13
15
China 21%, Japan 8%, Hong Kong 6%
Thailand (2007)
61
15
14
Japan 12%, China 10%, Singapore 7%
Vietnam
64
20
20
Japan 14%, China 9%, Australia 7%
Source: ING, IMF, National sources (central banks and statistical offices)
Page 17
Main exports
Agricultural 52%, mineral (eg oil) 14%, transport 10%, metals 5%
Transport 15%, metallurgy 11%, soy beans 7%, oil/fuel 10%, ores 7%, meats 6%
Copper 58%, other mined ores 8%, food 9%, industrials 25%
Petrol/derivatives 26%, coal 12%, coffee 6%, ferro-nickel 5%
Electrical machinery 24%, oil/other mining 17%, Vehicles 17%, machinery 12%
Copper 25%, gold 17%, other mineral prod 20%, fish 6%, textiles 6%
Frozen meat 17%, leather/skin 8%, dairy products 8%, textile 7%, rice 6%
Mineral products 64%, metals 20%
Iron/steel + other metals 20%, petroleum products 13%, clothing & footwear 11%
Mach & transport equip 31%, mineral fuels 13%, chemicals 9%, food 8%
Mach & elec equip 36%, road vehicles 17%, iron/steel + other 10%
Machinery 21%, mineral prod 12%, wood 10%, metals 10%
Manufactured goods 27%, machinery 21%, telecoms 18%, vehicles 12%,
Mineral products 50%, fuels 36.5%
Wood 24%, base metals 15%, food & ag 13%, mach 10%
Mineral products 14%, machinery 13%, transport equip 11%, food/agric 11%
Transport equip 17%, machinery 23%, metals 12%, food 9% (2006 data)
Machinery 22%, metals 16%, textiles 13%, transport equip 12%
Mineral prod 64%, metals 16%, machinery 6%, chemicals 6%
Iron/steel + other metals 20%, food 15%, machinery 14%, chemicals 10%
Machinery/elec equip 30%, vehicles 25%, base metals 14%
Textiles/clothes 21%, motor vehicles 16%, iron/steel 12%, agric/food 8%
Base metals 42%, mach/eq 10%, minerals 9%, chemicals 8%, vehicles 7%
Fuel products 52%, finished goods 31% of which iron 2% and clothes 3%
Rough diamonds 34%, chemicals 18%, pharma 7%
Fuel and mining products 90%
Precious metals 27%, base metals 18%, mineral products 16%, machinery 11%
Mechanical & electrical products 57%, hi-tech products 29%, clothing 11%
Apparel 39%, electrical mach 10%, jewellery 6%, textile yarn 2%
Pearls 13%, mineral fuels 15%, iron/steel 4%
Gas 10.1%, crude petroleum 8%, textiles 9%, coal 6%, copper 5%, rubber 5%
Electronic equip24%, semi-conductors 18%, electrical prod 7%, chemicals 6%
Clothing/apparel 34%, cotton 21%, rice 7%, leather 4%, petroleum products 2%
Electronic products 63%, clothing/apparel 6%, cathodes 3%
Oil 26%, electrical machinery 21% , office machinery 13%, chemicals 17%
Elec mach 15%, telecom 12%, vehicle 13%, other transport 7%, petroleum 6%
Machinery 46%, manufactured goods 13%
Textiles 24%, crude oil 21%, seafood 8%, electronics 5%, wood products 5%
Credit
and the crunch
Page 19
Argentina
Philippines
Mexico
Indonesia
Turkey
Romania
Russia
Poland
Egypt
Czech Republic
India
Brazil
Ukraine
Kazakhstan
Lithuania
Hungary
Bulgaria
Croatia
Chile
South Africa
Thailand
Israel
Latvia
Greece
Estonia
South Korea
China
Germany
France
Japan
220
200
180
160
140
120
100
80
60
40
20
0
Portugal
Spain
United Kingdom
United States
Netherlands
(% of GDP)
The credit crunch – private sector debt
Lending/GDP – households and corporates (2007)
High credit levels in rich
and Asian countries
Emerging European credit is heading
towards Eurozone levels
Latam and CIS countries
have low credit levels
Private sector debt
Page 20
Chile
Lithuania
Philippines
Bulgaria
Poland
Russia
Romania
Mexico
Kazakhstan
Ukraine
Argentina
Indonesia
Czech Republic
Public sector debt
Turkey
Brazil
Estonia
Latvia
India
Croatia
South Africa
Thailand
Hungary
China
South Korea
Egypt
Israel
Germany
France
Greece
Spain
United Kingdom
Portugal
United States
Netherlands
Japan
(% of GDP)
The credit crunch – total debt in the economy
Private and public sector debt/GDP (2007)
400
350
300
250
200
150
100
50
0
The US credit boom – Greenspan 1987-2006
The rise in GDP and the change in credit each year as a % of GDP
25
20
15
10
5
0
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
-5
Real GDP %YoY
Change in lending as % of GDP
Page 21
Bank lending – credit and GDP growth
China lending data
India lending data
10
20
5
15
10
0
5
-5
0
-10
95
96
97
98
99
00
Real GDP %YoY
01
02
03
04
05
06
95
07
96
97
98
99
Real GDP %YoY
Change in lending as % of GDP
Russia lending data
00
01
02
03
04
05
06
07
Change in lending as % of GDP
Iceland lending data
110
100
90
80
70
60
50
40
30
20
10
0
10
5
0
-5
-10
95
96
97
98
99
Real GDP %YoY
00
01
02
03
04
05
06
07
95
Change in lending as % of GDP
96
97
98
99
Real GDP %YoY
Page 22
00
01
02
03
04
05
06
Change in lending as % of GDP
07
Bank lending – credit and GDP growth
Hungary lending data
Poland lending data
10
10
5
5
0
0
-5
-5
95
96
97
98
99
00
Real GDP %YoY
01
02
03
04
05
06
95
07
96
97
98
99
00
Real GDP %YoY
Change in lending as % of GDP
Bulgaria lending data
01
02
03
04
05
06
07
Change in lending as % of GDP
Romania lending data
25
15
20
10
15
5
10
0
5
-5
0
99
00
01
02
Real GDP %YoY
03
04
05
06
99
07
00
01
02
Real GDP %YoY
Change in lending as % of GDP
Page 23
03
04
05
06
Change in lending as % of GDP
07
The credit crunch – Asia in the 1990s
Even Indonesia, where credit to GDP
rose just 14ppt from 1991-97 inclusive,
was engulfed in the Asia crisis
80
60
40
20
0
1991-1993
Page 24
1994-96
1997
1991-97
ia
Ind
ina
Ch
I nd
on
es
ia
rea
Ko
uth
So
Ph
ilip
pin
es
ila
nd
-20
Th
a
• India did not get impacted as credit had
not risen, nor did China where credit
growth was domestically financed.
100
ysi
a
• The collapse in 1997 quickly spread to
Malaysia and eventually even South
Korea and Indonesia where credit
growth was just 10-30pp of GDP, vs
80pp in Thailand and Malaysia.
120
Ma
la
• Credit from 1991-97 jumped by 80pp of
GDP in Malaysia and Thailand.
Change in credit stock 1991-97 in key Asian countries
Change in credit to GDP (ppt)
• Credit rose too fast in south-east Asia
in the 1990s.
EMEA credit growth was very high
Though some developed markets were higher
Credit growth: EMEA
Ire
2001-03
2004-06
2007
2001-03
2001-07
Ireland even beat Iceland in terms of credit
growth, with Spain not far behind and equal to
Thailand in the 1990s. Germany, Japan, Italy and
Austria seem to have been restrained.
80
70
60
50
40
30
20
10
0
-10
-20
La
tv
Es ia
ton
Bu ia
l
g
Ka
ari
za
kh a
s
Lit tan
hu
an
U k ia
rai
n
Cr e
oa
Hu tia
ng
Ro ary
ma
ni
Ru a
Sth ssia
Afr
ic
Po a
lan
d
T
Cz urke
y
ec
hR
e
p
Slo
va
kia
Eg
yp
t
Change in credit to GDP (ppt)
120
110
100
90
80
70
60
50
40
30
20
10
0
-10
-20
-30
lan
d
Ne Spai
n
the
rla
nd
s
De
nm
ark
UK
Gr
e
Ne
w Z ece
ea
lan
d
US
Fra
nc
e
Be
lgiu
Sw m
ed
en
Au
str
ia
Ita
ly
Ge
rm
an
y
Ja
pa
n
Change in credit to GDP (ppt)
Credit growth: Developed markets
2004-06
2007
2001-07
Most EMs saw high growth, but the Baltics,
Bulgaria, Kazakhstan and Ukraine rose most.
Egypt, Czech Republic, Poland and Turkey seem
to have been more restrained.
Page 25
Asia and Latin America were restrained
So will be hit mainly by the global slowdown, not directly by a credit crunch
70
60
50
40
30
20
10
0
-10
-20
-30
-40
Credit growth: Latam 2001-07
Change in credit to GDP (ppt)
30
Only India and Vietnam have seen
any significant rise in credit since 2000
20
10
0
-10
-20
2001-03
2004-06
2007
2001-03
2001-07
2004-06
2007
y
ua
Ur
ug
na
nti
Ar
ge
Pe
ru
r
do
ua
Ec
Me
xic
o
ile
Ch
ela
zu
ne
Ve
Co
lom
bia
il
az
Br
nd
ysi
a
Ma
la
ila
Th
a
on
g
Ph
ilip
pin
es
So
uth
Ko
rea
ng
K
Ch
ina
Ho
Ind
Vie
tna
ia
Sin
ga
po
re
Pa
kis
tan
-30
m
Change in credit to GDP (ppt)
Credit growth: Asia 2001-07
2001-07
In Latin America, credit only began to rise after
2004, and only took off in 2007. This was too late
to reach extremely high levels.
In Asia, only Vietnam saw very high credit growth
in the 1990s. The rest of Asia has learnt lessons
from the 1990s.
Page 26
What happens when credit stops rising so fast
• Even when total credit is rising, an economy can go into recession. While new
monthly credit extension in Latvia was still around LVL130m each month in 3Q08,
GDP was already negative. It is the rate of change in credit that is crucial.
400
350
300
250
200
150
100
50
Ju
l-0
8
Ja
n08
Ju
l-0
7
Ja
n07
Ju
l-0
6
Ja
n06
Ju
Ju
l-0
5
0
Ja
n05
Ja
n04
GDP up 12% YoY
80
70
60
50
40
30
20
10
0
-10
Ju
l-0
4
(real %YoY)
GDP down 4% YoY
l-0
3
Ja
n04
Ju
l-0
4
Ja
n05
Ju
l-0
5
Ja
n06
Ju
l-0
6
Ja
n07
Ju
l-0
7
Ja
n08
Ju
l-0
8
14000
12000
10000
8000
6000
4000
2000
0
Latvia: monthly credit and real %ch YoY
(LVLm)
(LVLm)
Latvia: stock of outstanding credit
Stock of outstanding credit in Latvia
HH credit growth (real %YoY, lhs)
Page 27
Monthly borrowing (LVLm, rhs)
What happens when credit stops rising so fast
• This graph shows the amount of credit extended each month as a percentage of the peak month, tracked
against GDP. Growth disappears when monthly credit is 60% lower than the peak month. When the figure is
-100%, it means the debt stock is declining.
• Late 2008 saw a dramatic fall in credit growth in every country – the Baltic decline was slow by comparison
Latvia and Estonia credit and GDP growth
15
Jun-06
Sep-06
Dec-06
Mar-07
Sep-07
Jun-07
Dec-07
Mar-08
Jun-08
When credit is 10
dow n 90%, GDP
5
may shrink
dramatically
0
-20
-40
-60
-80
Sep-08
When mo nthly credit
extensio n is 80% o f the peak
mo nth, little impact o n GDP
When credit grow th
falls by more than half,
GDP may stagnate
-5
-10
-100
Latvia GDP grow th (rhs)
Estonia GDP grow th (rhs)
Latvia %ch in monthly credit extension from peak (lhs)
Estonia %ch in monthly credit from peak (lhs)
Page 28
GDP growth (%YoY)
(%ch in monthly credit from
peak)
0
The sudden collapse in credit growth
• The Latvian/Estonian experience was a long drawn out collapse in credit compared
to what is happening today. With a few rare exceptions, like Poland, credit has
begun contracting and very fast. It has taken just 5 months for Bulgaria to see a
collapse in credit growth that took Estonia 17 months over 2007-08.
Bulgaria vs Estonia – credit extension
Romanian GDP set to fall
Page 29
What happens when credit stops rising so fast
• The Latvian/Estonian experience implies that Kazakhstan could have negative GDP data by early 2009,
Lithuania by 2Q09, and even central Europe by 2010 though a global recovery would offset that. Note oil
and agriculture may have distorted 3Q08 GDP data. More worrying is that credit growth slowdowns have
become more dramatic in recent months so the descent into recession will be quicker.
• The caveat is that credit is half as important in Russia or Romania when compared to Latvia/Estonia, so the
impact may be less. Big falls in credit growth will hit economies with high stock of debt the most. Bulgaria,
Lithuania and Kazakhstan may suffer more than Romania or Russia for example.
Months since credit peak vs GDP growth
Credit to GDP and depth of decline
Romania
6
Bulgaria
Decline in credit since peak (%)
8
3Q GDP (%YoY)
Poland
0
10
Russia
Poland
4
Kazakhstan
Lithuania
Czech Rep.
2
Hungary
0
Turkey
-2
Estonia
Latvia
-4
Hungary
-10
-20
-30
Romania
-50
-60
Bulgaria
-70
10
15
20
Lithuania
Medium impact on
GDP
-80
Kazakhstan
Estonia
Turkey
0
25
20
40
60
Credit as % of GDP
Months
Page 30
High impact
on GDP
Latvia
-90
-6
5
Modest impact
on GDP
Czech
Republic
-40
-100
0
Russia
No impact
on GDP
80
100
Credit crisis
Financing and other risks
The external debt trigger
100% usually a threshold for a crisis
External debt due to foreign banks within 12 months as % of fx reserves (excl gold)
4Q07
4Q06
4Q05
4Q04
4Q03
4Q02
4Q01
4Q00
4Q99
4Q98
4Q97
4Q96
4Q95
4Q94
4Q93
4Q92
4Q91
4Q90
Argentina
Brazil
Ecuador
Mexico
49
34
78
42
29
43
126
34
26
50
72
28
42
44
101
32
85
55
101
46
126
61
124
46
194
90
90
59
154
103
93
63
134
99
66
73
137
93
138
92
154
96
98
93
139
73
82
138
152
65
86
154
133
68
102
528
114
97
114
104
144
111
185
121
167
262
169
130
154
298
194
183
China
HK
India
Indonesia
Korea
Malaysia
Philippines
Thailand
8
67
29
53
56
22
42
12
7
64
25
52
35
24
45
17
7
56
24
53
25
22
64
22
7
53
20
46
25
23
60
19
7
53
16
38
29
19
61
20
7
44
9
43
31
20
46
19
9
55
14
62
30
26
49
32
11
65
24
71
34
25
50
32
12
76
26
72
47
25
57
42
21
104
28
104
57
36
93
83
23
181
31
212
289
69
163
147
25
268
35
188
198
41
77
121
31
376
43
201
166
33
64
121
34
430
37
175
157
26
53
106
69
409
43
167
145
27
50
87
72
409
71
164
156
24
71
78
26
480
88
163
174
27
99
74
30
534
269
180
138
21
347
66
55
51
137
177
112
175
77
43
138
66
57
41
106
213
83
216
89
36
144
51
42
37
122
242
78
176
101
39
52
38
29
22
78
223
85
91
72
32
42
24
20
21
74
160
76
99
52
38
35
22
18
23
65
204
65
62
47
42
33
19
11
40
42
147
51
43
57
39
43
44
14
44
58
110
47
46
58
28
49
35
13
41
45
141
44
28
50
25
76
56
15
60
48
42
61
23
28
22
53
87
35
56
56
42
46
8
15
18
33
69
207
38
34
13
47
5
20
14
55
38
46
28
23
4
26
5
6
14
76
22
70
27
13
2
41
1
6
28
35
19
660
24
16
2
31
NA
1
92
58
18
520
NA
0
0
50
NA
0
89
50
NA
1586
NA
NA
NA
68
NA
NA
96
40
NA
NA
NA
NA
NA
240
NA
NA
73
44
NA
Russia
Kazakhstan
Ukraine
Georgia
21
84
54
19
17
57
36
12
26
77
22
13
23
38
16
25
33
47
14
24
33
48
15
20
45
45
22
40
44
28
31
48
129
32
39
28
226
34
71
23
251
21
45
9
235
19
19
16
142
20
18
16
432
17
40
NA
142
2
133
NA
NA
NA
0
NA
NA
NA
NA
NA
NA
NA
NA
NA
Egypt
Israel
South Africa
Turkey
40
17
54
83
35
17
62
71
28
17
40
74
22
17
72
82
26
22
136
56
28
19
149
55
31
17
160
100
32
13
182
117
27
16
212
91
23
13
284
107
15
14
292
87
14
18
1157
70
15
27
369
72
16
27
513
102
16
25
643
182
22
33
743
128
55
30
667
139
111
34
683
128
1705
3413
146
589
1933
102
833
1592
141
355
1027
196
378
842
182
600
806
131
635
975
178
531
938
135
430
764
144
375
0
179
223
0
145
187
0
83
241
0
96
202
0
87
141
0
126
157
0
155
135
0
157
138
0
84
Bulgaria
Czech
Croatia
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Iceland
US
New Zealand
Bold is crisis year. Shading indicates a number >=100%. Source: JEDH
Page 32
Which EM countries are at risk?
• Emerging markets don’t take the fx risks that they used to. Short-term debt is below the
100% threshold that has often coincided with a crisis. Where it is above 100%, it is often
foreign-owned banks that owe money to foreign parent banks, so risk is lower.
Short-term debt as a ratio of reserves, June 2008
high=worrying
low=reassuring
300
2156
Foreign-owned
banking sectors
250
591
200
150
100% often a trigger threshold
100
96
50
t
Israe
l
Sout
h Afr
ica
Turk
ey
Icela
nd
New
Zeal
and
Denm
ark
Egyp
Russ
ia
Kaza
khsta
n
Ukra
ine
Geor
gia
aria
Czec
h
Croa
tia
Esto
nia
Hung
ary
Latvi
a
Lithu
ania
Pola
nd
Rom
ania
Slov
akia
Bulg
Chin
a
HK
India
Indo
nesia
Kore
a
Mala
ysia
Philip
pines
Thai
land
Paki
stan
Arge
ntina
Braz
il
Ecua
dor
Mexi
co
0
Short-term debt as ratio of reserves (high = worrying, low = reassuring) Jun 2008
Page 33
Emerging markets safer than some developed
markets
The great EM disasters of the 1990s were usually the consequence of poor policy choices by EM governments,
with the crisis occurring when foreign financing for these bad policies disappeared. The triggers came when:
1) Governments could no longer borrow money (Russia 1998, Argentina 2001).
2) Foreign banks would not roll over private sector external debt (Korea 1997, Mexico 1994, Brazil 2002).
3) The current account position made them vulnerable (Turkey 2001, Mexico 1994, Thailand 1997).
Now governments do not borrow money – or not much. Short-term external borrowing is low. The current
account + FDI picture is much improved.
Gross external debt (to BIS banks and for int’l debt securities) due in 12 months + 2008 FDI + C/A,
all as % of fx reserves in Jun 2008, with forecasts for 2009
RISK
2156
Higher external debt obligations often reflects
high foreign ow nership in economy
Fundamentals are supportive
of sovereign risk
SAFETY
HK
Kor
ea
Ukr
ai n
e
Sl o
va k
Sou
ia
th A
fric
a
B
New ul garia
Zea
la n
d*
Hun
gar
y
Rom
an i
a
Tur
key
Cr o
atia
Li th
uan
ia
Es t
oni
a
Lat
v ia
Ic e
land
*
400
350
300
250
200
150
100
50
0
-50
Chi
na
Rus
si a
Ma
l ays
ia
Tha
il an
d
Is ra
el
Egy
pt
Arg
ent
i na
Phi
li pp
in e
s
Ind
ia
Kaz
ak h
stan
Me
x ic o
Bra
z il
Cze
ch
Ind
on e
si a
Pol
and
The chart shows the total of
the external debt due within
12 months + the C/A + FDI, as
a ratio of fx reserves. Ie, it
would take Turkey 10 months
to run out of reserves if they
could not roll over any debt.
But it would take Iceland less
than 3 weeks (Iceland is off
the scale of our chart).
Russian reserves would
grow!
2008/2008F
Page 34
2009F
ep
R
ub
Tu lic
rk
e
So Po y
l
ut an
h
Af d
Bu rica
lg
H aria
un
R gar
om y
an
R ia
us
si
La a
t
U vi
Ka kr a
za ain
kh e
Li sta
th n
ua
G ni a
eo
r
Es gia
to
ni
a
Ph Ch
ilip ina
pi
ne
s
In
di
Ja a
M pa
al n
ay
Ta sia
Si iw
ng an
H ap
on o
g re
In Kon
do g
n
Th esia
ai
la
n
Ko d
r
M ea
ex
ic
Br o
az
il*
P
C e
ol ru
om
bi
a
ch
ze
C
EM loan-to-deposit ratios
Loan-to-deposit ratios (Jun-08 or Sep-08)
190
170
90
Less scope for lending
if global markets closed
150
130
110
Higher scope for lending even if global markets closed
70
50
Loan-to-deposit ratio Jun-08
Page 35
(Lack of) foreign ownership helps predict a crisis
Foreign bank ownership vs Loan/deposit ratio
Foreign ownership (% of total)
100
Czech Rep
Bulgaria
90
80
70
Estonia
Lithuania
Romania
Hungary
Poland
60
Latvia
50
40
Turkey
Crisis
Ukraine
30
20
Russia
10
Kazakhstan
0
50
70
90
110
130
150
Loan/deposit ratio
Page 36
170
190
210
The absurd case scenario
If all deposits leave the system
Short-term ext debt as % of fx reserves
The absurd case scenario (US$bn)
Russia
All converted at this fx rate
300%
Kazakhstan Ukraine*
Turkey
Romania
Hungary
South
Africa
250%
2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009 2008 2009
28.0
120
7.25
1.69
3.02
213
10.3
200%
150%
All lcl currency deposits of
the banking system
-278
-24
-32
-161
-31
-38
-195
100%
As of
6/08
6/08
9/08
9/08
9/08
9/08
6/08
50%
C/A position (US$bn)
FDI (US$bn)
12-mth external debt due to
BIS banks (Jun-08)
94 -34
12
13
-100 -100
International debt securities
and IMF payments due within
12 months (Jun-08)
Total excluding deposits
issue
-14
8
-18
-7
5
-18
-52
15
-55
-38
9
-55
-28
14
-38
-14
6
-38
-10
4
-28
-6
4
-28
-3
0
-2
-1
-1
-3
-3
-1
-1
-3
-3
-2
-2
2 -124
-2
-19
-26
-22
-96
-87
-53
-47
-37
-33
-29
-30
0%
-21 -20.4
8
6
-14 -14
us Ch
si ina
Ka a 2
za 008
kh
st
an
Br
az
M il
ex
U ic o
kr
ai
n
P e
C ola
ze n
So ch d
ut Re
h
Ko p
Bu rea
lg
ar
Tu ia
r
R ke
om y
a
H nia
R un
us ga
si
a ry
19
97
-10
4
-11
R
6
4
-11
-3
Bank deposits as % of fx reserves
600%
Total
-276
-26
-58
-257
-84
-74
-224
Much of the debt owed by
Hungary and Romania
will be inter-company
loans
500%
400%
300%
200%
396
48
Incl Welfare Incl National
and
Fund
Stabilisation
fund
38
Add 16.4
from IMF
70
35
23
Add 15.7
from IMF+ 9
from EU and
WB
100%
0%
R
* Note non-time deposits are only US$6bn
Source: JEDH, ING, Bloomberg, Reuters
33
us
si
Ka a 2
z a 00
kh 8
s
U tan
kr
R ain
So om e
ut an
h
i
Ko a
re
Tu a
rk
M ey
ex
H ico
un
ga
r
Br y
az
Po il
la
Bu nd
lg
ar
i
C a
R
us Cz hin
s i ec
a
h a
19 R
97 ep
(M
2)
Reserves
Page 37
Credit crunch – bank ownership vs sovereign risk
• While sovereign risk may be low, banks may be more vulnerable if they have borrowed
significantly abroad (eg common in the former Soviet Union).
• However, if they have borrowed from parent banks abroad (eg the Baltics), then this is less
problematic. Then the greater risk is recession rather than devaluation.
• The table below also highlights the sovereign risk as seen in short-term external debt figures
relative to fx reserves. The data imply the Czech banking system is the most secure, while
Ukraine, Latvia, Estonia and Kazakhstan are most at risk, though none are so risky as
Iceland.
Risk ranking
Russia
Kazakh
Czech
Slovak Ukraine Sth Afr
Poland
Lith
Bulg
Turkey
Hung
Rom
Latvia
Loans to deposits (Jun 2008)
149
164
76
NA*
161
Foreign bank ownership
(2006/07)
37
8
96
97
Sovereign risk (2007)
V low
V low
Med
Loan to deposit risk
V high
V high
Lack of "parent" risk
High
Average
Med
111
93
170
116
84
122
134
154
187
NA*
37.5
NA
67
91
82
26
85
88
69
97
NA*
Med
Med
Med
Med
Med
Med
High
High
High
V high
V high
V high
V low
NA
V high
Med
Low
V high
Med
Low
M/high
High
V high
V high
V high
V high
V low
V low
High
High
Med.
V low
Low
High
Low
Low
Med
V low
V high
High
Low
Low
High
Med
Med
Med
Med
Med
Med
Med
High
High
V high
Page 38
Estonia Iceland
Conclusions on credit
• Since 2000, many Emerging European countries have dramatically increased their
borrowing as a percentage of GDP – those that borrowed most are now facing
recession.
• The greatest concerns have all been connected to locally owned banks, OTP in
Hungary (unjustified though that seemed to be), Parex bank in Latvia,
Prominvestbank in Ukraine and nearly all the Kazakh banks. And Iceland of course.
Only Turkey still looks vulnerable on this measure.
• High loan to deposit ratios is a negative for all countries except Poland, Turkey and
best of all, the Czech Republic. Others will have to raise deposit rates and cut back
on lending. This is an acute need in Russia, but also Romania, Ukraine etc.
• Recession can still be very deep even while credit growth is still rising in real terms.
• Lastly – connected to apparently low sovereign risk – note that economists can be
particularly bad at forecasting an end to currency regimes. Most investment bank
reports as late as 4Q1994 predicted Mexico would not be forced to devalue!
Page 39
Currencies
The demise of the carry trade
The US dollar long-term fair value is 1.10-1.20
based on REER
EUR/USD long-term fair value – using the real effective exchange rate
1.80
1.80
CHEAP
1.60
1.60
1.40
1.40
1.20
1.20
1.00
1.00
0.80
0.80
EXPENSIVE
0.60
0.60
74
76
78
80
82
84
86
88
REER (CPI based)
90
92
94
96
REER (PPI based)
Page 41
98
00
02
EUR/USD
04
06
08
ING PPP (November 2008)
ING PPP baskets purchased per EUR100
1.6
Cheap
Expensive
1.5
1.4
(baskets)
1.3
1.2
1.1
High per capita income
1.0
0.9
0.8
0.7
•
US
ain
Sp
UK
Ko
ng
ng
Ho
Ch
ina
Bu
lga
ria
Po
lan
d
Ph
ilip
pin
es
Bra
zil
Arg
en
tin
a
Hu
ng
ary
Ro
ma
nia
Cz
ec
hR
ep
Slo
va
kia
Ru
ssi
a
Tu
rke
y
Ka
za
kh
sta
n
ile
rai
ne
Uk
Ch
Ind
ia
Afr
ica
uth
So
Me
xic
o
0.6
This is a long-run indicator and much like The Economist’s Big Mac index. It is not a real
effective exchange rate index which is often flawed by its starting point. Our index tells us
how much 23 goods cost in these countries.
Page 42
ING PPP vs per capita GDP 2008
Low per capita income countries NEED a currency that goes a long way
(capped at US$25,000)
25,000
20,000
Above the line implies a cheap currency
Below the line =
fx too expensive
15,000
10,000
5,000
U
S
Eu UK
ro
zo
ne
Ko
ng
g
H
on
M
ex
ic
o
I
So
n
ut dia
h
Af
ric
a
C
hi
U le
kr
ai
ne
C
hi
n
Bu a
lg
ar
ia
Po
Ph lan
ilip d
pi
ne
s
Br
Ar azil
ge
nt
in
a
H
un
ga
r
R
om y
a
C
ze nia
ch
R
Sl ep
ov
ak
ia
R
us
si
a
Tu
rk
Ka
za ey
kh
st
an
0
•
Given that India’s per capita GDP is roughly US$1,000, a hundred euros needs to buy a lot
of goods in Mumbai. Given how much richer Mexico is, this is not necessary. When
combined with the balance of payments and interest rates, this suggests the rupee may still
be expensive at 50/USD while the MXN is extremely undervalued at 13.5/USD.
•
Sell KZT and RON (to 4.2-4.5), hold HUF at 260/EUR and buy PLN and CZK.
Page 43
EM currencies now at average level of 2004-08
EM currencies have not “overshot” on the weakening side
EM currency 'spread'
over US has re-appeared and
may remain high in 2009
Baskets purchased per €100
1.3
1.2
1.1
1.0
0.9
0.8
0.7
0.6
Jun-04
Oct-04
Mar-05
Sep-05
Jan-06
Jun-06
EM average
•
Nov-06
US
Mar-07
Aug-07
Jan-08
Jun-08
Nov-08
Spain
The global liquidity surge of 2004-07 drove EM fx to artificially strong levels. After
weakening in late 2008, it may not appreciate again, especially when yields on sovereign
debt (and other assets) are now so high. Why appreciate in risky local market assets
when such high yields are available closer to home or in in hard currency EM assets.
Page 44
Carry trade – fx levels
ING3Pi – implied exchange rates
Implied ING3Pi rate/€
Exchange rate Regional avg as
vs €*
benchmarkEM as benchmark
(lc/€)
(lc/€)
(lc/€)
Spain as
benchmark
(lc/€)
Exchange rate
vs US$*
(lc/US$)
Implied ING3Pi rate/US$
Regional avg as
benchmark
EM as benchmark
(lc/US$)
(lc/US$)
US as
benchmark
(lc/US$)
Emerging Europe
Bulgaria
Czech Republic
Hungary
Kazakhstan
Poland
Romania
Russia
Slovakia
South Africa
Turkey
Ukraine
Latin America
1.96
24.0
256
153
3.53
3.75
34.5
30.4
12.66
1.97
7.40
1.69
26.3
261
206
3.06
4.05
38.7
33.4
9.74
2.36
6.21
1.89
29.4
292
231
3.43
4.52
43.3
37.4
10.90
2.64
6.95
1.33
20.8
206
163
2.42
3.20
30.6
26.4
7.70
1.86
4.91
1.53
18.9
201
120
2.77
2.94
27.1
23.9
9.77
1.52
5.86
1.32
20.7
205
162
2.41
3.17
30.4
26.3
7.52
1.83
4.91
1.48
23.1
229
181
2.69
3.55
34.0
29.4
8.41
2.04
5.49
1.01
15.8
157
124
1.84
2.43
23.2
20.1
5.75
1.40
3.76
Argentina
Brazil
Chile
Mexico
Asia
4.37
2.76
870
16.32
5.16
3.18
838
13.08
4.71
2.90
765
11.93
3.33
2.05
540
8.43
3.37
2.12
670
12.83
3.98
2.44
645
10.27
3.64
2.23
589
9.38
2.49
1.52
403
6.41
8.25
13.6
50.7
61.8
5.83
9.6
35.8
43.7
6.84
7.75
49.5
48.7
6.55
10.8
40.2
48.3
6.48
10.7
39.8
47.8
4.43
7.30
27.2
32.7
China
8.71
Hong Kong
9.9
India
63.0
Philippines
62.9
* Exchange rate on day local offices priced up the basket.
Source: National sources, Reuters, ING
8.34
13.7
51.2
62.4
Page 45
Central European currencies
PLN cheap
CHEAP
Ja
n03
Ju
n03
Ja
n04
Ju
n04
O
ct
-0
4
M
ar
-0
5
Se
p05
Fe
b06
Ju
n06
N
ov
-0
6
M
ar
-0
7
Au
g07
Ja
n08
Ju
n08
N
ov
-0
8
02
3Q
02
2Q
01
4Q
01
2Q
01
EXPENSIVE
1Q
00
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
0.7
3Q
Baskets purchased per €100
• Within central Europe, the cheapest place to go shopping (among freely floated currencies)
last November was Poland where we could buy 15% more than in Hungary. Prices were
equally high in Romania, Slovakia and the Czech Republic, though affordability was quite
different. This implies the RON should have weakened and the PLN strengthened against
their partners.
Czech Republic
Hungary
Poland
Page 46
Slovakia
Spain
Romania
EU and Euro entry dates
Key EU and earliest possible euro adoption dates
Entry
Negotiations
EU ERM membership
applications
begun
entry
EU MEMBERS (since 1960) and those that have completed negotiations
Ireland
1961/67/72
1973
Mar-79
Denmark
1961/67/71
1973
Mar-79
UK
1961/67/71
1973
(10/90-9/92)
Greece
1975
1976
1981
Mar-98
Spain
1977
1979
1986
Jun-89
Portugal
1977
1978
1986
Apr-92
Austria
1989
1993
1995
Jan-95
Finland
1992
1993
1995
Oct-96
Sweden
1991
1993
1995
2009+
Slovenia
1996
1998
2004
Jun-04
Cyprus
1990
1998
2004
Apr-05
Malta
1990/98
2000
2004
Apr-05
Slovakia
1995
2000
2004
Nov-05
Lithuania
1995
2000
2004
Jun-04
Estonia
1995
1998
2004
Jun-04
Latvia
1995
2000
2004
Apr-05
Czech Republic
1996
1998
2004
2010/11+
Poland
1994
1998
2004
2009
Hungary
1994
1998
2004
2009/10+
Bulgaria
1995
2000
2007
2010+
Romania
1995
2000
2007
2012+
IN NEGOTIATIONS
Croatia
2003
2005
2011+
2011+
Turkey
1987
2005 No (2015+)
No (2015+)
NOT IN NEGOTIATIONS
Albania
2010+
2012+
2017+
2017+
Macedonia
2004
2010+
2015+
2015+
Bosnia
2010+
2012+
2017+
2017+
Serbia
2009+
2010+
2015+
2015+
Montenegro
2010+
2010+
2015+
2015+
Ukraine
2012+
2015+
Source: European Commission, ING forecasts
2020+
Euro adoption
1999
2011-12+
Unlikely
2001
1999
1999
1999
1999
2012+
2007
2008
2008
2009
2012+
2012+
2012+
2014+
2012+
2013+
2012+
2015+
2020+
Page 47
Currency
Euro
Kroner
Pound
Euro
Euro
Euro
Euro
Euro
Krona
Euro
Euro
Euro
Euro
Litas
Kroon
Lat
Koruna
Zloty
Forint
Lev
Leu
Regime
N/A
ERM peg to euro with 2.25% bands
Free-float
N/A
N/A
N/A
N/A
N/A
Free-float
Entered at 239.6
Entered at 0.585
Entered at 0.429
Entered at 30.126
ERM currency board to euro
ERM currency board to euro
ERM peg to euro 1% bands
Free-float
Free-float
Free-float
Currency board to euro
Managed float vs euro
2014+
No (2018+)
Kuna
Lira
Managed float vs euro
Free-float
2020+
2018+
2020+
2018+
2018+
Lek
Denar
Marka
Dinar
Euro
2025+
Hryvnia
Managed float vs euro
Tightly managed float vs euro
Currency board to euro
Dirty free-float with euro reference
Deutschemark (now euro) adopted as only
legal tender in Nov-00
Managed float vs US$
Central parity
rate
7.46
3.45
15.65
0.703
282
1.96
1.96
Conclusions
• We are seeing the most dramatic worsening of economic data in our working careers. We are faced
with a financial crisis at least as bad as 1974-75 and potentially a global recession as bad as 1980-82. A
more negative scenario is likely if China implodes in 2009.
• Our base case is global monetary and fiscal stimuli will keep the recession centred on 4Q08 and 1H09, with
recovery as we head into 2010. There are many risks to this scenario.
• Emerging European GDP in 2009 may range from a -5% fall in Latvia to -4.5% in Ukraine, -3.5% in
Romania, -2.5% in Hungary, to stagnation or small falls (up to -2%) in Russia, Kazakhstan, Czech Republic
and potentially 2% growth in Poland. Recession is plausible in Bulgaria and Lithuania by late 2009 due to
slowing credit growth. Political risk is likely to grow across the whole emerging market universe.
• Local interest rates on deposits need to rise fastest in countries with poor loan to deposit ratios, particularly
in the CIS, Baltics, Romania and to a lesser extent Hungary.
• Currencies have sold off and are now at a 2004-08 average relative to the US or Eurozone. Further
weakness is possible – and is probable if China implodes. The best value is in the PLN, MXN and the UAH
(but only in the long-term). The worst value is in the KZT, with depreciation very justified in Romania and
Argentina. We see Russia’s band widening as echoing the fx depreciation in all commodity currencies.
Inflation targeting may be well be adopted as a formal policy in 2010, with a full free float.
• Yields in developed markets are now so high, that these may benefit first from any market recovery in early
2009, followed by hard currency bonds. Local currency debt is very unlikely to attract the volumes of 200607. A poor harvest in 2009 could hurt local debt as we go into 2010.
• Equity markets may begin to recover later in 2009, pricing in a recovery well before unemployment has
peaked in 2010.
Page 48
ING Emerging Markets Research Contacts
London
Bratislava
Bucharest
Budapest
Istanbul
Kiev
Mexico City
Moscow
Manila
New York
Prague
Sao Paulo
Singapore
Warsaw
Charles Robertson
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Salvador Moreno
Head of Research & Chief Economist, EMEA
Senior Economist, Emerging Europe
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Economist, Slovakia
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Economist, Romania
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Economist, Hungary
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william.ollom@americas.ing.com
diego.torres@americas.ing.com
vojtech.benda@ing.cz
zeina.latif@americas.ing.com
tim.condon@asia.ing.com
prakashb.sakpal@asia.ing.com
mateusz.szczurek@ingbank.pl
rafal.benecki@ingbank.pl
grzegorz.ogonek@ingbank.pl
Page 49
Disclosures and disclaimer
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Page 50
Bank ownership
BALKANS (1st, 2nd and 3rd EU Enlargement waves)
Share of assets
(%)
Bosnia
2007
Romania
87.9% foreign, 5.5% state (2007)
Erste (BCR)
Soc Gen (BRD)
Raiffeisen
Banca Transilvania
EFG Eurobank (Banc Post)
Unicredit
Alpha bank
Volksbank
CEC
ING
Slovenia
29.3% foreign (was 40% in 2006), 4.5% state - 2007
KBC & State (Nova Ljubljanska banka)
Nova kreditna banka Maribor
Abanka Vipa
Nova Ljubljanska banka (Banca Celje)
Soc Gen (SKB banka)
IntesaSanPaolo (Banka Koper)
Unicredit (Bank Austria Creditanstalt)
Hypo Alpe Adria
Serbia
75.5% foreign, 16.5% state (2007)
Intesa
Raiffeisen
Komercijalna banka Beograd
Hypo Alpe-Adria (HAAB Beograd)
EFG Eurobank
AIK Bank
Unicredito
Soc Gen
ProCredit
NBG (Vojvodanska banka Novi Sad)
Assets (EURbn)
2005
93.7% foreign, 2.0% state (2007)
2007
2005
10.012
5.999
Unicredit
21
25
2.1
1.5
Hypo Alpe-Adria (Mostar and Banja Luka)
21
19
2.1
1.2
Raiffeisen
20
21
2.0
1.3
NLB Group
9
Volksbank
6
Intesa (UPI banka)
5
0.9
0.6
4
0.5
0.2
Croatia
90.4% foreign, 4.7% state (2007)
47.073
35.39
Unicredit (Zagrebacka)
23.2
24
10.9
8.6
Intesa (Privedna Banka Zagreb)
17.8
18
8.4
6.4
Erste (Erste and Steiermarkishche Banke)
11.8
12
5.6
4.1
Raiffeisen
11.1
11
5.2
3.9
Hypo Alpe-Adria (Slavonska banka and HAA)
10.7
10
5.0
3.6
Soc Gen (Splitska Banka)
7.5
9
3.5
3.2
HPB
4.2
OTP
3.5
3
Unicredit (Bulbank, Hebros, Biochim)
15
21
OTP (DSK)
13
NBG (UBB)
10
Raiffeisen
2.0
1.6
1.2
30.212
16.796
4.6
3.5
14
4.0
2.3
10
3.1
1.6
10
9
3.1
1.4
EFG Eurobank (Bulgarian Post Bank)
7
5
2.2
0.9
First Investment Bank
7
8
2.1
1.3
Piraeus Bank
6
1.8
KBC (Investment Bank)
3
1.0
Soc Gen (SG Expressbank)
3
0.9
Bulgaria
82.3 foreign, 0.4% state (2007)
Page 51
Share of assets
(%)
2007
2005
24
15
6
5
5
5
5
5
4
26
15
9
36
10
8
6
5
5
5
5
31
10
9
6
7
6
6
12
9
9
8
5
5
4
4
4
4
11
16
10
9
4
9
4
5
6
5
Assets (EURbn)
2007
2005
72.0437 35.3569
17.6
9
10.8
5.2
4.4
3
3.8
3.7
1.6
3.5
3.1
3.5
3.5
2.9
1.5
2.24
1.8
42.195
15.3
4.2
3.5
2.3
2.3
2.2
2.2
1.9
28.508
9.2
3
2.5
1.7
2
1.8
1.9
21.1
2.5
2.0
1.9
1.7
1.1
1.0
0.9
0.8
0.8
0.8
10.7
1
1.4
0.9
0.8
0.5
0.5
Bank ownership
CE 4 (1st EU Enlargement wave)
Share of assets (%)
Poland
2007
2005
66.9% foreign, 18.8% state (2007)
Unicredit (Bank Pekao - Bank BPH)
PKO BP
Share of assets (%)
Assets (EURbn)
2007
Czech Republic
2005
15
13
20
16
34.4
30.2
2007
2005
96.4% foreign, 3.0% state (2007)
233.793 163.4
Assets (EURbn)
2007
2005
139.84
100.5
Erste (Ceska Sporitelna)
22
22
30.6
22.6
23.8
KBC (CSOB)
21
25
29.8
25.4
18
17
25.0
17.8
31
Commerzbank (BRE)
7
6
15.4
8.6
Soc Gen (Komercni)
ING (Bank Slaski)
6
7
14.5
10.9
Unicredit
7
7
10.1
7.4
AIB (Bank Zachodni WBK)
5
5
11.5
7.7
Raiffeisenbank
4
3
5.5
2.7
Citigroup (Handlowy)
5
6
10.8
8.5
Citi
4
BCP (Bank Millenium)
4
8.4
GE Money
2
.
3.2
2
4
3.1
BGK
3
7.7
Commerzbank
KBC (Kredyt bank)
3
7.5
Slovakia
97.4% foreign, 1.0% state
Hungary
84.5% foreign (2007)
OTP
KBC (K&H)
4.9
9
19
10
24.9
9.3
49.3804 38.75
Erste (Slovenske Sporitelna)
19
18
9.1
6.8
14.2
Intesa San Paolo (VUB)
17
16
8.4
6
7.5
Raiffeisen (Tatra Banka)
16
13
7.8
4.9
11
13
5.2
4.8
107.708 78.41
23
3.6
Bayerische Landesbank (MKB)
8
9
8.9
6.5
KBC (CSOB)
Intesa San Paolo (CIB)
8
8
8.9
5.8
Unicredito (HVB and UniBanka)
8
9
4.1
3.4
Raiffeisen
8
7
8.2
5
ING
5
7
2.6
2.8
Erste
7
8
7.9
5.7
Dexia
4
2.2
Unicredit (HVB)
6
5
6.0
4
OTP
3
1.5
KBC (Istrobanka)
3
1.2
Page 52
Bank ownership
OTHER EMEA
Share of assets (%)
Russia
2007
2005
2006, state owned 37.4%, foreign 12.1%)
Sberbank
24
26
Vneshtorgbank
7
6
Gazprom
4
4
Soc Gen (Rosbank and Societe
Generale Vostok)
3
2
Bank of Moscow
3
2
Alfa
2
2
Rosselkhosbank
2
Raiffeisen
2
UniCredito
2
Uralsib
2
2
Ukraine
Foreign 37.5%, state 8.0% (2007), state 12% inc
Prominvestbank
Privatbank
9.4
11
Raiffeisen (Aval)
7.4
8
BNP Paribas (UkrSibbank)
6.2
6
Unicredito (Ukrsotsbank)
5.2
5
Ukreximbank
4.8
5
Prominvestbank
4.4
6
Nadra
3.5
3
Oshchadbank
3.2
4
OTP
3
3
Alfa
2.5
Finance and Credit Bank
2
Turkey
(Jun-06)
26% foreign
Ziraat
14
15
Is
14
15
AK
13
12
Garanti
12
10
YKB
9
10
Vakif
8
7
Halk
7
7
NBG (Finansbank)
4
4
Dexia (Denizbank)
3
2
ING (Oyakbank)
2
2
HSBC
2
TEB
2
Fortis
2
Assets (EURbn)
2007
2005
137.3
40.5
21.4
73.7
18.4
12.4
14.6
14.1
13.5
12.9
11.3
10.1
9.6
5.9
6.5
6.8
7.6
6.0
5.0
4.2
3.9
3.6
2.8
2.6
2.4
2.0
0.0
3.9
3.1
2.2
1.8
1.9
2.3
1.2
1.4
1.3
329.1
46.4
45.9
41.1
38.7
30.3
25.2
23.9
12.5
9.3
7.7
7.5
6.9
5.7
6.7
0.8
(Jun-06)
33.8
35.1
28.1
23.4
23.8
16.9
16.3
8.6
5.3
5.3
Soc Gen was reportedly interested
Soc Gen was reportedly interested
Intesa close to finalising purchase (by 1q07? Oct 06), Russia's Alfa bank was interested
State
Taken over by Klyuev brothers Nov 08, roughly 75% sold to Russia’s VEB in Jan 09.
Taken over by Dmitry Firtash, 87% for US$600m says Izvestiya Nov 08
State
Was Raiffeisenbank
Possible take-over target
State
Isbank Pension fund
Sabanci and Citigroup (20%), Franklin Templeton owns stake
Dogus Group and GE (25.5%)
40% owned by Koc, 40% by Unicredito, 19.8% free-float
State 59%, employees 16%, 25% floated
State seeking buyer, up to US$6bn, sale by May 07 ?
NBG owns 46% plus buying shares
75%
BNP Paribas
BNP Paribas ?
Page 53
Democracy
Page 54
Democracy and GDP
Regime change: the influence of per capita GDP
1985 PPP
dollars
Under 1,000
Chance of democracy dying (%)
Life expectancy of
democracy based on
average**
Average year
Chance of autocracy becoming democracy (%)
If incomes growing Average year
If incomes
shrinking
2006 PPP
dollars***
If incomes growing
If incomes
shrinking
8 yrs
12.50
21.74
8.16
0.66
1.01
0.39
Under 1,850
1,000
17.5 years
5.71
8.33
4.35
2.48
3.26
2.15
1,850
2,000
26 years
3.80
7.32
2.8
2.76
3.75
2.38
3,710
3,000
30 years
3.33
4.88
2.75
1.61
1.92
1.49
5,580
4,000
Just 2% chance
1.87
4.55
1.18
4.92
6.25
4.44
7,420
5,000
0.88
0
1.03*
6.41
10.53
5.08
9,330
6,000
0.83
3.44*
0
6.25
40.0*
0
11,180
0
0
0
3.33
0
3.7*
13,040
7,000 or more
Immortal
* Based on 1-3 examples (Argentina alone for democracies).
** Expected life in any state is the inverse of probability of transition away from that state.
*** Based on 87% accumulated US CPI from the end of 1985 to the end of 2006.
Source: “Modernization: Theories and facts", Adam Przeworski and Fernando Limongi, 1997
•
Politics has often been the trigger for significant economic change in the past – eg
the oil shocks of 1973/74 and 1980-81 resulting from Middle Eastern political
developments – or in emerging markets, the consequences of populist policies.
•
Economic shocks can trigger political change – except in wealthy democracies
which are immortal. Potential changes worth considering include China, Russia
and the Middle East (again).
Page 55
Democracy danger levels
Danger levels for regime change
Autocracies 3.3% chance of dying
Democracies 0.8% chance of dying
Autocracies 6.3% chance of dying
Autocracies 6.4% chance of dying
Democracies 0.9% chance of dying
Autocracies 4.9% chance of dying
Democracies 1.9% chance of dying
Autocracies 1.6% chance of dying
Democracies 3.3% chance of dying
Democracies 3.8% chance of dying
Autocracies 2.8%chance of dying
Democracy only likely to last 18 years
Autocracies 2.5% chance of dying
Democracy only likely to last 8 years
Autocracies 0.7% chance of dying
Spain
Israel
South Korea
Czech Republic
Hungary
Argentina
Poland
Saudi Arabia
South Africa
Chile
Malaysia
Russia
Mexico
Bulgaria
Thailand
Kazakhstan
Iran
Turkey
Romania (74th)*
Brazil
Dominican Republic
Algeria
Ukraine
China
Azerbaijan
Venezuela
Lebanon
Philippines
Serbia
Egypt
Indonesia
Georgia
India
Vietnam
Pakistan
Cote D'Ivoire
Nigeria (171st)*
Per capita GDP
(2006 PPP dollars)
27000
26200
24200
21600
17300
15000
14100
13800
13000
12700
12700
12100
10600
10400
9100
9100
8900
8900
8800
8600
8000
7700
7600
7600
7300
6900
5500
5000
4400
4200
3800
3800
3700
3100
2600
1600
1400
*Rank out of 171 countries in the full survey. Source: Freedom House, Modernism and Liberalism, CIA Factbook
Page 56
Freedom House rating in 2006
1
1.5
1.5
1
1
2
1
6.5
2
1
4
5.5
2.5
1.5
5.5
5.5
6
3
2
2
2
5.5
2.5
6.5
5.5
4
4.5
3
2.5
5.5
2.5
3
2.5
6
5.5
6.5
4
Not Free
Partly Free
Not Free
Not Free
Not Free
Not Free
Partly Free
Not Free
Not Free
Not Free
Partly Free
Partly Free
Not Free
Partly Free
Not Free
Not Free
Not Free
Partly Free
Net oil importers and freedom
Net oil importers (2005) thousand barrels, and Freedom Ratings (2006)
0
7.5
-2000
-4000
NOT FREE 5.5-7.0
6.5
5.5
-6000
PARTLY FREE
-8000
4.5
3.5
-10000
FREE (Avg 2.1)
-12000
2.5
1.5
-16000
0.5
Iceland
Peru
Indonesia
Uzbekistan
Lithuania
Slovakia
Bangladesh
Brazil
Bulgaria
Romania
Belarus
Hungary
New
Ireland
Czech
Finland
Chile
Switzerland
Hong Kong
Ukraine
Austria
Philippines
Sweden
Portugal
Australia
Pakistan
Greece
Poland
South
Turkey
Thailand
Belgium &
Singapore
Taiwan
Netherlands
Spain
Italy
India
France
South
Germany
China
Japan
USA
-14000
Freedom House score (rhs)
•
Net oil exports (lhs)
Energy importers tend to be democracies. These are countries without natural
wealth, so governments must impose taxes on their population, who then say “No
taxation without representation”.
Page 57
Net oil exporters and freedom
Top 20 net oil exporters and political freedom
Russia’s Freedom Ratings and oil prices
Freedom House rating (2006)
6.5
5.5
1
Not Free
Not Free
70
6.5
Nigeria
Venezuela
Iran
United Arab Emirates
Kuwait
Iraq
Mexico
2580
2454
2391
2374
2363
1820
1781
4
4
6
5.5
4
6
2.5
Partly Free
Partly Free
Not Free
Not Free
Partly Free
Not Free
Algeria
Libya
Angola
Kazakhstan
Qatar
Canada
1761
1702
1242
1156
1000
806
5.5
7
5.5
5.5
5.5
1
Not Free
Not Free
Not Free
Not Free
Not Free
780
469
426
393
5.5
6.5
5.5
3
Not Free
Not Free
Partly Free
Partly Free
Oman
Syria
Yemen
Ecuador
7
Not Free
6
5.5
60
50
Partly Free
5
40
4.5
4
30
3.5
20
3
2.5
10
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Saudi Arabia
Russian Federation
Norway
Net exports
(2005)
(000 bpd)
9144
6798
2756
Political Rights
Civil Liberties
Freedom Rating
Oil prices (constant prices)
Source: Freedom House, BP
•
Oil exporters tend to be autocracies – there are only 6 full democracies of the 39 oil exporters cited by BP.
Note energy exporters with large populations (eg Nigeria, Indonesia, Egypt) tend to be poorer and more
corrupt than countries where the wealth effects are not so dispersed.
•
Russia has defaulted to autocracy as higher oil prices have risen – allowing Putin to cut income taxes to
just 13% for example. No taxes = no representation.
_
Page 58
Freedom and Corruption
Hong K.
UK
Norway
Singapore
New Zeald.
Bahrain
UAE
Portugal
USA
Chile
Sth Africa
Czech Rep.
Malaysia
Hungary
Poland
Turkey
China
Egypt
India
Mexico
Brazil
Cuba
Romania
Argentina
Serbia
Ukraine
Iran
Kazakhsta
Philippines
Indonesia
Russia
Nigeria
Venezuela
Azerbaijan
Angola
Chad
Belarus
Haiti
Political Freedom scores vs Corruption perceptions – 155 countries in total
1
7
2
3
Not free (5.5-7.0)
More corrupt
4
6
Less corrupt
Partly free
(3.0-5.5.5)
5
5
4
6
7
3
8
Free (1.0-3.0)
9
2
1
10
Corruption Index, lhs (10 = good, 0 = bad)
Political Freedom, rhs (1 = good, 7 = bad)
Page 59
Orthodoxy in 3/5 of the EMBI Global after crises in
the 1990s (2006 budget estimates)
Mexico (1994-95)
0
10
PAN
(Calderon)
Brazil (1994, 1999, 2002)
20
30
40
0
Orthodox
20
30
40
50
60
PT (Lula)
Orthodox
Populist
PRD (AMLO)
PSDB
(Alckmin)
0%
budget
balance
PRI (Madrazo)
P-SOL
(Helena)
Source: Instituto Federal Electoral
10
20
Populist
30
Russia (1998)
40
0
50
Orthodox
AKP
-3%
budget
deficit
Source: Wikipedia (Justica Eleitoral)
Turkey (1994, 1997, 2001)
0
10
10
20
30
40
Orthodox
United Russia (Putin)
Communists (KPRF)
CHP
Populist
DYP
MHP
Lib Dems (LDPR)
-1%
Populist
Motherland (MDRP)
budget
deficit
Yabloko (Liberal)
Source: Election result, Jul-07
Source: Yury Levada Analytical Center, Feb-06
Page 60
8%
budget
surplus
50