The new normal Or, where the world goes from here

Robert PowellSenior editor, MENArobertpowell@eiu.com

DubaiJune 2010

Where are we now?

Global: Recoverology

Bounce-back theory: “V” The sharper the contraction, the stronger the recovery

Financial-impairment theory: “U”, “L” Recoveries following financial crises are much slower

than normal recoveries

Borrowed-time theory: “W” Stimulus boosts economy at the cost of weakness later

Armageddon theory: “Q” Too grim to talk about

Global: World trade bounces back

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World trade volumes. 2000=100. Seasonally adjusted.Source: CPB Netherlands Bureau for Economic Policy Analysis.

Financial markets: Fragile

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3-month LIBOR/3-month overnight index swap (OIS) spread, percentage points. A higher spread denotes more marketstress. Sources: Haver Analytics; Economist Intelligence Unit.

Lehman fails

Financial markets

crash

Fed introduces

QE

Euro zone woes spook

markets

Policy: No Keynesian free lunch

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Gross public debt stock as a % of GDP. End-period.Source: Economist Intelligence Unit, CountryData.

The bad news

US: A recovery is under way …

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Unemployment rate

Jobs in ‘000s; unemployment, %. Source: Bureau of Labour Statistics.

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… but housing is still sluggish

US housing starts, ‘000s, SAAR.Source: Bureau of the Census.

Euro zone: Sisyphean task …

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Germany Spain Greece Ireland

Why stay? Cost of leaving too high Keeps borrowing costs down Provides a stability blanket Provides an inflation anchor

Why leave? Adjustment costs too high—eg Greece needs to “do a Latvia” Difficulties of converging with Germany—can only come through increasing competitiveness by cutting wages etc

Reform? Monetary union AND a fiscal union?

Real private consumption, 2000 Q1=100. Source: Economist Intelligence Unit, CountryData.

The good news

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Crises accelerate existing trends

GDP, purchasing power parity (PPP) US$ bn. Source: Economist Intelligence Unit, CountryData.

China: Massive credit expansion

Bank credit rose sharply in 2009 By 33% of GDP By 31% from previous year By RMB9.6trn (US$1.4trn)

Govt started to slow loan growth Target is RMB7.5trn increase in 2011 Implies growth of 19%; 18% of GDP

There is a housing bubble, but: Average LTV is 46% (08/2009) 24% of buyers pay all cash 23% of houses bought by investors

What’s the risk of a credit bust? CCP is the world’s most liquid financial institution NPLs can be “disappeared”

Nominal

Real

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Chinese bank credit growth. % change, year on year.Sources: PBC; NBS; Haver Analytics; EIU.

India: Growth strong, but fiscal risks

Monetary and fiscal stimulus measures implemented in 2009 have driven recovery

Industrial output growth has rebounded strongly

Service sector growth remains rapid—pharma/healthcare and retail see highest demand for labour in short term

Construction sector outlook is improving

Assisted by favorable demography, India’s economic growth rate is expected to exceed China’s by 2018

BUT medium-term fiscal consolidation is needed, including implementation of GST

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India’s GDP trends.Source: Economist Intelligence Unit.

The CIVETS: Six to watch forPopulation (m)

GDP/head (US$, PPP)

Inflation (%) Growth (%)

Colombia 46.9 8,910 2.9 2.4

Indonesia 243.0 4,240 5.1 5.6

Vietnam 87.8 3,140 10.5 6.2

Egypt 84.7 5,920 12.2 5.2

Turkey 73.3 12,750 10.1 4.8

S Africa 49.1 10,720 5.8 2.8

Forecasts are for 2010, as of June 2010.Source: Economist Intelligence Unit, CountryData.

Currencies: It’s still the ugly sisters

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Trade-weighted € US$:€

US$/€ strongly correlated with risk perception Euro zone structural concerns to dominate over short term US fiscal tightening will give support to US$ in 2H 2011 Euro zone can’t cope with a strong €?

Pity the yen Racing up against the € and keeping up with the US$. Bad news for Japan’s exporters and for its deflation

Emerging markets RMB “wobbly peg” to US$ EMs to depend on risk tolerance

Source: Haver Analytics.

Average

What this means

Globalisation—a new phase

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Globalisation index.Source: Economist Intelligence Unit.

Hyperglobalisation

“Embracing manyness”—a world with no centre

Treat emerging markets as you would your home market

Watch for the new competitive landscape

Technology continues to be a driver of globalisation

Expect an innovation surge

But watch the politics—Sino-US and in fiscally stretched developed world

Where’s the growth?

Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of April 2010. Source: Economist Intelligence Unit, CountryData.

The Middle East – after the windfall

Sheikh Zayed Road -1990 Sheikh Zayed Road – 2007

Resilient!

MENA grew by 1.4% in 2009 Oil prices back at US$70-80/b

Tourism recovering

FDI flows shifting Financial investors still nervous Infrastructure and real estate

projects at risk Fiscal funding to the fore!

OIL: short-term bear, long-term bull

Oil price outlook: Near term

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50Dated Brent

% change

Oil price: US$/barrel; % change, year on year.

Source: Economist Intelligence Unit, CountryData

But prices remains below 2008 highs

EIU oil market outlook

m barrels/day

2007 2008 2009 2010 2011

Total world oil production 85.1 86.3 84.8 86.5 88.4

Non OPEC 47.6 47.1 48.8 49.3 49.9

OPEC 35.4 36.6 33.4 34.4 35.7

Total world oil consumption 86.4 86.0 84.9 86.5 87.8

Stock change -1.3 0.3 -0.02 0.1 0.6

Brent dated price (US$/b) 72.7 97.7 61.9 80.2 78.5

a OECD stocks

Source: Economist Intelligence Unit, CountryData

Long-term picture is still bullish…

Source: International Energy Agency

• Disappointing non-OPEC supply• Potential for strong EM demand• High cost of E&P• Investment depressed

• Geopolitics• OPEC action• Oil nationalism

The BP Macondo spill effectAlgeria

Major investor in upstream gas, operating the In Salah and In Amenas fieldsEgypt

Biggest foreign oil producer and a major player in the offshore gas sectorIraq

Working with CNPC on boosting output at the Rumaila field to a targeted 2.85 b/d in 2016

Oman Investing US$650m in the Khazzan and Makarem tight gas project

UAE Holds minority stakes in several Abu Dhabi oil and gas producers

Iraq 1 – Brazil 0 2010 6% of global oil production from deepwater 2020 Plan was for 10% of global oil production from deepwater

   

All of which makes the Middle East more important!!

Source: BP, Statistical Review of World Energy

(and don’t forget the gas….)

Source: BP, Statistical Review of World Energy

Pushing on

Oil economies are in the black …

Budget balance, % of GDP

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Arabian peninsula and the Gulf

Bahrain, Iran, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Yemen

Source: Economist Intelligence Unit, MENA RO Country Forecast

…and looking good

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Sources: SWF Institute

But debt remains a worry for some

External debt US$ bn

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Sources: Economist Intelligence Unit.

and non-oil economies are in the red

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Non-oil exporters

Budget DEFICITS, % of GDP

Source: Economist Intelligence Unit.

Egypt, Israel, Jordan, Lebanon, Morocco, Tunisia.

Lots done …

Source: World Bank, Doing Business report 2010.

… more to do (Legal & regulatory risk)

Source: Economist Intelligence Unit, Riskbriefing.

Ones to watch…

GCC single currency – back to the stable

GCC Single market created in January 2008

GCC VAT and corporation tax—possible

But a GCC single currency? Not likely….

Abdulrahman al-Attiyah, Secretary-General of the Gulf Cooperation Council “I don't foresee the currency to be launched in 2015”

The US dollar peg – with us a while yet

Meanwhile …Closer economic ties still on track

Gulf power grid and rail network

Gulf Co-operation Council: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE

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Qatar UAE Bahrain Kuwait

Population growth (% change)

Dubai—debt overhang

Property bubble… Fast-rising expat population Tourism boom “Flipping”

…Property bust Inter-bank rates soar Dubai Financial Index crashes Property prices fall by 45% last year Merrill Lynch expects they will fall 15% this year Dubai World asks for US$24.3bn debt “standstill” Dubai International Capital follows suit in May

Abu Dhabi steps in Central Bank, commercial banks and SWF help out Slow road back for Dubai, but Abu Dhabi booms on the back of strong oil prices

A new city is being built, Masdar, designed around green principles

Saudi—conservatism pays

Still the oil king 12.5m b/d capacity; producing around 8m b/d China is now largest market for oil sales, overtaking

US But rising domestic usage, means exports fall from

5.7m b/d in 2009 to 4.8m b/d in 2014

The region’s next property boom? Mortgage law expected by end of the year Could increase housing demand by up to 200,000

units a year but foreign ownership rules still restrictive

(although KAEC may change this)

Iraq—the oily tiger?

An oil superpower? Ten long-term oil contracts signed

Investment of US$100bn in the oil sector predicted

Could conceivably boost capacity to 12m barrels/day in a decade

Extremely positive ramifications for the economy, employment and immigration inflows

A more stable political scene? Iraqi election may see a more cohesive

government in place If this proves to be the case, and losing

parties are sufficiently placated, the security situation could also continue to improve

Source: Economist Intelligence Unit.

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Iraqi GDP, US$ bn (PPP)

Iran—isolated

Sanctions No major restrictions on exporting oil

CNPC heavily involved in Iran’s energy sector South Pars gas field (LNG) Azadegan oilfield

But major restrictions on spending the money Sanctions on banks; insurance; export credits European companies pulling out Impact on Dubai

UAE exported over US$2bn in machinery & US$1.2bn in transport equipment to Iran in 2009

Where’s the growth?

Real GDP growth; % change, year on year. Source: Economist Intelligence Unit, CountryData.

2009 = 9.5% 2010 = 23.3% 2011 = 12.7%

More Information?

Data and analysis from today’s presentation were taken from the Economist Intelligence Unit’s country analysis and forecasting services. For more information on these services and other EIU capabilities, including risk assessment, industry trends, and economic data, please contact:

Economist Intelligence Unit

2 Dubai Media City

Tel: + 971 (0) 4 433 4202Fax: + 971 (0) 4 438 0224