Country Risk Forecasting

Transcription

1 Country Risk Forecasting Cedric Chehab, Head of Americas Research Business Monitor International

2 Table of Contents 1. Why Do We Forecast? 1 2. How Do We Forecast? 3 3. Country Risk Case Studies 7 4. Common Questions Q&A 13

3 1. Why Do We Forecast?

4 Why Do We Forecast? Forecasts Help Our Clients In Several Ways Our macroeconomic forecasts help our corporate clients develop pan-regional and country-level growth strategies. We help by: Identifying regional and country-level trends in growth and government policy. Identifying sub-sector trends on a GDP by expenditure basis (consumption, investment, exports etc), or on a industry-basis (autos, commodities, shipping, pharmaceuticals, telecoms etc). We help our financial clients by identifying short-to medium term trade ideas for the major asset classes including fixed income, equities, currencies & commodities. These are investment-focused ideas. Focus is on financial markets, but heavily influenced by our macro views. Importantly, we also help all of our clients identify key risks. They can be: Macroeconomic risks related to growth, politics, business environment, regulation etc Financial markets risks related to the currency, the cost of finance or commodities. 1

5 Why Do We Forecast? What Are We Forecasting Anyway? Our forecasts help tell a story about what the future will look like. Our forecasts are a narrative (based on analysis) of how we see the global, regional, our country-level economies/sectors evolving over time and how it will impact market participants, whether they are corporations, governments, or investors. All of our analysis and forecasts are underpinned by data. This includes: Historical data and forecasts out 10 years for 175 countries & 23 sectors. Total of 762,380 lines of data (including derived data). Integration of data throughout the whole research process. Proprietary, databases and risk ratings (economics, politics and sovereign ratings) This allows our clients to navigate uncertain waters and plan for future growth, while managing risk. 2

6 2. How Do We Forecast?

7 How Do We Forecast? A Visual Representation Of Our Methodology: 3

8 How Do We Forecast? So, What Is The Secret Recipe? The most important idea behind our forecasting methodology is that one cannot look at any area of risk in isolation: There is a reflexive process that ties the different areas of risk together One area of risk can impact another, so ignore them at your own peril All areas of risk are inter-related. Here is a great corporate example: Carlsberg is a beverage company. 30% of revenues come from Eastern Europe & Russia in particular. So roughly 30% of revenues depend on sales to the Russian consumer, which in turn is affected by : Wages, economic activity determined by government policy, oil price/sales, investment, inflation, credit conditions. Currency movements determined by macro policy, investment, oil exports, etc. The price of oil determined by global demand & supply as well as political risk: China, US, Eurozone, Saudi Arabia, Iran etc. 4

9 How Do We Forecast? A Visual Representation In Practice Oil & Gas Research BMI Ratings Politics Local Data O&G Output Forecasts O&G Price Forecasts Regional Economic View Brazil Economic Outlook Infrastructure Research Coffee/Cocoa/Sugar/Grains Output Forecasts China 5 Global Economic View US Investor risk appetite Eurozone US$/EUR Iron ore Output Forecasts Mining Research Iron ore Price Forecasts Coffee/Cocoa/Sugar/Grains Output Forecasts Agribusiness Research

10 How Do We Forecast? What Are The Benefits Of This Integrated Methodology? Proactive Analysis & Forecasting Forward looking views, rather than reactive analysis Consistency & Coherence Due to the large number of countries & industries we cover, we have a systematic approach Independence Our methodology is wholly proprietary Out of consensus views that can have a significant material implications for countries & corporate clients 6

11 3. Case Studies

12 Case Studies US Economic & Financial Crisis 2007/2008 In 2007 we saw some very concerning signals Country-wide falling house prices Poor lending standards High leverage in the banking and shadow banking system High commodity prices sapping consumer spending Large international macroeconomic imbalances (current account imbalances) A slowing of economic growth Some stress in financial markets In October 2007, we became very cautious, due to rising stress in financial markets 7 Credit conditions were tightening quickly, despite monetary easing Equity markets looked very weak Any deterioration in financial markets would have negative effects on growth Key Analysis Sectors Commodities Macroeconomics Global Dynamics Financial Markets A US recession would have a negative effect on emerging markets growth and commodities due to the nature of rebalancing

13 Case Studies Could Greece 2010 Be Worse Than Argentina 2001? In April 2010, we ran a comparison between Greece In 2010 and Argentina 2001, which suggested that Greece would be much worse: Bailout/Default Greece would not be able to devalue (as part of the euro) Get deflation, not inflation Go down unorthodox path The costs of exiting the eurozone would be too high Financial stress would see a rise in bond yields, affecting investment Political cohesion would be difficult Key Analysis 8 Suffer an L shaped recession Suffer from weak global economic backdrop Macroeconomics Politics Global Dynamics Financial Markets

14 Case Studies China Slowdown We have long-held a below consensus view on Chinese growth. Although we were a little early in 2011, the view has played out very well in Key Analysis Sectors Growth of 7.5% in 2012, well below consensus Macroeconomics Housing property bubble would start to deflate Global Dynamics Huge state/provincial off balance sheet debt Financial Markets Negative return on infrastructure investment (ROI) due to overcapacity Limited room for government stimulus similar to 2009 Currency is not a one way bet due to short-term financial flows This view has significant ramifications for global growth and for the extractive sectors of Latin America given that China accounts for 40-50% of global metals demand. 9

15 Case Studies Potential For Another Venezuela Devaluation There are several imbalances which will lead to another devaluation: Debt Financing is Too expensive Overvalued Exchange Rate Fiscal Deficits & Falling Reserves M2/reserves ratio & the black market rate suggest at least a 30% devaluation Oil accounts for 95% of exports High inflation and government controls deter investment Capital controls remain in effect Political power is highly concentrated Upcoming elections may lead to uncertainty with regard to policy Increased presence of military in the government Core view is that Chávez wins in October 10

16 Case Studies 2012 Risks To Infrastructure Investment We have been highlighting risks to investment in global infrastructure. A primary example was Australia: Key Analysis Sectors Below consensus growth on China Global Dynamics Australia s exposure to Chinese growth & a strong exchange rate Macroeconomics Below consensus view on commodity prices (China) Commodities Financial Markets Mining investment would weaken as margins fall Infrastructure plans (railways and ports) to support mining expansion in doubt Result: Several companies have announced Capex under review (ex: US$20bn Port Hedland by BHP) This trend will likely spread to other resource-related countries such as Canada, Peru, Chile, Brazil etc. 11

17 4. Most Common Questions

18 Most Common Questions Examples of The Type of Questions We Receive What is your outlook for China and why? What is your outlook for the Eurozone and will Greece default? How resilient is the Latin American consumer to a global slowdown? What is your view on political reforms, and what does this mean for growth? Is security in the region a problem? Are Latin American governments in better shape to deal with another recession? 12

19 5. Q&A

20 IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have been written in connection with the "promotion or marketing" of any transaction contemplated hereby ("Transaction"). Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Any terms set forth herein are intended for discussion purposes only and are subject to the final terms as set forth in separate definitive written agreements. This presentation is not a commitment to lend, syndicate a financing, underwrite or purchase securities, or commit capital nor does it obligate us to enter into such a commitment, nor are we acting as a fiduciary to you. By accepting this presentation, subject to applicable law or regulation, you agree to keep confidential the information contained herein and the existence of and proposed terms for any Transaction. Prior to entering into any Transaction, you should determine, without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume these risks) as well as the legal, tax and accounting characterizations and consequences of any such Transaction. In this regard, by accepting this presentation, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice, (b) there may be legal, tax or accounting risks associated with any Transaction, (c) you should receive (and rely on) separate and qualified legal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accounting advice (and any risks associated with any Transaction) and our disclaimer as to these matters. By acceptance of these materials, you and we hereby agree that from the commencement of discussions with respect to any Transaction, and notwithstanding any other provision in this presentation, we hereby confirm that no participant in any Transaction shall be limited from disclosing the U.S. tax treatment or U.S. tax structure of such Transaction. We are required to obtain, verify and record certain information that identifies each entity that enters into a formal business relationship with us. We will ask for your complete name, street address, and taxpayer ID number. We may also request corporate formation documents, or other forms of identification, to verify information provided. Any prices or levels contained herein are preliminary and indicative only and do not represent bids or offers. These indications are provided solely for your information and consideration, are subject to change at any time without notice and are not intended as a solicitation with respect to the purchase or sale of any instrument. The information contained in this presentation may include results of analyses from a quantitative model which represent potential future events that may or may not be realized, and is not a complete analysis of every material fact representing any product. Any estimates included herein constitute our judgment as of the date hereof and are subject to change without any notice. We and/or our affiliates may make a market in these instruments for our customers and for our own account. Accordingly, we may have a position in any such instrument at any time. Although this material may contain publicly available information about Citi corporate bond research, fixed income strategy or economic and market analysis, Citi policy (i) prohibits employees from offering, directly or indirectly, a favorable or negative research opinion or offering to change an opinion as consideration or inducement for the receipt of business or for compensation; and (ii) prohibits analysts from being compensated for specific recommendations or views contained in research reports. So as to reduce the potential for conflicts of interest, as well as to reduce any appearance of conflicts of interest, Citi has enacted policies and procedures designed to limit communications between its investment banking and research personnel to specifically prescribed circumstances. [TRADEMARK SIGNOFF: add the appropriate signoff for the relevant legal vehicle] 2012 Citibank, N.A. All rights reserved. Citi and Arc Design is a registered service mark of Citigroup Inc.. In January 2007, Citi released a Climate Change Position Statement, the first US financial institution to do so. As a sustainability leader in the financial sector, Citi has taken concrete steps to address this important issue of climate change by: (a) targeting $50 billion over 10 years to address global climate change: includes significant increases in investment and financing of alternative energy, clean technology, and other carbonemission reduction activities; (b) committing to reduce GHG emissions of all Citi owned and leased properties around the world by 10% by 2011; (c) purchasing more than 52,000 MWh of green (carbon neutral) power for our operations in 2006; (d) creating Sustainable Development Investments (SDI) that makes private equity investments in renewable energy and clean technologies; (e) providing lending and investing services to clients for renewable energy development and projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the issue of climate change to help advance understanding and solutions. Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks. efficiency, renewable energy & mitigation