Emerging Market Sovereigns: Drivers and Challenges of Convergence Tony Stringer, Managing Director Global Sovereigns & Supranationals 11 October 2011
Eurozone Sovereign Debt Source: Fitch 1
Eurozone Sovereign CDS Spreads Source: Thomson Datastream 2
Eurozone Sovereign Ratings through the Crisis Source: Fitch 3
Real GDP Growth Source: Fitch 4
Major European Bank Exposure to GIIPS Sovereign Debt (EURbn) Italian (EUR170bn) and Spanish (EUR190bn) banks have the highest exposure to GIIPS Sovereign debt, although in both cases over 90% is to their respective Sovereigns Major French (EUR85bn) & German (EUR63bn) bank exposure to sovereign risk considered manageable given banks size Other large exposures relate to Italian banks exposures to other Italian banks (EUR135bn) and Spanish banks exposures to other Spanish banks (EUR188bn) Overall exposure to the Greek Sovereign and Banks is relatively manageable at EUR26.3bn and EUR3.6bn respectively Source: Public disclosures & Fitch calculations >150 >80 >40 >10 >1 <1 5
Eurozone Banks - Public Issuance severely constrained since mid-2011 Debt/covered Bonds Issued in EMEA and Proportion of Guaranteed 160 140 120 100 80 60 40 20 0 Unsecured issuance in EMEA (LHS) Covered bonds (LHS) O/w proportion of guaranteed issues (RHS) (USDbn) (%) 70 60 50 40 30 20 10 0 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Source: Dealogic 6
Size of China s Banking Sector Equal to All 42 Other EMs Combined Total Assets at End-2010 (U SDb n) M E/Africa CIS Asia CEE LatAm 14,570 3000 2500 2000 1500 1000 500 0 CHN BRA KOR IND TWN RUS TUR MAL RSA UAE MEX POL SAU INS THA CHL CZE BAH EGY QAT KUW PHI HUN COL ARG UKR ROM VEN KAZ SLK CRO SLN PER PAN BUL BEL OMA LAT LIT EST AZE GEO ARM Source: Fitch report EM Banking System Datawatch 7
China Also Has One of the Fastest Growing Systems Cumulative Loan Growth End-08-End-2010 (%) M E/Afri ca C IS A sia C EE LatA m 90.5 70 60 50 40 30 20 10 0-10 -20 BEL CHN ARM ARG VEN IND BRA TUR INS COL QAT AZE MAL POL PER OMA PHI EGY MEX PAN THA RUS CRO TWN RSA CHL BUL SLN ROM SLK KUW UAE CZE GEO KOR SAU UKR KAZ HUN EST LIT LAT BAH Source: Fitch report EM Banking System Datawatch 8
And Also the Most Thinly Capitalized Equity/Assets at End-2010 25 20 15 10 5 0 9 LAT CHL ARM UAE GEO AZE UKR SAU KUW CRO RUS BEL BUL OMA TUR COL QAT PHI PAN BAH EGY ARG INS KAZ MEX THA POL BRA SLK PER EST MAL ROM HUN VEN CZE SLN LIT RSA KOR IND TWN CHN (%) M E/A frica C IS A sia CE E Lat Am Source: Fitch report EM Banking System Datawatch
Easy Money is Fuelling Inflation & Rising Property Prices Inflation is critical because it is the one factor that could force Chinese authorities to end their decades-long policy of channeling abundant, cheap loans to the corporate sector With continuing rapid credit growth, the monetary drivers of inflation remain largely unaddressed. As a result, when monetary policy loosens inflation could return quickly. The policy options for addressing the next inflation wave are narrowing Inflation is Not Just About Food (% yoy) 40 35 30 25 20 15 10 5 Growth of M1 (LHS) Non-food CPI (RHS) Jan 03 Feb 05 Mar 07 May 09 Jun 11 4 3 2 1 0-1 -2-3 Housing Has Boomed (%) 165 145 125 105 House price/rent House price/household disposable income 85 Mar 07 Feb 08 Jan 09 Dec 09 Dec 10 Source: CEIC, Fitch estimates 10
EM and DM: Diverging Rating Actions, Converging Rating Levels Rating Actions by Region a (Index) 2008 2009 2010 2011 ytd 20 10 0-10 Average Rating by Region b Long-Term Foreign Currency AA+ BBB- AA- A+ BBB+ Asia LatAm E.Eur MENA DM -20-30 DM Asia LatAm MEA E.Eur BB B+ Jan 97 Jan 00 Jan 03 Jan 06 Jan 09 a Outlook change = + / - 1; upgrade / downgrade = + /- 2 Source: Fitch b Un-weighted averages, can reflect changes in coverage Source: Fitch 11
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