global economic outlook: abac iv 2017

Meeting Document Summary Sheet

Document Title: Global Economic Outlook: ABAC IV 2017

Purpose: For information

Issue: Guest presentation by Michael Taylor, Managing Director –CCO APAC at Moody’s Investor Services. The key messages that will be touched on in the presentation are:

1. Improvement in global trade and industrial activity bodes well for the macro outlook in 2018 2. Most of our rated APAC sovereigns have stable outlooks 3. Evaluating the potential downside risks for Asia’s credit outlook

Background: Global economic outlook

Proposal /Recommendations: None

Decision Points: For information only

Document: Program 37-031

Draft: FIRST

Date: 29 October 2017

Source: FEWG Chair

Meeting: Da Nang, Viet Nam

Moody’s 2018 Asia Credit Outlook

NOVEMBER 2017Michael Taylor, Managing Director – CCO APAC

2Moody’s 2018 Asia Credit Outlook, November 2017

Key messages

Evaluating the potential downside risks for Asia’s credit outlook

Most of our rated APAC sovereigns have stable outlooks

3

2

Improvement in global trade and industrial activity bodes well for the macro outlook in 20181

1 Global outlook: Synchronized global growth


Sources: IMF WEO, Moody’s Investors Service

Real GDP Growth ForecastAnnual % change

Global growth momentum will be sustained in 2018

-4

-2

0

2

4

6

8

10

12

%

G-20 Advanced G-20 Emerging


Broad-based Improvement in Global Trade and Industrial Activity

Sources: CPB, Moody’s Investors Service

Trade Volume & Industrial ProductionAnnual % change, 3mma

Commodity PricesIndex, 2005 = 100


222

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

2015 2015 2016 2016 2017

Change in Nonfarm Payroll (Thousands)6-month moving average

Source: Haver Analytics

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Total unemployed (%)*Civilian Unemployment Rate (%)

Note: *Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons

US: Strong hiring shows economic strength, despite subdued inflation


-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

France Germany ItalySpain Euro Area

-15.0

-10.0

-5.0

0.0

5.0

10.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

France Germany ItalySpain Euro Area

Loans to Domestic NFC% Change - Year to Year (SA, 2015 = 100)

Loans to Households% Change - Year to Year (SA, 2015 = 100)

Euro Area: Greater Demand Momentum Reflected in Increasing Lending

Source: Haver Analytics


-4

-2

0

2

4

6

8

10

12

14

2010 2011 2012 2013 2014 2015 2016 2017

Economic Activity Index y-on-y growth (%)Industrial Production y-on-y growth (%)

* EVI is calculated as (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year) / Official Foreign Exchange Reserves. The EVI measures a country’s susceptibility to withdrawal of liquidity or a ‘sudden stop’.Source: Haver Analytics, Moody’s Investors Service, Instituto Nacional de Estadística Geografia e Informátion

Mexico: Positive data surprises amid stabilizing financial markets» Uncertainty related to renegotiation of the North American Free Trade Agreement

(NAFTA) remains. A successful NAFTA talks alone will not fix the structural impediments deeply embedded in the Mexico’s economy, but sound fiscal management continues to support its sovereign creditworthiness.

0

10

20

30

40

50

60

70

0

5

10

15

20

25

30

35

40

%

% o

f GD

P

General government debt as % of GDP (LHS)External Vulnerability Indicator* (RHS)

2 APAC remains the fastest growing region


Sources: Moody’s Investors Service, Global Macroeconomic Outlook (August 2017 Update)

Real GDP Growth Forecasts (2017-18)Annual % change

-4

-2

0

2

4

6

8

%

2016 2017F 2018F

APAC’s near-term growth prospects have brightened…


…supported by improved external demand

ASEAN 6 include Singapore, Indonesia, Thailand, Malaysia, Philippines and Vietnam.Sources: Moody’s Investors Service, Haver Analytics

Merchandise Exports Continue to ImproveAnnual % change, 3mma

-30

-20

-10

0

10

20

30

Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

% y

ear-

on-y

ear

China Korea ASEAN 6 India Japan


Portfolio flows and investments are holding up well

-$10

-$5

$0

$5

$10

$15

$20

Sep

15

Jan

16

May

16

Sep

16

Jan

17

May

17

Sep

17

$ bi

llion

Africa & Middle EastEmerging EuropeLatin AmericaEmerging Asia

-$15

-$5

$5

$15

$25

$35

$45

Sep

15

Jan

16

May

16

Sep

16

Jan

17

May

17

Sep

17

$ bi

llion

Africa & Middle EastEmerging EuropeLatin AmericaEmerging Asia

-$20

$0

$20

$40

$60

$80

$100

$120

$140

$160

Mar

-15

Jun-

15

Sep-

15

Dec

-15

Mar

-16

Jun-

16

Sep-

16

Dec

-16

Mar

-17

Jun-

17

$ bi

llion

Argentina BrazilIndia IndonesiaMexico RussiaSouth Africa TurkeyChina Total

Source: The Institute of International Finance

Net Portfolio Equity Flows$ billion

Net Portfolio Debt Flows$ billion

Gross FDI Inflows$ billion


Sources: Moody’s Investors Service, National Bureau of Statistics, Haver Analytics

GDP and Key Macro IndicatorsAnnual % change

» Authorities’ commitment to deleveraging, financial stability is credit positive for sovereign, but there will be policy challenges and trade-offs along the way. President Xi has reiterated the supply side reform as a key policy initiative at the 19th Party Congress.

China: Growth momentum to continue into 2018

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

0%

5%

10%

15%

20%

25%

% y

ear-

on-y

ear,

3mm

a

% y

ear-

on-y

ear

Nominal GDP Industrial productionRetail sales Fixed-asset investment: total (RHS)Fixed-asset investment: property and construction (RHS) Exports (RHS)


Business ConditionsDiffusion index of "Favorable" minus "Unfavorable”

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2010 2011 2012 2013 2014 2015 2016 2017

Large ManufacturingLarge Non-ManufacturingMeduim ManufacturingMedium Non-ManufacturingSmall Manufacturing

Pickup in Corporate Profitability and Demand for CreditPre-tax corporate profits vs. outstanding loans in the corporate sector

Sources: Haver Analytics, Bank of Japan, Ministry of Finance and Moody's Investors Service

Japan: Improved momentum supports a favorable outlook for near-term growth

-5

0

5

10

15

20

25

-1

0

1

2

3

4

5

2012 2013 2014 2015 2016 2017

JPY

trillio

ns, s

easo

nally

adj

uste

d

% y

ear-o

n-ye

ar

Outstanding Loans: CorporationsCorporate profits, pre-tax (RHS)

3 Big five risks to our outlook


Stable balance of risks, increased risk of escalation in the Korean peninsula

Steady expansion AE and EM

Ris

k Le

vel C

ompa

red

to P

revi

ous

Est

imat

es

Stable commodity prices

Stable Chinese demand

Medium Term2017 Positive

2017 Negative

Geopolitical risks –

North Korea

Protectionist stance in the US

Re-pricing of assets as global interest

rates rise

China’s delicate

balancing act

Multiple sources of elevated leverage across APAC

Source: Moody’s Investors Service


Potential impact channels on South Korea’s credit profile



Credit impacts through economic, fiscal and financing channels

Lower exports to Korea

Global supply chain disruptions in

particular in electronics

Disruptions to global trade as Korea’s

shipping capacity isimpaired

Fiscal strength

Susceptibility to event risk

Loss of LNG and oil revenues

Lower nominal GDP raising debt burden

Increase in military expenditure widening

deficits

Heightened external debt refinancing risk

Capital outflows from higher risk sovereigns

to safe havens

Lower FDI inflows from Korea

Vietnam

Vietnam

VietnamUS JapanChina

Exporters inclQatar, Kuwait

Mongolia, others depending on timing of conflict and debt

maturities

Potentially broad impact across trade-reliant

sovereigns

Sri LankaChina

SingaporeSlovakia

SingaporeHong Kong

Taiwan

Economic strength

Japan



South Korea is important in some key areas of global trade and finance

Sources: IMF, UN Comtrade, Haver Analytics, Moody’s Investors Service

South Korea’s weight in international trade and goods


Capital flows exposed to Fed tightening

Capital Outflows from Emerging Asia Have Recently Reversed but Will Remain Volatile Net Non-resident Purchase of Emerging Asia Stock and Bonds*, $ billion

Sources: Moody’s Investors Service, IIF

*Emerging Asia in the exhibit refers to India, Indonesia, Korea, the Philippines and Thailand, for which the IIF provides data on daily capital flows. Here “t” refers to days

-30

-25

-20

-15

-10

-5

0

5

10

15

t-30 t-20 t-10 t t+10 t+20 t+30 t+40 t+50 t+60 t+70 t+80 t+90 t+100 t+110 t+120 t+130 t+140 t+150

2008 Global Financial Crisis (t=May 18) 2013 Taper Tantrum (t=May 22) 2016 US Election (t=Nov 8)


Significant disconnect between financial market expectation and fundamentals forecasts

0.000.200.400.600.801.001.201.401.60

United Kingdom - MIS ForecastsGBP OIS (SONIA) Curve

-0.80

-0.40

0.00

0.40

0.80

1.20Euro Zone Eur OIS (EONIA) Curve

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

United States - MIS ForecastsUS Dollar Swaps (30/360, S/A) Curve

-0.20

-0.10

0.00

0.10

0.20

0.30

Japan moody's Analytics ForecastsJPY OIS Curve

Sources: Moody's Investors Service, Moody;s Analytics Bloomberg, Federal Reserve Bank of St. Louis (FRED)


Multiple sources of elevated leverage

Sources: Official National Sources, BIS, IMF, IIF, Haver Analytics, Moody’s Investors Service

APAC Leverage Vulnerability Heat Map

Data are latest available and either financial or calendar year depending on reporting standard. Figures may be actuals or estimates.* IMF series on domestic credit provided by the financial sector. As bonds outstanding and non-bank lending are excluded, this likely underestimates the level of domestic debt.** Indian and Indonesian data include debt held by non-profit institutions serving households; Australian data include debt of unincorporated enterprises; New Zealand data include rentalproperties, consumer loans and student loans.*** Data include corporate debt of private and public sector enterprises. The Philippines' data are proxied by outstanding bank loans in the corporate and small and medium-sizedenterprise sectors.

% of GDP5-yr change,

ppts% of GDP

5-yr change, ppts

% of GDP 5-yr change,

ppts% of GDP

5-yr change, ppts

% of GDP5-yr change,

ppts2016 5-yr change 2016 5-yr change 2016 5-yr change Q4 2016 Q4 2016 5-yr change

Australia Aaa STA 175.2% 28.8 115.6% 18.1 39.7% 17.7 135.6% 16.3 81.1% 11.8New Zealand Aaa STA 150.0% 7.1 141.8% -2.6 28.9% -1.9 99.9% 7.3 83.7% -3.7Singapore Aaa STA 142.2% 52.6 439.3% 19.6 28.1% -12.9 74.8% 5.1 118.1% 36.0Hong Kong Aa2 STA 226.0% 19.3 414.8% 18.4 4.2% 1.1 68.6% 9.2 233.9% 58.4Korea Aa2 STA 169.3% 14.6 27.0% -6.3 38.2% 6.6 82.1% 14.1 100.4% 2.5Taiwan Aa3 STA 177.3% 10.6 32.5% 7.3 38.3% -3.0 86.7% 3.1 63.0% -0.4Macao Aa3 STA 114.4% 58.5 95.4% 46.9 0.0% 0.0China A1 STA 217.2% 72.2 12.7% 3.5 36.7% 5.3 47.4% 18.8 166.3% 46.4Japan A1 STA 260.5% 24.1 71.8% 21.7 216.9% 22.0 59.1% -0.1 95.5% -6.3Malaysia A3 STA 147.2% 21.6 74.5% 15.5 52.7% 2.7 88.4% 12.2 68.5% 7.2Thailand Baa1 STA 124.8% 7.5 32.3% 4.1 31.5% 3.6 78.6% 10.5 50.0% 2.5Philippines Baa2 STA 63.6% 13.2 24.5% -9.2 38.3% -7.4 8.8% 3.1 39.1% 10.3India Baa3 POS 76.8% -3.7 20.4% 0.6 67.8% 0.5 10.2% 1.4 46.6% -3.7Indonesia Baa3 POS 41.8% 6.6 34.1% 8.9 27.9% 4.8 17.0% 1.8 23.3% 8.4Bangladesh Ba3 STA 46.2% -1.1 15.4% -4.9 27.2% -5.2Fiji B1 POS 71.2% 9.3 18.6% -3.9 45.8% -6.9Sri Lanka B1 NEG 54.1% 20.0 57.3% 7.1 79.3% 8.2Vietnam B1 POS 142.1% 38.1 44.1% 6.8 52.6% 13.3Papua New Guinea B2 STA 34.0% 18.5 92.2% 22.3 32.6% 15.2Maldives B2 STA 61.9% -7.1 31.9% -9.3 65.7% 1.0Cambodia B2 STA 58.8% 34.7 49.1% 16.1 32.6% 2.3Pakistan B3 STA 46.2% 8.9 26.5% -4.6 67.6% 8.7Solomon Islands B3 STA 25.5% 8.2 25.0% -6.2 7.8% -11.2Mongolia Caa1 STA 62.7% 24.9 216.3% 111.5 91.4% 67.3

Domestic Credit* External Debt General Government Debt

Leverage Indicators

Household Debt**Non-Financial Sector

Corporate Debt***

Low debt Moderate debt High debt


Region exposed to rise in protectionism

Sources: Moody’s Investors Service, World Bank Temporary Trade Barriers Database, International Monetary Fund

Temporary trade barriers% of products

0.0

0.5

1.0

1.5

2.0

2.5

3.0

% o

f Pro

duct

s

Antidumping Countervailing duties Safeguards Temporary barriers

Rise in protectionist sentiment may lead to the renegotiation of existing trade pacts and a reduced appetite for new deals.


China’s overall leverage continues to increase, despite at a slower pace» High savings, a closed capital account and small equity market combine to fuel debt» High growth objective and low productivity of credit in generating GDP push debt/GDP

ratios upEconomy-wide leverage continues to increase Credit intensity has been rising since the beginning

of the decade

Note: Debt/GDP ratios for Q1 2017 are estimatesSources: Institute of International Finance, Moody’s Investors Service

Credit Weaknesses – Deteriorating Debt Servicing Capacity

0%

50%

100%

150%

200%

250%

300%

Deb

t/GD

P, %

Household debt Non-financial corporations Government

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0xCredit intensity Incremental capital-output ratio

Note: Credit intensity refers to the ratio of new total credit flow (measured by adjusted total social financing, or TSF, plus estimated credit not captured by TSF) every year relative to each additional unit of nominal GDP. ICOR is calculated as investment share in GDP divided by the annual increase in real GDP. A higher value represents a lower productivity of capital.Sources: People's Bank of China, National Bureau of Statistics of China, Wind, Moody’s Investors Service

moodys.com

Michael TaylorManaging Director – CCO APACCredit Strategy and [email protected]

mailto:[email protected]


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global economic outlook: abac iv 2017

Economy & Finance