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Beyond the Budget:Issues to Contemplate In A ‘New-N li i ’ W ldNormalizing’ World
UOB Economic-Treasury Research
Disclaimer
This presentation was prepared for informational purposes only and shall not be copied or
y
February 2014
This presentation was prepared for informational purposes only and shall not be copied, orrelied upon by any other person for whatever purpose. The information provided herein isbased on publicly available information. Although believed to be reliable, UOB Group makesno representation as to the accuracy or completeness. This presentation must be viewed inconjunction with the oral presentation provided by UOB and/or its officially appointeddistributors/agents. Nothing in this presentation constitutes accounting, legal, regulatory, taxor other advice. The reader(s) of this document should consult his/their own professionaladvisors about the issues discussed herein This presentation is not intended as an offer or
Produced by UOB Economic-Treasury ResearchFebruary 2014 1
advisors about the issues discussed herein. This presentation is not intended as an offer orsolicitation with respect to the purchase or sale of any investment product and nothing hereinshould be construed as a recommendation to transact in any investment product. To invest,please refer to the prospectus (where applicable) for details.
US: Tapering Finally Here1 US: Tapering Finally Here1
Asia: Coping With Tapering Effect 2
3 Consumer Leverage
China: Shadow Banking & Local Government Debt4
Produced by UOB Economic-Treasury ResearchFebruary 2014 2
A Better Global Economy in 2014 – US Leading The Way
US
Dec 2013 PMI showed better DM performance but latest Jan 2014 PMI is a concern
Taiwan
Europe
Japan
Korea
Indonesia
Hong Kong
Taiwan
China
India
Korea
42.0 44.0 46.0 48.0 50.0 52.0 54.0 56.0 58.0
Singapore
Jan'13 PMI Dec'13 PMI
Produced by UOB Economic-Treasury ResearchFebruary 2014 3
Source: HSBC-Markit, Bloomberg
When Will US Short Interest Rates Rise?
Produced by UOB Economic-Treasury ResearchFebruary 2014 4
Expecting Rate Hike Cycle To Start in 1Q 2015, But Depends On How Fed’s Forward Guidance Evolve Under Janet Yellen
Market-Implied Interest Rate Pricing Vs Historical Cycles
S IMF WEO O t 2013
Produced by UOB Economic-Treasury ResearchFebruary 2014 5
Source: IMF WEO Oct 2013
It Is Nearly 6 Years Since The 2008 US Jobs Downturn Started, & 2014 Looks Like The Year US Overcomes the Jobs Loss
15lions
)
US Non-Farm Payrolls Cumulative Comparisons
2008 2001 1990
1975 – 19 months
1981 26 th
10
ativ
e C
hang
e (M
il 1981 1975 1981 – 26 months
1990 – 33 months
0
5
m P
ayro
lls C
umul
a
2001 – 49 months
2008 – 71 months and still counting!
-5
US
Tot
al N
on-F
arm counting!
The next downturn – >100 months? (i.e. >8years)
-100 6 12 18 24 30 36 42 48 54 60 66
U
Months from Start of Negative Payrolls
( y )
The time required to "breakeven" for the US jobs market to recover is getting longer and longer
Produced by UOB Economic-Treasury ResearchFebruary 2014 6
Source: CEIC, UOB Treasury Research
is getting longer and longer
US: Tapering Finally Here1 US: Tapering Finally Here
Asia: Coping With Tapering Effect
1
2
3 Consumer Leverage
China: Shadow Banking & Local Government Debt4
Produced by UOB Economic-Treasury ResearchFebruary 2014 7
Concerns on interest rates led to the weakening of Asian currencies
Asian currencies’ performance against USD From 1 Jan 2013 To Date
4.33 2 2 8
5
10
%1 Jan 2013 to 8 May 2013
1 Jan 2013 to 14 Feb 2014
3.21.5 1.5 0.7 0.5
‐0.1 ‐0.5 ‐1.4 ‐2.0
2.8
‐0.1
‐3.5 ‐4.2
0.2
‐5
0
‐12.4
‐6.0‐7.9
‐11.8
‐8.5
‐14.8‐15
‐10
‐17.7
14.8
‐20THB MYR INR CNY IDR PHP HKD SGD TWD KRW JPY
S Bl b (D il D t )
Produced by UOB Economic-Treasury ResearchFebruary 2014 8
Source: Bloomberg (Daily Data)
Asia in Better External Positions to Manage Liquidity Outflow
Asian Foreign Reserves
33124,000
US$bn
1193
403 327 317 262 259 171 135 113 84145 203 90 49 90 27 75 28 25 24 110
1,000
2,000
3,0002012 1998
0China Japan Taiwan Korea Hong Kong India Singapore Thailand Malaysia Indonesia Philiippines
Asian Foreign Reserves As % of GDP
120.693.8 85.188.3
80100120140% of GDP
2012 1998
46.8 44.5 40.3 33.6 28.3 20.0 14.4 12.8
52.932.8
25.4 34.314.2 15.0 13.6 5.2 6.3
24.7
‐20406080
Hong Kong Singapore Taiwan Thailand Malaysia China Philiippines Korea Japan India Indonesia
Produced by UOB Economic-Treasury ResearchFebruary 2014 9
Source: IMF, UOB Economic-Treasury Research
1 US: Tapering Finally Here
Asia: Coping With Tapering Effect 2
1 US: Tapering Finally Here
3 Consumer Leverage
China: Shadow Banking & Local Government Debt4
5 Currency & Interest Rate Trends
Produced by UOB Economic-Treasury ResearchFebruary 2014 10
Streamlining of Bank Capital Components
Produced by UOB Economic-Treasury ResearchFebruary 2014 11
Streamlining of Bank Capital Components
Basel II Basel III
Tier 3 Capital1
Min 5-yr
Lower Tier 2 Capital
ore
than
Tie
r 1C
apita
l
Max
50%
T1
subordinated debt, no incentive to redeem, coupon deferral abilityNo maturity, fully discretionary non-cum
Tier 2 Capital
Additi lUpper Tier 2
Capital
Hybrid / 8
Not
mo
5% T
1M discretionary non-cum
dividends, no incentives to redeem, loss absorption on going concern basis
Additional Tier 1 Capital
yInnovative Tier 1
CapitalNon-innovative
Capital8%
RW
A
otal
Cap
ital
1M
ax 1
Ordinary equity plus retained earnings and other disclosed reserves, capped
t i it
Common Equity Capital
Common Equity CapitalM
in 5
0% T
o
Min
50%
Tie
r 1 amount on minority interests, apply regulatory deductions against it
p
(net of deductions)
Produced by UOB Economic-Treasury ResearchFebruary 2014 12
M
Household Debt Rose Quicker Than Income Levels For Some Countries
Household Debt vs GDP per capita
90
110Household Debt (% of GDP)
Thailand Malaysia Spain
UK
USUSUK
Spain
50
70
Singapore
Hong KongHong Kong
Thailand
Malaysia Singapore
Spain
10
30
2012
2007Indonesia
China
Indonesia
China
-10
10
0 10,000 20,000 30,000 40,000 50,000 60,000
S IMF E it UOB E i T R h E ti t
Nominal GDP per capita (US$) Indonesia
Note: With the exception of Singapore, Malaysia, and Thailand, the data for other countries are from respective household loans.
Produced by UOB Economic-Treasury ResearchFebruary 2014 13
Source: IMF, Euromonitor, UOB Economic-Treasury Research Estimates
Unlike The West, Asia Has Higher Savings to Cushion Debt
Gross Savings vs GDP per capita
40
45
50Singapore
China
SingaporeChina
Gross Savings/Nominal GDP
25
30
35
HKMalaysiaThailand
Indonesia
MalaysiaHK
ThailandIndonesia
5
10
15
20
US
Spain
UK
US
IndonesiaSpain
UK
0
5
0 10,000 20,000 30,000 40,000 50,000 60,000
2005 2012
S IMF UOB E i T R h E ti t Nominal GDP per capita (US$)
Produced by UOB Economic-Treasury ResearchFebruary 2014 14
Source: IMF, UOB Economic-Treasury Research Estimates Nominal GDP per capita (US$)
Available Residential Properties
Type of PropertyNumber Per Cent
2000 2005 2010 2012 2000 2005 2010 2012All Types (Private) 193,028 229,356 258,243 277,620 19.3 20.8 21.3 22.0
Detached Houses 10,004 9,894 10,350 10,567 1.0 0.9 0.9 0.8
Semi-Detached Houses 20,139 20,785 21,185 21,370 2.0 1.9 1.7 1.7
Terrace Houses 35,884 37,267 38,208 38,451 3.6 3.4 3.2 3.0, , , ,
Apartments 56,429 60,431 66,638 71,256 5.6 5.5 5.5 5.6
Condominium Units 70,572 100,979 121,862 135,976 7.0 9.2 10.0 10.8
Executive Condominium 6,788* 9,527 10,430 10,430 0.7 0.9 0.9 0.8
HDB 802,600 864,600 943,900 974,300^ 80.1 78.4 77.8 77.2^HDB 802,600 864,600 943,900 974,300 80.1 78.4 77.8 77.2
Total 1,002,416 1,103,483 1,212,573 1,262,350 100 100 100 100
Source: Singapore Department of Statistics, UOB Economic-Treasury Research’s Estimate
* Data as of 2001^ UOB Economic-Treasury Research’s Estimatey
Produced by UOB Economic-Treasury ResearchFebruary 2014 15
Demand & Supply of HDB Flats
HDB’s Supply vs Number of New Households
Demand > SupplyDemand > Supply
Source: Singapore Department of Statistics, CEIC, HDB, UOB Economic-Treasury Research’s Estimate* B d ti 80% f i l ill h HDB fl t
Produced by UOB Economic-Treasury ResearchJanuary 2014 16
* Based on assumption 80% of new marriage couples will purchase HDB flats
HDB Upgraders Sitting On Significant Gains
Mature Town/Estate Non-Mature Town/Estate
550,000
600,000
375 000
400,000
425,000
450,000
4-Room resale prices in Whampoa has risen by
Dec 2012: $561,500Mar 2013: $432,000
4-Room resale prices in Jurong West has risen b 132% i 2003
450,000
500,000
300,000
325,000
350,000
375,000Whampoa has risen by 116% since 2003
by 132% since 2003
300 000
350,000
400,000
225,000
250,000
275,000
300,000
BTO Launch Jan 2013Whampoa Dew4-Room FlatPrice: $385,000
BTO Launch May 2013Spring Haven4-Room Flat
250,000
300,000
Mar-03 Nov-04 Jul-06 Mar-08 Nov-09 Jul-11 Mar-13175,000
200,000
Mar-03 Nov-04 Jul-06 Mar-08 Nov-09 Jul-11 Mar-13
4 Room FlatPrice: $260,000
Produced by UOB Economic-Treasury ResearchFebruary 2014 17
Whampoa 4-Room Flat Resale Price Jurong West 4-Room Flat Resale Price
Source: CEIC, HDB, UOB Economic-Treasury Research
Affordability Comparison (2012)Rule-of-Thumb for affordability in global city-states is 4x for overall system, and 7-8x for private residential
Description Singapore HDB BTO
Singapore HDB Resale
Singapore Condominium
Hong KongClass B**
Malaysia KL Condominium
Price per sqm S$3,583 S$5,453 S$11,976 HK$99,079 RM5,120
Average House Size (sqm) 90* 90* 110 56 120
Assumed House Cost S$322,500 S$490,774 S$1,317,360 HK$5,548,424 RM614,386
Average Monthly Household Income S$6,712*** S$9,515*** S$14,137*** HK$40,600 RM8,000
House Price vs Income Ratio 4.0 4.3 7.8 11.4 6.4Ratio
Description ChinaNational
ChinaBeijing
ChinaTianjin
ChinaShanghai
Taiwan Taipei City
Price per sqm RMB5,430 RMB16,553 RMB8,010 RMB13,870 NT$93,000
Average House Size (sqm) 90 90 90 90 124Average House Size (sqm) 90 90 90 90 124
Assumed House Cost RMB488,700 RMB1,489,770 RMB720,900 RMB1,248,300 NT$11,532,000
Average Monthly Household Income RMB5,476 RMB7,253 RMB5,491 RMB7,459 NT$73,360
House Price vs Income 7 4 17 1 10 9 13 9 13 1Ratio 7.4 17.1 10.9 13.9 13.1
Source: Singapore Department of Statistics, UOB Economic-Treasury Research
Assume 2 working adults in a household where household income data is not available.*Ave 4-room HDB
**Ave private residences in HK, Kowloon and New Territories
Produced by UOB Economic-Treasury ResearchFebruary 2014 18
p ,***Singapore -- Based on national median income, average national income and median resident household income for those living in condos and pte flats/houses respectively
Average & Median Income Of Households
Average & Median Monthly Household Income From Work
YMedian Household Income ($) Average Household Income ($)
YearResident Households Employed Households Resident Households Employed Households
2000 3,638 4,000 4,988 5,456
2005 3,860 4,345 5,447 6,052
2010 5,000 5,704 7,214 8,0580 0 5,000 5, 0 , 8,058
2012 6,000 6,712 8,637 9,515
Average Monthly Household Income From Work Among Employed Households By Deciles
Deciles 2006 ($) 2008 ($) 2010 ($) 2012 ($)( ) ( ) ( ) ( )
Total 6,280 7,752 8,058 9,515
51-60th 5,477 6,753 7,090 8,196
61-70th 6,535 8,107 8,450 9,806
71-80th 8,046 9,849 10,142 11,973
81-90th 10,203 12,916 12,887 15,038
91-100th 18,170 22,797 23,345 29,012
Source: Singapore Department of Statistics, UOB Economic-Treasury Research
Produced by UOB Economic-Treasury ResearchFebruary 2014 19
Source: Singapore Department of Statistics, UOB Economic Treasury Research
Demand In Singapore Likely To Remain Firm
AssumptionsAssumptions
Affordability Ratio Remains Low Due To Low Interest Rates & Income Growth
1000
1100
45
50
AssumptionsUnit Size: 1,200 sq ftPrice: $1,120 psfUnit Cost: $1,344,000Interest Rate: 1.50%Household Income: $14,137/monthPeriod: 25 years repaymentD bt S i i 24 3%
AssumptionsUnit Size: 1,450 sq ftPrice: $929 psfUnit Cost: $1,347,000Interest Rate: 5.60%Household Income: $8,340/month
800
900
35
40
Debt Servicing: 24.3%Period: 25 years repaymentDebt Servicing: 47.8%
5.00%
6.00%
600
700
25
30
4-Quarter Rolling Average
3.00%
500Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13
20
Median Price of Condominium ($psf) Affordablity: Mortgage Payment as % of Monthly Income (RHS)
S URA CEIC Si St ti ti UOB E i T R h E ti t
Produced by UOB Economic-Treasury ResearchFebruary 2014 20
Source: URA, CEIC, Singapore Statistics, UOB Economic-Treasury Research Estimates
1 US: Tapering Finally Here
Asia: Coping With Tapering Effect 2
1 US: Tapering Finally Here
Consumer Leverage3
4 China: Shadow Banking & Local Government Debt
Produced by UOB Economic-Treasury ResearchFebruary 2014 21
Shadow Banking: What Do We Know?
A typicalA typical “shadow bank” transaction flow e.g. ICBC distributing China Credit Trust products...
S “Q i bl L di i Chi ” NYT 1 J l 2013
Produced by UOB Economic-Treasury ResearchFebruary 2014 22
Source: “Questionable Lending in China”, NYT 1 July 2013 http://www.nytimes.com/interactive/2013/07/02/business/Questionable-Lending-in-China.html?ref=global
Growing Credit Intermediation by Non-Banks• Banking sector still the primary provider of credit, accounting for 55% of
“net new financing” in 2013.• However, share of fresh credit from non-bank channels (“shadow
banking”) has increased since 2010.g )
Produced by UOB Economic-Treasury ResearchFebruary 2014 23Source: UOB IR, PBOC
Source: UOB IR, PBOC
Estimated Size of China Shadow Banking Varies• Some divergence in analysts’ estimates, due to different interpretation
d d bl ti hi hli ht i diand some double-counting – highlights issues surrounding transparency (quite common for emerging markets).
• But all in broad agreement that China’s shadow banking is sizeable, i CNY35t CNY50t t d 2013 (62% 86% f GDP)ranging CNY35trn–CNY50trn at end-2013 (62%–86% of GDP).
Produced by UOB Economic-Treasury ResearchFebruary 2014 24
Source: UOB IR compilation; Note: China’s nominal GDP for 2013 was CNY55trn (USD9.3trn).
Source: UOB IR, Various; Note: China’s nominal GDP for 2013 was CNY55trn (USD9.3trn).
Shadow Banking: What Do We Know?
S ( ) ( )As at End-Sept 2013 (RMB bn)
Finance Company
As at End 2010 (RMB bn)
FinancialLeasing
Trust
Guarantor
Small Lender
Finance Company
Financial Leasing Underground
10,1312,500
Trust
WMPSmall
Lender
FinanceCompany
Leasing
Underground
3,040
2 800
2,500
WMPBank
Security Firms 9,920
7,5716,540
B k
GuarantorSecurity
Firms
2.800
3,1703,827
WMPEntrusted Loans
BankAcceptance Entrusted Loans
BankAcceptance
S UOB IR JPM N t Oth i iti fi h t & d d l di
Produced by UOB Economic-Treasury ResearchFebruary 2014 25
Source: UOB IR, JPM Note: Others comprise securities firms, pawn shops, guarantors &underground lending.
China’s State Council “Document 107” (107号文)
Shadow Banking: What Do We Know? China s State Council Document 107 ( 07号文)
• Media reports* noted document’s release on regulation of shadow banking
• This is the highest profile guidelines on shadow banking ...
M l t d l ti lik l t b l d l t• More related regulations are likely to be released later ...
• Affirmed shadow banking’s positive contribution but concerns about insufficient/ineffective regulation...
• Concerns about banks’ off-balance sheet activities and trust companies’ “credit type” business
• Not full blown crackdown, but to improve regulations, transparency of the sector
• Document 107 did not provide size of “shadow banking”
• PBoC will be responsible for collating statistics on the sector, various social financing
• Financial Stability Board estimates at 26% of GDP in 2010 (or ~RMB13.5tn)
• Based on total social financing data, we estimate the size at RMB34tn as of Nov 2013, +27% from RMB27tn at end-2012.
Produced by UOB Economic-Treasury ResearchFebruary 2014 26
*e.g. “中国影子银行监管新规雷霆出台” 6 Jan 2014, Reuters http://link.reuters.com/qus75v
All in: What Do We Know?
Produced by UOB Economic-Treasury ResearchFebruary 2014 27
Hypothetical Banking Recap Seems Manageable• Recapitalisation bill for China banking sector would mean additional
d bt f th t i f 20% 30% f GDPdebt for the government, ranging from 20%–30% of GDP.• Assumptions:
– Increase in problematic assets to emerge over a period of time.– Impairment to emanate from various on-balance-sheet assets & shadow exposures.– Zero recovery rate. Case Study - China banking crisis (1990s)
• At the end of 1998, China’s 4 large state-owned commercial banks, accounting for 68% f b ki t t
Banking-sector recapitalisation bill68% of banking system assets, were deemed insolvent. Banking system’s NPL ratio was estimated at 20% in 2002.
• The government undertook significant measures to restructure and bail out the
g pProblematic exposures (% of assets + shadow)
(% of GDP) 8% 10% 12% 14% 16%1 year 21 28 34 41 47
2 years 15 22 29 35 42erio
d
banks. By end of 2005, commercial banks’ NPL ratio dropped to below 10%. The cost of a potential clean up of the banking system was estimated to have reached CNY4.8trn (47% of 2002 GDP).
2 years 15 22 29 35 42
3 years 10 16 23 30 36
4 years 4 11 17 24 31
Memo: At end-June 2013 Recap Target:
Cris
is p
e
• In this case, the government has demonstrated its willingness and capability to funnel massive fiscal reserves to avert a crisis. If history is any guide, the country will not slip into a full-blown crisis as long as the government is willing to foot the bill
Tier 1 CAR: 9.9% Tier 1 CAR: 10.0%PPOP/Assets: 2.2%
Banking assets: CNY144.2trn% of shadow assets: 30%
RWAs CNY71.5trnGDP: CNY56.9trn
Produced by UOB Economic-Treasury ResearchFebruary 2014 28Source: UOB IR, Fitch
government is willing to foot the bill.
Source: IMFSource: UOB IR est, CBRC
Disclaimers
This presentation was prepared for informational purposes only and shall not be copied, or relied upon by any other person for whatever purpose. Thisbe copied, or relied upon by any other person for whatever purpose. This presentation must be viewed in conjunction with the oral presentation provided by UOB and/or its officially appointed distributors/agents. Nothing in this presentation constitutes accounting, legal, regulatory, tax or other advice. The reader(s) of this document should consult his/their own professional advisors about the issues discussed herein. This presentation is not intended as an offer or solicitation with respect to the purchase or sale of any investment product and nothing herein should be construed as a recommendation toproduct and nothing herein should be construed as a recommendation to transact in any investment product. To invest, please refer to the prospectus (where applicable) for details.
Produced by UOB Economic-Treasury ResearchFebruary 2014 29
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