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ASIAN ECONOMIC PROSPECTS:

OPPORTUNITIES FOR AUSTRALIA

Company Directors Conference 8th May 2013

Manu BhaskaranCentennial Group

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KEY TAKEAWAYS

Good upside with manageable risks

Cyclical: Asia showing resilience Stronger fundamentals, domestic demand

Long term: best since 1990s crisis ASEAN in particular is making a comeback

Risks to watch Geo-political: Middle East oil prices Country political risks: Malaysia Policy/overheating risks: Vietnam

Implications for Australia2

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CYCLICAL OUTLOOK:

WATCH EXTERNAL IMPACT

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EXTERNAL ENVIRONMENT

Ex-US, main markets are weak in 2013Country

% world GDP

Outlook

US 23.1 Positive: Housing, credit flowsConstraints: Fiscal, rising savings rate

Eurozone 19.3 Negative: Austerity + political stresses = episodic stresses

China 9.3 Slowing manufacturing activity hurtsKey risk: Imbalances, excesses remain

Japan 8.7 Positives: Yen, monetary stimulusNegatives: Structural weaknesses

Other emerging

8.3 Worse: clear signs of slowdown

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EXTERNAL ENVIRONMENT (2)

Other global drivers mostly negativeFactor Outlook

Commodity prices

Oil: falling but risk premium could spikeCyclicals down: rubber, base metals, coalFood: rising risks due to weather

Tech spending Business uncertainty hurting New product launches help

Capital flows Volatile, still potentially destabilising

Currencies Volatile, competitive depreciation in Asia/G-3?

Protectionism The dog that has not barked – yet.

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KEY DRIVERS OF ASIAN GROWTH

Global indicators turning up but risks remain

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ASIAN RESILIENCE IS HIGH

Improved Asian resilience allows shocks to be absorbed

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CYCLICAL: DOMESTIC DEMAND

Infrastructure investment is rising again Thailand, Malaysia, Singapore …

Consumers remain optimistic Tight labour markets: rising wages, jobs Low interest rates with low personal

leverage Strong remittances but farm incomes

slowed Govt policy measures support

growth Fiscal spending Social spending and Minimum wages up

Domestic demand supports growth

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LONG TERM TRENDS

ASEAN’S BRIGHTENING PROSPECTS

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BIG TRENDS FAVOUR ASEAN

Competitiveness gains Rising costs/currency in China Improving business environment Sino-Japan tensions Japanese FDI

Investment/GDP to rise higher growth Share of global FDI to rise ASEAN companies regionalising intra-FDI Infrastructure spending rising Domestic private investment crowded in

Longer term upswing in place

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BIG TRENDS FAVOUR ASEAN (2)

Rise of the laggards Philippines: best growth since 1990s Myanmar: opening up decisively

Rising synergies from integration ASEAN Econ Community taking shape New forms of integration – Iskandar,

Mekong

Longer term upswing in place

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COUNTRY THEMES

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CHINA: ECONOMIC CHALLENGES

Recovery losing momentum Policy uncertainty, weak exports, excess

cap Restructuring exerts a drag

Demographics: downsizing low-value Re-balancing underway

Excessive investment, cost normalisation Speculative excesses unwinding

Could crystallise financial shocks Policy action has contained

extreme risks

Near term challenges remain high

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CHINA: UNDERLYING ISSUES

Shift to lower but higher quality growth

Huge capacity to manage challenges Massive fiscal resources to offset shocks

Lower growth - deliberate policy aim Improve inequality, environment Don’t need high growth, labour shortages

Politics: tensions under control Growing challenges: corruption, cronyism,

… But system tried/tested, adjusting,

adapting

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INDIA: OFF THE BOTTOM?

Economy weak but bottoming out Short term positives

Business and FDI confidence recovering Policy easing: rates cut, Rupee has fallen

Supply side forces remain positive Laggard states rising: Bihar, Orissa, … Relatively good demographics Corporate re-engineering Rural income growth

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INDIA: POLITICS IS KEY

A bumpy ride but still positive

Political will for reform improved New strategy: boost supply side growth

Competition among states helps Better governed get re-elected

Political risks 2013 state elections, 2014 general election Fragmentation, vested interests, corruption

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INDONESIA: HOW SUSTAINABLE?

Slightly faster growth in 2013 Domestic economy on firm footing

Consumer Confidence Index rising Rising incomes, low rates Foreign investment rising

Long term drivers Demographics: cheap, plentiful labour Huge consumer market Natural resources Urbanization 17

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INDONESIA: LONGER TERM

Can do better with clearer policy Constraints on even higher growth

Doing Business: labour laws, corruption… Distortions/Inward looking policies Infrastructure: little progress

Policy changes coming: fuel subsidies

Risk is in financial/monetary dimension Monetary policy loose: inflation, current

acct Rupiah under pressure

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INDONESIA: POLITICAL RISKS

2014 Elections Approaching Positive: democracy entrenched Presidential: Prabowo leading

Hunger for strong, decisive leader But he has an unfortunate history

Deeper malaise in political system Institutions remain weak Vested interests capturing system Extremists’ violence tolerated

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MALAYSIA: MAKING A COMEBACK?

Underlying economy better but politics?

Near term: hit from global demand Exports weakening, commodity prices

down Offset by election-related spending

Structural improvements ETP roll-out boosting investment Reforms spurring FDI Still competitive in key niches New growth poles taking off Services liberalisation

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PHILIPPINES: STEADYING

Stable, looking better New regime: encouraging signs

Aquino: fighting corruption, tax evasion Economy: foundations laid for

rise Fiscal reforms space for investment Remittances up, composition change BPO expanding, up value chain Infrastructure could add to this

PHILIPPINES: FOUNDATIONS LAID

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THAILAND: ROBUST PROSPECTS

After 7 years of crisis, good upside Near term: domestic demand is key

Pro-poor policies, min wage, rebates for cars

Longer term: new surge of growth Massive infrastructure projects – USD73bn Greater Mekong Sub-Region taking off Regional diversification of growth Capacity to adjust to challenges Flexible, diversified, balanced economy

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THAILAND OUTLOOK(2)

Will political risks disrupt outlook? Risks remain high in near term Two fundamental challenges

Divided country – struggle for its soul King’s health and royal succession

Inching grumpily to compromise But there could be shocks along the way

Royal succession bears watching King’s long illness: Thais used to his

absence

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SINGAPORE: DECENT GROWTH

Singapore is at a turning pointNear term: slow growth in 2013 Exposed hugely to global cycles

Especially in tech products Restrictive policies: labour, real

estate Offset by rising wages,

constructionLonger term: steady 3% growth

likely Centre of high growth ASEAN,

India, … Highly competitive, critical mass

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SINGAPORE: TOUGH TIMES?

But some painful adjustments ahead

Model of growth has to change Social safety nets need to expand Shift to productivity led growth

Competitiveness - costs high Local companies forced to restructure Effects could be deflationary

Major challenge for real estate Change in retirement funding system

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VIETNAM – RISING BUT …

Supply side unleashed Demographics excellent

Human capital New growth sources:

Oil/gas, tourism, low-end manufacturing WTO entry has brought in FDI Chinese FDI is rising

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VIETNAM – RISING BUT …(2)

Major constraints remain Political: leadership infighting

possible President vs PM, fight vs vested

interests Financial vulnerability

Higher propensity for inflation Small banks are a risk

Business environment Corruption, State enterprises

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RISKS TO MONITOR

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MAJOR WILD CARD: MID-EAST

Key nations facing unavoidable stresses

Syria: civil war spillovers Turkey, Lebanon, Iraq, Israel

Iran nuclear: some Israeli action likely

Saudis facing simultaneous challenges Neighbors: Yemen, Bahrain Succession & other internal stresses

Egypt: long power struggle ahead Gaza: more violence likely

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IMPLICATIONS FOR AUSTRALIA:

Long term upsides are compelling

But this is a messy region

Australia seems under-exposed to region

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CONCLUSIONS ON ASEAN

Strategically, ASEAN is key Immediate neighbour Astride sea lanes of communication Great Game of influence: US vs China, …

Political hang ups of the past receding New generation of leaders: opportunity

ASEAN as a market for Australia: 660m + USD2.2tr (vs 23m and USD1.5tr) Growing around 6% pa

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CONCLUSIONS ON ASEAN

Common Interests

Both of us need scale to compete Increased ASEAN-AU engagement helps Leverage off AU’s FTAs with ASEAN,

S’pore… Areas of opportunity

Urbanization, infrastructure: engineering Financial deepening: higher value services Healthcare Education

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THANK YOU!