Sovereign Deck

8/3/2019 Sovereign Deck

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Moodys Global Economy Sovereign Conference

We will begin shortly

October 11, 2011


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Moodys Global Economy Sovereign Conference

October 11, 2011


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Welcome


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Panel I

G3: The Highly IndebtedEconomies


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Bart Oosterveld, Managing Director, Sovereign Risk Group

The U.S. Aaa Rating

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Key Drivers Behind Moodys Confirmation of the Aaa Rating

Economic Strength

Unparalleled diversity and size, long record of relatively solid economic growth, basedon demographics and productivity, and high per capita income

Debt position not out of line with other Aaa-rated governments

Global role of the dollar

Unquestioned access to finance at low and stable cost means the US government cansupport higher levels of debt than most other governments.

Beginning of process of deficit reduction

August 2 adoption of the Budget Control Act, while by itself not sufficient, resulted indeficit reduction. The goal of reversing the upward debt trajectory is shared by bothparties.

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Negative Outlook on US Rating Due to Future Debt Trajectory

Other large Aaa-rated governments have improving debt trajectories over the mediumterm.

US projections still do not assure an improving trajectory unless further deficit-reduction

measures are forthcoming.

Moodys expectation is that the deficit-reduction process will continue, although it isunlikely to be smooth. There is a risk that political differences will prevent it from occurring.

--A negative economic scenario could also impede deficit-reduction.

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IMF Projections of General Government Debt(% of GDP)

60.0

70.0

80.0

90.0

100.0

110.0

120.0

2010 2011f 2012f 2013f 2014f 2015f 2016f

France Germany United Kingdom United States

Source: International Monetary Fund, World Economic OutlookDatabase, April 2011

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Future Events Related to the Rating Outlook

November 2011: The joint special committee recommendations for deficit reduction, orlack thereof

December 2011: Congressional vote on the committees recommendations

February 2012: Administration presents fiscal year 2013 budget

November 2012: National elections

December 2012: Expiration of the Bush tax cuts

February 2013: New administration presents fiscal year 2014 budget

[Early 2013: Debt limit reached]

Continuing: Economic data

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The Euro Area at a Critical Junction

Sarah Carlson, Vice President and Senior Analyst, Sovereign Risk Group

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Large number of rating actions in the Euro area

Country Rating end-2010

Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11

Belgium RUR-

Cyprus Aa3 STA RUR- A2 STA RUR- Baa1 Neg

Greece Ba1 RUR- B1 Neg RUR- Caa1 Neg Ca Dev

Ireland Baa1 Neg Baa3 Neg Ba1 Neg

Italy Aa2 STA RUR- A2 Neg

Malta A1 STA A2 Neg

Portugal A1 RUR- A3 Neg Baa1 RUR- Ba2 Neg

Slovenia Aa2 STA Aa3 RUR-

Spain Aa1 RUR- Aa2 Neg RUR-

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Key drivers and turning points for ratings

Assumptions about Eurozone support

Concerns about growth, competitiveness

Increasing risk of constrained market access

Implementation risks to ambitious plans

Structural break in risk pricing for highly indebted economies

Loss of investor confidence is a key rating factor

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Where to next? Conflicting objectives

Preserve Euroarea in current

form

Avoidcommitment toa fiscal union

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Strong pressure to change strategy, but large obstacles in the way

The current situation is not a stable equilibrium

Policymakers will need to make a choice

Ultimately, we think that they will choose to preserve the Euro area

Reconciling the policy options that are available and what the market wants will bea challenge

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The path ahead depends on the authorities reactionfunction

Aaa Non-Aaa Supported

moreprobable

lessprobable

EMU 17 Scenario I: Impact of further Greek default notcontained. Escalating tensions and funding costs,and potentially further defaults beyond Greece,result in halting, piecemeal moves towards somefurther fiscal integration and mutualisation of risk.

Neutral Negative Negative

Scenario II: As above, but wit h credible steps takenquickly towards much higher level of fiscalintegration and mutualisation of risk across euroarea.

Broadly Neutral(perhaps slight increase

in issuance costs)

Scenario III: Despite furt her Greek default, rapidsigns of growt h and successful implementation ofausterity packages in other programme countriesreassure investors without material steps towardscloser fiscal integration.

Positive Positive Positive

Exits Scenario IV: Greece default s and exits but impactisolated through immediate meaningful, crediblesteps towards deeper fiscal integration andmutualisation of risk.

Scenario V: Greece exits from the MonetaryUnion. Contagion causes one or two further exitsbefore authorities take meaningful and crediblesteps towards deeper fiscal integration.

Negative Negative Negative

Breakup Scenario VI: Break-up of much or all of the EuroArea

Negative Negative Negative

Positive once intentbecomes clear, highly

negative in t hemeantime

Negative fordefaulters, positive forsurvivors once intent

becomes clear

Broadly neutral onceintent becomes clear,


Positive once intentbecomes clear, highly


Positive for survivorsonce intent becomes

clear

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Japan

Tom Byrne, Senior Vice President, Regional Credit Office, Asia and Middle East,Sovereign Risk Group

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Asia-PacificJapan needs reform and growth

End of Koizumi reformmomentum

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Ann Van Praagh, Managing DirectorChief Credit OfficerPublic Finance

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Bart OosterveldManaging DirectorSovereign Risk Group

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Sarah CarlsonVice President and Senior AnalystSovereign Risk Group

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Tom ByrneSenior Vice President, Regional Credit OfficeAsia and Middle EastSovereign Risk Group

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Break


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Panel II

Emerging Markets andPersistent Global Imbalances


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Brazil and Mexico

Mauro Leos, Vice President and Senior Credit Officer, Sovereign Risk Group

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B R A Z I L

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BRAZIL: What about ?

Inflation 7.23% (August) vs. 6.5%

BCB Survey: 2012 expectation 5.53%; policy credibility

the SELIC Battle

Fazenda vs. BCB

Banco Central do Brasil = institutional pillar (track record)

... Salrio Mnimo

14% in 2012

Rule = institutional element = increased policy predictability

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What is really important for Brazilsratings

1. Medium-term challenges not (very) near-term conditions

2. Fiscal issues not balance-of-payments

3. Positive shocks not negative shocks

* Key assumption: Ability to manage challenges posed by external shocks

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What about the Positive Outlook ?

when / what ?Time horizon: 12 18 months

1) Re-confirmation of shock- absorption capacity (necessary but not sufficient)

2) Policy response:

Compliance with primary surplus target

Reduction of rollover risk: avg. debt maturity,

3) Fiscal transparency (no accounting tricks)

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Brazil

The country is about to face another stress test

Brazil is well equipped to handle external shocks

Current ratings adequately capture existing credit risks

We do not anticipate rating actions in the near term

Brazils sovereign credit prospects will be strongly

influenced by fiscal issues and the medium-term growth

outlook

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M E X I C O

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-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.00.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

F

Mxico Estados Unidos

R2 Synchronization business cycles: MX vs USA

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MEXICO: Moderate fiscal impact despite severeeconomic shock

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90.0

100.0

110.0

120.0

130.0

140.0

150.0

2007 2008 2009 2010 2011F

M xic o Baa1 Mediana Baa Me diana A

Fiscal Impact of the Crisis: MEXICO vs Baa and ADebt / GDP (%) -- 2007=100

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83.6

136.1

208.8

60

80

100

120

140

160

180

200

05-ene-07

05-mar-07

05-may-07

05-jul-07

05-sep-07

05-nov-07

05-ene-08

05-mar-08

05-may-08

05-jul-08

05-sep-08

05-nov-08

05-ene-09

05-mar-09

05-may-09

05-jul-09

05-sep-09

05-nov-09

05-ene-10

05-mar-10

05-may-10

05-jul-10

05-sep-10

05-nov-10

05-ene-11

05-mar-11

05-may-11

05-jul-11

05-sep-11

LCFcon FMI: $72 mmd

MEXICO: International Reserves + IMFs FCL

Billion dollars

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A financial Love Story: Non-Residents and MBonos

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2-J

-07

-

r-

2-

y-07

-Jl-

-

-

2-

v-07

-J

-

-

r-

2-

y-08

-Jl-

-

-

2-

v-08

-J

-

-

r-

2-

y-09

-Jl-

-

-

-

-

-J

-

2-

r-10

-

-

2-J

l-10

2-S

-10

-

-

2-J

-11

-

r-

-

-

-Jl-

-

-

Total Government Securities held by non-residents, US million (LH) %Total

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Mexico

Only Latam country that experienced a real stress test

Fiscal resilience under worst-case conditions

Sovereign credit performance better than others

Institutional factors at play:

Fiscal Responsibility Law

Banco de Mexico

Ample financial buffers

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Russia

Yves Lemay, Managing Director, EMEA Banking

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Economic recovery continues but is fragile

Real economy faces headwinds from

global slowdown

GDP growth has not recovered to pre-crisis level (average of 7% from 2000-07)

GDP growth for 2011 & 2012 was reviseddown in Q3 due to global slowdown

Industrial production and retail sales still

increased in August

Inflation has moderated to 7.2% inSeptember from 8.2% in August

Food prices down to 6.4% in Septemberfrom 14.2% peak in February

Main risk to economic outlook is asharp drop in oil price

Declining investor confidence with knock-on effects and capital flows and exchangerate

Sources: CBR, Bloomberg, Moodys

24

68

10121416

01/01/2008

01/04/2008

01/07/2008

01/10/2008

01/01/2009

01/04/2009

01/07/2009

01/10/2009

01/01/2010

01/04/2010

01/07/2010

01/10/2010

01/01/2011

01/04/2011

01/07/2011

Russia: CPI inflation

-24

-16

-8

0

816

24

01/01/2008

01/04/2008

01/07/2008

01/10/2008

01/01/2009

01/04/2009

01/07/2009

01/10/2009

01/01/2010

01/04/2010

01/07/2010

01/10/2010

01/01/2011

01/04/2011

01/07/2011

Industrial output and retail sales (% yoy)

Industrial output Retail sales

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There are a number of challenges at present

Continued net capital outflows

Since Q4 2010, we observe continuedoutflows but so far they are still wellbelow 2008 numbers

Russia is a special case as high capitalinflows meet high capital outflows

The Ruble has weakened sharply

FX rate dragged down by global riskaversion despite still high oil prices

A sharp drop in oil prices wouldaccelerate downward pressure

Political risk has moved in focus

Elections in December and March Economic and institutional reforms

Foreign policy stance

Sources: CBR, Moodys

80

100

120

140

160

01/01/2008

01/04/2008

01/07/2008

01/10/2008

01/01/2009

01/04/2009

01/07/2009

01/10/2009

01/01/2010

01/04/2010

01/07/2010

01/10/2010

01/01/2011

01/04/2011

01/07/2011

BRIC: exchange rates vs USD

BRL/USD RUB/USD INR/USD CNY/USD

-150

-100

-50

0

50

100

Q1,2006

Q2,2006

Q3,2006

Q4,2006

Q1,2007

Q2,2007

Q3,2007

Q4,2007

Q1,2008

Q2,2008

Q3,2008

Q4,2008

Q1,2009

Q2,2009

Q3,2009

Q4,2009

Q1,2010

Q2,2010

Q3,2010

Q4,2010

Q1,2011

Q2,2011

Q3,2011

Net capital outflows by private sectorUSD bn

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Large FX reserves & low public debt are credit strengths

International reserves are approaching

pre-crisis level

Cushion against external shocks

However, Reserve Fund did not recover

Low public debt level and debt serviceburden

Reduced vulnerability against backgroundof Euro-crisis

Caveat is that oil price to balance thebudget rose sharply from USD 26 in 2007to above USD 100 at present

FX rate has become more flexible

This can help to absorb external shocksbetter than in 2008/2009

However, sharp drop in oil likely to lead tointervention

0

20

40

60

80

100

2007 2008 2009 2010 2011F 2012F

Public debt in % of GDP

China (Aa3) Russia (Baa1) Brazil (Baa2) India (Baa3)

Sources: CBR, Moodys

-50

100

250

400

550700

01.0

2.2

008

01.0

5.2

008

01.0

8.2

008

01.1

1.2

008

01.0

2.2

009

01.0

5.2

009

01.0

8.2

009

01.1

1.2

009

01.0

2.2

010

01.0

5.2

010

01.0

8.2

010

01.1

1.2

010

01.0

2.2

011

01.0

5.2

011

01.0

8.2

011

International reserves

FX reserves Reserve Fund National Wealth Fund Gold

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Russian banking sector

41

Weaker global and Russian macro outlook, and high market volatility, will affect Russianbanks through:

liquidity squeeze

difficulties in raising wholesale funds

slower credit growth (5-10% in 2012)

pressured asset quality

Despite the vulnerabilities, Russian banks have sufficient capital buffers and recurrent

earnings to cope with the increase in credit losses anticipated

Loan-loss provisions will likely increase to about 12% of gross loans by YE2012, from 9.6% atmid-2011

We note that Russian banks have also strengthened their funding profiles by increasing theirfocus on customer deposits, away from wholesale borrowings


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Long-term outlook clouded

Undiversified economy

Oil and gas sector account for about25% of GDP, 35% of fiscal revenues,50% of FDI and 60% of exports

While there is high level support tomodernize the economy,implementation has been slow

Weak institutions

Weak rule of law, high corruption andunfavorable conditions for doingbusiness impede investment (domesticand foreign) and growth potential

Unfavorable demographics

Russia faces a declining population andrising pension and health care costs

This has negative consequences forpublic finances and growth potential

1.5

2

2.5

3

3.5

4

4.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

TI Corruption Perception Index

Brazil China India Russia

35

40

45

50

55

60

2010 2015 2020 2025 2030

Dependency ratio*

Brazil China India Russia

*Number of dependents (old aged, children) in % of total population

Sources: Transparency International, UN, Moodys

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Middle East and Asia Pacific

Tom Byrne, Senior Vice President, Regional Credit Office, Asia and Middle East,Sovereign Risk Group

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Middle EastHigh Oil Prices Raise GCCs Fiscal Space

20

40

60

80

100

120

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

US$pe

rbarrel

Brent Crude 2010 Average oil price 2011 Forecast oil price 2010 Fiscal breakevens

Kuwait

Qatar

UAE

Bahrain

Saudi

Oman

Source: Bloomberg, Moody's

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Middle EastFundamentals Boosted by Oil

-15

-10

-5

0

5

10

15

20

25

30

Fiscal Balance (% of GDP)

2010

2011F

2012F

-15

-10

-5

0

5

10

15

20

25

30

35

40

CA Balance (% of GDP)

2010

2011F

2012F

Source: IMF, Moody's

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Middle EastJasmine Revolution Contagion, Upper Rightlack of wealth and political accountability most pronounced

PoliticalV

oiceandAccounta

bility

Wealth--Per Capita GDP

Libya Syria Egypt Algeria Saudi Tunisia Turkey Oman Jordan Lebanon Qatar Kuwait Bahrain UAE Morocco Yemen

Jordan

Egypt

Tunisia

Morocco

Lebanon

Bahrain

Saudi Arabia Libya

Turkey

QatarUAE Algeria

Oman

Kuwait

Syria

Yemen

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Asia-PacificChina Provides Uplift to Regional Growth

Source: IMF, Moody's

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

2005 2006 2007 2008 2009

Closely Linked w/

China Mean

Not Closely Linked

w/ China Mean

Real GDP Growth Performance 2005 - 2009

% change

2005 2006 2007 2008 2009Closely Linked to China

Japan 1.9 2.0 2.4 -1.2 -6.3

Korea 4.2 5.1 5.0 2.3 0.2

Taiwan 4.7 5.4 6.0 0.7 -1.9

Thailand 4.6 5.1 5.0 2.5 -2.3

Australia 3.4 2.5 4.7 2.4 1.4

Brazil 3.2 4.0 6.1 5.2 -0.6

Median 3.8 4.5 5.0 2.3 -1.3

Mean 3.7 4.0 4.9 2.0 -1.6

Not Closely Linked to China

US 3.1 2.7 1.9 -0.3 -3.5

Germany 0.8 3.4 2.7 1.0 -4.7

Italy 0.7 2.0 1.5 -1.3 -5.2

Ireland 6.0 5.3 5.6 -3.6 -7.6Canada 3.0 2.8 2.2 0.7 -2.8

France 1.9 2.2 2.4 0.2 -2.6

Median 2.5 2.7 2.3 -0.1 -4.1

Mean 2.6 3.1 2.7 -0.6 -4.4

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Asia PacificResilient Real GDP Growth

Source: IMF

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

2005 2006 2007 2008 2009 2010 2011F 2012F

%YoYGrow

th

ASEAN-5 European Union Latin America & the Caribbean United States China

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Asia-PacificGovt Balance Sheets Less Burdened

And robust growth has minimized debt accumulation post-2008 crisis, ex-Japan

-25 25 75 125 175 225 275

Australia

Indonesia

New Zealand

Thailand

Korea

China

Taiwan

Singapore

Malaysia

Philippines

Spain

India

Germany

UK

France

USA

Greece

Japan

Debt/GDP, 2007 Change in Debt/GDP, 2007 to 2010

Source: Bloomberg, Moody's

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Thomas KellerManaging DirectorGlobal Public Public, Project, and InfrastructureFinance Group

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Mauro LeosVice President and Senior Credit OfficerSovereign Risk Group

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Yves LemayManaging DirectorEMEA Banking

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Tom ByrneSenior Vice President, Regional Credit OfficeAsia and Middle EastSovereign Risk Group

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Thank You

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