EPSTEIN
page 1 / 469 . OCR, unverified
Dataset10 084
--- SOURCE: IMAGES__0084__EFTA01458971.txt ---
METADATA_SOURCE: IMAGES0084
METADATA_FILENAME: EFTA01458971.pdf
----------------------------------------
December 2015
World Outlook 2016: Managing with less liquidity
sovereign wealth funds this year. We expect these institutions will start
investing in 2016. Some argue that the market expectation of RMB
depreciation may jeopardize the inflows. We do not think this is the key
constraint, as central banks hold Euro and Yen assets despite these currencies
also facing depreciation expectations. In our minds, the key constraint is that
the domestic market is not ready for foreign reserve managers yet.
Infrastructure needs to be established, liquidity condition needs to improve,
and rules need to be revised to facilitate trading. This will take time, but we
have no doubt it is doable.
We maintain our view that the Chinese government will not allow sharp RMB
depreciation in the rest of the year. As the market expectation for a December
rate hike heightens, RMB depreciation would cause high volatility in the
financial market, which is damaging to China's economy. We believe the PBoC
may want to wait for the Fed to hike rate first and see how risks in the
emerging markets evolve, before it takes the next move on the exchange rate.
ZhiweiZhang,
Page 36
Deutsche Bank AG/London
CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e)
DB-SDNY-0119143
CONFIDENTIAL
SDNY_GM_00265327
EFTA01458971
--- SOURCE: IMAGES__0084__EFTA01458972.txt ---
METADATA_SOURCE: IMAGES0084
METADATA_FILENAME: EFTA01458972.pdf
----------------------------------------
December 2015
World Outlook 2016: Managing with less liquidity
Asia (ex Japan): Triple troubles
At first glance, Asia's ongoing economic slowdown could be explained away in
cyclical terms that could bottom next year. After all, the hangover from the
global financial crisis of 2008-09 persists and global economic recovery is
uneven. With appropriate policy support, the recovery could gain strength, and
it appears that 2016 may well be the year of strong fiscal spending in many
parts of the world. The recent commodity bust may turn out to be temporary,
with only short-lived impact on investment. G2 economies could continue to
get stronger and re-emerge as a source of vigorous exports demand for Asia.
China's cyclical measures to deal with overcapacity and financial system stress
could pave the way for healthier growth.
Even if some of these favorable developments were to transpire, Asia may find
the economic environment in 2016 and 2017 to be about the same as the last
couple of years. There may be further slowing of China, but India and
Indonesia could see growth accelerate, Malaysia and the Philippines could
maintain trend growth, and the rest of Asia could see less disappointment.
Indeed, our forecast for the next two years assumes such a path. We see
China settling at sub-7% growth in an orderly manner, while by 2017 India's
growth should head past 7.5% and Indonesia should go back to 5%. 2-3%
growth may be the norm for many other Asian economies, but given the
challenging nature of the cycle, that ought to be an acceptable outturn. The
key assumption in these forecasts is that financial sector risks are managed
and economic spillovers from a slowing China are contained.
But there are some major fault lines in this somewhat innocuous narrative.
Deeper examination of the region's economic dynamic however reveals a
series of headwinds that transcend the cycle. In this piece, we go over three
key headwinds — aging, stagnant trade, and rising debt - that could get in the
way of growth and prosperity in the coming years. There are enough savings
and safeguards in place in the region to mitigate risks of an outright crisis
owing to these headwinds; a more likely scenario however is a gradual erosion
of potential GDP growth rate, worsening of public finances, and a general
decline in sentiment about the region's prospects.
Aging
Considerable attention has been paid in recent years to China's rapid aging.
Indeed, recent news on the relaxation of the long-standing one-child policy
reflects the seriousness with which the Chinese authorities are considering the
aging problem. Beyond China, a number of Asian Tiger economies are
undergoing an aging process that will last decades. Aging is problematic ior
variety of reasons. As the number of elderly rises, the labor force shrinks,
reducing not just the availability of workers but also the output, incomes, and
taxes generated by those workers. As a result, potential GDP growth declines,
the fiscal position worsens (as transfers to dependents rise and tax collection
from the shrinking pool of workers declines), and overall economic vitality
dissipates. The decline in potential GDP growth along with a rise in the share
of dependents also has adverse implications for savings, debt sustainability,
and financial markets.
Can't public policy arrest this problem? While we welcome China's latest