EPSTEIN
page 3 / 469 . OCR, unverified
supportive of Asian exports than has been the case.
Our conjecture is that the recent bout of poor trade data reflects structural
factors that will hold back exports (and export related investment) for years to
come. The recovery in the US and EU is atypical, characterized by poor wage
growth, low quality jobs, and greater service sector orientation than the past.
Also, the aging dynamic in both regions is changing the pattern of
consumption (and imports) profoundly. Furthermore, contrary to press reports
riigure 3: Deutsche Bank forecasts
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Sant Dan:ft ORM AttildVeh
Page 38
Deutsche Bank AG/London
CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e)
DB-SDNY-0119145
CONFIDENTIAL
SDNY_GM_00265329
EFTA01458973
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METADATA_SOURCE: IMAGES0084
METADATA_FILENAME: EFTA01458974.pdf
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December 2015
World Outlook 2016: Managing with less liquidity
of trade liberalization, trade restrictions have risen sharply among the G-20 in
recent years, as per UNCTAD data. We don't think any of these drags are
going away. Therefore, Asian exporters may well have to settle for a new
nor m& of anemic exports growth. Within the region, there are some additional
challenges, starting with China's import substitution drive (which has hurt
intermediate and capital goods exports from Japan, Taiwan, and Korea), rising
cost of production (Singapore and Thailand). and failure to move up the value
chain (Taiwan and Thailand).
For aspiring economies like India and Indonesia, these developments are
disappointing. The prevalence of regional excess capacity and weak G2
demand for Asian exports will make it particularly hard for these economies to
join the club of major export-oriented manufacturers. They will do better
relying on manufacturing to satisfy domestic demand, in our view.
Debt
The rise in regional debt. especially in China, is tinder a great deal of focus,
evidenced by a plethora of reports issued by multilateral agencies. Taking
advantage of years of strong growth, favorable investor sentiment, relatively
low rates, ample liquidity, expectations of stable currency, and supportive
fiscal and financial sector policies, Asian borrowers have accumulated
substantial debt in recent years. But the optimistic projections: as:it:timed with
these borrowings have turned out to be mostly wrong. Both nominal and real
growth rates have slowed, pushing down ROE, real rates have turned out to be
high owing to sharp disinflation or deflation, and for those with foreign
currency borrowing, expectations of stable currency have been off by a large
margin due to the strong USD cycle. For those in the commodity sector, the
risks are the greatest due to the combination of sharp revenue declines and
soaring cost of servicing foreign currency debt.
In addition to corporates, Asian households have amassed sizable debt in
recent years, with Hong Kong, Malaysia, Singapore, South Korea, Taiwan and
Thailand characterized by burdens amounting to over 60% of GDP. China's
reported household debt figures are lower (slightly below 40% of GDP), but
strikingly, its households have added more than 20% of GDP worth of debt in
the past five years. Gross debt figures for wealthy economies like Singapore,
South Korea, and Taiwan may be less alarming due to households' strong
asset position, but for the rest of the cohort the high debt level can act as a
major deterrent to the credit cycle and consumption outlook. High household
debt may not be a source of systemic risk in the near term, but could readily
become a chronic drag to growth. Unlike corporations, households don't have
particularly orderly routes to restructuring debt. Hence firm level defaults and
restructuring could form the headlines in the coming year, but the household
debt burden that lies side-by-side could well be a bigger source of long-term
headwind to the economy.
Conclusion
Against this background, Asian policy makers need to recognize the near-