Eurasia Group PwC Global Trends Summary 1Q10
Transcript of Eurasia Group PwC Global Trends Summary 1Q10
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7/29/2019 Eurasia Group PwC Global Trends Summary 1Q10
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eurasiagroupDefining the Business of Politic
Eurasia Group Global Trends Quarterly
Executive SummaryIn collaboration with PricewaterhouseCoopers, Eurasia Group is monitoring and
assessing major trends shaping the global business environment. This document
summarizes the fndings o our white papers. The extraordinary breadth and
depth o the current worldwide economic turmoil and its gradual stabilization
create new uncertainties in international and local political environments. Now,
more than ever, it is crucial to understand emerging global trends.
Dollar Dynamics
Economic Downturn
Resource Nationalism
New Capital Routes
First Quarter 2010
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FIrst Quarter 2010
Key pointsTe US dollar has depreciated by more than 12% sinceMarch 2009 against a basket o major trading partnerscurrencies. However, we are not at the beginning o a dol-lar in decline story but rather are well into it. Te dollarhas allen signicantly over the past our decades. Te USdollar will remain weak against currencies whose values aredetermined by the market, such as the eurozone and Japan,and may eventually even weaken against countries thatcontinue to depress the value o their currencies, such asChina. Such policies may, however, change abruptly. TeUSs trading partners are not coordinating their currency
policies; each major economy is targeting its economicpolicies toward promotion o its own political interests.Idiosyncratic political interests are naturally a concern oreconomic actors, given implications or commodities, cur-rency volatility, and the shiting costs o doing businessacross the globe.
Business implications
Growth in new consumer markets: Consumer
markets or US goods will expand in places where
the local currency has strengthened against the dollar.
Moreover, with declining US consumption, govern-
ments that had looked to the US as the consumer o
last resort will increasingly look to generate domestic
demand. Higher consumption in these economies
could oer opportunities or US exporters. Te rms
that best anticipate the needs and wants o these new
consumers will gain the most rom these countries
adjustment policies. China and India represent thelargest prizes, but their relative openness remains un-
predictable. Although a smaller population, Japanese
consumers may also oer signicant opportunities
given their stronger purchasing power.
Currency volatility and unpredictability: In coun-
tries that try to hold back the tide against the dol-
lars decline, heightened currency market activity is
likely as traders push back. Tis will show up as both
short-term volatility and longer-term unpredictability
about where markets will be over the course o anygiven time horizon. Consequently, paying attention
to currency politics and trends will remain very im-
portant. Monitoring the continued availability o -
nancial hedging strategies will also be important as
the nancial regulatory system is overhauled.
Is the Dollar Going Down?
Grappling with the dollars decline
Currencymanagement
Policy responses to the weak US dollar
Government Companies
Brazil Managed oat Will reduce tax burden; Will offerbetter nancing conditions Focus on domestic market;Efciency improvements
China De facto peg toUS dollar
Export subsidies; Promotingdomestic consumption
Increased selling in domesticmarket
Eurozone Free oat None Direct investment in the US
India Managed oat Tax breaks for exporters None
Japan Free oat None Shifting production abroad
Russia Managed oat None Efciency improvements
Source: Eurasia Group
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FIrst Quarter 2010
Key pointsAs 2010 begins, the global economy is showing tenta-tive signs o recovery, with the IMF orecasting globalgrowth o 3.1% or the year. However, while economicconditions may be improving, some o the most seriouspolitical challenges could lie ahead. Rising decits are in-creasingly a signicant problem or some governmentsand may become unsustainable in some cases, especiallyin western Europe. As the downturn continues, it is ex-acerbating the scal situation in a number o Europeancountries and undermining Europes ability to coordinatepolicy. Tere are risks or countries both in the eurozone
and those still in the accession process. Interestingly, east-ern European countries are actually better positioned toaccess sovereign support in the event o a nancing crisisthan are current eurozone members. By contrast, acrossmuch o Asia and Latin America, governments enteredthe crisis with relatively healthy nances. Chinas lowbudget decit, high savings, and strong nancial posi-tion supplied it with more-than sucient resources withwhich to counter the downturn. Brazils relatively limitedmacroeconomic vulnerabilities have helped the countrynavigate the global downturn comparatively well.
Business implications
Defcit levels risks and opportunities: Signicant
stimulus spending or 2010 will ace sustainability
constraints, particularly in the orm o rising de-
cits. As countries meet their spending shortalls they
may turn to higher taxes or look to privatizations,
which pose risks and opportunities respectively.
Companies should look to historical precedent and
legislative agendas to anticipate how countries are
going to respond to more acute decits.
Elections signal sustained spending:
Governmentspreparing or elections in 2010 are unlikely to reduce
stimulus spending. Te political risk o curtailing it
is simply too high or governments to undertake
cuts ahead o elections. Conversely, some coun-
tries prohibit new government spending initiatives
within six months o elections, so it could remain
at pre-planned levels until the completion o elec-
tions. Companies would do well to monitor election
schedules in order to anticipate sustained stimulus
spending, as well as to gain a sense o when spending
may be capped.
Political Risks Challenge Economic Recovery
2010 Fiscal policy and maneuverability outlook
2009 Downturneconomic impact 2010 Fiscal policy trend
EuropeTough scal situations compounded bycomplex political debates
ChinaStimulus spending will mean a slight decit,but a growth lull could drain more resourcesthan expected
IndiaExpansionary scal policy, although facingspending constraints
IndonesiaFiscal maneuverability if needed, butoverwhelming approach is conservative
RussiaRelatively conservative scal approach, withsufcient maneuverability
Brazil Fiscal policy will remain expansionary
Source: Eurasia Group
Legend: Very negative Negative Minimal
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3 eurasiagroupDefining the Business of Politic
FIrst Quarter 2010
Key pointsResource nationalism has been building steam in recentyears. In many o the countries that have chosen to pur-sue resource nationalism, most o the labor, nancial, andtechnological resources that are devoted to the energy sec-tor are brought to bear through large national oil compa-nies. For some countries, this model has worked. Notably,each o these countries companies is more and more notedor technological sophistication, particularly in deepwaterproduction. For other countries, the model has been lesssuccessul. I successully implemented, resource nation-alism can help create a positive political legacy or gov-
ernments. However, i they lack the capacity to continueto develop their domestic potential post-nationalization,political support can quickly alter. Other governmentswith more autocratic structures do not ace signicantdomestic political risks in pursuing resource nationalistpolicies. Tese governments are perhaps most vulnerable imismanagement o the oil and gas sector leads to revenuelosses or prominent elites.
Business implications
Understanding host country leverage: Te above
analysis shows that some governments are better posi-
tioned than others to sustain state-centric policies guid-
ing oreign investment in their domestic energy sectors.
Some elements o resource nationalism are cyclical
such as the popularity and political capital o elected
governments and scal stabilitywhile others are more
structural. Te latter would include the scale o hydro-
carbons potential, legacy aspects o resource national-
ism embedded in political culture, and to some extent,
industry costs. Industry costs can also be cyclical andfuctuate according to technological breakthroughs.
Breakthroughs in deepwater drilling, or example,
have unlocked the potential or the Brazilian pre-salt.
It is crucial or oreign investors to understand which
actors drive government resource nationalism and to
structure their response (exiting, waiting, renegotiating,
nding a partner, etc.) accordingly.
Limitations on government response: Recent cases
suggest that oreign investors ace signicant challenges
when, ater encountering resource nationalism, theyturn to their home governments or diplomatic assis-
tance. Companies should be prepared to rely on their
own capabilities or managing resource nationalism,
most importantly through pre-transaction planning,
risk management, and partner selection.
Working with Rising Resource Nationalism
Millionsofdollars
Source: Bloomberg
0
500
1,000
1,500
2,000
2,500
3,000
3,500Venezeula
Saudi Arabia
Russia
Mexico
Kazakhstan
Brazil
11/30/20
09
10/31/20
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9/30
/2009
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/2009
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6/30
/2009
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/2009
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/2009
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/2009
2/28
/2009
1/31
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11/30/20
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9/30
/200
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/200
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/200
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Credit default swap spreadsSovereign debt major oil producers
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4 eurasiagroupDefining the Business of Politic
First Quarter 2010
Key points
While emerging market (EM) economies traditionally havebeen a destination or nancial fows, years o manuactur-ing and commodity export-led growth is increasingly turn-ing key states, such as China, the Persian Gul states, andIndia rom importers into exporters o capital. Capital fowsbetween EM nations have expanded rapidly in recent years,a trend that is likely to accelerate. In doing so, it will radi-cally reshape global capital markets and the business oppor-tunities and risks associated with EM nations. Four actorswill primarily drive capital transactions between develop-ing countries: New capital increasingly originates in EMcountries; EM nations continue to oer investors attractive
rates o return compared to developed markets; EM nationshave strengthened their nancial markets inrastructure andgrown more sophisticated; and as a whole, large EM nationsare waking up to their newly-ound economic power andusing it to urther their political interests.
Business implications
EM corporations and fnancial services frms will have
a signifcant competitive edge in their own regions:
As more EM corporations seek investments abroad,
corporations rom developed countries will ace greater
competition. Most o this competition will probably
come rom companies within the region, such as oc-
curred when local airlines in South America (Chiles
LAN and Brazils Gol) undercut eorts by US-based
airlines to boost their business in the region. Western
entities must increasingly establish regional presences
in order to eectively compete with EM rms, and
must devote resources and time to understanding how
to operate in dierent cultural, social, and political
environments. As a case in point, marketing to retail
clients in India could be easier or an Indian or South
Asian bank than or a Western institution.
EMs still look to developed countries: EM coun-
tries will continue to want and need to interact with
developed states; some will be probably continue to
welcome access. Brazil, India, and South Arica will
be more important destinations or both developed
and developing world capital. Other states, such as
Singapore (which is trying to develop as a nancial
center), will welcome Western participation and
cooperation. Some EM countries, especially those
that are importers o capital, such as those in eastern
Europe, will be increasingly tied to US/EU capitalfows, given their political orientation.
New Paths or Capital: Emerging Markets Flows
Photo credits: Reuters
This material was produced by Eurasia Group in collaboration with PricewaterhouseCoopers. This is intended as general background research and is not
intended to constitute advice on any particular commercial investment, trade matter, or issue and should not be relied upon for such purposes. It is not to
be made available to any person other than the recipient. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any
form or by any means, electronic or otherwise, without the prior consent of Eurasia Group. 2010 Eurasia Group
Other OECD
OECD Europe
Japan
US
Other emerging marketsBRICs
2006 2009
Source: Financial Times Global 500
Geographical distribution of the 50 largest banks by market capitalization
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13%9%8%
16%
23%
6%
9%
4%
4%
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