The Changing Outlook for Emerging EconomiesPiero Ghezzi

Head of Economic and Emerging Market Research

March 2010

PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES AT THE END OF THIS PRESENTATION.

22

2009 was a milestone year

• The 2008-09 recession was the largest post-war downturn but EM economies held reasonably well

Note: GDP gap for past crises estimated using by gap between actual GDP and GDP assuming growth at the potential rate since the beginning of the recession. EM Crisis include Argentina, Brazil, Mexico, Thailand, Korea and Singapore. Source: Haver, Barclays Capital.

-6.0 -6.1

-8.1 -7.7

-4.8

-1.2-0.1

-10.9

-3.8

-12.6-14

-12

-10

-8

-6

-4

-2

0

US Euro Japan UK Brazil China India Russia Avg US Avg EM

% Estimated GDP gap in past crises

Estimated GDP gap (relative to trend) from 2Q08 to 2Q09

3

What was different in EM this time?

Source: World Bank, IMF, Barclays Capital

• Reduced dependence on external finance and large liquidity war chests have strengthened the ability to engage in countercyclical policies

• Embrace of macroeconomic stability by local governments after hard lessons from the 70s and 80s have resulted in more fiscal discipline and credible monetary policy

Building the liquidity war chest Low inflation and better fiscal ratios

Source: BIS, Barclays Capital

0

20

40

60

80

100

120

1985 1988 1991 1994 1997 2000 2003 20065

10

15

20

25

30

35

EM: inflation (lhs) EM: public external debt (rhs)

% y/ y % GNP

0%

4%

8%

12%

16%

20%

1993 1995 1997 1999 2001 2003 2005 20070%

10%

20%

30%

40%

50%

Reserves over GDP (median)Reserves over total external debt (median) RHS

4

EM was able to administer counter-cyclical policies

Source: National Central Banks, Haver Analytics, Barclays Capital

Note: For AEM Economies

• Improved fundamentals allowed EM to undertake counter-cyclical monetary (almost everywhere) and fiscal (in many cases) policies

Change in the cyclically adjusted fiscal deficit during the Asian and global financial crisis

Aggressive countercyclical monetary policies when they were needed the most

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Change '96-'98 Change '00-'02 Change '07-'09

Fiscal deficit Cyclically adjusted fiscal deficit

% GDP0

1

2

3

4

5

6

7

8

9

01 02 03 04 05 06 07 08 09

US AEM

Policy rates (simple average %)

Source: National Treasury Offices, IMF, Haver Analytics, Barclays Capital

Note: For AEM Economies

5

Increased dependence on China also mattered..

• EM Growth (ex-China) is less sensitive to G7 growth, more to Chinese growth

___________________________Source: IMF, Barclays Capital.Note: EM growth was regressed on G7 and China GDP growth

Less Sensitivity to G7 Growth, More to ChinaChina’s share of global commodity

consumption growth

___________________________Source: Bloomberg, Barclays Capital

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

G7 ChinaEarly period EM betas (1993-99)Late Period EM betas (2001-09)

EM growth sensitivty to G7 growth decreases from early period to late while its sensitivty to China's growth

increases

0% 20% 40% 60% 80% 100% 120% 140%

Oil

Aluminium

Coal

Zinc

Copper

China's share of global consumption growth (2000-08)

6

…and China recovered extremely rapidly

Source: Bloomberg, Barclays Capital

A “V” shaped recovery in China End of recession timeline

6

7

8

9

10

11

12

13

14

2005 2006 2007 2008 2009

0.4

0.6

0.8

1.0

1.2

1.4

1.6

China GDP (% y/ y) China auto sales (mn)

2009 JanFeb Japan ChinaMar Brazil India Korea Indonesia Taiwan AustraliaApr Germany FranceMayJun US Chile MexicoJul Argentina

Aug ItalySep S Africa RussiaOct Canada TurkeyNov UK PolandDec

2010 JanFeb HungaryMarApr Spain

Source: Barclays Capital

7

Self-reinforcing negative EM dynamics of the past were avoided

___________________________Source: Bloomberg, Barclays Capital.

Value of $100 Invested in January 2004

0

50

100

150

200

250

300

350

2004 2005 2006 2007 2008 2009 2010

MSCI EM MSCI World (Developed)Reuters/ Jefferies CRB Barclays GEMS USD

8

It’s not only EM’s advance…

• … but also the decline of developed markets.

• EM countries economic “Sharpe ratios” have more than doubled

___________________________Source: IMF, Barclays Capital.

Better Relative “Growth Sharpe” in EM …

Early

Late

Early LateMea

n4.20%

3.68%

2.10%

1.20%Vol

.3.77%

3.17%

1.30%

2.24%

Sharpe Ratio

1.16

1.22

1.54

0.68

Period :

Growth Rate

(EM Median)

(G7 Median)

9

Many EM Countries show high growth and low volatility

___________________________Source: Barclays Capital.

Growth Sharpe Ratios (1997–2009)

Ven

USUK

Turkey

ThailandSwitz

Swe

S Africa

Singapore

S Ara

Russia

Romania

Portugal

PolandPI

Peru

Mexico

MalaysiaKorea

JapanIta

Israel

Ireland

Indonesia

India

HunGreece

Ger

Fra

Egypt

Czech

Col

China

Chile

CanBrazil

Bel

Nor

AustraliaArgentina

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8Volatility %

Avg

annual

gdp g

row

th %

Taiwan

10

EM is getting a bigger slice of the GDP pie (I)

___________________________Source: IMF, Barclays Capital.

EM share of world GDP continues to increase

0

5

10

15

20

25

30

35

40

45

90 92 94 96 98 00 02 04 06 08 10 12 14

EM Asia Latam EM Europe & Africa

EM: USD based share of nominal world GDP%

11

EM is getting a bigger slice of the GDP pie (II)

___________________________Source: Barclays Capital.

EM Contribution to Global Growth

Contribution to GDP Growth (% y/ y)

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2007 2008 2009 2010 2011

EMEA LatAm EM Asia (ex China) China Developed Global

12

EM is getting a bigger slice of the AUM pie (III)…

There has been a structural reallocation of money into EM

___________________________Source: EPFR Global, ICI, Barclays Capital. Note: EM and Developed flows include both bonds and

equities

10%

-0.53%

-9.79%

-19%

8.29%

25.16%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Money Market AUM(% Chg)

Fund flows intoDeveloped Mkts (%

AUM)

Fund flows intoEmerging Mkts (%

AUM)

Aug-08 to Mar 09 Mar-09 to Present

13

…consistent with improved returns of including EM in Global Portfolios

___________________________Source: Bloomberg, Barclays Capital.Note: Median values in EM alphas and betas from country-by-country regressions against a short DXY position (FX) and MSCI World total returns. The equity sample

includes the top ten EM markets based on market cap. In Adding EM to the global portfolio: MSCI World includes developed countries. MSCI Global includes developed and emerging countries. Mean is the average of the m/m TR (capital return for equities) over the sample period (Jan 05 to Feb 10). Volatilities (non annualized) are the standard deviations of the return series over the same sample period

1. 70% of MSCI World and 30% of MSCI EM.2. G6 treasuries (G7 ex US)3. Equally weighted US corps, G6 tsy, G7 and EM Corp and Sov.4. Equally weighted long AUD-CAD-NZD-NOK position.5. 50% short DXY, 25% long G10 comm, and 25% long GEMS.

Risk Adjusted Emerging Markets Returns

Adding EM to the global portfolio:

FX Equity FX Equity FX Equity FX Equity

0.67 1.52 1.11 1.4 0.6 1.54 0.55 1.52

0.42% 1.00% 0.52% 0.91% 0.43% 0.56% 0.73% 1.80%

R2 0.27 0.61 0.53 0.78 0.44 0.74 0.24 0.73

EM Medians EMEA Asia LatAm

MSCI WorldMSCI Global Portfolio

(1)US Corps AGIPS

(2)

Portfolio(3)

Short DXY G10 Comm(4)

Portfolio(5)

Mean (0.09%) (0.02%) 0.17% 0.30% 0.40% 0.50% 0.13% 0.21% 0.28%

Vol 5.40% 5.60% 6.20% 1.00% 2.00% 1.80% 2.57% 3.54% 2.66%

Credit FXEquity

Risk Adjusted Emerging Markets Returns

Adding EM to the global portfolio:

FX Equity FX Equity FX Equity FX Equity

0.67 1.52 1.11 1.4 0.6 1.54 0.55 1.52

0.42% 1.00% 0.52% 0.91% 0.43% 0.56% 0.73% 1.80%

R2 0.27 0.61 0.53 0.78 0.44 0.74 0.24 0.73

EM Medians EMEA Asia LatAm

MSCI WorldMSCI Global Portfolio

(1)US Corps AGIPS

(2)

Portfolio(3)

Short DXY G10 Comm(4)

Portfolio(5)

Mean (0.09%) (0.02%) 0.17% 0.30% 0.40% 0.50% 0.13% 0.21% 0.28%

Vol 5.40% 5.60% 6.20% 1.00% 2.00% 1.80% 2.57% 3.54% 2.66%

Credit FXEquityEquity Credit FX

MSCI World MSCI Global Portfolio(1) US IGCorps

G6 tsy(2) Portfolio(3) Short DXY

G10comm(4) Portfolio(5)

Mean 0.12% 0.21% 0.34% 0.42% 0.38% 0.50% 0.05% 0.20% 0.25%

Vol 5.03% 5.26% 5.59% 2.10% 2.46% 2.28% 2.54% 3.44% 2.58%

14

Looking forward…

1. Important to continue limiting vulnerabilities

2. Some thoughts on growth

15

Limiting Vulnerabilities: Fiscal Policy

___________________________Source: IMF, Haver Analytics, Barclays Capital.

Increase in Public Debt (% GDP) from 2008 to 2009Commodity Revenue (% Total Gov. Revenue)

___________________________Source: Haver Analytics, Barclays Capital.

0

2

4

6

8

10

12

14

16

18

Japa US Euro Kore Maly Indo Arge Taiw Phil Vene Indi Braz

Difference (2009 minus 2008)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Vene Mexi Indo Chil Peru Mala Rus Colo

Commodity Revenues (% Total Gov Rev.)

Multi yr average

• Fiscal deterioration has been greater in advanced economies but EM countries remain very dependent on commodities

16

Limiting Vulnerabilities: Monetary Policy

___________________________Source: IMF, Bloomberg, Barclays Capital.

Hitting inflation targets has been difficult Food weight in the CPI (%)

___________________________Source: Haver Analytics, IMF, Barclays Capital.

NB: max, min and mean of 6mma deviations of inflation from mid target. Lower and upper targets show the deviations to the limits of the inflation bands

-10

-5

0

5

10

15

20

25

30

SA Tur Pol Mex Bra Per Indo Kor Phil

max min mean Lower Target Upper Target

• Need to rethink inflation targeting regimes

0

10

20

30

40

50

60

Phill

ipin

es

Peru

Rus

sia

Chi

na

Arg

entina

Col

ombi

a

Pola

nd

Tur

key

Chi

le

Mex

ico

Braz

il

Sout

h A

fric

a

Hun

gary

Euro

zon

e

Kor

ea

USA

Food weight in the CPI, %

17

Limiting Vulnerabilities: Credit and Asset Prices

___________________________Source: Haver Analytics, Barclays Capital.

Excess money growth and the stock exchange Excess money growth and the property prices

___________________________Source: Haver Analytics, Barclays Capital.

-10

-5

0

5

10

1999 2000 2002 2004 2006 2007 2009

% y/ y

2.5

3.0

3.5

4.0Index

Excess money growthShanghai composite index (Log, RHS)

-10

-5

0

5

10

1999 2001 2003 2005 2007 2009-2

2

6

10

14Excess money growth (% y/ y)

Nationwide property price index (RHS, % y/ y)

• Correlation is too high to ignore

18

Limiting Vulnerabilities: Reserve accumulation

___________________________Source: IMF, Barclays Capital.

EM External debt and reserve accumulation… …but Global Imbalances a problem

___________________________Source: Barclays Capital.

-50

0

50

100

150

200

250

300

Chin Braz Indi Taiw Sing Kore Mexi Indo Colo Chil Vene Peru

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

5yr Reserve Accuml. (USD bn) Reserves to External Debt Ratio (RHS)

China $1.8trn Reserve Accuml.

-800 -600 -400 -200 0 200 400

Asia lenders ex-Ch-Jpn

Japan

Germany

Oil exporters

China

Italy

Australia

UK

Spain

US

USD bn Global Borrowers

Global Lenders

Current Account

• Accumulation of net foreign assets has worked well for individual countries although inefficient for the world

19

Growth: Difference between two regions is remarkable

___________________________Source: IMF, Haver Analytics, Barclays Capital.

Real GDP Growth (% y/y)… Savings and Investment (% GDP)

___________________________Source: IMF, Barclays Capital.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 00-04 05-09

LatAm EM Asia

5yr Avg Real GDP Growth (% y/ y)

10

15

20

25

30

35

40

45

50

1992 1996 2000 2004 2008

EM Asia Saving LatAm SavingEM Asia Investment LatAm Investment

20

Growth: Intra Regional differences key in Asia

___________________________Source: IMF, Haver Analytics, Barclays Capital.

Growth is now dominated by China and India… …And the recent increase in investment as well

___________________________Source: World Bank, Barclays Capital.

• Asia is not as homogeneous as one would think

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008

China India Korea Singapore Indonesia Other

0%

10%

20%

30%

40%

50%

60%

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Chin Indi Indo Mala Phili

Investment (% GDP)

21

Growth: Demographics will accentuate intra Asia differences

___________________________Source: CIA World Factbook, Barclays Capital

Outside South Asia birth rate below replacementBy 2020, populations in North Asia will have peaked

___________________________Source: United Nations, Barclays Capital.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

PK PH MY

BD IN

Wor

ld ID US LK VN

CN UK

TH GE

KR JP SG HK

Births/ woman (2009 est) Replacement rate

0

200

400

600

800

1000

1200

1400

1600

1800

1980 1990 2000 2010 2020 2030 2040 2050

0

20

40

60

80

100

120

140

China India Japan (RHS) Korea (RHS)

Millions

22

LatAm Growth: Brazil has gained weight relative to Mexico

Latin American growth composition

___________________________Source: IMF, Barclays Capital.

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

1962 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006 2007 2008

Brazil Mexico Venezuela Colombia Chile Peru Argentina Other

23

Latam Growth: larger economies save too little…

___________________________Source: World Bank, Barclays Capital

Gross domestic savings in Latam (% GDP) Fixed Investment in Latam (% GDP)

___________________________Source: World Bank, Barclays Capital.

10%

15%

20%

25%

30%

35%

40%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Braz Mexi Chile Peru

Gross Domestic Savings (% GDP)

10%

15%

20%

25%

30%

35%

40%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Braz Mexi Chile Peru

Investment (% GDP)

24

.. and the region needs to live with worsening CA balances

___________________________Source: IMF, Barclays Capital

Latin American Current Account (% GDP)

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%19

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

E

2010

F

2011

F

LatAm CA (% GDP)

25

Latam: Composition of foreign liabilities is improving

___________________________Source: IMF, Haver Analytics, Barclays Capital.

LatAm Foreign Liabilities (USD bn)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Foreign Direct Investment Portfolio Equity Portfolio Bond

Latam: Foreign Liabilities Breakdown (USD bn)

2626

Analyst Certification and Important Disclosures

Analyst Certification(s)

I, Piero Ghezzi, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Important Disclosures

For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Capital Research Compliance, 745 Seventh Avenue, 17th Floor, New York, NY 10019 or refer to https://ecommerce.barcap.com/research/cgi-bin/all/disclosuresSearch.pl or call 212-526-1072.

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2727

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