7 th February 2014

1. Global macroeconomicEnergy TransitionmeetsSovereignCredit Rating EvolutionWhat scenarios ? 7th February 2014

2. Key issues addressed: Why does mainstream finance underestimate energy and climate issues? The come-back of sovereign risks RISKERGY’s innovative approach of Sovereigns financial rating Scenarios

3. 1. Mainstream finance underestimates energy and climate financial materiality

4. 1. Three main “market failures” • Oil price signal has proven to low • No price signal on CO2 emissions • Classic economy does not integrate energy as a wealth production factor

5. 1. IEA has systematically sent a biased price signal on oil prices

6. 1. Forward oil prices are artificially low

7. 1. When there is a signal, it is not heard …

8. 1. CO2 emission rights prices are not incentives

9. 1. Energy impact on GDP growth is underestimated Strong shift in price trend for raw materials since 2000 Increased correlation of raw material prices with oil prices

10. 1. Energy impact on GDP growth is underestimated Increased volatility weighs on investments decision and their profitability

11. 1. Energy impact on GDP growth is underestimated Emerging hedging strategies on oil import/export for Sovereigns facing increased price volatility

12. 2. The come-back of sovereignrisks

13. 2. Sovereign risk is key to credit risk assessment • Sovereign bonds account for 41% of global international bonds issues (outstanding amount of 41000 billion $) • The financial crisis has further increased the link between sovereign credit risk and financial institutions credit risk • Sovereign credit rating remains a “ceiling” for corporate credit rating. • There has been a recent shift in market appreciation of sovereign risks: from “no risk” rate to potential default of OECD countries and emerging countries new instability • Evolution in regulation are under way whereby OECD sovereign bonds will no longer bear zero risk for Capital Adequacy Ratio

14. 2. Sovereign risk is key to credit risk assessment Sovereigndebt impact Sovereigndebt volume Sovereigndebtmaturity < EOTW Sovereigndebtcurrency

15. 2. Main limitations of current methodologies for assessing sovereign risks (Big 3) • As underlined by the recent ESMA survey, to little expertise is dedicated to sovereign risks (low profitability of business model)

16. 2. Main limitations of current methodologies for assessing sovereign risks (Big 3) • Ratings eventually depend on a very limited number of criteria, GDP/Capita being one of the main driver (no anticipation on Irish crisis) (What “Hides” Behind Sovereign Debt Ratings? - AntónioAfonso, Pedro Gomes, and Philipp Rother - November 2006) • Ratings suffer from a strong inertia and sudden adjustments prove to have a pro-cyclical effect and to increase volatility • Current methodologies are snapshots of few key indicators anddo not integrate forward looking analysis, corresponding to long term risk drivers and average duration of sovereign bonds • Energy and climate risks for the economy’s output and the financial robustness of the state budget are not explicitly taken into account

17. 2. Energy subsidies dangerously weigh on primary balances Energy subsidies amout to up to 3% of world GDP and 8% of total public spending Energy subisdies prove an obstacle to investments in key development sector such as health and education « The paper shows that for some countries the fiscal weight of energy subsidies isgrowingso large that budget deficits are becomingunmanageable and threaten the stability of the economy, », IMF, EnergySubsidyReform - Lessons and Implications,2013

18. 2. Energy dependency and financial rating prove correlated, whereas current methodologies do not provide ex ante insight on this issue • Ex post correlation between financial ratings and energy dependency ratio Evolution of financial ratings and energy independance of 41 countries (18 EU, 20 other Europe + 3 row) :

19. 3. RISKERGY’s innovative approach of sovereign financial ratings

20. 3. A collaborative research program • 3,8M€ budget • 36 months (april 2013 to april 2016) • 4 firms, 3 research labs and Caisse des Dépôts • Market oriented research aiming at developping a new commercial methodology for sovereign rating

21. 3. Riskergy main objectives • Develop macro-economic models linked with fiscal and monetary models, as support of forward looking analysis of sovereign solvency • Integrate energy as a production factor: GDP= F(W,L,E) • Develop a financial rating methodology compliant with ESMA requirements • Identify early signals of financial risks linked with energy and climate resiliency of economies (enabling potential differenciation of issuers with equivalent ratings)

22. 3. Our modeling approach: Solvency Energy and or Climate shock ? • Supply shock (Fukushima, Ormuz, Irak, Lybia, Russian gaz …) • Demand shock: +1% world GDP => + 0,7% oil consumption • Voluntary regulation: carbon tax • Climate change risks (floods, storms, droughts…) What if?

23. 3. Global view of Riskergy’s approach

24. 3. RISKERGY energy performance indicators (1/2)

25. 3. RISKERGY energy performance indicators (2/2)

26. 3. Our collaboration scheme Model Hybridation: macro economy and energy Regional and national models Energy scenarios Data management Academic research Linkage between macro-economic and monetary/fiscal models Regulatory requirements and identification of client needs/expectations Optimization Rating methodology validated by the Regulator: ESMA Marketing and decision making tools Relations with international instituionnal investors Fund raising Market access

27. 4. Scenarios and Riskergy

28. 4. Scenarios • Big3 methodologies • Regulation guidelines • RISKERGY R&D

29. 4. Big3 methodology is “standard & poor” • Forecast : Current year + 2 years • Mostly external scenarios (+ national scenario) • Institutions : IMF / World Bank / OECD … • Note : Interestingly in most institutional macroeconomic scenarios, the price of oil is a key element, often provided by • IEA • Market futures

30. 4. Institutional forecast : IMF

31. 4. Institutional forecast : IMF (2)

32. IMF Forecast : ALPLBT model bias

33. 4. ESMA regulation => simple methodologies • Data • Availability • Quality • Traceability • Methodology (but taking into account sovereign risk specificities) • Comparability (but not between different asset classes) • Robustness • Scoring ≢ rating • Qualitative analysis is mandatory • Institutional analysis : the capacity to pay ≠ the will to pay

34. ESMA methodologyguidelines … but not for scenarios !

35. 4. RISKERGY scenario options (Work in progress) • National policy • “IEA new policy scenario” national options and not “450 scenario” • Infrastructure & long term evolutions are mostly given • Qualitative analysis for climate issues : impact ; resilience

36. 4. RISKERGY scenario options (Work in progress) OilDiagnosisx CoalDiagnosisx GasUSDiagnosisx GasUEDiagnosisx GasAsiaDiagnosisx National ElectricityDiagnosis With Diagnostic = overcapacity/ in equilibrium/ undercapacity/ stress • Scenario choices • 1 scenario BAU • 1 scenario Oil :undercapacity • 3-4 stress

37. Thanks for you attention Michel LEPETIT, michel.lepetit@riskergy.com, 06-03-26-93-18 Rodolphe BOCQUET, rodolphe.bocquet@riskergy.com , 06-34-18-73-97

38. 2. Energy current account deficit is a driver of debt increase in a number of countries OPEC oil revenues 2012 > 1000 Mds $ French oil trade deficit in 2011 = 3,2% of GDP