ICTF Conference, Barcelona, 13 May 2014

1. ICTF Conference, Barcelona, 13 May 2014 Bart Poublon – Head of Risk Asia Pacific bart.poublon@atradius.com

2. ONCE UPON A TIME… Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

3. OOOPS Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

4. AGENDA Hot in Asia China Abenomics The Fragile 5 Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

5. CHINA – WHAT IS HAPPENING? • New Leaders – Though • Growth Target 7.5% • HSBC PMI Index contracts for 4th straight month at 48,3 • Fitch China downgrade to A+ : high debts & Shadow financing • China debt 61% of GDP and Foreign currency reserves of USD 3,8 trillion • China`s Third Plennum • H1 2014: First Bankruptcy of Listed Company, Run on a bank, first bond defaults Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

6. CHINA MACRO ECONOMIC RISKS – THE REAL ESTATE BUBBLE Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

7. CHINA MACRO ECONOMIC RISKS - SHADOW BANKING & HIGH CORPORATE DEBTS Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

8. CHINA MACRO ECONOMIC RISKS – OFFSHORE BORROWING AND A WEAKER RENMINBI • Mid 2010 Beijing allowed the Renminbi to start rising again • Chinese corporates saw an opportunity to take advantage of Renminbi appreciation and interest rate differentials by borrowing abroad (eg Hong Kong) • Exposure from Hong Kong banks on Mainland banks and non- banks has tripled since 2010 to USD415 billion • Experts estimates the Renminbi is currently between 15 to 25% above fair value • Issues: • Renminbi depreciation will make Chinese exports cheaper but will makes offshore loan repayments more expensive • Potential issues in Shadow Banking Channels may cause panic and a scramble for liquidity Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

9. CHINA MICRO ECONOMIC RISKS • Reliability financial information poor • Poor legal framework for recoveries • Moral hazard and weak corporate governance • Deleveraging of banks and Cross-guarantees widespread • Atradius` Claims experience on China • Sectors (Steel, Coal, Solar, Paper) • Peer to peer lending (form of Shadow banking) • Traders • Cross-guarantees • Fraud Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

10. CHINA – CONCLUSION • Chinese Government takes the right steps: fight the excessive credit and debt growth – Take the pain now, accept lower growth and avoid bigger problems in the future • No doubt we will see more negative news: slowdown in growth, more defaults and insolvencies, more issues with shadow banking products and unwillingness from government to bail investors out • President Xi: `The Third Plenum aims to give market forces a greater role in the economy. Corporate failure is a hallmark of capital markets – Investors need to price the risk properly` - Eg China Vanke bonds vs Brazil Government bonds • Likelihood of a stimulus plan looks low at this point in time Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

11. CHINA – CONCLUSION • NO FINANCIAL MELTDOWN EXPECTED as China has ammunition if needed • Gigantic Foreign Currencies reserves of China at US$ 3,8 trillion • Low Government debt – Government can take action or absorb shocks • Closed Capital Account – Money can not flee out of China • Banks are State-Owned if the People`s bank of China tells them to lend they will follow orders • GDP Growth slowing but still above 7% Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

12. THEY ARE BACK Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

13. ABENOMICS Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

14. ABENOMICS • What is it all about? 3 pronged attack to achieve 2% inflation within 2 years time • Loose monetary policy – BOJ is buying USD 583 bn to 680 bn of Japanese Government Bonds per year • Increased public spending • Structural reform of Japanese economy Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

15. JPY/USD Exchange Rate 1990-2014 Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

16. NIKKEI ON TESTOSTERONE Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

17. ABENOMICS AND IT`S EFFECT ON THE JAPANESE ECONOMY • After 15 years of deflation core consumer prices start to rise +1,3% • Consumption Tax (VAT) increase from 5% to 8% - Remember 1997 • Salary growth crucial for Abenomics to succeed – if not discretionary spending squeezed • The missing J-curve - Japans trade deficit widened to $134bn • Bank of Japan forecasts real GDP growth at end of 2014 at +1,4% Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

18. WILL IT WORK IN LONG TERM? This is what the critics say: • Bank of Japan unable to achieve 1% inflation in past – Will they be able to get to 2% • Bubble trouble • Currency wars • Risky Fiscal Policy: • Highest public debt in the world at 250% of GDP • Target to cut budget deficit by 50% in 2015 and to be in surplus in 2020 Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

19. THE FRAGILE 5 • Who: South-Africa, Turkey, Brazil, India and Indonesia • Why are they fragile: • These counties run large current account and fiscal deficits and are most reliant on outside financing to finance their growth and investment • They also have just one year of Forex reserves to cover their GEFR • Due to the US taper markets are worried that capital flows towards emerging markets will reduce or reverse • What happened in H2 2013: • Large outflows of money from emerging markets and turbulence on EM Stock Exchanges • Strong currency depreciation reduces ability to meet foreign debt repayments Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

20. THE FRAGILE 5 • How is Indonesia faring in 2014: No longer fragile • GDP growth in Q4 2013 remains strong at 5,7% and better then analysts expectations • Rupiah is recovering due to 175bp interest rate hike • Current account deficit shrank to below 3% - in the right direction Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

21. ASIA CRISIS REDUX FOR INDONESIA? No – Market thinks it is a correction What is different with 1997? • Government debt low at 31% of GDP (similar in 1997) • Household debt low at 17% of GDP • 70% of Bond Market is in Indonesian Rupiah – was not the case in 1997 • Foreign Exchange Reserves are larger then in 1997 – protects against panic sales of the currency (1997 US$17bn – Now US$113bn) • No currency pegs in place like in 1997 – adjustments are spread – no sudden shocks in currency rates Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

22. INDONESIA TODAY • Largest Economy in SE Asia and 16th in the world • GDP growth 5,78% • 4th largest population in the world at 250m • 80% of population younger then 40 • Natural resources: oil, gas, tin, copper, gold Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

23. …AND IN 2030 • Market opportunities triple to 1.5 trillion • Not your typical Asian Tiger - Growth driven by domestic consumption • 90m Indonesians will join the consumer class between now and 2030 • Only India and China will add more consumers • Will be 7th largest economy behind China, USA, India, Japan, Brazil and Russia Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

24. AGENDA Hot in Asia China Abenomics The Fragile 5 Hot in Asia - Barcelona, 13-05-2014, Bart Poublon - Head of Risk Asia Pacific

25. ICTF Conference, Barcelona, 13 May 2014 Bart Poublon – Head of Risk Asia Pacific bart.poublon@atradius.com