Eurasia Group PwC Global Trends Summary 1Q10

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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1 eurasiagroupDefining the Business of Politic

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.


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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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.


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

09

9/30

/2009

8/31

/2009

7/31

/2009

6/30

/2009

5/31

/2009

4/30

/2009

3/31

/2009

2/28

/2009

1/31

/2009

12/31/20

08

11/30/20

08

10/31/20

08

9/30

/200

8

8/29

/200

8

7/31

/200

8

Credit default swap spreadsSovereign debt major oil producers


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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.


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

3%

13%9%8%

16%

23%

6%

9%

4%

4%

2%

3%

Eurasia Group PwC Global Trends Summary 1Q10

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