RREEF Infra Australian Infra Mkt Review Q1 2012

7/30/2019 RREEF Infra Australian Infra Mkt Review Q1 2012

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RREEF Infrastructure

RESEARCH REPORT

www.rreef.comwww.rreef.com

RREEF Infrastructure

Australian Infrastructure Market Update

First Quarter 2012


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RREEF Infrastructure Australian Infrastructure Market Update | First Quarter 2012 1

Table of Contents

1. Executive Summary .................................................................... 12. Global economy .......................................................................... 33. Austral ian economy .................................................................... 64. Austral ian dr ivers and challenges ............................................. 85. Infrastructure investment trends ............................................. 156. Scenarios ................................................................................... 167. Important Notes ......................................................................... 18

Contacts:

Nadir Maruf

ManagingDirector

Head of RREEF InfrastructureAsia Pacific

+ 61 (2) 8258 2012

[email protected]

Jeremy Don

Director

Chief Operating Officer

+ 61 (2) 8258 1223

[email protected]

Irina Johnstone

Director

Head of Investor Relations

+ 44 (0) 207 545 0254

[email protected]

Simon Durkin

Director

Head of European Research

[email protected]


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1. Executive Summary

Global

Cautious optimism returned to the global economic outlook in Q1 2012.1 The world

economy is set to expand at a below-trend pace in 2012 as it regains momentum.2

The global economys positive turn in the first quarter is not without obstacles in the

months ahead. Labour and housing markets still face structural adjustments in many

countries, and governments and households continue struggling to rebalance their

budgets.3

The European economy remains vulnerable. 4 IHS/Global Insight forecasts the

overall Eurozones economy to contract by 0.4 per cent in 2012, a slightly better

outlook than had been expected three months earlier.5 The continents two-speed

path continues, with economic growth in the core European countries forecast to be

relatively flat in 2012 even as most peripheral economies are now mired in recession. 6

European banks and peripheral sovereigns face daunting challenges that require

long-term solutions.7 Though it is indirectly impacted, Australias direct exposure to

the Eurozone crisis is limited.8

Upbeat indicators in the US provide hopeful signals for the year ahead.

9

IHS/GlobalInsight forecasts U.S. economic growth of 2.1 per cent in 2012, with momentum

continuing to build through 2014.10

Chinas economic growth has decelerated in recent months amid weaker external

demand and a slowdown in the property sector.11

Commodity prices have stabilised at relatively high levels.12 The Reserve Bank of

Australia (RBA) index for commodity prices has held near or above 100 since early

2011.13

Aust ral ia

The Australian economy was on track for 3.6 per cent year-over-year (y-o-y) growth in

Q1 2012 according to private sector consensus forecasts for the period.14 Australian

economic growth will continue this year at close to trend according to the RBA.15

Despite encouraging headline indicators, deeper worries persist of two-tier Australian

economy split across industries and geography.16

The RBA expects inflation to hold within the 2-3 per cent target range over the next

two years.17 A lower headline inflation rate in the first half of 2012 will rise in the

latter half of the year as a new carbon tax is implemented.18

1 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p. 1.2 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April 2012.3 Monthly Bulletin, European Central Bank, 7 March 2012, p. 7.

4 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April 2012.5 IHS Global Insight, Current Forecast, 16 March 2012.6 IHS Global Insight, Current Forecast, 16 March 2012.7 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April 2012.8 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 91-98.9 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p. 1.10 IHS Global Insight, Current Forecast, 16 March 2012.11 Monthly Bulletin, European Central Bank, 7 March 2012, p. 12.12 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.13 Reserve Bank of Australia, Index of Commodity Prices (Table G5), 2 April 2012.14 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 4-5.15

Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.16 National Australia Bank, Global & Australian Forecasts, 13 March 2012, pp. 8-19.17 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.18 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 37.


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High levels of household debt continue to impact savings and spending patterns.19

Uncertainty regarding interest rates for variable-rate home mortgages has reduced

Australian consumers motivation to spend.20

Australias industry sectors continue to undergo structural change.21 As recently as

2005, mining accounted for less than 20 per cent of private sector investment, but by

Q4 2011, the mining sector alone accounted for just over half of all new capital

expenditures. 22 New capital expenditures in other sectors of the economy have

remained relatively stagnant in recent years.23 Declining employment in the retail

sector has been attributed to the high value of the Australian dollar (AUD), which has

driven Australian consumers online to find better prices from foreign retailers.24

A favourable interest rate differential and strong terms of trade have been among the

factors pushing up the value of the AUD. 25 A modest easing of both of these

factorsthe value of the AUD and the terms of tradeis anticipated over the next two

years.26

The Australian housing market has stabilised but remains relatively soft. 27

Australias population growth carries significant upside economic implications.28 In

the short term, this includes a boost to domestic demand, including the housing

sector.29 Longer term, foreign immigrants can help ease anticipated skill shortages in

the labour market as aging workers retire.30

19 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 31.20 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 5.21 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.22 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.23 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.24 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 79-84.25 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 39-40.26 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012; IHS Global Insight, Australia:Country Intelligence Report, 22 March 2012, p. 31.27

Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.28 Westpac, Market Insights, March 2012, p. 12.29 Westpac, Market Insights, March 2012, p. 12.30 Westpac, Market Insights, March 2012, p. 12.


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2. Global economy

Overview: Cautious optimism returned to the global economic outlook in Q1 2012. 31

Following a period of uncertainty and downgraded forecasts in the latter half of 2011,

hopeful signs emerged in the early months of 2012, including upbeat indicators in the US

and progress toward more predictable fiscal governance in Europe. 32 Business and

consumer sentiment have improved broadly across advanced economies in recentmonths.33 The global edition of the Purchasing Managers Index (PMI) signalled first-

quarter improvements in all-industry output and new orders.34

These positive developments will still not be enough to stave off a mild recession in the

Eurozone. IHS/Global Insight forecasts the overall Eurozones economy to contract by

0.4 per cent in 2012, a slightly better outlook than had been expected three months

earlier.35 Elsewhere in Europe, the UKs economy will continue to sputter in 2012, as

austerity measures undertaken by the British government delay a full-blown recovery until

later in 2013.

Exhibi t 1: Real GDP growth

Outlook for selected countries

Sources: IHS Global Insight, forecast series GDPR_A

p = preliminary; f = forecast

As of March 2012

Outside of Europe, many advanced economies will experience improving momentum

during the year ahead. IHS/Global Insight forecasts Japan, the US, New Zealand, andAustralia to experience a solid uptick in economic momentum in 2012. 36 Of these

countries, however, Australia is the only one expected to surpass global economic growth

in 2012. Many emerging markets will continue to outpace world economic growth,

although the momentum in early 2012 has begun to soften in China, Hong Kong, and

Singapore.37

31 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p.1.32 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p.1.33 Monthly Bulletin, European Central Bank, 7 March 2012, p. 7.34 Monthly Bulletin, European Central Bank, 7 March 2012, p. 7.35 IHS Global Insight, Current Forecast, 16 March 2012.36 IHS Global Insight, Current Forecast, 16 March 2012.37 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012.

-2

-1

0

1

2

3

4

5

6

7

8

9

10

Eurozone

Germany

UnitedKingdom

Japan

Canada

UnitedStates

NewZealand

World

SouthAfrica

Australia

Brazil

Russia

Indonesia

India

China

Real GDP % growth 2011p 2012f 2013f


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The global economys positive turn in the first quarter is not without obstacles in the

months ahead. Labour and housing markets still face structural adjustments in many

countries, and governments and households continue struggling to rebalance their

budgets.38

Exhibit 2: Current fiscal balance vs. long-term growth


Notes: f = forecast

Sources: IHS Global Insight, forecast series GDPR_A and GBAL%GDP_A

As of March 2012

Europe: Economic growth in the core European countries is forecast to be relatively flat in

2012, with most peripheral economies now in recession.39

The Eurozone crisischallenged policymakers in 2011 with its unprecedented complexity and diversity of

stakeholders. 40 Long-term policy measures unveiled by the European Central Bank

(ECB) in late 2011 met with initial success in the first months of 2012.41 Sporadic but

gradual progress toward a workable solution continues, with financial markets slowly

gaining confidence in the process as it moves forward.42 Still, the overall risks to success

remain high, with peripheral countries like Greece, Portugal, and Spain facing daunting

challenges in the months ahead.43

US: The US economy exhibited signs of improvement in recent months across a range of

indicators, including consumer spending, income growth, and employment.44 Lingering

impediments to economic growth include rising petrol prices and a sluggish recovery in

the housing market.

45

In January, the US Federal Reserve announced baseline plans tohold interest rates at very low levels until late 2014.46 IHS/Global Insight forecasts U.S.

38 Monthly Bulletin, European Central Bank, 7 March 2012, p. 7.39 IHS Global Insight, Current Forecast, 16 March 2012.40 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.41 Monthly Bulletin, European Central Bank, 7 March 2012, pp. 5-6.42 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.43 Westpac, Market Insights, March 2012, p. 14; and ANZ, Research Quarterly: Economics, Commodities, and

Markets, Issue 7, Q1 2012, 21 March 2012, pp. 8-9.44 Monthly Bulletin, European Central Bank, 7 March 2012, pp. 8-9.45 ANZ, Research Quarterly: Economics, Commodities, and Markets, Issue 7, Q1 2012, 21 March 2012, pp. 6-7.46 Deutsche Bank, Global Economic Perspectives, 14 March 2012.

United StatesCanada

Germany

United Kingdo m

Russia

Australia

China

India

Indonesia

Japan

New Zealand

Brazil

South Africa

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

FiscalBalance

(average

2011-2013F)

Long-term economic growth (average 2015F-2040F)

world average long-term GDP growth 3.6%

Eurozone 3% deficit limit


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economic growth of 2.1 per cent in 2012, with momentum continuing to build through

2014.47

China: Weaker external demand and a slowdown in the property sector have pushed

Chinas economic growth into a path of deceleration in recent months.48 During Q1 2012,

China announced plans to lower its official target growth rate to 7.5 per cent, the lowest

level since 2005.49 The move signalled a tacit acknowledgement by the government that

the rapid pace of growth in recent years is not expected to continue.50 Slower growth inChina in the first half of 2012 is expected to remove some pressure from global

commodity prices, at least in the short term.51 Longer term, Chinas economic growth

should stabilise as the global outlook improves and as recent monetary easingincluding

looser reserve requirementstake hold.52

Japan: The Great Tohuku Earthquake in March 2011 pushed Japan into recession for the

rest of the year. While economic growth is expected to return in 2012, any initial signs of

turnaround in the first quarter were faint. 53 Prices remain relatively flat, leaving the

country on the cusp of deflation despite rising oil and electricity prices.54 At its February

meeting the Bank of Japan (BOJ) set a target rate for inflation of 1%.55 Negative or

mixed signals in the first quarter could also be seen in household spending, industrial

production, exports, and the labour market.56 Stimulative spending on reconstruction isexpected to provide a much needed boost to the economy in 2012.57 The BOJ also

announced plans in February to expand its bond purchasing program by an additional

JPY 10 trillion.58

India: Elevated consumer prices and interest rates squeezed y-o-y economic growth in

India in Q4 2011 to 6.1 per cent, the lowest level in three years. 59 Caught in a tough

position, the Reserve Bank of India (RBI) faces a choice between a stimulative rate cut or

an inflation-hedging wait-and-see policy.60 As of March, the RBI opted for the latter.61 A

few signs began emerging in the first quarter that the countrys economic deceleration

was easing and that business sentiment was improving.62

47

IHS Global Insight, Current Forecast, 16 March 2012.48 Monthly Bulletin, European Central Bank, 7 March 2012, p. 12.49 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 6-7.50 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 6-7.51 Westpac, Market Insights, March 2012, p. 14.52 ANZ, Research Quarterly: Economics, Commodities, and Markets, Issue 7, Q1 2012, 21 March 2012, pp.12-13.53 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 14-15.54 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 14-15.55 Monthly Bulletin, European Central Bank, 7 March 2012, pp. 9-10.56 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 14-15.57 Monthly Bulletin, European Central Bank, 7 March 2012, pp. 9-10.58 Monthly Bulletin, European Central Bank, 7 March 2012, pp. 9-10.59 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 10-11.60 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, pp. 10-11.61 Levine, Glenn, Rates on Hold in India, Moodys Analytics, 15 March 2012.62 Deutsche Bank, Global Economic Perspectives, 14 March 2012.


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3. Australian economy

Q1 2012 performance: Natural disasters put a dent in Australias export capacity in early

2011.63 A year later in Q1 2012 the economy was on track for 3.6 per cent y-o-y growth

according to private sector consensus forecasts for the period.64 Headline indicators for

business investment, industrial production, and exports have risen in recent months,

providing hopeful signs for the year ahead.

65

Yet less sanguine indicators have alsoemerged. The most recent Westpac-Melbourne Institute index of leading indicators rose

at a sub-trend rate of 2.6 per cent.66 Outside the mining industry, many other sectors of

the economy remained weak, including residential real estate, tourism-related activities,

and retail trade.67

Other downside risks loom large. External threats include the Eurozone crisis and

economic deceleration in China.68 Australia is also experiencing structural changes in

household spending and the housing market.69 In evaluating these developments, the

RBA, chose to leave interest rates unchanged at its April 3 meeting.70

Outlook: All things considered, IHS/Global Insight forecasts GDP growth of 3.1 per cent

in Australia for 2012, up from 2.0 per cent in 2011.71 The improving growth is attributed

largely to Australian coal exports and to the base effects of post-disaster reconstruction. 72

IHS/Global Insight also points out that the forecast would have been even stronger had

external global conditions been more robust.73

Exhibit 3: Consensus forecast for Aust ralian economic growth

Per cent change over same quarter of previous year

Notes: f = forecast

Sources: Consensus Economics,Asia Pacific Consensus Forecasts.

As of March 2012

In its March report, the global staffing firm Manpower reported that 24 per cent of

Australian employers plan to hire workers in the second quarter of 2012 compared to just

11 per cent that plan to downsize.

74

The seasonally adjusted net balance of +13 per centwas unchanged from the Q1 2012, but it is lower than levels reported in previous quarters

63 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 34.64 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, p. 4-5.65 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012, p. 4-5.66 Westpac, Bulletin, Leading Index points to lacklustre growth, 21 March 2012.67 National Australia Bank, Global & Australian Forecasts, 13 March 2012, pp. 8-19.68 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.69 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.70 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.71 IHS Global Insight, Current Forecast, 16 March 2012.72 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 31.73 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 31.74 Manpower, Employment Outlook Survey: Australia, Q2 2012

0.0

0.5

1.0

1.52.0

2.5

3.0

3.5

4.0

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2010 2011 2012f 2013f

Real GDP % growth


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of 2011.75 Recent business confidence surveys and job advertisement volumes have also

pointed to weak labour conditions in the first half of 2012.76

Exhibit 4: Outlook for hiring by Australian employers

Net balance of employers planning to increase hiring versus those planning to decrease

Net Balance

Period Increase Decrease ActualSeasonally

Adj ust ed

2012 Q2 24% 11% +13 +13

Q1 23% 10% +13 +13

2011 Q4 25% 9% +16 +15

Q3 26% 9% +17 +18

Q2 29% 6% +23 +22

Notes: Seasonally adjusted and based on a representative national sample of 2,251 employers in the most recent quarter.

Sources: Manpower Employment Outlook Survey: Australia, Q2 2012

As of March 2012

75 Manpower, Employment Outlook Survey: Australia, Q2 201276 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 36.


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4. Australian drivers and challenges

Inflation: Australias consumer prices have decelerated in recent quarters following a

spike in food prices in early 2011.77 The base effect of this spike is likely to bring the

headline inflation rate lower in the first half of 2012, but the introduction of a carbon tax in

mid-2012 will boost the rate again in the latter half of the year. 78 The RBA expects

inflation to hold within the 2-3 per cent target range over the next two years.

79

Accordingto the RBA, a key aspect of Australias consumer inflation is the difference between

tradables and non-tradables.80 The price of non-traded goods and services has risen

briskly while the price of traded items has held more constant due to exchange rates. 81

Any depreciation of the Australian dollar could thus add pressure to consumer prices.82

Credit and lending: Australian banks are in a relatively strong position, with limited direct

exposure to the Eurozone crisis.83 Banks are well capitalised with generally conservative

lending practices.84 With global funding conditions improving in early 2012, Australias

larger banks have recently issued significantly more bonds.85 Banks have been eager to

compete for deposits.86 Deposit growth has recently outpaced credit growth.87

Non-performing business loans remain a problem for some banks, and this is due largely

to struggling sectors of the Australian economy that have benefited less from the resource

boom.88 As Australian households have pulled back on spending, they have been quick

to repay loans and increase their savings rate.89 An unexpected hike in lending rates in

February impacted variable-rate home mortgages. 90 Any uncertainty with regard to

interest rates is likely to exacerbate consumers recent hesitation to spend.91

Resources demand: In August 2011, the RBAs index of commodity prices reached its

highest level since late 2008.92 The index then receded through the next six months

before turning upward again in March 2012.93 The index has held near or above 100

since early 2011.94

77 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.78 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 37.79 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.80 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.81 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.82 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 85-90.83 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p. 2.84 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 32.85 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p. 2.86 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 37-43.87 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p. 2.88 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p. 2.89 Reserve Bank of Australia, Financial Stability Review, 27 March 2012, p. 2.90 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 5.91 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 5.92 Reserve Bank of Australia, Index of Commodity Prices (Table G5), 2 April 2012.93 Reserve Bank of Australia, Index of Commodity Prices (Table G5), 2 April 2012.94 Reserve Bank of Australia, Index of Commodity Prices (Table G5), 2 April 2012.


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Exhibit 5: RBA index of commodity pr ices

Notes: index based on monthly averages; 2008/09 = 100

Sources: Reserve Bank of Australia (Table G5)

As of March 2012

Rising prices and demand for commodities has driven investment in Australias mining

sector. New capital expenditures for mining have been rising as a share of total privatesector business investment for years.95 As recently as 2005, mining accounted for less

than 20 per cent of private sector investment, but by the Q4 2011, the mining sector alone

accounted for just over half of all new capital expenditures.96

Exhibit 6: Actual private new capital expenditures, mining as a share of total

Notes: Based on seasonally adjusted current prices.

Sources: Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition

As of December 2011

Since 2007, new private capital expenditures in the mining sector have nearly tripled.97

New capital expenditures in other sectors have remained relatively stagnant. 98

Businesses outside the mining sector have become increasingly reluctant to invest due to

recent uncertainty about global economic conditions.99 The value of the Australian dollar

has also put many of the trade-exposed non-mining industriesespecially manufacturing

and tourismin a defensive position.100

95 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.96

Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.97 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.98 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.99 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 32.100 Hume, Neil, Boom in mineral wealth exploitation fails to mask Australias problems, Financial Times, 22

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Indexed to2008/2009

= 100

2008

Commodityprices spike,then collapseas the global

economyfalters

2010-2012

Commodityprices recover in

2010 butplateau in 2011

as globaleconomicoutlook

moderates

0%

10%

20%

30%

40%

50%

60%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2005 2006 2007 2008 2009 2010 2011

Percent of total (%)


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Exhibi t 7: Actual pri vate new capital expenditure, 2007 = 100

Notes: index based on seasonally adjusted current prices indexed to 2007.


As of December 2011

Geographic divergence: The tilt toward mining investment at the expense of other

industries also has a geographic aspect. Australia added 22,300 jobs over the 12 months

ending in February 2012, according to the Australian Bureau of Statistics.101 This net

gain masked a stark difference across states.102 Resource-rich Western Australia and

Queensland added 53,400 and 25,500 jobs, respectively. 103 New South Wales and

Victoria together shed more than 64,000 jobs over the same period.104

Exhibit 8: Australian employment by indust ry

Seasonally adjusted employment level as of February 2012

Change in the past 12 months

Total (000s) Net (000s) Per cent (%)

New South Wales 3,598.4 -31.2 -0.9%

Victoria 2,848.0 -33.6 -1.2%

Queensland 2,340.7 +25.5 +1.1%

Western Australia 1,266.9 +53.4 +4.4%

South Australia 819.0 +4.5 +0.6%

Other states & territories 571.0 +3.7 +0.7%

Aust ral ia 11,444.0 +22.3 +0.2%

Notes: Seasonally adjusted


As of February 2012

Foreign exchange: In Q1 2012, the AUD traded well above its historical rate for all major

currencies. 105 This pattern has been consistent for some time across all major

currencies except the Japanese yen.106 A favourable interest rate differential and strong

terms of trade have been among the factors pushing up the value of the AUD.107

March 2012, p. 6.101 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.102 ANZ, Research Quarterly: Economics, Commodities, and Markets, Issue 7, Q1 2012, 21 March 2012, pp.10-11.103 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.104 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.105 Reserve Bank of Australia, Exchange Rates, (Table F11), 30 March 2012.106 Reserve Bank of Australia, Exchange Rates, (Table F11), 30 March 2012.107 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 39-40.

0

50

100

150

200

250

300

350

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2005 2006 2007 2008 2009 2010 2011

Indexed to2007 = 100 Mining industry All industries except mining


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Exhibit 9: Comparative exchange rates

Units of foreign currency per A$

Notes: AUD (A$); USD (US$); JPY (); EUR (); GBP (), CNY (renminbi).

Sources: Reserve Bank of Australia (Table F11)

As of March 2012

The mining sector accounts for about two-thirds of Australian exports. 108 While demand

from Asia encourages investment in Australias resource sector, it also contributes to askewed exchange rate which holds back much of the rest of the economy.109 The value

of the AUD has proven especially sensitive to demand from China. In March, when BHP

Billiton announced an anticipated slowdown in Chinese demand for iron ore, the AUD fell

by 1 per cent in a single day against the US dollar and the euro. 110 A gradual

depreciation of the AUD is widely expected over the short to medium term.111

Monetary policy: Uncertainty about interest rates in recent months has rattled Australian

mortgage holders. Global economic conditions in late 2011 compelled the RBA to cut

policy rates by a total of 50 basis points in November and December, but major banks

were initially slow to pass this cut along to customers.112 Another cut in the policy rate

was widely expected in February, but the RBA held steady at 4.25 per cent as global

conditions improved. This time major banks, squeezed by wholesale funding costs anddeposit competition, lifted interest rates a few basis points on variable-rate mortgages,

even as the RBA left its policy rate unchanged.113 The RBA again left rates unchanged at

its meeting in early April.114 IHS/Global Insight forecasts that the RBA will wait until the

latter half of 2013 before starting a series of incremental hikes to adjust to a changing

economic environment.115

108 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 50.109 Hume, Neil, Boom in mineral wealth exploitation fails to mask Australias problems, Financial Times, 22March 2012, p. 6.110 Keohane, David, Aussie comes under pressure, Financial Times, 21 March 2012, p. 22.111 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 38-39.112

IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 41-42.113 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 41-42.114 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.115 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 40-41.

average monthly exchange rate since January 2011

long-term average since January 2000

USD / AUD CNY / AUD JPY / AUD EUR / AUD GBP / AUD

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Jan-2011

Apr-2011

Jul-2011

Oct-2011

Jan-2012

0

1

2

3

4

5

6

7

8

Jan-2011

Apr-2011

Jul-2011

Oct-2011

Jan-2012

65

70

75

80

85

90

Jan-2011

Apr-2011

Jul-2011

Oct-2011

Jan-2012

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

Jan-2011

Apr-2011

Jul-2011

Oct-2011

Jan-2012

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

Jan-2011

Apr-2011

Jul-2011

Oct-2011

Jan-2012


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Exhibit 10: Policy rates and inflation


Sources: IHS Global Insight, forecast series RMP_A and CPI_A

f = forecastAs of March 2012

Retail trade: The Australian labour market displayed marked differences across sectors

for the 12 months ending in February 2012.116 The mining sector added nearly as many

jobs as the healthcare sector during this period, despite being less than one-fifth as large

in terms of total employment.117 Other sectors experienced outright declines.118 One of

these was retail, which lost 23,800 jobs during the period. 119 The RBA recently

acknowledged that structural changes are underway across labour market sectors, and

retail trade is clearly an area where this is occurring.120

Exhibit 11: Australian employment by industry

Seasonally adjusted employment level as of February 2012Change in the past 12 months

Total (000s) Net (000s) Per cent (%)

Health Care & Social Assistance 1,349.5 +49.1 +3.8%

Retail Trade 1,208.6 -35.4 -2.8%

Construction 1,019.9 -1.4 -0.1%

Manufacturing 971.2 -23.8 -2.4%

Professional, Scientific & Technical Services 888.4 +1.9 +0.2%

Education & Training 863.9 +19.3 +2.3%

Accommodation & Food Services 745.7 -59.2 -7.4%

Public Administration & Safety 742.1 +34.6 +4.9%

Transport, Postal & Warehousing 549.9 -46.1 -7.7%

Other Services 474.8 +28.6 +6.4%

Financial & Insurance Services 423.1 +14.0 +3.4%

Administrative & Support Services 404.4 -5.1 -1.2%Wholesale Trade 397.5 -30.0 -7.0%

Agriculture, Forestry & Fishing 334.3 +7.8 +2.4%

Mining 249.7 +44.6 +21.7%

Rental, Hiring & Real Estate Services 225.0 +23.2 +11.5%

Information Media & Telecommunications 224.0 +7.1 +3.3%

Arts & Recreation Services 200.0 -8.1 -3.9%

Electricity, Gas, Water & Waste Services 153.8 +1.5 +1.0%Notes: Seasonally adjusted


As of February 2012

116 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.117

Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.118 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.119 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.120 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012; and Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 79-84.

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2013F

2014F

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2012F

2013F

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US Eurozone UK Japan Australia

Bank rates Inflation, % yoy

BanksRates

Inflation% yoy


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At the surface, part of the decline in retail jobs seems to be broad changes in consumer

behaviour, as high household debt burdens have encouraged consumers to save more

and spend less.121 And in fact, the Westpac-Melbourne Institutes consumer sentiment

index did fall sharply in March 2012 to a level below its long-term average.122 Looking at

retail spending patterns over a longer period of time, however, a more complex picture

emerges. Total retail sales volumes have actually risen steadily since 2009, but a few

retail formats like department stores and clothing and footwear stores have fared poorly

during this period.123 The RBA attributes the format-specific declines to the internet.124

At current exchange rates, Australian consumers can find better prices online from foreign

retailers.125

Exhibit 12: Retail sales trends compared with foreign exchange trends

Monthly retail turnover by format (2009 = 100) vs. the USD / AUD exchange rate

Notes: Exchange rate expressed as US dollars per A$; retail sales index based on monthly trend data

Sources: Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition; Reserve Bank of Australia, Exchange Rates (Table F11)

As of January 2012

Population & labour force trends: Since 2006, the natural increase of Australias

populationthis is essentially the net difference between birth certificates and death

certificateshas lagged immigration in total volume.126 For the year ending in June 2011,

Australia added about 150,000 new residents through natural increase and another

170,000 through immigration.127 This trend carries significant economic implications.128

In the short term, it gives the countrys domestic demand an added boost, especially in the

housing sector.129 There are long term implications as well. Foreign students have

contributed heavily to the surge in immigration over the past decade. 130 Meanwhile,

structural shifts in Australias labour market have led to surplus labour in industrial sectors

with labour deficits in high-skilled service occupations.

131

Matching changing employerrequirements with skilled foreign immigrants has potential to boost the economy in the

long run. 132 This will be important since population projections indicate that aging

121 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 35.122 Westpac, Bulletin, Consumer sentiment tumbles, 14 March 2012.123 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition; Reserve Bank of

Australia, Exchange Rates (Table F11), 30 March 2012.124 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 79-84.125 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 79-84.126 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.127 Australian Bureau of Statistics, Australian Economic Indicators, April 2012 edition.128 Westpac, Market Insights, March 2012, p. 12.129 Westpac, Market Insights, March 2012, p. 12.130 Westpac, Market Insights, March 2012, p. 12.131 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 46-47.132 Westpac, Market Insights, March 2012, p. 12.

0.450.500.550.600.650.700.750.800.850.900.951.001.051.101.15

949596979899

100101102103104105106107108

Jan-2009

Mar-2009

May-2009

Jul-2009

Sep-2009

Nov-2009

Jan-2010

Mar-2010

May-2010

Jul-2010

Sep-2010

Nov-2010

Jan-2011

Mar-2011

May-2011

Jul-2011

Sep-2011

Nov-2011

Jan-2012

USD / AUD

2009 retailturnoverindex = 100

USD / AUD (RHS)

Clothing, f ootwear, &personal accessoryretailing (LHS)

Department stores(LHS)

Total retail turnover(LHS)


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Australian workers will need to be replaced by an ample supply of skilled labour in the

years ahead.133

Exhibit 13: Annual components of population change

Notes: Based on summary of the four quarters ending in June of the stated year


As of June 2011

133 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 46-47.

+0

+50

+100

+150

+200

+250

+300

+350

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+450+500

1986

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1998

1999

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2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Net annualpopulation change

Natural increase (birthsminus deaths)

Net immigration


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5. Infrastructure investment trends

For the year ending in Q1 2012, the total transaction volume for Australian infrastructure

rose significantly over the same period ending in Q1 2012. 134 According to Infrastructure

Journals transaction database, closed transactions rose from a total of AUD 23.6 billion in

the year ending Q1 2011 to a preliminary total of AUD 32.0 billion for the year ending Q1

2012.

135

On a sector level, the deal market continued to be dominated by the transportand mining sectors. As of Q1 2012, these sectorseither alone or in combination

accounted for 56.4 per cent of the infrastructure market, down from 66.2 per cent in the

previous year.136

Exhibit 14: Distribution of c losed infrastructure transactions by sector

Summary for the years ending 31 March 2012 and 2011.

Notes: Infrastructure-related transactions attributed to Australia with status of financial close as of the dates shown; transactions include both project and non-

project finance

Sources: Infrastructure Journal, transaction database

As of 31 March 2012

134 Infrastructure Journal, transaction database as of 31 March 2011.135 Infrastructure Journal, transaction database as of 31 March 2011.136 Infrastructure Journal, transaction database as of 31 March 2011.

Transport /Mining13%

Transport31%

Social &Defence

1%

Oil & Gas7%Renewables

3%

Power15%

Mining

23%

Telecoms1%

Other6%

Year toQ1 2011

Transport /Mining29%

Transport24%

Social &Defence

19%

Oil & Gas11%

Renewables6%

Power4%

Mining3%

Other4%

Year toQ1 2012


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6. Scenarios

Baseline

The global economy grows at a below-trend pace in 2012 but continues to improve.137

The European economy remains vulnerable in 2012.138

The US economy steadily improves in 2012.139

The Chinese economy moderates to a more sustainable growth rate in 2012 and

beyond.140

Commodity prices stabilise at relatively high levels.141

European banks and peripheral sovereigns present challenges that require long-term

solutions.142 Australias direct exposure is limited.143

Australian economic growth continues at close to trend.144

The AUD value weakens gradually and incrementally through 2013.145

Australias terms of trade ease modestly from relatively high levels.146

The Australian inflation rate stabilises in the target 2-3 per cent range through

2013.147

Interest rates for Australian borrowers hold steady.148

Australias industry sectors continue to undergo structural change.

149

Australias unemployment rate remains stable, despite underlying changes in the

labour market.150

Australias high levels of household debt continue to impact savings and spending

patterns.151

The Australian housing market stabilises but remains relatively soft. 152

137 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.138 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.139 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.140 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.141 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.142 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.143 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 91-98.144 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.145 Consensus Economics, Asia Pacific Consensus Forecasts, 12 March 2012.146 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 31.147 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.148 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.149 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.150

Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012; and IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 31.151 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 31.152 Reserve Bank of Australia, Statement by Glenn Stevens, Governor: Monetary Policy Decision, 3 April2012.


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Downside

A worsening of the Eurozone crisis impacts Australian banks by increasing the cost of

funding in global markets.153

Weaker external demand for Australias commodity exports reduces the short-term

economic outlook.154

High levels of household debt along with uncertainty about interest rates for variable-

rate mortgages further dampens Australias consumer spending.155 Over the long term, the Australian economy lacks the skilled labour it needs to sustain

trend economic growth.156

Increasing frequency of natural disasters becomes a concern for business

investors.157

Upside

Inflation remains well under control, giving the RBA considerable flexibility with

monetary policy.158

A boost in labour productivity offsets age-related turnover in the workforce and also

counters the high value of the AUD.159

Labour force participation gets a boost from creative government policies toencourage more workers and to reduce structural unemployment.160

Substantive education reforms pave the way for a higher skilled labour force over the

longer term.161

Greater market competition for infrastructure services raises economic growth

prospects.162

Ongoing tax reforms bring the corporate tax rate more in line with peers in advanced

countries, thus encouraging greater foreign investment across economic sectors.163

Ongoing tax reforms include tax incentives to boost household savings, adding a

degree of permanence to recent shifts in saving and spending patterns. 164

Ongoing tax reforms focus heavily on the financial sector, with aims to (1) reduce

bank funding costs; (2) phase out withholding taxes for foreign banks; and (3) simplify

cross-border transactions.165 As a result, Australia emerges as a more competitivefinancial hub for Asia.166

Interest rates abroad surge, reducing Australias differential advantage. The AUD

loses value somewhat faster than expected, allowing other sectors of the Australian

economy to rebalance and become more competitive.167

A looming capacity shortage in the power sectors of some states is met by creative

investments in renewable energy.168

Australia strengthens and deepens its integration with emerging Asia.169

153 Reserve Bank of Australia, 2012 Q1 Bulletin, 15 March 2012, pp. 91-98.154 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 2.155 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 5 and 51-52.156 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 36.157 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 10.158 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp.13 and 51.159 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 52.160 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 52.161 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 52.162 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 52.163 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, pp. 9 and 54.164 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 43.165 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 43.166 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 43.167 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 13.168 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 49.169 IHS Global Insight, Australia: Country Intelligence Report, 22 March 2012, p. 51.


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RREEF Infra Australian Infra Mkt Review Q1 2012

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