Foundation for Fiscal Studies Ireland- Brave in a New World? Andrew - - PowerPoint PPT Presentation

Foundation for Fiscal Studies Ireland- Brave in a New World?

25 May 2011

Strategy

Andrew S. Nevin, PhD

Strictly Private and Confidential

Draft Section 1 – Market context

8,000 10,000 12,000

Bank assets vs. nominal GDP, 1980 - 2007

Bank assets - Europe Bank assets - World CAGR (1980 – 2007) 19.0% 17.9%

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 2

Source: Datastream, IMF Note: Bank asset indices are calculated based on total assets for listed banks only

2,000 4,000 6,000 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Index (1980 = 100) Bank assets - World Nominal GDP - World Nominal GDP - Europe 17.9% 6.3% 5.9%

Draft Section 1 – Market context

Sustained GDP growth in the west The past 30 years The future? Low GDP growth?

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 3

Growth of the western financial sector is significantly above that of the economy as a whole Emerging markets created

• pportunities for western economies

Western financial sector growth is equal to or less than GDP growth? Emerging markets begin to compete for resources and outperform western economies Discontinuity between the future and the past

Source: PwC analysis

Draft Section 2 – Key drivers of change

Rise of SAAAME

Long term drivers (5-20 years)

Demographic shift

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 5

Rise of SAAAME War for Resources

Source: PwC analysis Note: SAAAME = South America, Africa, Asia and the Middle East

Demographic shift Rise of state-directed capitalism

Rise of SAAAME

‘Business as usual’ Banking continues on its existing course ‘New world order’ Banks are attacked on multiple fronts

• South America, Africa, Asia and the Middle

Strategy

• The west remains the centre of decision

making and economic power in global banking

• London and New York remain by far the

largest global financial centres

• Western regulators and central banks,

alongside the IMF, continue to be recognised as the thought leaders in global financial services

• South America, Africa, Asia and the Middle

East become a largely self-sufficient and dominant economic, financial and trading bloc, confirming a shift in global economic power

• Western banks are locked out of the major

emerging growth markets and struggle to remain relevant in the new world order

• Emerging market banks can freely enter the

west and do so aggressively (both

• rganically and by acquisition)

?

Source: PwC analysis Note: SAAAME = South America, Africa, Asia and the Middle East

Draft

Question: What is the largest IPO of all time?

Section 2.1 – Rise of SAAAME

World's biggest IPO: Petrobras raises $70 billion

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 7

Petrobras raises $70 billion

• n Sao Paulo exchange

Source: Bloomberg

Draft Section 2.1 – Rise of SAAAME

100,000 120,000 140,000 160,000 s ($bn)

Forecasted trends in the value of domestic banking assets 2010-2050

E7

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 8

• 20,000

40,000 60,000 80,000 100,000 2010 2015 2020 2025 2030 2035 2040 2045 2050 Domestic banking assets ($ G7

Draft Section 2.1 – Rise of SAAAME

Value of trade (2005) Share of trade (2005) Value of trade (2009) Share of trade (2009) CAGR (2005 - 2009) Developed to developed $5,180bn 51% $5,500bn 46% 1.5%

Scale and growth of world trade to and from developing and emerging regions, 2005 - 2009

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 9

developed Emerging to developed $1,982bn 20% $2,302bn 19% 3.8% Developed to emerging $1,360bn 13% $1,789bn 15% 7.1% Emerging to emerging $1,577bn 16% $2,387bn 20% 10.9%

Source: WTO, PwC analysis Note: Developed countries include North America, Europe (includes 27 EU and Eastern European countries), Japan, Australia and New Zealand. Emerging countries include South and Central America, the CIS, Africa, the Middle East and Asia (excluding Japan, Australia and New Zealand)

Draft Section 2.1 – Rise of SAAAME

World trade flows, 2009 $627bn Europe $324bn $366bn $292bn

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 10

North America Asia Middle East Africa $96bn $115bn $95bn $128bn South and Central America

Source: WTO, PwC analysis Note: Map excludes trade flows from the CIS

Draft

• From 2009-50 the E7 will:
• Grow from $21trn to $138trn in 2050
• At a CAGR of 4.8%
• From 2009-50 the G7 will:
• Grow from $29trn to $69trn in 2050
• At a CAGR of 2.2%

Section 2.1 – Rise of SAAAME PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 11

Capital

Source: PwC analysis

Draft Section 2.1 – Rise of SAAAME PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 12

Source: PwC analysis

Growth in consumer markets

Draft Section 2.1 – Rise of SAAAME PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 13

Manufacturing

Source: PwC analysis

Draft Section 2.1 – Rise of SAAAME PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 14

Labour

Source: PwC analysis

Draft Section 2.1 – Rise of SAAAME PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 15

Natural resources

Source: PwC analysis

Draft Section 2.1 – Rise of SAAAME PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 16

Oil

Source: PwC analysis

Draft Section 2.1 – Rise of SAAAME

214 198 181 152 200 250

Top 10 banks worldwide by market capitalisation, 29 September 2010

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 17

Source: Datastream Note: Market capitalisation calculated as total US $ value of all categories of shares, including preference shares

132 131 129 114 104 94 50 100 150 Industrial and Commercial Bank of China China Construction Bank HSBC JP Morgan Chase and Co Bank of America Wells Fargo and Co Bank of China Citigroup Banco Santander Itau Unibanco $bn

Draft

30% 35% 40% 45% 50%

Section 2.1 – Rise of SAAAME

Industry survey – most likely scenarios Rise of SAAAME

PricewaterhouseCoopers

• 5%

10% 15% 20% 25% Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5

Foundation for Fiscal Studies • Ireland- Brave in a New World? 18

‘Business as usual’ Banking continues on its existing course ‘New world order’ Western banks are attacked

• n multiple fronts

Source: PwC analysis Note: Sample size = 477

Draft Section 2.1 – Rise of SAAAME

• There will be a continued and inexorable shift of power to SAAAME, both in terms of capital and
• influence. SAAAME is likely to become a self-sufficient trading bloc
• Increasingly, emerging market banks will compete in western markets

– It is relatively simple for emerging market banks to enter western markets – At present, these banks are cautious and may focus on other emerging markets first – However, as they gain scale, they are increasingly likely to seek returns from banking both

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 19

– However, as they gain scale, they are increasingly likely to seek returns from banking both ends of the ‘trade pipe’

• It will remain difficult for western banks to enter and expand in protectionist SAAAME markets,

although opportunities will continue to exist in African and South American markets

• Overall, for western banks, the market will become increasingly competitive and growth will

come primarily from taking share from others

Source: PwC analysis

Demographic change

‘Business as usual’ Banking continues on its existing course ‘New world order’ Banks are attacked on multiple fronts

• Major intergenerational conflict emerges in

aging societies, denting already slowing economic growth

Strategy

• Healthier and longer-living populations mean

western GDP continues to grow

• Western banks thrive as they develop new

products to support demand for financial services from ageing populations

• Growing and more affluent populations in

emerging markets present new opportunities for western banks to offer financial services and / or assist in managing their assets economic growth

• Younger people in the west do not trust

banks and use non-bank alternatives, further decreasing the market for banking

• Cross-border investment faces increasing

regulatory issues, essentially preventing young people in emerging economies from buying assets from retirees in developed countries, thus further depressing asset prices

• Many western banks need to shrink to

survive ?

Source: PwC analysis

Draft Section 2.2 – Demographic change

700 500 300 100 100 300 500 700 65+ 25-64 0-24 Age (years)

Western Europe, USA and Japan 2010: 847.3m

65+ 25-64 0-24 Age (years)

India, Indonesia, Nigeria, Brazil 2010: 1,769.4m

700 500 300 100 100 300 500 700 65+ 25-64 0-24 Age (years)

China 2010: 1,330.1m

PricewaterhouseCoopers

20

Foundation for Fiscal Studies • Ireland- Brave in a New World? 21

Source: US Census Bureau, PwC analysis

700 500 300 100 100 300 500 700 Population (millions) Male Female 700 500 300 100 100 300 500 700 65+ 25-64 0-24 Population (millions) Age (years)

Western Europe, USA and Japan 2050: 952.6m

Male Female 700 500 300 100 100 300 500 700 Population (millions) Male Female 700 500 300 100 100 300 500 700 65+ 25-64 0-24 Population (millions) Age (years)

India, Indonesia, Nigeria, Brazil 2050: 2,494.5m

Male Female 700 500 300 100 100 300 500 700 Population (millions) Male Female 700 500 300 100 100 300 500 700 65+ 25-64 0-24 Population (millions) Age (years)

China 2050: 1,303.7m

Male Female

Draft Section 2.2 – Demographic change

Low median age regions by 2050 High median age regions by 2050 Medium median age regions by 2050

50 60

Median age in 2010 and 2050 45 47 51

50 60

Median age in 2010 and 2050 40 40 41

40 50 60

Median age in 2010 and 2050

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 22

35 42 39

• 10

20 30 40 CIS Western Europe Eastern Europe Median age in 2010 Change in median age by 2050

28 37 29

• 10

20 30 40 Latin America North America Asia Median age in 2010 Change in median age by 2050

18 24 26

• 10

20 30 40 Sub Saharan Africa Middle East North Africa Median age in 2010 Change in median age by 2050

25 36 37

Source: US Census Bureau, PwC analysis

Draft Section 2.2 – Demographic change

• The size of the total addressable market may reduce in certain European countries with

declining and ageing populations (e.g. Germany). Caution needs to be taken to avoid over- investing in low growth or declining markets

• Demographic shifts will impact the mix of financial products consumed, given that consumers

require different products at different stages in their lives. Banks will need to ensure that their product offerings remain relevant to the changing customer base

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 23

product offerings remain relevant to the changing customer base

• Younger generations will interact in a different way, as demonstrated by the rapid growth of

social media, and will likely demand a new and distinct offering from their banks

• The mechanism for funding retirement will need to change given population ageing. It is likely

that assets will increasingly need to be divested to younger people in high growth markets in

• rder to fund retirement

Source: PwC analysis

War for resources

‘Business as usual’ Banking continues on its existing course ‘New world order’ Banks are attacked on multiple fronts

Strategy

• There will be limited, if any, disputes

(economic, political or military) over

• resources. Global supply will meet demand
• Banks will continue offering similar product

mixes and pursue the same investment strategies

• There will increasingly be disputes

(economic, political or military) over

• resources. Global supply will fail to meet

demand

• The requirement for investments to be

sustainable will become a key driver of the way banks allocate capital ?

Source: PwC analysis

Draft Section 2.3 – War for resources

1,000 500

Fiscal crisis Slowing Chinese economy Corruption Regulatory Asset price collapse Geopolitical conflict Extreme energy price volatility

Economic and geopolitical risks 2011

SD)

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 25

250 100 50

Extreme consumer price volatility economy Corruption Terrorism

Unlikely Likely Very likely

Regulatory failures

Likelihood over next 10 years

Resource and climate change risks 2009 2011

Climate change Flooding Air pollution Water security Biodiversity loss

Source: World Economic Forum Global Risks Report (2009 – 2011)

Expected impact (Billion USD

Draft

100.00 120.00 140.00 30 35 40 45 50 S$) millions of bpd of oil)

Trends in oil prices and total energy consumption

Section 2.3 – War for resources PricewaterhouseCoopers

0.00 20.00 40.00 60.00 80.00

• 5

10 15 20 25 30 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Brent crude oil (US$ Total Energy consumption ( in terms m Quarterly prices USA China India

Foundation for Fiscal Studies • Ireland- Brave in a New World? 26

Source: International Energy Agency (IEA), Public speeches of Jeff Rubin Expected energy consumption

Draft Section 2.3 – War for resources

Projected change in agricultural productivity by 2080 due to climate change*

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 27

Source: UNEP / GRID-Arendal Maps and Graphics Library *Projections incorporate the effect of carbon fertilisation

• 50%
• 15%

+15% +35% No data

Draft Section 2.3 – War for resources

Non-domestic land purchased by governments and private companies, as at December 2008

28. Mongolia: 270,000 ha

NOTE: Map shows significant investments by the 6 countries highlighted, but not all investments

Kazakhstan: 7,000 ha Russia: 80,400 ha

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 28

Source: GRAIN.org 28. 2 USA: 216,862 ha Mexico: 1,050 ha Argentina: 21,000 ha Brazil: 100,000 ha Cuba: 5,000 ha Cameroon: 10,000 ha Madagascar: 1,300,000 ha Mongolia: 270,000 ha Australia: 43,000 ha Philippines: 1,240,000 ha Egypt: 1,600 ha Sudan: 690,000 ha Sudan: 378,000 ha Sudan: 10,117 ha Algeria: 1,500 ha Philippines: 3,000 ha China: 100 ha

South Korea owns 2,306,000 ha China owns 2,090,796 ha Saudi Arabia owns 1,610,117 ha UAE owns 1,282,500 ha Japan owns 324,262 ha India owns 10,000 ha Total investments

Paraguay: 10,000 ha Uganda: 4,046 ha Tanzania: 300 ha Laos: 700,000 ha Indonesia: 1,600,000 ha Indonesia: 25,000 ha Pakistan: 900,000 ha New Zealand: 5,700 ha

Draft Section 2.3 – War for resources

• As global demand for natural resources continues to rise, supply will not be able to keep pace

– The growing scarcity of resources such as oil and rare earths is already apparent – Increasingly, the west will be faced with shortages of resources it currently takes for granted, such as water

• Climate change is likely to exacerbate the problem
• Disputes over resources (economic, political or military) are increasingly likely

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 29

• Disputes over resources (economic, political or military) are increasingly likely

– Governments and private companies have already made a series of unprecedented land grabs to secure food and other resources for the future. Further such moves may create international tensions

• Going forward, banks will need to invest in and finance resources and technologies that are
• sustainable. Stakeholder pressure will ensure that sustainability becomes a key driver in capital

allocation decisions

• Banks will need to adjust to a world in which certain assets, many of which are currently readily

available, become increasingly scarce and valuable

Source: PwC analysis

Rise of state-directed capitalism

‘Business as usual’ Banking continues on its existing course ‘New world order’ Banks are attacked on multiple fronts

Strategy

Source: PwC analysis

• Governments rapidly revert to laissez-faire

policies, both for banks and the real economy

• Banks do not face greater requirements to

demonstrate their social utility

• Governments continue to believe in

capitalism and a strong financial system; however, they exert increasing control over both banks and the real economy

• Banks increasingly need to demonstrate

that they are socially useful ?

Draft Section 2.4 – Rise of state-directed capitalism

The evolution of development economics, 1989 - 2010

Maintain tight fiscal policy Laissez-faire Washington consensus, c.1989 Seoul consensus, 2010 Policy measure Key Interventionist

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 31

Source: IMF, World Bank, PwC analysis

Reduce regulation where appropriate (including in capital markets) Privatise state-run entities Liberalise import restrictions Allow a free exchange rate

Draft Section 2.4 – Rise of state-directed capitalism

Countries which have imposed or tightened capital controls and date of introduction

Colombia

May 2007

Taiwan

November 2009

China / Hong Kong

May 2010

Indonesia

June 2010 PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 32

Source: Factiva, FT, IMF, PwC analysis

There is currently speculation that capital controls could also be introduced in Russia, the Ukraine, the Philippines and Chile Venezuela

May 2010

South Korea

July 2010

Turkey

September 2010

Brazil

October 2010

Thailand

October 2010

Draft Section 2.4 – Rise of state-directed capitalism

“In the interests of jobs for Saskatchewan families, in the interests of the quality of life that we prize that is funded by revenues to the government, in the interest of the place of our province and our country in the world, we must say no to this hostile takeover … the people of Saskatchewan deserve nothing less than a potash industry unequivocally managed, operated and marketed for the benefit of Canada and Saskatchewan.” Brad Wall, Saskatchewan Premier, October 2010 “Unocal is located in the United States and has approximately 1.75 billion barrels of oil. It would be foolish, to say the least, to allow a foreign government ... to own that much of such a strategic resource so vital to the U.S. Economy ...”

The government of Saskatchewan has urged the Canadian federal government to block BHP Billiton’s hostile bid for Potashcorp to protect the province’s best interests. The US government has both blocked M&A activity it perceives as harmful to America’s interests …

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 33

Source: BBC News, Various press reports

government ... to own that much of such a strategic resource so vital to the U.S. Economy ...” Byron Dorgan, US Senator, July 2005, introducing a bill to bar a merger between China National Offshore Oil Corporation (CNOOC) and Unocal “This deal is completely consistent with what the U.S. government has said they would like to see Chinese energy companies do, which is to provide capital into America to acquire minority interests and for American companies to use that capital to go out and develop American oil fields and to reduce oil imports.” Aubrey McClendon, CEO of Chesapeake Energy, October 2010, speaking after CNOOC’s successful, government approved purchase of a 33% stake in Chesapeake’s Eagle Ford shale project

… and approved M&A activity aligned to national interests and its industrial policy. Some business leaders in the UK have begun to call for similar government intervention.

“If as a country we are more accessible to foreign control than other countries are, we need to look at changing the philosophical stance on it rather than just the rule book – and that decision is a matter for the government”. Roger Carr, Former Chairman of Cadbury, October 2010, calling for the UK government to rethink its free-market stance on foreign takeovers of UK companies

Draft

6,137 5,000 6,000 7,000 Commodity funded

Section 2.4 – Rise of state-directed capitalism

SWF AUM, 1999 – 2012 Forecast

CAGR 1999 - 2009 CAGR 2009 – 2012F 19% 21%

PricewaterhouseCoopers

830 1,123 1,058 1,238 1,467 1,874 2,306 2,988 3,717 3,863 3,797 1,000 2,000 3,000 4,000 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2012 $bn Non-commodity funded

Foundation for Fiscal Studies • Ireland- Brave in a New World? 34

Source: IFSL, PwC analysis Note: Chart excludes assets held within other sovereign investment vehicles (e.g. pension reserve funds)

15% 15% Forecast

Draft Section 2.4 – Rise of state-directed capitalism

“People might not understand the minutiae of over-leveraging or short-selling, but they know that the roots of our current crisis lie in irresponsibility … We need to make sure the financial sector serves the long-term interests of the economy, not just its own short-term interests … The financial sector must understand that it cannot behave like this crisis never happened.” David Cameron, July 2009 “Banks need to show some restraint and show some discipline and show some sense of responsibility.” President Obama, January 2009

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 35

Source: Various press reports

“If there is to be a recovery, it will be a trade recovery and banks will have a crucial role in funding that trade through their commercial and investment banking arms. That’s their “socially useful” purpose.” Telegraph, November 2009 “The financial crisis resulted in a massive socialisation of losses after decades of private gain … The public have already paid for the failure of the banks twice, first by bailing them out, and then by suffering a programme of drastic cuts to public services to appease the financial markets. We need urgent reform of the banking system to ensure that bailed-out banks are not allowed to repeat their failures. The government should ensure that banks use public money in a way that is socially useful …” New Economics Foundation, October 2010 “Banks are meant to serve a socially useful function by channelling savings into productive businesses but they lost sight of that. Radical restructuring is needed to separate their genuine utility functions from their gambling activities.” Observer, June 2010

Draft Section 2.4 – Rise of state-directed capitalism

• All businesses will need to adjust to governments exerting greater control over both their

activities and the real economy – In developed markets, the crisis necessitated a rapid increase in state intervention and, in many people’s eyes, has legitimised ongoing intervention – In emerging markets, governments have exerted significant control for many years and

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 36

– In emerging markets, governments have exerted significant control for many years and this is likely to persist

• All businesses will increasingly need to demonstrate that they are socially useful
• All businesses will also need to assess the impact of government intervention on the real

economy when considering how to allocate investments across asset classes and industry sectors

Source: PwC analysis

Draft

0.90 0.95 1.00

Human Development Index, 1980-2010

Norway Australia New Zealand United States 0.94 0.94 0.91 0.90 0.90 0.89 0.89 0.88 0.85 0.70 0.66 0.6 0.7 0.8 0.9 1.0

Human development index score, 2010

Section 3 – Conclusion PricewaterhouseCoopers

0.70 0.75 0.80 0.85 0.90 1980 1990 2000 2005 2006 2007 2008 2009 2010 HDI Value Ireland Canada Japan United Kingdom 0.52 0.0 0.1 0.2 0.3 0.4 0.5 0.6 HDI Value

Foundation for Fiscal Studies • Ireland- Brave in a New World? 38

Draft Section 3 – Conclusion

The four long term trends The challenge to Ireland

Rise of SAAAME

Ireland is the entry point to the EU for US firms, can it perform this role for SAAAME countries?

PricewaterhouseCoopers Foundation for Fiscal Studies • Ireland- Brave in a New World? 39

Source: PwC analysis

Rise of state-directed capitalism War for resources Demographic change

Ireland needs to renew its national strategy, it has previously done well with a strategy based around FDI, pharmaceuticals, IT and agriculture Ireland is well placed in terms of water and agriculture resources but lacks energy resources Can Ireland overcome the demographic challenges it faces?