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“O mar com fim será grego ou romano: O mar sem fim é português.” Fernando Pessoa Ludovic Subran Chief Economist and Director of Economic Research Lisbon – July 18, 2013

Outline

File name / department / author ÂŠ Copyright Euler Hermes 28/06/2013

Economic Outlook: Three blocks, Three Disconnects and Three Crossroads

Trade: What has Changed; What will Change

Portugal: Building back its future

A three-and-a-half speed - but delayed - recovery 2011

2012

2013

2014

World GDP grow th

2.9

2.5

2.4

3.1

Advanced economies Em erging economies

1.6 5.1

1.3 4.5

1.1 4.4

1.9 4.9

North Am erica United States Canada

1.9 1.8 2.6

2.2 2.2 1.7

1.8 1.8 1.9

2.7 2.7 2.3

Latin Am erica Brazil

4.2 2.7

2.6 0.9

3.0 2.7

3.5 3.3

Western Europe United Kingdom

1.5 1.0

-0.2 0.3

-0.2 0.8

1.0 1.4

Eurozone members Germany France Italy Spain

1.5 3.1 1.7 0.5 0.4

-0.5 0.9 0.0 -2.4 -1.4

-0.6 0.3 -0.3 -1.8 -1.6

0.8 1.5 0.4 0.3 0.3

Central and Eastern Europe Russia Turkey

4.7 4.3 8.8

2.1 3.4 2.2

2.4 3.2 4.0

3.1 3.8 4.0

Asia China Japan India

4.8 9.3 -0.5 6.3

4.9 7.8 2.0 5.0

4.8 7.7 1.6 6.0

5.1 7.9 1.4 7.0

Oceania Australia

2.3 2.4

3.3 3.6

2.4 2.7

2.8 3.1

Middle East Saudi Arabia United Arab Emirates

4.6 8.5 4.2

3.5 6.8 4.5

2.5 4.0 3.5

3.8 4.5 4.0

Africa Morocco South Africa File name / department / author

1.1 5.0 3.5

5.8 2.7 2.5

4.5 4.5 2.5

4.8 4.5 3.5

Leading indicators suggest a delayed recovery in the global cycle, expected at end-2013 Manufacturing PMI Index 65

Japan

Germany

France

United States

China

60 55 50 â&#x20AC;&#x2DC;No growthâ&#x20AC;&#x2122; threshold

45 40 35 30 25 05

Sources: IHS Global Insight, IMF, Bloomberg, Markit, Euler Hermes

Looking for Reconnection? The world at a crossroads for the next few years Yes

# Reconnect 1) Global recovery with eurozone out of recession

Yes

# Disconnect 1) Decoupling within and between regions

Wealth effects feed the real economy

2) Further divergence between real and financial spheres

Monetary policies channels are restored and aligned

3) Institutional blockade

Confidence is restored

2) USA, Japan to grow at moderate rates and emerging economies to grow at lower risk

Sound fiscal policy 2) Efficient specialization

Balanced competition (end of currency wars)

3) New economic forces and leaders emerge

Protectionism and political risk fade away

3) Inflationary risks are subdued

No Source: Euler Hermes

# Reconnect 2.0 1) Global growth to accelerate and sovereign risk to lower

# Re-crisis 1) Global demand collapses

# Depression relapse 1) Recession(s) and devaluation(s)

2) Financial crisis and deflationary pressures prevail

2) Industry and social fabrics at risk

3) Eurozone to enter a third year of recession, rise in social unrests

3) A world of volatilities

File name / department / author

Disconnect #1: Regions! The EU and the US are decoupling

Why Abenomics and Chinaâ&#x20AC;&#x2122;s new growth model do matter

Private consumption and investment (base 100 = Q1 2007)

Sources: IHS Global Insight, IMF, Euler Hermes Sources: IHS Global Insight, Euler Hermes File name / department / author

Disconnect #2: A (wild) monetary world Broken monetary transmission channels, despite rising global liquidity

Increasing supply and slow demand supports an ease in commodity prices

Central Banksâ&#x20AC;&#x2122; balance sheets, % of GDP 45%

2007

2010

Commodity prices, index 2005=100

2013 38%

40%

35%

Agriculture

Metals & Minerals

Food

220 210

30%

27%

26% 25%

Energy

230

200

21%

190

20% 15%

180

10%

170

160

FED

BOE

ECB

Sources: Bloomberg, IMF, Eurostat, Euler Hermes

BOJ

150 11

Sources: World Bank, Euler Hermes

File name / department / author

Disconnect #3: Institutions and societies Eurozone: Major challenges remain, in spite of important progress Important progress has been made…

The scarring effect Unemployment rate (% )

• Ease of deficit targets to avoid adverse impact on growth (Spain, Portugal, France, Netherlands) • Structural and institutional reforms: now let’s walk the talk!

• ECB actions (OMT, Forward Guidance) reduced the perceived convertibility and break up risks

… But major challenges remain • Stability of the new Italian ‘grand coalition’, German legislative elections in September

• Incomplete ‘Europolicy toolbox’: •Act I: Banking union: still lacking the separation of banks and sovereign.. •Act II: Progress on the fiscal union, but no common budget.

Sources: IHS Global Insight, Euler Hermes

•Act III: SME and pro-growth support announced but not enough firepower. File name / department / author

Crossroads #1: Austerity 1 – Growth 0 Fiscal austerity (change in structural balance) vs. nominal GDP growth, 2009-2012

US UK

3 yar change in nominal GDP 2009 to 2012 (OECD estimates)

Germany

Netherlands

EMU nominal growth has been massively hit by tight fiscal policy. Potential nominal growth ~ 3%

EMU fiscal multiplier ~ 1.7

Benchmarking: (i) UK “above the line“ because of GBP depreciation; and (ii) US “above the line“ because of FX flexibility and shale gas boon ?

Ireland

France

Italy

Spain

0 0

4 Portugal

-5 -10 Greece

-15 -20

3 year change in structural balance (OECD estimates)

Sources: Datastream, AGI, Euler Hermes 8 File name / department / author © Copyright Euler Hermes 28/06/2013

Crossroads #2: From monetary tsunami to credit drought, exit strategy needed Credit and asset prices disruptions due to significant capital inflows Credit to private sector, y/y, %

Sources: IHS Global Insight, IMF, Euler Hermes File name / department / author

Proxy for capital inflows (USDbn)

Sources: IHS Global Insight, IMF, Euler Hermes

Crossroads #3: Giving a second chance to the industrial fabric 2013: upside trend for 29 countries

2014: upside trend for 14 countries

Yearly changes of insolvencies 2014 vs 2013

Yearly changes of insolvencies 2013 vs 2012

Source : Euler Hermes File name / department / author

Source : Euler Hermes

Outline

File name / department / author ÂŠ Copyright Euler Hermes 28/06/2013

Economic Outlook: Three blocks, Three Disconnects and Three Crossroads

Trade: What has Changed; What will Change

Portugal: Building back its future

World trade has tripled in 10 years and will grow faster than growth: bright prospects for everyone? 2000-2012: between crises and shifts in power

Sources: IHS Global Insight, Euler Hermes forecasts

File name / department / author ÂŠ Copyright Euler Hermes 7/17/2013

Sources: IHS Global Insight, Euler Hermes forecasts

A story of constant evolution rather than a revolution Strategic openness, regional agreements, and cycles Trade liberalization between 2001 and 2011 and growth rate by region

Sources: IHS Global Insight, Euler Hermes forecasts

The biggest winners: emerging countries that signed trade agreements

File name / department / author © Copyright Euler Hermes 7/17/2013

Exchanges and growth in added value

Sources: IHS Global Insight, Euler Hermes forecasts

• Group 1: “Formerly globalized, highly competitive” • Group 2: “The champions of open markets” • Group 3: “Designated exporters 13

So… What and where is next? From the Silk Road to the Tablet Road to… The Next 18 countries and Top 7 industries Growth in imports between 2012-2015

Sources: World Bank, FMI, IHS Global Insight, Euler Hermes forecasts File name / department / author © Copyright Euler Hermes 7/17/2013

Breakdown by sector of import potentials in 2015 vs. 2012

Sources: IHS Global Insight, Euler Hermes 14

But supply chains have their own challenges (1) Automotive: Co-dependence and (over)relocations 80% of Mexico's automotive exports go to North America

Agrifood: The organization of production is based on logistics and safety norms Little change in the share of intraregional trade over the years

Source: United Nations Comtrad Sources: ITC, Euler Hermes File name / department / author ÂŠ Copyright Euler Hermes 7/17/2013

But supply chains have their own challenges (2)

Pharmaceuticals: the retail price of medicines limits their export

IT: Hyperdependence and hypercompetition Price of IT com ponents in Taiw an over 10 years 110 100 90

80 70

Increased production of generics in low-cost zones could boost international trade in medicines File name / department / author ÂŠ Copyright Euler Hermes 7/17/2013

janv-00 juil-00 janv-01 juil-01 janv-02 juil-02 janv-03 juil-03 janv-04 juil-04 janv-05 juil-05 janv-06 juil-06 janv-07 juil-07 janv-08 juil-08 janv-09 juil-09 janv-10 juil-10 janv-11 juil-11 janv-12 juil-12

A total breakdown of the semiconductors supply chain would cost one half of worldwide GDP through knock-on effect, or $32,000 billion 16

The longer the crisis, the faster the rise of political risk and protectionism Borders close and roles change: an effect made worse by the crisis

Strong growth of intra-zone trade along with the number of Free-Trade Agreements (FTAs)

1,350 protectionist measures have been implemented since 2008

Change in intra-regional trade between 2000 and 2012

Sources: Chelem, Euler Hermes File name / department / author ÂŠ Copyright Euler Hermes 7/17/2013

Source: Center for Economic and Policy Research 17

Outline

Economic Outlook: Three blocks, Three Disconnects and Three Crossroads

Trade: What has Changed; What will Change

Portugal: Building back its future

Portugal: A glass half empty?

Or a glass half full? Cost competitiveness improved Nominal unit labor costs, index 1999 = 100

Sources: OECD, Euler Hermes

External imbalances reduced Current account balances, % of GDP

Sources: IHS Global Insight, Euler Hermes forecasts

Financing of the economy have eased…somewhat… Credit contraction softened Credit to non-financial corporations, y/y, %

Sources: ECB, Euler Hermes

Credit conditions remain tight, notably for SMEs NFC lending rates by export content and firm’s size, %

Sources: Banco de Portugal, IMF, Euler Hermes

â&#x20AC;Ś and attractiveness is improvingâ&#x20AC;Ś but conditioned Business environment more favorable than in the other Southern European countries Ease of Doing Business ranking, 2013

Sources: Doing Business, Euler Hermes

Political stability is a must for a smooth partial return to the market in Fall 2013 10-yr sovereign bond yields, %

Sources: Bloomberg, Euler Hermes

Portugal is (and has always been) trade-friendly Positive trends in export market distribution and export structure by product Rank 1 2 3 4 5 6 7 8 9 10

Export distribution (% of total exports) Spain 26% France 12% Germany 11% African countries 7% United Kingdom 6% United States 4% Italy 4% Netherlands 3% Belgium/Luxembourg 3% Brazil 1%

Exposure to emerging markets is growing Export share by destination

6.3%

African countries excluding North Africa, Nigeria, Southafrican Union, Ghana and Gabon.

Export concentration by product - the lower the more diversified

5.9%

* BRIC: Brazil, Russia, India and China Dragons: Singapore, Hong-Kong and South Korea Tigers: Thailand, Malaysia, Indonesia, Vietnam and Philippines Jaguars: Mexico, Argentina, Chile, Colombia and Venezuela File name / department / author ÂŠ Copyright Euler Hermes 20/12/2012

Sources: Global Insight, Euler Hermes

Some ‘champions’ needs to be taken care of Important comparative advantages in wood/paper and textile Comparative advantages by sector for Portugal

Within TOP 10 Portugal export markets: Spain, France and Germany = the most important importers of Textile and Wood/Paper Exports by sector and by partner, % of total exports

* Excluding North Africa, Nigeria, Southafrican Union, Ghana and Gabon.

Once pioneers of globalization, always pioneers! Tight relationships between Portugal and African countries Transfers from Portugal by country

Portugal managed to maintain a quasi-stable global export market share over the past years Global export market share

Sources: Chelem, Euler Hermes

Sources: World Bank, Euler Hermes File name / department / author ÂŠ Copyright Euler Hermes 20/12/2012

Brazil will have to change its model and work with Europe • Brazil will grow less fast than ancitipated • Infrastructure and industrialization needs + rise of a consuming middle class + need to fight against inflation will curve protectionism • Huge opportunity for Europe (and Portugal) Infrastructure and transport Index

2012

3 2

Sources: World Bank, Euler Hermes

China

Japan

France

Spain

Germ…

Turkey

•Sensitive to global commodity demand and prices •Relatively low domestic savings •Inequalities of income distribution, but expanding middle class with rising expectations. •Infrastructure constrains •Fragmented political system

Brazil

•Diversified economic base •Large domestic market, expanding middle class, attractive for FDI •Durable political system with established effective democratic transfers of power •High level of FX reserves, moderate external debt

2007

India

Weaknesses

Russia

Strengths

Two out of four Portuguese-speaking countries are amongst the top growers in Africa

Sources: Euler Hermes Risk Dimensions as of June 2013

Strengths •High rates of economic growth (6.5% in 2013 & 8% in 2014) •Relative stability after a debilitating civil war •Economic reform agenda in favor of market competitive to boost income generation •Close links with South Africa

Weaknesses •Mozambique remains aid dependent •High incidence of public health issues, which puts a strain on government finances and incurs large social costs •The country is prone to periodic natural disasters

Sources: Euler Hermes Risk Dimensions as of June 2013

Strengths •High rates of economic growth (8% in 2013 & 6.5% in 2014) •Second biggest oil producer in SSA after Nigeria (2.1% of world output) •Significant natural resources through its mining (particularly diamonds) and agricultural sectors

Weaknesses •Perceptions of high corruption •High volatility to oil prices •Ongoing rrebuilding and reconstruction of economic and social communities that require important resources

Thank you for your attention Economic Research Department Euler Hermes Group 1 place des Saisons 92048 Paris La DĂŠfense Cedex France Phone +33 01 84 11 50 50 research@eulerhermes.com http://www.eulerhermes.com/economicresearch

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