Growth in emerging markets is slowing. This is concerning. Senior Economist Marcus Wright considers two questions. What are the problems in emerging market economies? Why does that matter to us?

1. Marcus Wright
RBS Economics
November 2015
Emerging Markets:
Gimme Shelter

2. What’s this about?
- Growth in emerging markets is slowing. This is
concerning. We consider two key questions:
1. What are the problems in emerging
market economies?
2. Why does that matter to us?

3. Emerging markets matter more than ever
0
10
20
30
40
50
60
70
1994 1996 1998 2000 2002 2004 2006 2008 2011 2013 2015
Share of the Global Economy (%)
Developed Economies
Emerging Economies
Emerging Asia
Source: IMF
0%
10%
20%
30%
40%
50%
60%
70%
80%
1994 1996 1998 2000 2002 2004 2006 2008 2011 2013 2015
Contributionto Global GDP Growth
Developed Economies
Emerging Economies
Emerging Asia
Source: IMF
• Emerging markets have
accounted for 50%-60%
of global output & 70% of
global economic growth
each year since the crisis.
• They are much more
important to the global
economy compared with
the late 1990s when the
last EM crisis struck.
• In other words, an EM
slowdown can do a lot of
damage to the outlook for
global growth.

4. Pass the credit parcel
• While credit growth
stagnated in developed
economies following the
crisis, it rebounded
quickly in emerging
markets.
• But now slower EM
credit growth and
Eurozone deleveraging
has left global credit
growth in the doldrums.
-5%
0%
5%
10%
15%
20%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Outstanding PrivateSectorCredittoDeveloped
andMajor Emerging Economies
(%Y/YChange)
Source: BIS
-10%
0%
10%
20%
30%
40%
2000 2002 2004 2006 2008 2010 2012 2014
Outstanding Private Sector Credit
(% Y/Y Change)
Developed Economies Emerging Economies
Source: BIS

5. Quelle surprise – China is the main culprit
0
5
10
15
20
25
China - Credit to Private
Non-Financial Sector
(Oustanding, $ Trillion)
Source: BIS
0%
20%
40%
60%
80%
100%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Outstanding Credit to
China'sprivate sector...
As% of the US
As% of global
Source: BIS
• Credit to China’s non-
financial private sector has
risen a staggering $15trn
since the crisis – close to
the size of the US economy.
• China’s credit pile has
risen from a mere 20% of the
level of the US to 80% in just
six years.
• When credit rises that
much so quickly, much of it
inevitably gets wasted.

6. A reckoning awaits China’s banking sector
-
5
10
15
20
25
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Liabilities of Chinese Corporates
(Trillions of RMB)
Transportation
Manufacturing
Mining, utilities
Nonfin services
Construction and real estate
Source: IMF
• It’s the corporate sector
that has driven China’s debt
increase.
• Hong Kong’s build-up has
been even greater, relative
to the size of its economy.
• China’s banking sector is
likely to be sitting on non-
performing loans in excess
of official figures.
• China can afford the clean-
up but the debt overhang
and banking sector repair
will drag on growth.
-40
-20
0
20
40
60
80
100
Corporate Sector Debt
(% of GDP Change since Crisis)
Source: BISNon-financial Corp Sector

7. That debt is becoming more of a burden
• Emerging economies have
gorged on debt.
Consequently, since the
crisis, they are devoting
more of their incomes to
repaying it.
• Developed countries by
contrast are devoting less.
0% 10% 20% 30% 40%
UK
Rest of World
US
Japan
France
Australia
Germany
Netherlands
Canada
Spain
Italy
Sweden
Banking Exposureto China
and HK by Country
(% of $1.5 trn global exposure)
Source: BIS
• Despite China’s relatively
closed financial system,
global banking exposure to
China is $1.5trn.
-10
-5
0
5
10
Den
Spa
UK
Hun
Por
SA
US
Aus
Fin
Jap
Ger
Ita
Kor
Cze
Pol
Mex
Swe
Bel
India
Fra
Indon
Bra
Neth
Thai
Mal
Tur
Rus
HKSAR
China
DebtService Ratios
- Change since 2008, Private Non-FinSector
Source: BIS
Mainly
Developed
Economies
Mainly
Emerging
Economies

8. A big score…off-shore
500
1,500
2,500
3,500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Emerging and Developing Economies -
Debt Securities Outstanding
($ Bn)
AtHome
IncludingOffshore Borrowing
Source: BIS
China - Offshore Bonds by Industry
Real Estate
Finance
Oil and Gas
Utilityand Energy
Computersand
Electronics
Metal and Steel
Transportation
Source: IMF
• Offshore bond issuance
results in the classic
emerging market problem –
currency mismatch on the
balance sheet of EM firms.
• A move toward tighter US
monetary policy could
expose these vulnerabilities.
• Unsurprisingly, China is
again the major player with
real estate, finance and oil &
gas the main sectors.

9. The problems are more than debt alone
• Having previously grown
much faster than the pace of
global GDP growth, world
trade growth is now slower.
• Emerging markets hoped
for a strong rebound in
export growth following the
crisis but it never
materialised. It’s not just
due to the Eurozone.
• China’s slowdown is
transmitting across other
emerging markets as
reduced demand for their
exports.-20%
-10%
0%
10%
20%
30%
40%
2003 2005 2007 2009 2011 2013 2015
Export Volume (% Y/Y Change)
Emerging Economies
Emerging Asia
Source: CPB
Pre-crisis average: 10%
Post-crisis
average: 4%
-15%
-5%
5%
15%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Global GDP Growth v
Global Trade Growth
(% Y/Y Change)
Global Trade Growth
Global GDP Growth

10. Here comes the deflationary wind
• Emerging markets pushed
investment in productive
capacity, housing &
infrastructure in response to
the global slowdown.
• The global economy
benefitted because developed
economies pulled back.
70
80
90
100
110
120
2007 2008 2009 2010 2011 2012 2013 2014 2015
Investment as Share of GDP
(2007 = 100)
Developed Economies Euro Area
Emerging Economies
Source: IMF
-4 6 16 26 36
China
S. Korea
Philippines
Taiwan
Singapore
Malaysia
Months in Producer Price Deflation
(Overpast 36 months)
Source: Macrobond
• Too much investment. Too
much capacity. Lots of price
deflation.
• That deflation gets exported
to the developed world.

11. Falling productivity, but room for reform
0.0
1.0
2.0
3.0
4.0
1970s 1980s 1990s Pre-Crisis 2011-2012 2013-2014
EM Labour Productivity per Person
Employed(% Y/Y Change)
Source: Conference Board
• Emerging market
productivity growth has
slowed substantially.
• It’s another sign that
investment in many emerging
markets, particularly China,
has been targeted at the
wrong areas. Capital has
been misallocated.
• And emerging markets,
generally speaking, are
relatively difficult places to
do business.
• They remain a long way
behind the great emerging
market success story –
S.Korea.
40
50
60
70
80
90
Ease of Doing Business
(Distance toFrontier of Best Practice, 100=best)
Source: World Bank

12. Less favourable demographics have arrived
30
40
50
60
70
80
90
1950 1960 1970 1980 1990 2000 2010 2020 2030
Population Dependency Ratio
China India
S.Korea
Source: UNRatio of population aged 0-14 and 65+ per 100 aged 15-64
Forecast
40
50
60
70
80
90
1950 1960 1970 1980 1990 2000 2010 2020 2030
Population Dependency
Ratio
SelectedEmerging
Economies
DevelopedEconomies
Ratio of population aged 0-14 and 65+ per 100 aged 15-64 Source: UN
Forecast
• China’s dependency ratio has
started to rise (more
dependents per working-age
person). The change to the
one-child policy may have
come too late in the day.
• South Korea’s is also
beginning to rise. But South
Korea is a much richer country.
• A falling dependency ratio
has thus far boosted growth.
Those days are over for many
emerging markets.
• India remains in the midst of
its ‘demographic dividend’.

13. Consequences…
• The issues facing emerging markets, are deep-rooted &
unlikely to disappear soon. Consequently their drag on
global growth, trade & inflation will likely persist.
• In response, the US Fed & the Bank of England may have to
keep interest rates lower for longer. The ECB and the Bank of
Japan will likely expand their Quantitative Easing (Buying for
longer).

14. …and yet more consequences
• All the while emerging markets will likely remain a source of
financial vulnerability. Periodic bouts of financial stress like
those seen in recent months should be considered the norm.
• China’s policy response to its debt problems will be a crucial
influence on the fortunes of the global economy in the
coming years. Either it cleans up its banks and rebalances
growth toward services and consumption (of which there is
so far little or no evidence) or it doesn’t & risks heading into
financial stress.

15. Follow us on Twitter
15
@RBS_Economics
https://twitter.com/rbs_economics

16. 16
Disclaimer
This material is published by The Royal Bank of Scotland plc (“RBS”), for information purposes only and
should not be regarded as providing any specific advice. Recipients should make their own independent
evaluation of this information and no action should be taken, solely relying on it. This material should not be
reproduced or disclosed without our consent. It is not intended for distribution in any jurisdiction in which this
would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by
RBS and RBS makes no representation or warranty (express or implied) of any kind, as regards the accuracy
or completeness of this information, nor does it accept any responsibility or liability for any loss or damage
arising in any way from any use made of or reliance placed on, this information. Unless otherwise stated, any
views, forecasts, or estimates are solely those of RBS’s RBS Economics Department, as of this date and are
subject to change without notice. The classification of this document is PUBLIC. The Royal Bank of Scotland
plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The
Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial
Conduct Authority and the Prudential Regulation Authority. © Copyright 2015 The Royal Bank of Scotland
Group plc. All rights reserved