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J A N U A R Y 2 0 0 5 G L O B A L E C O N O M I C A N D C U R R E N C Y P E R S P E C T I V E 2 0 0 5 KARIM PAKRAVAN, VICE PRESIDENT S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L

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JANUARY2005

GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

KARIM PAKRAVAN, VICE PRESIDENT

STRICTLYPRIVATEANDCONFIDENTIAL


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[For any pitchbook or presentation including advisory, equity or debt security or loan product or combinations thereof. NOT for use in fairness/valuation or Commercial Bank presentations.]

This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party.This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan.Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan.

The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change.JPMorgan’s opinions and estimates constitute JPMorgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only.In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us.In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity.JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction.Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.

Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by JPMorgan.

JPMorgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation.JPMorgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.

JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P.Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A.JPMorgan deal team members may be employees of any of the foregoing entities.

This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.

GLOBALECONOMICANDCURRENCYPERSPECTIVE2005


Global outlook l.jpg
GLOBAL OUTLOOK equity or debt security or loan product or combinations thereof.

GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

1


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2005 GLOBAL ECONOMIC OUTLOOK equity or debt security or loan product or combinations thereof.

  • Cyclical Peak :Global output expanded last year at 3.8%, its fastest pace since the 1980s

  • Back to Trend Growth: As we enter 2005, the world economy is growing at a strong, albeit unspectacular pace:

    • Healing of global corporate sector

    • Supportive financial conditions

  • Economic Divergence: after several quarters of synchronous growth, significant growth divergence:

    • G3: US/Japan at trend, eurozone below trend

    • Asian economies slow down and converge

    • Latin America/Emerging Europe: momentum for economic acceleration

  • Monetary Divergence:

    • US Fed shift to neutral, with Fed rates rising by 200 bp over 2005

    • Other major markets: Real ZIRP

  • Oil Prices Let-up

  • Downside Risks: Nevertheless, global economic performance faces significant downside risks:

    • Currency market disequilibria-Perfect Storm?

    • Unsettled oil markets/ significant geo-political risks

  • GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    2


    Global growth g 3 l.jpg
    GLOBAL GROWTH: G-3 equity or debt security or loan product or combinations thereof.

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    3


    Global growth emerging markets l.jpg
    GLOBAL GROWTH-EMERGING MARKETS…. equity or debt security or loan product or combinations thereof.

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    5


    Durable improvements l.jpg
    …DURABLE IMPROVEMENTS equity or debt security or loan product or combinations thereof.

    • Emerging markets marked a third year of double digit returns in 2004

    • The days of easy money are numbered:

      • Fed tightening cycle

      • Self-sustaining growth in the US and major emerging markets.

      • However, durable improvements in both economic fundamentals and investor perceptions means that emerging markets are less dependent on global liquidity conditions:

        • EM assets as a distinct class

        • Broadening of investor basis

    • Event risks are subdued:

      • Very strong external position

      • Flexible exchange rates

    EMBIG

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    6


    Improved risk perceptions reduce the risk l.jpg

    Spread Change in EMBI (bp) equity or debt security or loan product or combinations thereof. Date of Fed Hike Length of Cycle (months) Total Fed Funds Rate Hike (%) 1m 3m 12m

    February-94 12 3.00 171 335 753

    June-99 11 1.75 85 43 -264

    3.0

    6.0

    2.5

    2.0

    5.0

    1.5

    1.0

    4.0

    2.0

    0.5

    1.5

    0

    3.0

    1.0

    0.5

    Jan-04

    Feb-04

    Apr-04

    May-04

    Jul-04

    Aug-04

    0

    -0.5

    Jan-04

    Mar-04

    Apr-04

    Jun-04

    Aug-04

    Sep-04

    IMPROVED RISK PERCEPTIONS REDUCE THE RISK

    • The difference is that investors became risk averse ahead of the first interest rate hike at the same time that fundamentals have been on an uptrend since 2002

    Start of the Current Cycle

    Start of the Current Cycle

    Fed Funds

    EMBIG Spread (%)

    Fed Funds Policy Rate Level

    EMBIG Strip Spread (%)

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    Investors Market Position

    Fed Funds Policy Rate Level

    7


    China soft landing or no landing l.jpg
    CHINA- “SOFT LANDING” OR “NO LANDING” equity or debt security or loan product or combinations thereof.

    • The authorities are at an inflection point on macro policies

    • Official data for the first three quarters shows a rebound in the economy in the third quarter. Real GDP up 9.5%, inflation on an upward trend, exports and imports surging and investment showing little signs of slowing down

    • These trends are evidence that the “administrative” (i.e. central command) measures taken so far have done little to significantly curb economic activity– a “No Landing” scenario” rather than a “Soft “ one

    • This realization may have been behind the 27 bp interest rate increase by the People’s Bank of China at the end of October. Despite the rise, real interest rates remain close to zero

    • The PBOC has hinted that it is not satisfied with the pace of economic slowdown, and the October move may be the first sign of a monetary tightening—look out for inflation numbers to year-end

    • The recent interest rate increase is a sign that: a)the government is more comfortable with the pace of growth; and b) that it is starting to rely more on market-based macro instruments, mainly rates and FX policies

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    8


    The china question l.jpg
    THE CHINA QUESTION equity or debt security or loan product or combinations thereof.

    • CNY revaluation: no longer an “if”, but “when” and “how”

      • China moving towards market-oriented policy measures

      • Rebound of economic activity in the third quarter have dampened fears of a hard-landing

      • Concerns about persistent inflation-both cost-push and demand-pull

      • Political consensus

    • When: Most likely in 05-Q1

    • How:

      • Widening of the band

      • Move towards a basket of currencies

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    9


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    OIL PRICES: SHORT-TERM DEVELOPMENTS equity or debt security or loan product or combinations thereof.

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    10


    Oil price from iraq i to iraq ii usd bbl wti l.jpg
    OIL PRICE:FROM IRAQ-I TO IRAQ-II (USD/BBL-WTI) equity or debt security or loan product or combinations thereof.

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    11


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    WILL OIL MARKETS STABILIZE IN 2005? equity or debt security or loan product or combinations thereof.

    A

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    12


    Geopolitical risks flashpoints and oil prices l.jpg
    GEOPOLITICAL RISKS:FLASHPOINTS AND OIL PRICES equity or debt security or loan product or combinations thereof.

    • Existing and developing hot spots will continue to dominate the headlines in 2005

    • However, geopolitical risk is not synonymous to oil supply risk

    • Flashpoints:

      • Iraq-No evidence of stabilization

        • Best case: Czechoslovak scenario: controlled chaos/separation

        • Worst-case: Yugoslav scenario: civil war

        • Oil Supply Disruptions: Frequent/Large-scale

      • Iran:

        • Rising US-Iran tensions over Iran’s nuclear program

        • Very few options for the US/military action unlikely

        • High “Headline” Impact

      • Nigeria: Civil Strife

      • Russia: Yukos takeover

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    13


    Geopolitical risk outlook impact 2005 l.jpg
    GEOPOLITICAL RISK OUTLOOK/IMPACT 2005 equity or debt security or loan product or combinations thereof.

    Political risk

    High

    Low

    30 kbd

    S. Arabia

    50kbd

    Russia

    Oil Production/Export Risk

    Iran

    100kbd

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    Nigeria

    200kbd

    500kbd+

    Iraq

    14


    Currencies outlook l.jpg
    CURRENCIES OUTLOOK equity or debt security or loan product or combinations thereof.

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    15


    Currency model l.jpg
    CURRENCY MODEL equity or debt security or loan product or combinations thereof.

    Measure

    Forces

    Economic forces

    US economic surprises

    Relative growth expectations

    Economic forces

    Growth

    Return forces

    Carry-to-risk

    Forward carry

    Equity return-to-risk

    Return forces

    Money markets

    Bonds

    Equities

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    Technical forces

    Moving average rules

    IMMs

    Risk reversals

    Speculative positions

    Portfolio flows

    Technical forces

    Price/flow momentum

    Positions

    16


    2005 currency outlook fundamentals prevail dollar bear l.jpg
    2005 CURRENCY OUTLOOK: FUNDAMENTALS PREVAIL- DOLLAR BEAR… equity or debt security or loan product or combinations thereof.

    • Broad-based dollar decline gained momentum in Q4--$ ends 2004 at 8-year lows

    • Dollar-weakness should carry through H1-2005 until interest rate differentials rise

    • Markets see risks in second Bush term:

      • Middle East turmoil

      • Twin deficits

      • US shift-No talking the dollar up

  • Current account deficit matters

    • US ability to attract large capital inflows is increasingly questionable

    • On net, FDI negative

    • External deficit increasingly financed by official flows

    • Sustainable level for current account deficit (2-3% of GDP) implies a 4% of GDP correction in trade deficit

  • Curr. Acc (USD bn)

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    USD Index

    17


    2005 currency outlook east asia dollar system eads or the balance of financial terror l.jpg
    2005 CURRENCY OUTLOOK: EAST ASIA DOLLAR SYSTEM (EADS) OR “THE BALANCE OF FINANCIAL TERROR”

    • In the aftermath of the Asian financial crisis of 1997, the major Asian currencies (KRW, TWD, THB, and SGD) switched to a quasi-fixed exchange rate system informally known as EADS

    • The system has been maintained by an increasing degree of currency intervention and dollar asset accumulation by Asian central banks, a total of US$530 billion over 2003-04 alone for non-Japan Asia

    • This has made the US highly dependent on Asia for the financing of its widening current account deficit (46% of the total). It also has made Asian central banks highly vulnerable to dollar depreciation—hence what former Secretary of Treasury Larry Summers has called the “Balance of Financial Terror”

    • As we enter 2005, clear indications that we are moving towards greater Asian currency flexibility—is this the end of EADS?

      • Inflationary pressures

      • High cost of intervention

      • Reacceleration of growth

      • Chinese revaluation

    • A Chinese revaluation should result in greater regional flexibility and accelerate the dollar bear in the short-term

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    18


    Jp morgan currency forecast l.jpg
    JP MORGAN CURRENCY FORECAST “THE BALANCE OF FINANCIAL TERROR”

    GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    19


    On balance an optimistic bias l.jpg
    ON BALANCE, “THE BALANCE OF FINANCIAL TERROR”AN OPTIMISTIC BIAS

    • The macroeconomic risks are globally on the upside:

      • Faster European and Japanese recovery

      • Continued global liquidity

      • Faster Asian growth

  • What could go wrong?

    • A perfect Storm: Negative US dollar slide dynamics lead to a “perfect storm” of a sharply lower US dollar, a surge of US interest rates and a global down-cycle

    • Event risk in the Middle East

  • GLOBALECONOMICANDCURRENCYPERSPECTIVE2005

    20


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