Global and Singapore economic outlook, 2014 A pinch better …

1. Global and Singapore economic outlook, 2014A pinch better … Irvin Seah Senior Vice President DBS Currency & Economic Research January 2014 Data sources: Data for all charts and tables are US-EIA, CEIC and Bloomberg. Estimates are by DBS Group Research.

2. Global outlook

3. 2013: markets rewarded economies forsimply avoiding disaster • US: 1.6% growth, 28% return • EZ: -0.5% growth, 12% return • JP: 1.8% growth, 45% return • Asia: 6.1% growth, 5% return

4. 2014: markets will demand genuine growth,the only place we see that is in Asia • Conclude: Asia will outperform in 2014 Asia growth = weighted average of GDP growth of China, Hong Kong, Taiwan, Korea, Singapore, Indonesia, Malaysia, Indonesia, Thailand, Philippines

5. Asia 2014: Europe is the biggest plus!Sideways X to EU will add 0.5% to Asia GDP growth in 2014

6. Asia 2014: the US continues to muddle alongLittle help from the US…

7. Asia: will continue to drive itselfAsia ‘adds’ a Germany every 4 years

8. Asia 2014: China steady, near 8%Focus remains on long-run structural change, reform

9. US risks: consumptionConsumption growth finally picking up after 3 years?

10. US: labour marketstill weak despite falling unemployment rate

11. US risks: investmentzero capex growth for 18 months

12. US risks: debtdeleveraging takes time…

13. US risks: housing!Mortgage applications falling hard and fast

14. 2014 risks: housing warrantsspecial mention • QE3: Fed is buying $45bn worth of houses every month • That’s 5x the value of all new homes sold every month • What happens when the Fed stops buying? • Mortgage applications drop • Sales/prices drop • Construction drops • It’s not ‘speculation’. It’s what the textbooks predict • If housing drops, tapering stops!

15. Would markets like a Fed U-turn? • No! • Fed is stuck between a rock and a hard place. • Can’t live with QE, can’t live without it • A Fed U-turn is the biggest market risk for 2014 • Markets would dub it QE4

16. Risks 2014: EuropeSlow growth continues

17. EU risks: unemployment keeps climbing

18. EU risks: US vs EZ rates

19. Risks 2014: Asia • China: structural change is tough • Long-run: restructuring is harder than it seems • China is 30x bigger today than it was in 1978 • Short-run: consumption can’t take over for investment • And the quick switch mechanism is disappearing • Fed tapering? Probably not a risk anymore • The idea that Asia saw a lot of inflows from QE is wrong in the first place

20. China’s long-term focusFinancial sector reform is getting most attention at the moment

21. 85% of QE has stayed inside the Fed; it hasn’t gone into the economy

22. Fed tapering: Asia hasn’t seen any inflow for two full years!

23. Most of Asia’s inflows have been long-run flows • Capital has come to Asia for 2 reasons: long-run and short-run • Most of the capital inflow has been long-run inflow • Since 2001 dotcom crash: • US$2.4 trn gross inflow to Asia-10 • US$ 800bn gross outflow ($500bn in 2008; $300bn since Sept11) • Net inflow of $1.6 trn • Three steps forward, one step back • For every dollar of inflow, 66 cents has stayed for the long haul • Pretty good signal-to-noise ratio

24. The biggest structural changeunderway in the global economy today

25. 2014 growth: a pinch better all around

26. Singapore economic outlook

27. NODX share shifting towards Asia/China

28. Recent NODX improvement driven by China

29. Asia driving services growth – e.g. tourism

30. Mfg: External environment improving Indicators are showing gradual improvement

31. Mfg: Picking up

32. Services: Key engine

33. Services: Growth to persist

34. Slightly better in 2014 • GDP growth for 2013 is expected to register 4.0%

35. Inflationary pressure rising

36. Higher inflation in 2014 • Inflation to register 3.0% in 2013

37. A tight SGD NEER policy to curb inflation Source: DBS Research 37

38. Singapore residential property market

39. Residential • Household debt and mortgage debt as a percentage of GDP has risen to 77% and 45% respectively

40. Income growth kept pace with credit growth Income growth in Singapore had largely kept apace with credit expansion with mortgage loan growth averaging 6% since 2000 vs 5% annual income expansion

41. Looking ahead…. • We reckon there could be a surplus of 27,000-42,000 homes • This would push vacancies up from the present 5.6% to 8-9% by 2017 • Historically, rental rates and yields weaken when vacancies rises above 7%

42. ….tipping point in demand squeeze • Population per housing stock reached a high of 4.4 in 2012 from 3.76 in 2004. This ratio could retrace back to 3.7 by 2017 • Historically, property prices closely mirrors this trend

43. … watch interest rates

44. Residential overview • No boom and bust asset bubble in the works • Oversupply and cooling measures such as the TDSR will curb demand and result in private home price inflexion • Private home vacancies could rise to 8-9% over the next 3 years • Expect up to a 30% decline in primary home transactions this year • Private homes prices to retrace by 5% a year over the next 3 years

45. Summary: 2014 • Global outlook is improving and Asia will continue to outperform • Risks: • US: housing is the big one; Fed U-turn possible • EU17: unemployment and interest rates go higher, someone wants out of the euro • Asia: China’s restructuring proves harder than thought • Singapore will benefit from stronger Asia growth • GDP growth likely to register 4.0% in 2014… back to medium term potential growth rate • Inflation will be higher, at 3.0% in 2014 • Overall, 2014 will be a pinch better…. • ……… Happy New Year!

46. Thank you

47. GDP & inflation forecasts 47

48. Interest rate and FX forecasts 48

49. Disclaimer