Goldman Sachs

The Modern Relevance of Emerging Markets

Jim ONeill Managing Director & Head of Global Economic Research April 2007

Summary
1. World being transformed by globalisation. 2. BRICs should be regarded as big enough to be globally relevant. 3. Big emerging market countries that are willing and prepared to change have great prospects.

Updated Estimates for the Equity Risk Premium*

Real Expected Real Expected Real GDP Earnings Dividend Real Bond Implied Expected Nominal Growth Growth + Yield = Return - Yield = ERP Inflation Return

US Japan UK Europe ex UK World Optimistic World

*Calculated as of 11 April 2007.

3.0 1.5 2.5 2.3 2.5 4.0

3.0 1.5 2.5 2.3 2.5 4.0

1.9 1.1 3.0 2.3 2.1 2.1

4.9 2.6 5.5 4.6 4.6 6.1

2.2 1.1 1.9 1.9 1.9 1.9

2.6 1.5 3.6 2.7 2.6 4.1

2.0 0.5 2.0 2.0 1.8 1.8

6.9 3.1 7.5 6.6 6.3 7.8

The Largest Economies in 2006

14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
ce ly ia us s R St at es pa n m an y U ni C te hi d na K in gd om da ra z Ita Fr an an a Ja G er C B In d ia il
2006 GDP US$ bn

ni te

The Largest Economies in 2050

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
ra zi l R us si a U ni Ja te pa d n K in gd om G er m an y Fr an ce C an ad a St at es hi n ia In d C B Ita ly a U ni te

2006 GDP US$ bn

BRICs & N11 Economic Snapshot

GDP (US$bn) 2001-06 Average GDP Growth Rate (%) Trade GDP Per Capita Urbanisation Population ( mn) openness (% (US$) (% Total)* GDP)* FDI (% GDP)* Current Account (% GDP) Inflation (% yoy)

Bangladesh Brazil China Egypt India Indonesia Iran Korea Mexico Nigeria Pakistan Philippines Russia Turkey Vietnam

63 1,064 2,682 101 909 350 245 887 851 121 129 117 982 390 55

5.7 2.3 9.8 4.2 7.2 4.8 5.7 4.5 2.3 5.6 5.3 5.0 6.2 4.6 7.6

427 5,085 2,041 1,281 696 1,510 3,768 18,484 7,915 919 778 1,314 6,908 5,551 655

155 187 1,314 72 1,110 222 71 49 107 150 155 86 142 73 84

25.0 84.2 40.5 42.3 28.7 47.9 68.1 80.8 76.0 48.3 34.8 62.6 73.3 67.3 26.7

36.7 22.7 63.4 56.8 29.3 51.2 51.5 68.5 57.4 71.9 35.5 90.7 44.2 51.8 132.2

1.1 1.7 3.2 6.4 0.8 1.9 0.0 0.9 2.3 3.4 2.0 1.2 1.9 2.7 3.9

-0.3 1.4 8.6 1.8 -2.4 2.4 10.0 0.7 -0.4 15.7 -3.9 3.1 10.3 -8.0 0.1

6.8 4.2 1.5 7.3 5.6 13.1 14.0 2.2 3.6 9.4 7.9 6.3 9.9 10.2 7.6

* 2005 data; ** Latest reported Source: IMF, World Bank, UN, GS

The N11 vs BRICs

Current (Latest available) Variable Share of Global Output, % Average Income, US$ Share of Global Trade, % Share of Trade in GDP, % Share of Global Energy Consumption, % FDI Inflows as % of World FDI Inflows as % of GDP Population, bn Urbanisation, % N-11 7.1 3,069 8.3 60.4 8.7 6.0 1.9 1.24 48.9 N-11 ex Korea 5.2 2,357 5.7 57.4 6.7 5.2 2.3 1.20 47.5 BRICs 12.5 2,359 10.4 46.8 25.6 11.9 2.3 2.78 40.5 BRIs 6.4 2,318 3.6 31.6 12.2 4.0 1.5 1.46 40.4 1995 BRICs 7.2 905 5.6 27.2 22.3 13.6 2.2 2.39 35.1

Source: IMF, EIA, UNCTAD, UN World Population Prospects Database, GS calculations

The N-11 & BRICs: Today vs 2050

China Brazil Russia India Korea Mexico Turkey Indonesia Iran Pakistan Nigeria Philippines Egypt Bangladesh Vietnam 2006 GDP (US$ bn) GDP per cap (US$) 2,682 2,041 1,064 5,657 982 6,909 909 817 887 18,161 851 7,918 390 5,545 350 1,508 245 3,768 129 778 121 919 117 1,312 101 1,281 63 427 55 655 2050 GDP (US$ bn) GDP per cap (US$) 70,710 49,650 11,366 49,759 8,580 78,576 37,668 20,836 4,083 90,294 9,340 63,149 3,943 45,595 7,010 22,395 2,663 32,676 2,085 7,066 4,640 13,014 3,010 20,388 2,602 20,500 1,466 5,235 3,607 33,472

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

GDP 2006 US$ bn

Un i

te d

The World in 2050

The Largest Economies in 2050

Ch in St a at es In di a Br a M z il ex ic Ru o In ssi do a ne Un si ite Ja a d Ki pan ng G d om er m a Ni ny ge Fr ria an c Ko e re Tu a r Vi key et na Ca m Ph na ilip da pi ne s Ita ly Ira Eg n Pa yp Ba kis t ng ta n la de sh

Actual Growth vs Assumptions

Actual 2000-2006 Brazil Russia India China 3.0 6.8 7.0 9.6 Assumed 2000-2015 3.5 5.4 6.7 8.5 2000-2050 3.6 3.4 6.1 5.3

10

Overtaking the G7
Overtaking the G7: When BRICs' and N-11's GDP Would Exceed G7
China
France Germany Japan US Canada Italy France UK Germany Japan

India Brazil
Canada Italy France UK Germany Japan

Canada

Italy

France

Mexico
Canada Italy France UK Germany

UK

Germany

Japan

Japan

Russia
Canada Italy France UK Germany Japan

Indonesia
Canada Italy France

Nigeria Korea
Canada Italy

Canada

Turkey Vietnam
Italy Canada

Italy

Philippines

05

08

11

14

17

20

23

26

29

32

35

38

41

44

47

50

Note: Cars indicate w hen BRICs and N-11 US$GDP exceeds US$GDP in the G7. The N-11 countries not included in the chart do not overtake any of the G7 countries over the projection horizon. Source: GS

11

BRICs & the N-11: Rising Shares of Global Output

% World

14 12 10 8 6 4 2

BRICs and N-11: Rising Shares of Global Output

BRICs N-11 N-11 ex Korea BRICs ex China
GDP in current US$ share of world GDP

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: IMF, GS calculations

12

A Large High-Income Pool Could Emerge in the BRICs

New People With Incomes Above $15,000 in the BRICs by 2025 Japan 2025 Total Population Germany 2025 Total Population UK 2025 Total Population France 2025 Total Population Italy 2025 Total Population

50

100

150

200

250

Number, millions

13

10,000

15,000

20,000

25,000

ni te d

5,000

GDP 2006 US$ bn

The World in 2025

St a C te s hi J a na p G In an er d U m i ni te R an a d u y Ki s s ng i a Fr do an m Br ce az Ita il M l ex y Ko ic o C r In an ea do ad n a Tu esi rk a e Vi Iray et n n Ph Nig am i li er p Pa pin i a k e Ba is ta s n g Eg n la y p de t sh

10,000 0

World in 2025 (incl wealth)

2006 US$

20,000

30,000

40,000

50,000

60,000

70,000

Income per Capita in 2025

U U ni t ni e te d d St Ki at n e C gdo s an m Fr ad an a c G J ap e er a m n an Ita y Ko l y R rea u M s si ex a Br ic o a C z il Tu hi n rk a e Vi Ir y In etn an Phdon am i li es pp i a i Egn es yp I t N ndi Ba Pa ig er a n g k is i a la tan de sh

14

Ensuring the Conditions for Growth

Sound, stable macroeconomic policies Strong, stable political institutions Openness High and broad levels of education Miracle conditions are not needed.

0
Index

or ea C hi n M a ex i Vi co et na m R us s ia il y ra z B Tu rk e In d Ir a n

Overall Index

BRICs & N11. 2006 Growth Environment Score (GES)

Mean (Developing Countries)

ia Eg Ph ili ypt pp In ine s d B one an s gl i a ad e P a sh ki st a N n ig er ia

16

Ranking the N-11 Today and in 2025

2006 GDP Korea Mexico Turkey Indonesia Iran Pakistan Nigeria Philippines Egypt Bangladesh Vietnam US$ bn 887 851 390 350 245 129 121 117 101 63 55 Rank 1 2 3 4 5 6 7 8 9 10 11 2025 GDP US$ bn 1,861 2,303 965 1,033 716 359 445 400 318 210 458 Rank 2 1 4 3 5 9 7 8 10 11 6 2006 Income per capita US$ 18,161 7,918 5,545 1,508 3,768 778 919 1,312 1,281 427 655 Rank 1 2 3 5 4 9 8 6 7 11 10 2025 Income per capita US$ 36,813 17,685 11,743 3,711 9,328 1,568 2,161 3,372 3,080 1,027 4,583 Rank 1 2 3 6 4 10 9 7 8 11 5 Average Growth GES Rank 1 2 5 8 4 10 11 7 6 9 3

2001-06 2007-2025 Index 4.5 3.4 6.9 2.3 4.3 4.6 4.6 4.1 4.0 4.8 4.7 3.4 5.7 4.2 4.4 5.3 5.0 3.1 5.6 5.8 2.7 5.0 5.1 3.6 4.2 5.0 3.7 5.7 5.1 3.2 7.6 7.2 4.5

17

Oil Price Forecasts

90
$/bbl

80 70 60

GS Forecast

Forwards

50 40 30 20
Source: GS Commodities Research

10 02 03 04 05 06 07 08

18

P/E Ratios
Forward PE 2007E Japan United States China India Europe Russia Brazil 17.5x 14.2x 14.0x 13.6x 12.5x 10.5x 8.7x

19

US: Broad BoP

2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 98 99 00 01 02 03 04 05 06 07 08
*Forecast for 2007 % of GDP 4-quarter Mov. Avg.

BBoP

Current Account

Trends in US Balance of Payments (% of GDP)

Current Account Net FDI Last 3 Years -6.0 -0.2 -6.2 -0.2 0.8 -0.6 2.4 0.6 3.0 -3.2 5 Years 10 Years Better/Worse -5.4 -4.2 Worse -0.4 0.1 Mixed/Worse -5.8 -0.2 0.9 -0.3 2.1 0.5 3.0 2.8 -4.1 -0.1 0.6 -0.3 1.8 0.4 2.4 -1.6 Worse Worse Mixed/Better Worse Better Better Mixed/Better Worse

Narrow Basic Balance Net Equity Net US Treasuries US Overseas Bonds Foreign US Corporates Foreign US Agencies Net Portfolio Broad Basic Balance

BRICs BBoP vs Current Account

8
% GDP

7 6 5 4 3 2 1 0 -1 97 98

Current Account BBoP

99

00

01

02

03

04

05

China BBoP
12
% GDP

10 8 6 4 2 0 95 96 97 98

Current Account BBoP

99

00

01

02

03

04

05

World Top 10 FX Reserves

1,200 1,000 800 600 400 200 0
US$ bn

* As of February; for China as of January. Source: IMF

Si ng ia ap or H on e g K on g B ra zi M l al ay si a M ex ic o

hi na Ja pa n R us si a K or ea

In d

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