Korea
Balance of Payments Outlook
March 26, 2009

By Sharon Lam | Hong Kong

Summary and Conclusions

KRW has shown some signs of stabilizing recently. We had forecast USD/KRW at 1,500 in 1Q09 (see Korea Economics: Has to Survive on its Own, January 22, 2009), and said that the KRW should start to appreciate in 2Q09 due to expected improvements in the balance of payments (BoP). The recent KRW appreciation came slightly earlier than expected in the last two weeks, mostly because of USD weakness. So, is KRW appreciation due only to USD weakness or does the BoP story remain intact?

In this report, we attempt to discuss the breakdown of Korea’s BoP in detail. We conclude that we are confident that Korea can achieve a decent-sized current account surplus this year of 2-3% of GDP, but risks remain in the financial account due to the country’s external debt positions.  Yet, compared to last year when both the current and financial accounts were in deficit, the situation this year has improved and therefore KRW appreciation is justified, in our view.  However, we think that a too-sharp appreciation is difficult in the near term until Korea meaningfully rebuilds its foreign reserves. The lingering concerns on debt and shipbuilders’ FX hedging positions are not to be overlooked. Although our year-end USD/KRW forecast is 1,250, we believe that the appreciation path could be volatile, with the full-year average likely in the 1,300s, which is not offering too much appreciation from today’s level. We would turn more bullish on KRW if the above concerns fade, but more bearish if oil prices rise without strong demand support.

Balance of Payments in the Last 12 Months

Both the current account (C/A) and the financial account (F/A) posted deficits in 2008 at -US$6.4 billion and -US$50.9 billion, respectively, causing Korea’s foreign reserves to drop US$60.6 billion last year.

Last year’s C/A deficit was solely because of a significant decline in the goods trade balance to US$6 billion from US$28.2 billion in 2007. On the other hand, the services balance contributed positively to C/A last year since KRW depreciation led to fewer Koreans traveling abroad and more foreign tourists visiting Korea, thereby narrowing the services account deficit to US$16.7 billion from US$19.8 billion in 2007. The income balance also expanded to US$5.1 billion in 2008 from US$1 billion in 2007 as Koreans earned more investment income (including interest and dividends) from abroad than what they paid to foreign investors in Korea.

Last year’s F/A deficit was due to outflows in all sorts of investment. The biggest net outflow was seen in portfolio investment at -US$16.4 billion as foreign investors net sold both Korean equities and bonds last year. The second-largest outflow was recorded in the financial derivatives account at -US$14.3 billion due to unwinding in FX derivative products in 4Q. Direct investment and ‘other’ investment accounts both posted deficits of US$10.6 billion last year due to some sizable overseas business acquisitions and external debt repayments.

Looking at the quarterly performance, Korea’s C/A actually improved significantly in 4Q08 due to the drop in import prices and further narrowing in the travel deficit. However, the F/A deteriorated dramatically in 4Q as the rollover rate of its external debt was slashed amid the global credit crunch, causing debt repayment to jump.

Going into the first two months of 2009 with January data released, the C/A swung back into a deficit at -US$1.4 billion in January on the back of the export plunge but also due to the Chinese New Year effect causing less output but more imports. The F/A, on the other hand, improved to a surplus of US$4.7 billion, mainly due to foreign investors’ net buying of Korean bonds. Although February BoP data have not been released yet, we believe that the C/A will be in surplus as the trade balance posted a large surplus last month because of the decline in imports. The February F/A appeared more fragile, however, since foreign investors net sold the KOSPI again while more external debt was due last month.

Current Account Outlook

We have noted that Korea’s current account would be volatile at the start of this year due to seasonality and the slower adjustment in imports relative to exports at the beginning of a recession. However, a more persistent current account surplus should start in 2Q09, which will be an important factor to stabilize the currency, in our view. We forecast the 2009 current account surplus at US$18 billion (2.6% of GDP), reversing last year’s deficit of US$6.4 billion. Here, we attempt to discuss the outlook for the current account by looking at its breakdown in detail.

Trade Balance

For 2009, we forecast export growth (in USD terms) to be -20% and import growth -26%, which will result in a trade surplus of US$30 billion compared to US$6 billion in 2008.  With the 20% drop in export growth, we look for export receipts to fall by US$87 billion this year. Below we explain how easily the import bill can drop by more than this amount, leading to an expanding trade surplus.

The effect of commodity prices: The sharp decline in the goods trade balance last year was due to historically high commodity prices since Korea is a commodity importer. Crude oil and other industrial raw materials accounted for 60% of Korea’s total imports in 2008. Korea’s crude oil imports (which accounted for 20% of total imports) were US$86 billion last year (+42%), and imports of other industrial raw materials totaled US$183 billion (+29%). The rise in the oil import bill was almost purely a price effect since volume growth last year was little changed, and it explained 30% of the increase in total imports last year while the rise in imports of other industrial raw materials explained 50%. We expect the opposite to happen this year with the drop in commodity prices. Korea imports about 850 million barrels of crude oil annually, so we estimate that every US$10 decrease in the international crude oil prices will save US$8.5 billion from Korea’s import bill. Our global team forecasts crude oil to drop by an average of 65% in 2009, which will translate into roughly a US$60/bbl decline in the Dubai oil price (a benchmark for Korea’s crude oil imports). Assuming the same volume this year, then the price decrease alone would reduce Korea’s oil import bill this year by US$51 billion. If other commodity prices dropped by an average of 30%, then we estimate that Korea’s imports of industrial raw materials would also decline by US$55 billion this year. This is why we argued that the drop in commodity prices alone will slash the import bill (US$51 billion + US$55 billion) by enough to more than cover the expected US$87 billion drop in export receipts. Note that if we take account of a 15% decline in import volume, then the trade surplus will expand further. On the other hand, risks can be easily understood too, i.e., if commodity prices ease more mildly but export growth remains weak, then Korea can run the risk of a trade deficit unless import volume falls significantly.

The effect of weak domestic demand: Although the source of the recession is external this time, the domestic economy is also going through tough times due to deteriorating income and wealth. We forecast Korea’s domestic demand growth to be -6.1% this year, the first negative rate since the IMF crisis in 1997-98 and down from a five-year average of +6%. This contraction in domestic demand will certainly drag down import growth. Some might wonder if the government’s stimulus measures could lead to more demand for imports. We doubt it. Korea’s consumption is less dependent on imports since imports of consumer goods accounted for only about 6% of Korea’s total consumption in the past five years. Instead, Korea is more dependent on imports for its capex use since capital goods have accounted for about 46% of total capex in Korea in the last five years.  Yet, public sector capex is less than 20% of the total capex in Korea and, therefore, even though the government’s stimulus measures are unprecedentedly massive this time, it might be able to limit the economic contraction but it cannot turn around the economy, in our view. The same argument goes that the stimulus package alone will not be enough to pull up import demand sufficiently to cause a trade deficit in Korea this year.

The adjustment in imports for domestic use often seems to lag domestic demand growth, possibly because of contract terms for imports. This is why we had expected that Korea’s trade balance would remain fragile at the beginning of a recession, but the surplus should continue to expand as imports will shrink in line with both exports and domestic use. 

Services Balance

The services balance in Korea’s current account has been in deficit since 1999, mainly because Koreans have become active travelers to overseas countries while inbound tourism was lackluster. However, the travel account recorded its first surplus since 2000 in the last four months, not only because Koreans cut their overseas travel, but also because of an influx in inbound tourists to take advantage of the currency depreciation in Korea. In particular, Korea has been attracting tourists from Japan since the KRW has depreciated 85% against JPY in the last 14 months. Latest data showed that the number of tourists from Japan surged 52%Y in December 2008, and anecdotal evidence is that this trend has continued so far into 2009. 

Other than travel, another reason for Korea’s services deficit in the past years was its increasing use of overseas business services due to production relocation. However, we expect a smaller deficit this year in this regard as Korea’s overseas production is slowing on shrinking global demand, and those trading-related business services should drop as trade stagnates.

Before October 2008, the monthly service account deficit averaged at least US$1.5 billion, which could add up to an almost US$20 billion deficit annually in a normal year. However, the service account deficit has averaged only US$0.7 billion since October 2008 due to the reasons mentioned above, and if we extrapolate this to the full year, then it could save Korea almost US$10 billion of deficit this year. 

Income Balance

The income account consists of employee compensation and investment income. The flow of employee compensation in and out of Korea is rather insignificant, so the income balance is driven mainly by income generated from direct investment and portfolio investment – of which portfolio investment accounts for a much larger portion – which captures interest and dividend income but not the returns. Korea had a particularly strong income account surplus last year at US$5.1 billion (compared to US$1 billion in 2007 and US$0.5 billion in 2006), indicating that Koreans were earning more income on their overseas investment than foreign investors were earning in Korea. Beginning in 2H08, however, Korea’s overseas portfolio investment started to drop significantly, not only by value but also because Koreans sold their positions. By the end of 2008, Korea’s overseas portfolio investment position had declined to US$75.4 billion from US$158.6 billion at the start of the year. Yet, the same was true for foreign investment in Korea, which dropped to US$251.7 billion at end-2008 compared to US$397 billion at the start of the year. It is difficult to say whether Korea’s income balance will be in surplus or deficit this year, but either way, we believe that it will be insignificant compared to the trade and services balances.

The commonly known significance of Korea’s income balance is its seasonal impact. Korean companies usually pay dividends in March/April, and so there is often a large outflow of dividend income in those two months. This year, we estimate that dividend payments to foreign investors will total roughly US$2.7 billion, based on our strategy team’s dividend yield forecast of 2.3% on 2008 market cap and foreign ownership of 28.5%. This will be much smaller compared to an estimated US$6.2 billion in dividend payments to foreign investors last year. The dividend payments have caused Korea’s current account to be in deficit in March in the last three years, but the likelihood of such a deficit in March this year appears to be much lower.

Financial Account Outlook

Forecasts for the financial account outlook are very unreliable, in our view, because the forecasts are almost based on a pure guess of portfolio investment net flows, especially under the current investment environment. As a result, we do not forecast the financial account balance, but we would still like to offer a discussion on the latest trends and risks for the financial account in the section below. 

Direct Investment

Korea started to see a net FDI outflow in 2006, turning around the net FDI inflow in 2003-05 and 1998-2001. The gap between inward-outward FDI was exceptionally large in 2007 and 2008. Outward FDI amounted to US$15.6 billion in 2007 and US$12.8 billion in 2008, while inward FDI was just US$1.8 billion and US$2.2 billion during the same periods. It is a structural phenomenon that Korea’s manufacturing base is losing competitiveness to a cheaper China while Koreans themselves begin ambitious production relocation as well as overseas M&A deals. While we remain pessimistic on Korea’s inward FDI, we believe that the outflow should also decrease in 2009 and 2010, as the global recession should discourage and limit Korean corporates’ ability to acquire overseas assets. Therefore, we expect the direct investment account to be in a much smaller deficit compared to US$10.6 billion last year, and we do not rule out the possibility that it could be in surplus if Korean companies really discipline themselves on overseas direct investment this year.

Portfolio Investment

Korea’s portfolio investment deficit totaled US$16.4 billion in 2008. Foreign investors net sold US$46.6 billion of Korean equities (US$41.2 billion in equities and US$5.4 billion in bonds). On the other hand, Koreans themselves sold their overseas investments, which then became an inflow to the financial account at a total of US$30.2 billion last year. This should help to refute some arguments that the Koreans would sell their own assets to buy foreign assets when the KRW was weak. As mentioned earlier, it is difficult to predict portfolio investment flows, and we see both potential positives and risks. Factors that may attract more portfolio investment this year include an already low foreign ownership in the KOSPI, Korean exporters gaining market share, the government’s aggressive stimulus measures and further rate cuts. Risks to portfolio investment outflow, however, can come from continual global deleveraging, uncertainties regarding Korea’s financial system, Korea being included in the developed market index and a sharp increase in bond supply.

Financial Derivatives

Investment flows on financial derivatives were never a significant part of Korea’s BoP until 2H08, when it recorded a deficit of US$12.5 billion, which was even bigger than that on portfolio investment net outflows. Apparently, this was due to an abrupt unwinding of FX derivatives positions, which led us to believe that the deficit this year should be much smaller since most of the positions have been unwound already.

Other Investment (Including External Loans)

The ‘other investment’ account within the BoP captures the loan flows, trade credits and currency deposits, and posted a deficit of US$10.6 billon in 2008, reversing a surplus of over US$40 billion in the previous two years. Other investment saw a large net outflow in 4Q08 as Koreans could not roll over some of their external debt and therefore posted a short-term loan repayment which totaled US$46.3 billion in that quarter. 

The situation on external liabilities has improved since Koreans paid off some of the debt; yet, we should not be completely relaxed about the situation. External liabilities with one-year maturity totaled US$194 billion at end-4Q08 compared to US$233 billion at end-3Q08 and US$204 billion at end-2007. Of these US$194 billion external liabilities due, around 26% (i.e., US$50 billion) is related to shipbuilders’ hedging and cash advances that should be met with future ship order payments. Taking out other non-obligatory liabilities, the obligatory external debt that Korea needs to pay within 2009 is around US$140 billion. 

We do not have data on the schedule of foreign banks’ external debt due, but the BoK earlier announced that roughly 40% of Korean banks’ external debt that matures this year is due in 1Q09. Since the debt accumulation by domestic and foreign banks has been on a similar trend, we safely assume that most of the foreign banks’ external debt is also due in 1Q09. The success rate on debt rollover is also crucial. During the worst of the credit crunch in 4Q08, the rollover rate was roughly 30-40%, yet the BoK commented that the year-to-date 2009 rollover rate has been over 80%. Applying the debt maturity schedule and assuming that the rollover rate does not deteriorate sharply from here, the potential monthly capital outflow due to external debt repayments should be much smaller for the rest of this year after 1Q09.

Appreciating, but still some way for KRW to achieve fair value: The US$140 billion of external debt due this year is not a negligible amount. There is also risk that the approximate US$50 billion in shipbuilders’ hedging positions due this year can be affected by order cancellations. After all, Korea cannot continuously roll over its external debt, and the only remedy to strengthen its financial position is to pay off those debts one day, which will still represent a capital outflow from the BoP in the future. These lingering concerns and risks could continue to cause vulnerability to the KRW, so be prepared that KRW movement could remain bumpy. In addition, until Korea sees sustained strong current account surpluses to rebuild its foreign reserves and to have enough external assets to cover all its external liabilities, we think it will be difficult for the KRW to trade close to its fair value – i.e., around 1,100 against USD (based on our 3Q08 model) – anytime soon. Do not forget that policymakers may also want to keep the KRW competitive when global demand remains so fragile. As a result, although we expect the KRW to continue to appreciate toward year-end at 1,250, we believe that volatility will remain high and expect a full-year average in the 1,300 range.

Important Disclosure Information at the end of this Forum

Japan
Why the Yen Should Strengthen
March 26, 2009

By Robert Alan Feldman, Ph.D. | Tokyo

Introduction:  Trade Balance Collapse Will Likely Reverse

The drop of the Japanese trade surplus has been breathtaking. Japan has run a seasonally adjusted trade deficit since July 2008, a string of deficits not seen for nearly 30 years. Moreover, this decline of the trade surplus has occurred against the background of falling oil prices.

The collapse of global demand and consequent collapse of exports are widely seen as the key source of Japan’s trade balance drop. Indeed, seasonally adjusted exports were running at over JPY7 trillion per month through most of 2007 to mid-2008, but recently have dropped to only about JPY4 trillion. Thus, it is understandable to attribute the drop of the trade surplus to exports, and thus to believe that the yen will be weak until the global economy recovers. However, the full story is more complicated, and has a very different implication for the yen exchange rate.

Mystery of the Excess Imports

There has been a strong correlation between Japanese exports and imports, starting from the mid-1990s. (We use non-oil imports, in order to see through the impact of oil price fluctuations.) Japan’s non-oil trade surplus has been large and stable for many, many years. Only in the last few months has this relationship wholly disappeared. Why? (This disappearance occurs regardless of which measures of exports and imports are used. Indeed, the historically high level of imports is even higher if SNA measures of exports and imports are used.)

There are several potential answers. The first is the exchange rate itself. The sharp drop of the non-oil trade surplus has more or less coincided with the sharp appreciation of the yen. However, the evidence does not support this argument. There have been sharp moves of exchange rates in the past, but the non-oil trade surplus persisted. The current move of the real exchange rate has indeed been sharper than earlier moves; however, it seems hard to argue that the current move has been sharp enough to eliminate the non-oil trade surplus.

The second potential answer is a structural change in trade. Today, trade with China looms far larger than in the past. Thus, recent disturbances could have changed the response of the non-oil trade balance to global demand and to exchange rates. However, this argument is inconsistent with the history of trade flows. True, the correlation of exports and non-oil imports may have risen with the expansion of Japan-China trade. But such correlation is hardly new. Japanese firms have expanded around the world since the 1980s, building factories to serve both foreign and domestic markets. To assert that the change of trade structure caused a sudden collapse of the non-oil trade balance precisely from April 2008 seems implausible.

The third potential answer is leads and lags. After all, the essence of the correlation between exports and imports is intra-industry trade. For example, high-grade parts are made in Japan, shipped abroad for assembly, and then returned to Japan for final sale. Necessarily, the exports from Japan must lead the imports back into Japan. It is possible that exports from early and mid-2008 continued to flow back into Japan since mid-2008 in the form of pre-contracted finished goods, keeping imports relatively high. If this explanation is true, imports into Japan should collapse in mid-2009, corresponding to the collapse of exports from late 2008. This explanation is plausible, but needs calibration.

Calibrating Excess Imports

In order to calibrate the excess imports, a simple model of imports is needed. We have modeled nominal non-oil imports as a function of nominal exports (to capture the intra-industry trade effect and the level of economic activity) and the real effective exchange rate (with a 12-month lag). The sample period for the regression was January 2001 to April 2008. Using the parameters from the regression and actual values for exports and the exchange rate from May 2008 to February 2009, we then calculated the forecast value for imports during the latter period. The forecast values for imports (‘fit imports’) are sharply below the actual values. The gap between actual and forecast is the measure of ‘excess imports’. Between May-September, excess imports were about JPY0.4 trillion per month. Between October-February, excess imports were about JPY1.0 trillion per month. By February 2009, the cumulated ‘excess import’ value hit JPY6.8 trillion.

Another approach to calibrating excess imports simply compares the April 2008 trade balance (seasonally adjusted) of +JPY0.73 trillion with the February 2009 figure of -JPY0.04 trillion. Between those two dates, exports dropped by JPY3.10 trillion. Partly offsetting this export drop, oil imports shrank by JPY0.87 trillion, and non-oil imports shrank by JPY1.45 trillion. Net, these movements left a trade deficit of JPY0.0.04 trillion. The problem is that the non-oil import shrinkage was too small. Had previous relationships with exports and the exchange rate held, the shrinkage of non-oil imports should have been JPY2.37 trillion, leaving a trade surplus of JPY0.87 trillion – not so different from the April figure. The difference between the actual shrinkage of non-oil imports (JPY1.45 trillion) and the warranted shrinkage (JPY2.37 trillion) is a measure of excess imports (i.e., the amount the imports should have shrunk but did not).

Crucial Question for the Yen: Will Excess Imports Be Reversed?

The next question is the hardest: will the excess imports of the last nine months be reversed by very low imports for an extended period? This question is crucial to the path of the yen exchange rate. If the excess imports are reversed, then the trade balance will return to normal levels, and an argument for a weaker yen will disappear. If excess imports persist, then Japanese trade surpluses will be permanently lower, and investors will adjust expectations for the yen accordingly.

In our view, traditional relationships between exports and imports are likely to return. Granted, the shocks to the world economy have been wrenching. However, these shocks are precisely what disturb the usual course of business. As the world economy stabilizes, the older relationships should largely return. For example, as financing of exports returns to normal with the fading of credit disturbances, then exports should revive. Moreover, the lags after the credit disturbances of mid-2008-present should crush imports in coming months.

This argument depends crucially on leads and lags in trade patterns: it presumes that imports in the mid-2008 to present period were not impacted severely by the credit crunch, and that the impact on imports is yet to come. Should this presumption prove incorrect, imports would stay high, and the return to a positive trade surplus for Japan would depend on export recovery alone.

Road to 80, Road to 110: A Supply-Demand Approach

The supply of dollars comes from Japan’s net exports, which are dependent on the exchange rate and global demand. The weaker the yen (at given levels of global and domestic demand), the higher are net exports; hence, the supply curve is upward-sloping. The demand curve for dollars comes from net capital outflows (and intervention). The stronger the yen (at given levels of interest rate differentials), the cheaper are foreign assets; hence, the demand curve is downward-sloping. The intersection of the two curves determines the exchange rate.

In April 2008, the yen rested at JPY103/USD. With the collapse of the global economy, however, any exchange rate brought fewer net exports and hence fewer dollars; the supply curve for dollars shifted inward. At the same time, the collapse of interest rate differentials and increase of credit worries shifted the demand curve for dollars inward. The net result was a stronger yen, with the January 2009 exchange rate at JPY90/USD. Since January, the supply curve for dollars has shifted further inward as net exports drop, but the demand curve for dollars has shifted outward, as investors suffer from increased jitters about the Japanese economy and send money abroad. These moves brought the exchange rate to JPY98/USD.

Looking forward, we expect the equilibrium to shift to JPY80/USD. Net capital outflows will likely stay largely where they are now, leaving the dollar demand curve stable. However, excess imports are likely to fall, and so the supply curve for dollars will shift back toward its original position. The new equilibrium, around autumn 2009, would come at about JPY80/USD.

We present the argument of the yen-bears. In the view of these investors, the collapse of the world economy is likely to reduce net exports, and hence shift the supply of dollars inward. On the demand side, worries about the Japanese economy and policy process may trigger capital flight, not only by foreign but also by domestic investors. Hence, the demand curve for dollars would shift outward. The net result of these two shifts would be a much-weakened yen, e.g., JPY110/USD in the autumn.

Important Disclosure Information at the end of this Forum

Disclosure Statement

The information and opinions in Morgan Stanley research were prepared or are disseminated by Morgan Stanley & Co. Incorporated and/or Morgan Stanley C.T.V.M. S.A. and/or Morgan Stanley & Co. International plc and/or Morgan Stanley Japan Securities Co., Ltd. and/or Morgan Stanley Asia Limited and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H) and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services licence No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited and their affiliates (collectively, "Morgan Stanley"). As used in this disclosure section, Morgan Stanley includes RMB Morgan Stanley (Proprietary) Limited, Morgan Stanley & Co International plc and its affiliates.

Global Research Conflict Management Policy

Morgan Stanley Research observes our conflict management policy, available at www.morganstanley.com/institutional/research/conflictpolicies.

Important Disclosures

Morgan Stanley Research does not provide individually tailored investment advice. It has been prepared without regard to the circumstances and objectives of those who receive it. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages them to seek a financial adviser's advice. The appropriateness of an investment or strategy will depend on an investor's circumstances and objectives. Morgan Stanley Research is not an offer to buy or sell any security or to participate in any trading strategy. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized.

With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel is based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we do not represent that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a company. Facts and views in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel.

To our readers in Taiwan: Morgan Stanley Research is distributed by Morgan Stanley Taiwan Limited; it may not be distributed to or quoted or used by the public media without the express written consent of Morgan Stanley. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong; if you have any queries concerning it, contact our Hong Kong sales representatives.

Morgan Stanley Research is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Canada by Morgan Stanley Canada Limited, which has approved of and takes responsibility for its contents in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin);in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, supervised by the Spanish Securities Markets Commission(CNMV), which states that it is written and distributed in accordance with rules of conduct for financial research under Spanish regulations; in the US by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research it has prepared, and approves solely for purposes of section 21 of the Financial Services and Markets Act 2000, research prepared by any affiliates. Private UK investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. In Australia, Morgan Stanley Research and any access to it is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited.

Trademarks and service marks in Morgan Stanley Research are their owners' property. Third-party data providers make no warranties or representations of the accuracy, completeness, or timeliness of their data and shall not have liability for any damages relating to such data. The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley bases projections, opinions, forecasts and trading strategies regarding the MSCI Country Index Series solely on public information. MSCI has not reviewed, approved or endorsed these projections, opinions, forecasts and trading strategies. Morgan Stanley has no influence on or control over MSCI's index compilation decisions. Morgan Stanley Research or portions of it may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request.

The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client.

The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA.

As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations.