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Latin America has changed both in politics and economics. It is now better prepared to weather global instability. Volatility has returned to Latam markets, but we expect differentiation going forward, based on fundamentals. Most countries have good buffers to withstand the Fed’s tapering. Latam GDP growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. Growth differences within the region will increase: the Pacific Alliance will grow close to 4% in 2014 and 2015, more than double the pace in Mercosur. Regional growth will remain relatively high for its income level, converging to its potential in most countries. We expect growth for the region to converge to nearly 4% in the medium-long run. However, it is crucial that reforms continue to be pushed through to avoid weakening drivers of long-term growth.
Citation preview
Alicia Garcia Herrero
Chief Economist Emerging Markets BBVA
United Nations University, Tokyo March 2014
What to Expect from Latin American Economies in the Current Global Context?
Latam Outlook / March 2014
Page 2
Main messages Latin America has changed both in politics and economics. It is now better prepared to weather global instability.
Volatility has returned to Latam markets, but we expect differentiation going forward, based on fundamentals. Most countries have good buffers to withstand the Fed’s tapering
Latam GDP growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. Growth differences within the region will increase: the Pacific Alliance will grow close to 4% in 2014 and 2015, more than double the pace in Mercosur.
Regional growth will remain relatively high for its income level, converging to its potential in most countries. We expect growth for the region to converge to nearly 4% in the medium-long run.
However, it is crucial that reforms continue to be pushed through to avoid weakening drivers of long-term growth
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Latam Outlook / March 2014
Page 3
1 Latam structural situation in a new world
2 Latam breaks with the past
3 Short-term perspectives
4 Strengths and vulnerabilities
Contents
Latam Outlook / March 2014
Page 4
Beyond China and India, some Latin American countries are world players EAGLEs (excluding China and India)* vs G6 Economies: current economic size and contribution to World economic growth 2012-2022** in billion USD adjusted by PPP ** Size of the bubble are proportional to 2012 level; below country labels Source: BBVA Research and IMF WEO
Incr
emen
tal G
DP
2012-2
022
Indonesia1219 Brazil
2363Russia2520
Korea1618
Japan4623
Turkey1126
Germany3207 Mexico
1768UK
2335 Taiwan905
G6 avg.2620
300
400
500
600
700
800
900
1000
1100
1200
1300
EAGLEs
Advanced
Note: EAGLEs members, according to January 2013 forecast.
Latam Outlook / March 2014
Page 5
Other smaller ones also globally relevant • As many as 15 economies in the NEST (contributing more to global GDP than smallest G6, Italy)
• Egypt relegated from the EAGLEs; Chile and Ukraine advanced from the group of other EM to NEST
Note: NEST members, according to January 2013 forecast.
Nest, G6 and Other Economies: current economic size and contribution to World economic growth 2012-2022 (%)* in billion USD adjusted by PPP ** Size of the bubble are proportional to 2012 level; below country labels Source: BBVA Research and IMF WEO
Incr
emen
tal G
DP
2012-2
022
G6 avg.2620
Egypt540
Nigeria453
Thail.655
Australia967
S.Arabia744
France2260
Canada1451
Colombia500
Vietnam322
Malaysia498
Poland806
Spain1415
Bang.307
S.Africa580
Philip.425
Iraq156
Peru328
Argentina745
Pakistan517
Iran1002
Chile322
G6 min.(Italy)1808
100
150
200
250
300
350
400
450
500
Nest
Advanced
Others
Latam Outlook / March 2014
Page 6
Pacific trio taken together also huge • Colombia, Peru and Chile belong to the Nest, with average expected growth of around 5% for the
next 10 years. • The three countries are characterized by their reform drive, prudent macroeconomic policies and
increasing integration with the global economy (including the Asia-Pacific region).
0
500
1000
1500
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3500
Bra
zil
Mex
ico
Arg
entina
Colo
mbia
Per
u
Chile
Ven
ezuel
a
2012-2022
2012
0100200300400500600700800900
100011001200
Indones
ia
Bra
zil
Russ
ia
Andea
n-3
Kore
a
Japan
Turk
ey
Ger
man
y
Mex
ico
UK
Tai
wan
G6
ave
rage
EAGLEs and Latam: increase of GDP in the next 10 years (PPP-adjusted bn USD) Source: BBVA Research and IMF (WEO)
Latam: current GDP size and increase in the next 10 years (PPP-adjusted bn USD) Source: BBVA Research and IMF (WEO)
Latam Outlook / March 2014
Page 7
New middle class to support domestic demand but trend much bigger in Asia than in LATAM
• Latam economies face intense competition from Asia, as the region where middle classes will increase the most.
Emerging Markets: middle classes ranges by area (2010 PPP-adjusted USD) Source: BBVA Research
0
200
400
600
800
1000
1200
1400
2010 2020 2010 2020 2010 2020 2010 2020 2010 2020
East Asia South Asia LatAm Em.Europe Africa
High MC Medium MC Low MC
East Asia = China, Indonesia, Korea, Malaysia, Philippines, Thailand, Vietnam South Asia = India, Bangladesh, Pakistan LatAm = Brazil, Mexico, Argentina, Chile, Colombia, Peru Em. Europe = Russia, Turkey, Poland, Ukraine Africa = Egypt, Nigeria, South Africa
Middle class: High (25,000-40,000 USD), Medium (15,000-25,000 USD) & Low (5,000-15,000 USD).
Latam Outlook / March 2014
Page 8
1 Latam in the EAGLEs
2 Latam breaks with the past
3 Short-term perspectives
4 Strengths and vulnerabilities
Contents
Latam Outlook / March 2014
Page 9
LATAM breaking with the past After decades of poor performance, LATAM growing solidly and closing the gap with developed economies. The 2008-09 crisis was the stress test: it was the first big shock without a divergence in terms of per capita GDP.
LatAm: GDP per capita relative to G7 (%) Source: IMF and BBVA Research
LatAm: GDP per capita, relative performance to G7 during recession periods Source: IMF and BBVA Research
20%
22%
24 %
26 %
28 %
30 %
32 %
34 %
36 %
38 %
198
0
198
2 19
84
19
86
19
88
19
90
19
92
199
4
199
6
199
8
200
0
200
2 20
04
20
06
20
08
20
10
2012
20
14
2016
85
90
95
100
105
110
- 2 - 1 0 1 2 3 4 Recession's average (1981, 1996, 2001) Last Recession, 2009
Years since the beginning of the recession
Latam Outlook / March 2014
Page 10
Why is LATAM breaking with the past? 1) Structural reforms: reforms that began in the 80s are transforming Latin America.
Macroeconomic reforms
• Fiscal consolidation with higher and better taxes
• Independent Central Banks
• Financial reform
• Opening of the Economy
Microeconomic reforms
• From labor protection to targeted transfers to the poor
• Liberalization of internal markets and privatizations
• Receptiveness of FDI
• Pension system reforms
Better Business Climate for investment and more equitable societies
Latam Outlook / March 2014
Page 11
Why is LATAM breaking with the past? 2) Economic stability: While taming inflation in the late 90s, the region made sustained progress in external and public solvency over the years.
0
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80's 90's 00's 10's (2010-12) 0
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80's 90's 00's 10's (2010-12) 0
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-16
-14
-12
-10
-8
-6
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-2
0
2
80's 90's 00's 10's (2010-12) -16
-14
-12
-10
-8
-6
-4
-2
0
2
Current Account Fiscal Balance
LatAm: Inflation (CPI, % yearly average) Source: BBVA Research
LatAm: External and Fiscal Balance. (As % of GDP) Source: BBVA Research
LatAm: External Debt (As % of GDP) Source: BBVA Research
Latam Outlook / March 2014
Page 12
Why is LATAM breaking with the past? 3) Institutional stability: Economic change has come along with institutional progress
0%
10%
20%
30%
40%
50%
60%
70%
75 80 90 00 10 0%
10%
20%
30%
40%
50%
60%
70%
LatAm: Political Freedom (Freedom House Index, % of free countries) Source: BBVA Research with Freedom House data
Latam Outlook / March 2014
Page 13
Why is LATAM breaking with the past? 4) Sound banking system: The banking systems have been able to speed up credit
supply, to cut NPL losses and to preserve high capital to assets levels.
Latam: credit as % of GDP Source: BBVA Research,
LatAm: NPL % Source: BBVA Research, GSFR. *Last available information
0
10
20
30
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50
60
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80
90
ARG BRA CHI COL MEX PER PAR URU VEN
2003 2012
0
5
10
15
20
25
ARG BRA CHI COL MEX PER PAR URU VEN
2003 2012
Latam Outlook / March 2014
Page 14
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Avg 2003-2010
2011 2012 2013* Avg* 2014-2018
Domestic Demand GDP
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Avg 2003-2010
2011 2012 2013* Avg* 2014-2018
Private consumption Investment GDP
5) Supportive domestic demand: LATAM growth rests on the strength of domestic demand. For the first time in decades, growth comes along with the reduction of poverty and inequality, which drives domestic demand up.
Latam: Domestic demand and GDP (%yoy) Source: BBVA Research. LatAM: ARG, BRA, CHI, COL, MEX, PAN, PAR, PER, URU, VEN
Latam: Private Consumption, Investment & GDP (%yoy) Source: BBVA Research. LatAM: ARG, BRA, CHI, COL, MEX, PAN, PAR, PER, URU, VEN
Why is LATAM breaking with the past?
Latam Outlook / March 2014
Page 15
6) Asia and commodities: LATAM countries are also benefiting from Asian demand for commodities.
Trade flows Asia-LATAM (USD millions) Source: BBVA Research y COMTRADE.
Composition of Exports from LATAM to Asia (% total) Fuente: BBVA Research y COMTRADE.
Commodities
70%Other30%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
1990 2000 2010
Exports from Asia to Latam Exports from Latam to Asia
Why is LATAM breaking with the past?
Latam Outlook / March 2014
Page 16
1 Latam in the EAGLEs
2 Latam breaks with the past
3 Short-term perspectives
4 Strengths and vulnerabilities
Contents
Latam Outlook / March 2014
Page 17
-2%
0%
2%
4%
6%
8%
10%
CHI COL PER MEX BRA TUR IND INDO RSA
17-Dec to 20-Jan
20-Jan to 11-Feb
Market expectation for the next 12 months
Volatility returned to Latam markets but, recently, more differentiation
Variations in EM exchange rates (%) Source: BBVA Research and Bloomberg
Volatility also affected Latam: currency depreciation, higher sovereign spreads and
weaker equity markets
We expect contagion from the sharp currency depreciation in Argentina to be limited, with only
a moderate effect on Brazil and Uruguay
However, capital flows into the region have not reversed, just slowed
The markets already appear to be starting to differentiate on the basis of macro fundamentals
and solid policies
*RSA: Republic of South Africa
Latam Outlook / March 2014
Page 18
6.0
4.0
2.62.2
2.5 2.6
0
1
2
3
4
5
6
7
2010 2011 2012 2013 2014 2015
Latam Pacific Alliance Mercosur
Growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015
Latam*: GDP growth (%) Source: BBVA Research
* Latam: weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela; Pacific Alliance: Chile, Colombia, México, Peru. Mercosur: Argentina, Brasil, Paraguay, Uruguay, Venezuela
Activity will accelerate in 2014 as Mexico leaves behind temporary negative shocks …
… and external demand gradually recovers in line with global growth
Increasing divergence: Pacific Alliance will grow 3.8% in 2014 and 3.7% in 2015, more than double
the rate in Mercosur
In the longer term, regional growth will start to converge to its potential, around 3.5%
Latam Outlook / March 2014
Page 19
The Andean countries and Paraguay will continue to post the fastest growth
Latam countries: GDP growth (%) Source: BBVA Research
Mexico will see strong growth in 2014 after the downturn in the
construction sector in 2013
Brazil will record moderate growth of 2.5% in 2014, reflecting the negative
impact of tighter monetary policy and structural problems 0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
20
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ARG BRA CHI COL MEX PAR PER URU Latam MCS AP
Jan. 2014 Forecast Nov. 2013 forecast
Latam Outlook / March 2014
Page 20
Pressure on fiscal deficits will continue, but they will remain manageable
Only moderate growth in internal demand and lower raw materials prices will continue to put
pressure on fiscal balances
Latam: Fiscal deficits (% GDP) Source: BBVA Research and Haver Analytics
Fiscal deficits should start to ease from 2015 onwards, as growth and external demand
recover -5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
201
32
01
42
01
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201
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201
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01
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01
5
ARG BRA CHI COL MEX PAR PER URU Latam
Forecasts in February 2014 Forecasts in November 2013
Latam Outlook / March 2014
Page 21
External deficits will start to shrink in 2014
Deficits will start to decline, particularly in those countries with a bigger foreign trade gap (Peru,
Uruguay)
The outlook for exports will improve as the supply problems in the export sector in some
countries improve …
Latam: Balance on current account (% GDP) Source: BBVA Research and Haver Analytics
….as well as due to currency depreciation and the recovery in global growth
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
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ARG BRA CHI COL MEX PAR PER URU Latam
Forecasts in February 2014 Forecasts in November 2013
Latam Outlook / March 2014
Page 22
-4
-2
0
2
4
6
8
10
12
Jan-1
0
May
-10
Sep-1
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Jan-1
1
May
-11
Sep-1
1
Jan-1
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May
-12
Sep-1
2
Jan-1
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May
-13
Sep-1
3
Jan-1
4
May
-14
Sep-1
4
Jan-1
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May
-15
Sep-1
5
BRA CHI MEX COL PER URU
Inflation mainly to converge to central bank targets (Uruguay and Brazil exceptions)
Inflation (%yoy) Source: BBVA Research and Haver
Gradual convergence of inflation with central bank’ central target, except in Brazil and
Uruguay
Contained demand pressure and more moderate food prices will help to contain
inflation
Currency depreciation will in general terms have a limited pass-through to inflation
Latam Outlook / March 2014
Page 23
0
2
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14
Jan-1
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May
-10
Sep-1
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Jan-1
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May
-11
Sep-1
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Jan-1
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May
-12
Sep-1
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Jan-1
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-13
Sep-1
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Jan-1
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May
-14
Sep-1
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Jan-1
5
May
-15
Sep-1
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BRA CHI COL MEX PER
Heterogeneous monetary policy due to different inflation and cyclical positions
Official interest rate in IT countries (%) Source: BBVA Research and Haver
In future, tighter monetary policy in Brazil and Uruguay due to the pressures on inflation
The Pacific Alliance countries will follow different paths, in line with their cyclical
positions
The divergence between nominal and real interest rates will continue between Brazil and
the Pacific Alliance countries
Interest rates will rise in 2015, due to inflation (Brazil) or cyclical improvement
(Pacific Alliance)
Latam Outlook / March 2014
Page 24
Relatively stable exchange rates in 2014-2015 with the exception of Brazil and Uruguay
Latam: exchange rate depreciation vis a vis USD (%) Source: BBVA Research and Haver
Contained depreciation: most of the impact of tapering in the US was priced-in by the markets
in 2013
The principal exception will be Brazil: sharp depreciation in 2014 and 2015 due to higher
inflation and efforts to recover part of the loss of competitiveness...
Uruguay will also be dragged by higher inflation than its neighbours and the currency
depreciation experienced by its trade partners -5
0
5
10
15
20
BRA CHI COL MEX PAR PER URU
2013 depreciation 2014 depreciation (forecast)
2015 depreciation (forecast)
Latam Outlook / March 2014
Page 25
1 Latam in the EAGLEs
2 Latam breaks with the past
3 Short-term perspectives
4 Strengths and vulnerabilities
Contents
Latam Outlook / March 2014
Page 26
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
2008-2
012
2013f
2020f
2008-2
012
2013f
2020f
2008-2
012
2013f
2020f
2008-2
012
2013f
2020f
2008-2
012
2013f
2020f
2008-2
012
2013f
2020f
Argentina Brazil Chile Colombia Peru Uruguay
Structural Component Cyclical Component Estimated
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ARG BRA CHI COL MEX PER URU
Current Account Deficit FDI
Reduced vulnerability to external shocks, both in terms of flows …
Deficit on current account and financing with FDI (% GDP) Source: BBVA Research and national statistics
Balance on current account , cyclical and structural component (% GDP) Source: BBVA Research and Haver Analytics
External deficits, in the majority of cases financed by FDI, less volatile in periods of
market turbulence
Eliminating the cyclical component, the structural deficits in Latam will not exceed 3% of GDP: sustainable given the outlooks for growth
in the region
Latam Outlook / March 2014
Page 27
-
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ARG BRA CHI COL MEX PER URU
Reserves*/GDP (%)
Months of imports (right)*
Reserves*/short-term funding needs**
… and stocks
Deficit and public-sector debt (% PIB) Source: BBVA Research and Haver Analytics
International reserve indicators Source: BBVA Research, Haver Analytics and national statistics
* International reserves include IMF FCL lines in the case of Colombia and Mexico and sovereign funds in the case of Chile and Peru ** The need for short-term financing is the sum of the deficit on current account in 2014, short-term debt and long-term debt maturities in 2014.
High levels of international reserves … … and substantial reduction in public- and
private-sector debt with less foreign-currency exposure
ARG
BRA
CHI
COL
MEX
PER
URU
-10%
0%
10%
20%
30%
40%
50%
0% 1% 2% 3% 4% 5%
Expected fiscal deficit in 2014 (% of GDP)Est
imat
ed n
et p
ublic
deb
t in
20
13
(%
of
GD
P)
Latam Outlook / March 2014
Page 28
Flexible exchange rates have already acted as the first buffer against external shocks
Exchange-rate pass-through to inflation: impact on inflation of 10% currency depreciation Source: BBVA Research and IMF
A flexible exchange rate is the first buffer against an external shock, and has already
started to act
If this is to work as a buffer, it is crucial to reduce dollar exposure, as the region has done
The credibility of monetary policies has also helped to reduce the exchange-rate pass-
through to inflation 0.0
1.0
2.0
3.0
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5.0
Bra
zil
Chile
Colo
mbia
Mex
ico
Per
u
Uru
guay
Thank you!
For comments and questions, please contact me at :
alicia.garcia-herrero@bbva.com.hk
March 2014
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