Españ - BBVA...Latam Outlook / May 2016 Page 5 Global economic scenario was quite negative three months ago… Source: BBVA Research. Evolution from 11 Nov 2015 to 10 Feb 2016 Fall

Situación España 1T16

• Españ

Situación

Latin America Outlook

2nd QUARTER

2016

Latam Outlook / May 2016

Page 2

The global outlook has improved. but global growth will continue to be low. Financial stress

has been reduced significantly in the last three months. especially in emerging markets. and

commodity prices have recovered. Global growth will increase, but moderately and will remain fragile.

Latam GDP will shrink -1.1% in 2016 and recover to 1.7% in 2017. The fall in 2016 will be dragged

by the sharp recession in Brazil. whereas the Pacific Alliance will grow 2.3%. Recovery in 2017 will be

driven by the external sector (stronger global growth and better terms of trade) and higher investment

in places like Argentina, Peru and Colombia.

The positive effect of the recent recovery of commodity prices will be offset by lower public

expenditure. Public expenditure will be adjusted in most countries given lower tax receipts and to

preserve fiscal rules and sovereign ratings. The main exception will be Brazil, where the necessary

fiscal consolidation is likely to continue to be postponed.

Main Messages

Inflation abates slightly in most countries, helped by the recent appreciation of commodity

prices. Lower inflation and weak domestic demand will allow central banks to wait and see, with

stable interest rates likely for the remainder of this year with the exception of Colombia, where further

hikes are likely. In turn, Mexico will continue to synchronize interest rate hikes with the Fed’s.


Page 3

External

environment Global scenario improves, but growth will continue to be subdued


Page 4

Global financial markets calm down in the last three months

Financial stress in financial markets BBVA Research Financial stress index

Financial stress abates since high

reached in January, especially in

emerging markets…

… driven by:

1. Improved macro indicators in

China and lower FX depreciation

pressures

2. Recovery of commodity prices

(especially oil)

3. More gradual expected path of

Fed’s rate hikes

Source: BBVA Research

-2

-1

0

1

2

3

4

5

6

Jun-0

8

No

v-0

8

Apr-

09

Sep-0

9

Feb

-10

Jul-1

0

De

c-1

0

Ma

y-1

1

Oct-

11

Ma

r-1

2

Aug-1

2

Jan-1

3

Jun-1

3

No

v-1

3

Apr-

14

Sep-1

4

Feb

-15

Jul-1

5

De

c-1

5

Ma

y-1

6

Developed Emerging


Page 5

Global economic scenario was quite negative three months ago…

Source: BBVA Research. Evolution from 11 Nov 2015 to 10 Feb 2016

Fall in oil prices (Brent)

Correction in

Emerging Markets (Increase in EMBI spread)

More uncertain

global growth

-25%

Concerns

on China (fall in reserves)

-6%

Stock markets (MSCI Global stock market index)

-12% +100bp


Page 6

… but many of those factors have reversed in the last three months

Source: BBVA Research. Evolution from 10 Feb 2016 to 10 May 2016

Increase in

oil price (Brent)

Improved financial

conditions in EM (Fall in EMBI spread)

Lower uncertainty

on global growth

+46%

Less concern on

China (in the short run)

+0.5%

Stock market

rally (MSCI Global stock market index)

+12% -100pb


Page 7

Oil and copper prices recovered driven in part by less concerns about policy support for growth in China …

… but long-term perspectives for commodity prices suffer given doubts about the pace of structural reforms in China

Commodity prices also benefitted from lower global volatility

Brent oil: (USD/b) Source: BBVA Research and Bloomberg

Soybeans: (USD/mt) Source: BBVA Research and Bloomberg

Copper: (USD/lb) Source: BBVA Research and Bloomberg

0

20

40

60

80

100

120

1Q

2014

3Q

2014

1Q

2015

3Q

2015

1Q

2016

3Q

2016

1Q

2017

3Q

2017

1Q

2018

3Q

2018

1Q

2019

3Q

2019

1Q

2020

3Q

2020

Forecast in April 2016 Forecast in January 2016

1.5

1.7

1.9

2.1

2.3

2.5

2.7

2.9

3.1

3.3

1Q

2014

3Q

2014

1Q

2015

3Q

2015

1Q

2016

3Q

2016

1Q

2017

3Q

2017

1Q

2018

3Q

2018

1Q

2019

3Q

2019

1Q

2020

3Q

2020


300

350

400

450

500

550

600

1Q

2014

3Q

2014

1Q

2015

3Q

2015

1Q

2016

3Q

2016

1Q

2017

3Q

2017

1Q

2018

3Q

2018

1Q

2019

3Q

2019

1Q

2020

3Q

2020



Page 8

Nevertheless, global growth continues to be subdued, and with warning signs

Global growth (% qoq at annual rate) (Forecasts based on BBVA-GAIN model) Source: BBVA Research Global growth around 3% (annual rate) in the

last quarter has been accelerating, but still far from previous years

Global growth to increase to 3.4% in 2017 but it will still be subdued: • Given adjustment in emerging economies • Developed economies not growing beyond

its potential • Global investment still weak

Global trade growth still decreasing since 2014. Warning: traditional sources of global growth are not working, as well as in previous recoveries.

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%Growth; 1Q16, 2Q16 areforecasts

Average 2000-07


Page 9

Additional warning sign: global uncertainty shocks are now more frequent …

Immediate effect of uncertainty shocks on financial volatility* Source: BBVA Research

More frequent uncertainty shocks that generate high volatility (frequency has doubled)

Given fragile growth. uncertainty shocks tend to be amplified

-40%

-20%

0%

20%

40%

mar-12 nov-12 jul-13 mar-14 nov-14 jul-15 mar-16

First sign of withdrawal of monetary

stimulus by the Fed

Oil price fall Uncertainty on China

* Effect on VIX (implied volatility of S&P 500) from a model of volatility and global growth. See global outlook for 2Q16 for details.



Page 10

… but their impact on growth, though stronger, is also shorter-lived

Effect on growth of a temporary increase in volatility (percentage points)* Source: BBVA Research

* Impact on growth of an increase in volatility caused by and increase in uncertainty. Details in

Global Outlook 2Q16.


Good news is that even though negative shocks are more frequent, their impact on growth seems now less persistent

This could be in part the result of very accommodative monetary policy in developed economies, which buffer uncertainty shocks …

… but, what will happen when those accommodative monetary policies are withdrawn?

-0.03

-0.02

-0.01

0.00

0.01

m0

m1

m2

m3

m4

m5

m6

m7

m8

m9

m1

0

m1

1

m1

2

m1

3

m1

4

m1

5

m1

6

m1

7

m1

8

m1

9

m2

0

m2

1

m2

2

m2

3

Before 2007 After 2012


Page 11

Monetary and fiscal stimuli will continue to support growth in the short run. A soft landing continues to be the central scenario

State-owned enterprises: sustained by increasing debt and carrying excess capacity. Without reforms, they will drag medium-term growth by hampering an efficient allocation of resources.

China: gradual adjustment to continue

China: GDP growth (%) Source: BBVA Research

7.7

7.3

6.96.4

5.8

3

4

5

6

7

8

9

2013 2014 2015 2016 2017

Apr-16 Jan-16


Page 12

After a soft Q1, growth will increase during 2016, with a stronger employment growth

Fed will take into account stronger domestic growth and the drag from the external sector to decide on the timing and speed of further rate hikes. We anticipate 2 more hikes in 2016, but with a downward bias.

US: growth to increase during 2016

US: GDP growth (%) Source: BBVA Research

1.5

2.4 2.42.5

2.4

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2013 2014 2015 2016 2017

Apr-16 Jan-16


Page 13

China is currently the main global risk


Lik

elih

oo

d

Impact

Shock from

China

Impact in

Emerging

Markets from Fed rate

hikes

Europe Brexit

Geopolítics

Periphery


Page 14

Latam GDP to shrink in 2016 and recover in 2017


Page 15

Latam main asset prices (Index May 2013=100)

Source: BBVA Research y Haver

Lower global risk aversion and an increase in commodity prices lifted Latam financial markets

Main asset prices and exchange rates in the region showed significant gains since February…

… driven by lower volatility in global financial markets and the ensuing impulse on commodity prices

Going forward, volatility and corrections in financial markets may return, as long as risks on Chinese growth and exchange rates persist, in addition to unexpected changes in Fed’s plans for rate hikes.

40

60

80

100

120

140

160

180

200

220

Au

g-1

3

Nov-1

3

Fe

b-1

4

May-1

4

Au

g-1

4

Nov-1

4

Fe

b-1

5

Ma

y-1

5

Au

g-1

5

Nov-1

5

Fe

b-1

6

Ma

y-1

6

COMMODITIES (CRB) EXCHANGE RATE (DS)

EQUITY (MSCI) EMBI+


Page 16

Latam: Fiscal balance (%GDP) Public expenditure will be less expansionary than previously anticipated, especially in Argentina, Chile, Peru and México.

Main exception is Brazil, where we expect a less ambitious adjustment of public expenditure due to still-high political uncertainty

Source: BBVA Research and Haver

Public expenditure will be marked down or decelerate sharply in Latam, with the main exception of Brazil

Correction of public expenditure seems unavoidable in countries with very low (or even non-existent) fiscal space, in the context of a significant negative shock to tax revenues from subdued commodity prices.

-12

-10

-8

-6

-4

-2

0

20

15

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15

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16

20

17

ARG BRA CHI COL MEX PAR PER URU Latam

May-16 Feb-16


Page 17

Latam: Confidence indexes (households and firms) (values over 50 indicate optimism)

optimism

pessimism


Confidence indicators remain weak, dragging consumption and investment

Sharp recent fall in household confidence in Argentina (due to rise in utility prices as part of fiscal consolidation) and Colombia. Confidence improves in Peru after the elections

Firms: low confidence on the weak external environment, political noise and uncertainty about economic policies in some countries

Households: pessimism on weak labor markets and still-high inflation

0

10

20

30

40

50

60

70

abr-

14

oct-

14

abr-

15

oct-

15

abr-

16

abr-

14

oct-

14

abr-

15

oct-

15

abr-

16

abr-

14

oct-

14

abr-

15

oct-

15

abr-

16

abr-

14

oct-

14

abr-

15

oct-

15

abr-

16

abr-

14

oct-

14

abr-

15

oct-

15

abr-

16

abr-

14

oct-

14

abr-

15

oct-

15

abr-

16

ARG BRA CHI COL MEX PER

Consumers Producers


Page 18

Latam GDP to fall in 2016 (-1.1%) and recover gradually starting in 2017 (1.7%)

Latam*: GDP growth (%yoy)

(1) Weighted average of Argentina. Brazil. Chile. Colombia. Mexico. Paraguay. Peru. Mexico. Uruguay and Venezuela

(2) For Argentina. private estimates of GDP are used while official statistics are released


Growth forecasts revised down despite recovery of commodity prices in 2016 …

… as lower public expenditure in many economies weigh down on growth

Stronger 2017 growth in Latam driven by: 1. The external sector, due to higher global

growth, depreciated exchange rates and improved terms of trade

2. Investment, especially by the private sector in Argentina and infrastructure investment in Peru and Colombia

3.0 2.9

1.1

-0.4

-1.1

1.7

2.3

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2012 2013 2014 2015 2016 2017 2018

Latam (1) Argentina (2) Pacific Alliance Brazil


Page 19

Growth revised down

in Argentina (monetary

policy) and Uruguay (lower

consumption). Growth

marked down in 2017 in

Brazil, Uruguay

and Chile in 2017

Pacific Alliance will

grow 2.3% in 2016 and

2.8% in 2017,

towards its potential

(3.8%)

Peru, Colombia, Mexico and Paraguay, the most dynamic economies in 2016

Latam countries: GDP growth (%)


Latin America

maintains strong

heterogeneity in growth

momentum

and forecasts

-5

-4

-3

-2

-1

0

1

2

3

4

5

20

15

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15

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17

ARG* BRA CHI COL MEX PAR PER URU Latam Mercosur PacificAlliance

May-16 Feb-16


Page 20

0

2

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10

12

0

5

10

15

20

25

30

35

40

45

jun

-15

dic

-15

jun

-16

dic

-16

jun

-17

dic

-17

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

5

De

c-1

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Ju

n-1

6

De

c-1

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Ju

n-1

7

De

c-1

7

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Argentina (left) Brazil Chile Colombia Paraguay Peru Uruguay

ForecastInflation Target

Inflationary pressures abate somewhat, given recent exchange-rate appreciation

Latam: inflation (%yoy) in inflation-targeting countries

Inflation starts to flex down (except Colombia and Uruguay, but remains above Central Bank targets (bar Mexico and Paraguay)

Inflation will converge to Central Bank’s targets at the end of 2016 or in 2017, given less pressure from FX depreciation and from domestic demand.



Page 21

Persistence of inflation in some countries could delay convergence to inflation targets

Latam: persistence of core inflation*

Persistence of inflation is strongest in Argentina and, to a lesser extent, in Brazil, Colombia and Uruguay. This could delay convergence back to central banks’ inflation targets

* Degree of influence of past core inflation on current core inflation. Based on the

estimation of a Phillips curve where current inflation depends on the output gap, past

inflation, inflation expectations, exchange rate and commodity prices


0,0

0,2

0,4

0,6

0,8

ARG BRA CHI COL MEX PER URU

Nevertheless, persistence can diminish drastically if there is a significant change in the conduct of monetary policy (as in Argentina) or in indexation mechanisms.


Page 22

Official interest rates in inflation-targeting countries (%)

Monetary policy in wait-and-see mode, except in Argentina and Colombia


Lower pressure on inflation will allow Central Banks in the region to wait and see, keeping rates stable during 2016 (except Colombia)

Mexico will keep its official interest rate synchronized with the Fed

0

2

4

6

8

10

12

14

16

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

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n-1

7

De

c-1

7

Ju

n-1

5

De

c-1

5

Ju

n-1

6

De

c-1

6

Ju

n-1

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De

c-1

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Ju

n-1

5

De

c-1

5

Ju

n-1

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De

c-1

6

Ju

n-1

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De

c-1

7

Ju

n-1

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c-1

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n-1

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De

c-1

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Ju

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De

c-1

7

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n-1

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De

c-1

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Ju

n-1

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De

c-1

6

Ju

n-1

7

De

c-1

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Ju

n-1

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De

c-1

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n-1

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De

c-1

7

BRA CHI COL MEX PAR PER

Previsión


Page 23

Exchange rate to the US dollar (Index Dec 2014=100)

Depreciation vis-à-vis US dollar

FX appreciation in February-April driven by lower global risk aversion and return of capital inflows

Going forward, markets will follow closely Fed’s decision on interest rates and any signs of weaker growth in China or a weaker Renminbi.

In Mexico, Colombia and Chile there is some room for appreciation during 2016-17 given improving fundamentals and an expected rise in oil and copper prices.


Exchange rates will depreciate going forward, but from a stronger starting point than 3 months ago

80

100

120

140

160

180

200

220

240

dic

-14

dic

-15

dic

-16

dic

-17

dic

-14

dic

-15

dic

-16

dic

-17

dic

-14

dic

-15

dic

-16

dic

-17

dic

-14

dic

-15

dic

-16

dic

-17

dic

-14

dic

-15

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dic

-17

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-16

dic

-17

dic

-14

dic

-15

dic

-16

dic

-17

dic

-14

dic

-15

dic

-16

dic

-17

ARG BRA CHI COL MEX PAR PER URU

Forecast Actual


Page 24

Latam: Current account balance (%GDP)

External deficits continue to correct in most countries, in part due to deceleration of domestic demand


External deficits (small in Chile and Paraguay) continue to shrink in most countries …

… driven by the depreciation of exchange rates in previous quarters, a weak domestic demand and a gradual improvement of terms of trade

FDI is weakening due to the fall in commodity prices, but still represents a significant share of external financing needs, limiting external vulnerability in the region.

-8

-7

-6

-5

-4

-3

-2

-1

0

201

52

01

62

01

7

201

52

01

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01

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01

62

01

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01

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01

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52

01

62

01

7

201

52016

201

7

2015

201

62

01

7

ARG BRA CHI COL MEX PAR PER URU Latam

May-16 Feb-16


Page 25

The global outlook has improved. but global growth will continue to be low. Financial stress

has been reduced significantly in the last three months, especially in emerging markets, and

commodity prices have recovered. Global growth will increase but moderately and will remain fragile.

Latam GDP will shrink -1.1% in 2016 and recover to 1.7% in 2017. The fall in 2016 will be dragged

by the sharp recession in Brazil, whereas the Pacific Alliance will grow 2.3%. Recovery in 2017 will be

driven by the external sector (stronger global growth and better terms of trade) and higher investment

in places like Argentina, Peru and Colombia.

The positive effect of the recent recovery of commodity prices will be offset by lower public

expenditure. Public expenditure will be adjusted in most countries given lower tax receipts and to

preserve fiscal rules and sovereign ratings. The main exception will be Brazil. where the necessary

fiscal consolidation is likely to continue to be postponed.

Main Messages

Inflation abates slightly in most countries, helped by the recent appreciation of commodity

prices. Lower inflation and weak domestic demand will allow central banks to wait and see, with

stable interest rates likely for the remainder of this year. with the exception of Colombia, where further

hikes are likely. In turn, Mexico will continue to synchronize interest rate hikes with the Fed’s.


Page 26

Annex


Page 27

Latam GDP growth forecasts

GDP (%yoy) 2013 2014 2015 2016f 2017f

Argentina* 2.9 0.5 2.1 -0.4 3.2

Brazil 3.0 0.1 -3.9 -3.0 0.9

Chile 4.0 1.9 2.1 1.7 2.0

Colombia 4.9 4.4 3.1 2.0 3.0

Mexico 1.6 2.3 2.5 2.2 2.6

Paraguay 14.0 4.7 3.0 3.1 3.1

Peru 5.9 2.4 3.3 3.6 4.3

Uruguay 4.6 3.2 1.0 0.7 1.5

Mercosur 3.0 -0.1 -2.8 -3.7 0.8

Pacific Alliance 2.9 2.6 2.7 2.3 2.8

Latin America 2.9 1.1 -0.4 -1.1 1.7

e = estimate; f = forecast

Documents

Españ - BBVA...Latam Outlook / May 2016 Page 5 Global economic scenario was quite negative three months ago… Source: BBVA Research. Evolution from 11 Nov 2015 to 10 Feb 2016 Fall