Latin America Risks And Opportunities - Jan 2012

Business Monitor International

…Contrast This With China

Source: BMI, NBS, PBoC

Latin America & The Caribbean Risks & Opportunities In 2012

Cedric Chehab, Head of Americas Research Richard Hamilton, Head of Latin America CR & FM Tim Cooper, Global Economic Strategist


2

Global Outlook

• The global economy slowed significantly in Q4, but it is not in recession.

• The US is not entering recession, but fiscal cutbacks and household deleveraging will hold back a recovery in growth.

• The European crisis is the biggest risk. We believe the eurozone will hold together, but a breakup would tip the world economy into recession.

• Our China fears of a ‘hard landing’ are finally starting to be realized, presenting a major risk to global demand.

• Fiscal and monetary policy options are more limited now than at the onset of the 2008-09 recession with emerging markets better-positioned for stimulus.


Source: BMI Estimates

A Slow, But Sustained Global Expansion

BMI Global Forecasts 2011e 2012f 2013f

World Real GDP Growth (%) 3.0 2.7 3.4

World Consumer Inflation (% ave) 4.0 3.4 3.2

Oil Price, Brent Crude (US$/bbl) 106.00 102.00 100.00

ECB Refinancing Rate 1.00 0.50 0.50

US Fed Funds Rate 0.00 0.00 0.00

Bank of Japan Overnight Call Rate 0.10 0.10 0.10

US$/EUR Exchange Rate (average) 1.40 1.29 1.25 • Developed state growth will remain erratic and weak. This leaves the global economy susceptible to downside shocks. • The major risk is of a deflationary downturn, with weak global demand and a prolonged period of deleveraging in the US, eurozone and China.


Source: BMI Estimates

Developed Vs Emerging Markets

Emerging markets are growing more strongly than developed states, and have more room to manoeuvre domestic policy. Developed states are largely running out of ammo.

BMI Real GDP Forecasts

2011e 2012f 2013f

World 3.0 2.7 3.4

US 1.8 2.0 2.4

Eurozone 1.6 -0.3 1.4

China 9.2 7.5 7.1

Developed States 1.3 1.1 1.9

Emerging Markets 5.6 5.0 5.3

Emerging Asia 7.3 6.3 6.5

Latin America 4.0 3.7 3.5

Emerging Europe 4.0 2.7 4.2

Sub - Saharan Africa 4.2 6.0 6.0

Middle East & North Africa 3.7 4.4 4.6

Weighted by US$ Nominal GDP. Source: BMI


Source: Bloomberg, ECB, BMI

External Risks: Eurozone

• Eurozone has the resources, but lacks the resolve to overcome the crisis. Mild recession in 2012 & ‘muddle through’ is the best case scenario.

• Policymakers continue to deploy ‘smoke and mirror’ tactics rather than serious reforms:

• ECB as lender of last resort • Credible plan for fiscal union

• Address endemic lack of competitiveness • Debt restructuring of insolvent states. • Support economic growth and job creation

• Our core view remains ‘muddle through’. However, a failure to make tangible headway on the above reforms within the next 12-18 months risks a collapse of the currency union


Source: BMI

External Risks: China Hard Landing

• Following an unprecedented credit boom, tighter monetary policy and declines in residential construction are weighing on Chinese growth...and a hard landing is on the cards...

Our Hard Landing Definition:

1) Significant Contraction In Manufacturing

2) Contraction In Services

3) Sustained Fall In Imports

4) Double-Digit House Price Declines

5) Banking Sector Bailout

6) Growing Expectations of CNY Weakness


Latin America & Caribbean

Given these global headwinds we prefer economies in 2012 that have policy ammunition to combat slower growth

Based on this metric we divide the regional economies into three categories:

1. Those with the ammunition (if needed) – Chile, Brazil, Peru, Colombia, Mexico

2. Those who are fast running out of options – Argentina, Venezuela, Ecuador

3. Those with no domestic policy options – Most CentAm and Caribbean economies


Those With Ammunition

Current Policy Rate

Bps of hikes over last cycle

Brazil 10.50% 375

Chile 5.00% 475

Colombia 4.75% 175

Mexico 4.50% 0

Peru 4.25% 300

There are several regional economies with plenty of room to cut rates if growth cools aggressively Brazil and Chile have already embarked on rate cutting cycles, and we believe Colombia and Mexico are likely to follow at some point in 2012


Those With Ammunition

Although there has been significant fiscal stimulus since 2009, public sector leverage is still very low by

DM standards

With sovereign debt yields trading close to record lows, and CDS spreads well contained, these

governments have access to debt markets if required

Public Sector External Debt, % GDP

.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Brazil

Chile

Colombia

Mexico

Peru

Source: BMI, Respective Central Banks


Those Who Are Fast Running Out Of Options

We have long been concerned about economic trajectory for Venezuela, Argentina, and Ecuador

We believe 2012 could prove a pivotal year for Venezuela and Argentina, with the potential to derail investors’ perceptions of the Latin American region as a whole


Venezuela

We believe the current fiscal and exchange rate regime can last until the election, thanks to massive debt issuance in 2011 and high oil prices, but

few domestic policy options to significantly boost growth

Core scenario: President Hugo Chávez to remain in power

Implies continuation of high inflation, with strong possibility of another destabilising devaluation following the election

-20

0

20

40

60

80

100

120

140

160

Jan

-97

Oct

-97

Jul-

98

Ap

r-9

9

Jan

-00

Oct

-00

Jul-

01

Ap

r-0

2

Jan

-03

Oct

-03

Jul-

04

Ap

r-0

5

Jan

-06

Oct

-06

Jul-

07

Ap

r-0

8

Jan

-09

Oct

-09

Jul-

10

Ap

r-1

1

M1 Money Supply Growth, % chg y-o-y

Source: BCV, BMI


Argentina

Fears of a devaluation prompted massive capital flight in the run up to last year’s election Government has had some success in restricting capital outflows, but dealing with symptoms

rather than cause

As yet no signs of attempts to address causes of rampant inflation and overvalued exchange rate

Not conducive to attracting FDI, and without access to international capital markets government can only resort to printing money to stimulate growth

BADLAR Rate, %

Source: Bloomberg


3. Those With No Real Policy Tools

There are many smaller economies in the region which have very little in the way of domestic economic buffers to deal

with the external headwinds, which will exacerbate domestic problems

Problems include some of the highest crime rates globally, weak fiscal frameworks, and in several cases cripplingly

high debt burdens


Central America

Honduras, Guatemala & El Salvador: All suffering from severe fiscal weakness and militarisation of the drug war

Nicaragua is currently attracting significant fixed investment, but fiscal consolidation unlikely following the re-election of Daniel Ortega

Costa Rica’s fiscal decline continues, following government concessions to opposition demands for the 2012 budget

Costa Rica - Fiscal Deficit, % of GDP

Source: BMI, BCCR, f = BMI forecasts


Caribbean

Many Caribbean states are even more powerless than their CentAm counterparts because of:

Very High Debt Burden

Weak Growth Dynamics

Our Core View is increasingly accepted by consensus:

December 2011 S&P downgraded Bahamas and Jamaica, with warning for Barbados

Sovereign Risk Rankings For BMI And S&P (November 2011 )

Source: BMI, S&P


2010 2011e 2012f 2013f

Barbados -.5 .9 1.3 2.0

Jamaica -1.2 1.5 1.4 1.4

El Salvador 1.4 1.4 1.7 2.2

Venezuela -1.4 3.2 2.3 2.3

Guatemala 2.8 2.4 2.7 3.2

Nicaragua 4.5 3.3 3.3 2.8

Honduras 2.8 4.8 3.4 4.0

Mexico 5.4 4.2 3.4 2.7

Costa Rica 4.2 3.6 3.6 3.5

Brazil 7.5 3.0 3.9 3.7

Argentina 9.2 7.0 4.1 4.2

Colombia 4.3 5.7 4.7 4.4

Chile 5.2 5.9 4.8 3.3

Peru 8.8 6.7 5.8 4.8

Panama 7.5 8.3 6.9 5.5

Real GDP Growth Rates, %

e/f = BMI estimated/forecasted, Source: Respective central banks and/or statistics agencies


Q&A

• If you would like to arrange an initial trial or a trial of additional content, please contact:

• Contact: Erika Lockhart

• Email: [email protected]

• Phone: 646.368.1475

• Content: Country Risk, Financial Markets, and Industry Analysis (22 sectors)

• Deliverables: Daily Analysis, Quarterly Reports, and Proprietary Databases

17

Documents

Latin America Risks And Opportunities - Jan 2012