Latam Economic Outlook: Third Quarter 2014

Latin America: a soft patch in 2014

Juan Ruiz

BBVA Research │ Chief Economist for South America

Latin America Outlook – 3Q14 │ Madrid, 6 August 2014

Latin America Outlook / August 2014

Page 2

The global cycle remains robust, despite the soft patch in the first quarter. Global growth will rise from 3.0% in 2013, to 3.3% in 2014 and 3.8% in 2015.

Low volatility in international financial markets has spread to LatAm, even with the sharp slowdown in activity, but runs the risk of going into reverse if there is significant volatility after the Fed raises interest rates.

LatAm will grow 1.6% in 2014 and 2.5% in 2015, similar to 2013. The sharp downturn in regional growth in the first half of this year is behind us. The Pacific Alliance will grow by 3.1% and 4.0% in 2014-15, well above the regional average.

Slowdown reduces pressure on external deficits, but increases the pressure on fiscal accounts.

Weak growth has tended to bias the region’s monetary policies towards a more accommodative tone, even in economies where high inflation leaves doubts about the space for further monetary stimulus.

Key messages 1

2

3

4

5


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1 Global economy: recovery will continue, after the setback in the first quarter

2 LatAm: sharp slowdown in the first half of 2014 is behind us

Overview


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Global cycle: global growth will increase after the temporary setback in 1H14

Global GDP growth (% QoQ) Source: BBVA Research

Growth continues to be solid and will improve after the setback in 1H14

Lower growth in 1Q14 was largely due to the negative weather shock in the US 0.0

0.2

0.4

0.6

0.8

1.0

MC

Apr

-14

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ual

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-14

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rent

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-14

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rent

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3Q13 4Q13 1Q14 2Q14 3Q14

Current Forecast


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Tensions have eased in financial markets since the beginning of the year

BBVA financial stress index, developed and emerging markets Source: BBVA Research

Low volatility in international financial markets continues …

The recent upturn in emerging market stress index is specifically linked to Russia, an

idiosyncratic event which has not spread to other emerging economies

… in both developed and emerging economies

-0.10

-0.08

-0.06

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0.00

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0.06

-0.7

-0.4

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0.8

1.1

1.4

1.7

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-12

Oct

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Mar

-13

Aug-

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14

Jun-

14

Developed Emerging (rhs)


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We stick to our central scenario for China: growth of over 7%

China: GDP growth (%) Source: BBVA Research

The gradual rebalancing of expenditure, from consumption to investment, will continue

Softening of monetary policy, with lower reserve requirements, while interest rates will

remain unchanged

The government will continue taking measures to support growth, but is not

succeeding in breaking the dependence on loans

7.77.7

7.27.0

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

2012 2013 2014 2015

Baseline Jul-2014 Baseline Apr-2014


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US: growth surged in 2Q14. The Fed will match improvements in growth by raising interest rates

US: Fed funds (%) Source: BBVA Research

After a poor first quarter, growth recovers in the second

The Fed’s communication policy about its withdrawal strategy will be increasingly

influential

The Fed will stop expanding its balance sheet in October 2014 and interest rate hikes could

start in September 2015; rates will be dependent on improvements in the labour

market 0,0

0,5

1,0

1,5

2,0

2,5

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7

BBVA forecast

Fed Funds

Implicit policy rates in fed funds futures


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Eurozone: ECB measures bias upwards both growth and inflation

Eurozone: GDP growth (%) Source: BBVA Research

Economic recovery will be based on (i) positive policy combinations; (ii) progress on banking union;

(iii) improvement in the external environment

The ECB’s measures (TLTROs, LTROs, negative deposit rates, non-sterilisation, QE?)

strengthening interest-rate guidelines and the monetary policy transmission mechanisms

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1.9

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0.0

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2012 2013 2014 2015

Baseline Jul-2014 Baseline Apr-2014


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Oil prices will stay high because of geopolitical risks. Soy bean and copper trending downwards

Brent Crude: (USD/barrel) Source: BBVA Research and Bloomberg

Soy bean: (USD/mt) Source: BBVA Research and Bloomberg

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

Adjustment in the oil price scenario as a reflection of greater geopolitical risks

Soy bean and copper prices will continue to fall back down to their long-term values, very

similar to our estimates three months ago

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2010 2011 2012 2013 2014 2015 2016 2017

May 2014 August 2014

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2010 2011 2012 2013 2014 2015 2016 2017


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2010 2011 2012 2013 2014 2015 2016 2017



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In short, increasing global growth in 2014 and 2015

World growth forecasts (%) Source: BBVA Research

Global growth will continue, with improvements in developed markets, the US and the

eurozone, with a mild deceleration expected for China

The risk of a sharp slowdown in China is low and the Fed is keeping financial volatility well

anchored, but geopolitical risks are cropping up all over the place

EAGLEs is the emerging markets group which will contribute most to world GDP in the next 10 years. The group consists of China, India, Indonesia, Brazil, Russia, Turkey and Mexico.

3.03.33.8

1.92.02.5

-0.4

1.11.9

5.35.15.4

-2-10123456

13 14 15 13 14 15 13 14 15 13 14 15

World US Eurozone Eagles*

Forecasts in Aug 2014 Forecasts in May 2014


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1 Global economy: recovery will continue, after the setback in the first quarter

2 LatAm: sharp slowdown in the first half of 2014 is behind us

Overview


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The widespread recovery in asset prices in LatAm (bonds, stock exchanges) continues

But the risk of an adjustment in asset prices in LatAm does exist, should the Fed’s interest

rate hikes generate too much volatility

Capital flows to LatAm recover, buoyed by moderation in international financial tensions

and abundant liquidity

Calm in the international financial markets also reached LatAm

Sovereign spread in emerging economies (%) Source: BBVA Research and Haver Analytics

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Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Emerging Asia Emerging Europe Latam

Bernankespeech

Start oftapering


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Latin America will grow 1.6% in 2014 and 2.5% in 2015, similar rates to those of 2013

Activity figures surprised to the downside in the first half of 2014, except in Colombia

Severe moderation of private-sector investment in the region (BRA, CHI, MEX) and

in the public sector (CHI, PER)

LatAm*: GDP growth (%YoY) Source: BBVA Research

* Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela

Increasing differentiation: Pacific Alliance countries will grow by 3.1% in 2014 and 4% in

2015, well above the regional average

Growth will rise from a low base from 3Q onwards, due to higher global growth and

increased public investment

6.1

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2010 2011 2012 2013 2014e 2015e

Latam

Mercosur

Pacific Alliance


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Growth will continue to be very heterogeneous, with the 3 Andean countries and Paraguay standing out

Downward adjustments in most countries, apart from Colombia

Significant increase in growth in 2015, compared to 2014, in Peru, Mexico and Chile. Momentum will

continue in Colombia

LatAm countries: GDP growth (%) Source: BBVA Research

Brazil’s growth will remain very moderate

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ARG BRA CHI COL MEX PAR PER URU Latam MCS* PA**

Forecasts in August 2014

Forecasts in May 2014


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Box 1: Slight downward revision of potential growth rate in LatAm

Potential growth in Latin America is slightly above 3%, although with strong

heterogeneity by country. Downward revision because of ARG, BRA and CHI

Strong contribution of total factor productivity (TFP)

in Colombia, Mexico and Peru

LatAm: Potential GDP growth (% YoY avg.) Source: BBVA Research

Increased TFP in Mexico and Colombia, thanks to reforms. Total effect could be

even greater

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ARG BRA CHI COL MEX PER Latam

Capital Labour TFP Potential growth


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Economic deceleration reduces the pressure on external accounts …

External deficits will start to fall from 2014 and 2015, due to weak internal demand and

rising global growth …

LatAm: Current account deficit (% GDP) Source: BBVA Research and Haver Analytics

… and weaker exchange rates, which will partly offset the lower terms of trade

… the end of a series of supply shocks in the export sector (Peru, Colombia, Chile,

Argentina)…

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ARG BRA CHI COL MEX PAR PER URU Latam

Forecasts in August 2014 Forecasts in May 2014


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… but raises it on fiscal accounts

The slowdown in demand and lower commodity prices will put downward

pressure on tax revenues

LatAm: Fiscal deficits (% GDP) Source: BBVA Research and Haver Analytics

We also expect greater fiscal impulse in the Pacific Alliance countries and a higher financial

burden of debt in Brazil and Argentina

In Mexico and Chile this will be offset by the effects of the income tax reforms

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ARG BRA CHI COL MEX PAR PER URU Latam

Forecasts in August 2014

Forecasts in May 2014


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Upward pressures on inflation start to slacken

Inflation driven by shocks to food prices and exchange-rate depreciation

Inflation will stay in the upper reaches of central banks’ target bands, except in Chile.

Little scope for relaxing monetary policy

LatAm: inflation (% YoY) in countries with inflation targets Source: BBVA Research and Haver Analytics

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Brazil Chile Colombia Mexico Peru Uruguay

Forecasts


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Weak growth has tended to bias monetary policies towards a more relaxed tone

Inflation rates in the upper part of the target band (and hefty foreign deficits in Peru and

Uruguay) appear to leave little scope for interest rate cuts

We have noticed a certain trend in supporting growth with the cuts in Chile (anticipated) and

in Peru and Mexico (unexpected)

We expect further cuts in Chile and Peru, while Colombia continues to raise interest rates hand in hand with the improvement in the

cycle

Increasing use of macroprudential measures, such as cuts in reserve ratios

Official interest rate in countries with inflation targets (%) Source: BBVA Research and Haver Analytics

0

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BRA CHI COL MEX PAR PER


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Exchange rates will depreciate in 2014 and 2015, with very heterogeneous intensities

Variation in the exchange rate against the dollar in countries with inflation targets (%) Source: BBVA Research and Haver Analytics

Trend towards the depreciation of the exchange rate, because of a lower relative

growth, lower commodity prices and increased exchange rates by the Fed in 2015

More depreciation in countries with higher inflationary pressures (BRA, URU, ARG)…

… and in those countries showing signs of an overvalued currency (Brazil)

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BRA CHI COL MEX PAR PER URU

January-July 2014 July-December 2014 2015


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The global cycle remains robust, despite the soft patch in the first quarter. Global growth will rise from 3.0% in 2013, to 3.3% in 2014 and 3.8% in 2015.

Low volatility in international financial markets has spread to LatAm, even with the sharp slowdown in activity, but runs the risk of going into reverse if there is significant volatility after the Fed raises interest rates.

LatAm will grow 1.6% in 2014 and 2.5% in 2015, similar to 2013. The sharp downturn in regional growth in the first half of this year is behind us. The Pacific Alliance will grow by 3.1% and 4.0% in 2014-15, well above the regional average.

Slowdown reduces pressure on external deficits, but increases the pressure on fiscal accounts.

Weak growth has tended to bias the region’s monetary policies towards a more accommodative tone, even in economies where high inflation leaves doubts about the space for further monetary stimulus.

Key messages 1

2

3

4

5

Latin America: a soft patch in 2014

Juan Ruiz

BBVA Research │ Chief Economist for South America

Latin America Outlook – 3Q14 │ Madrid, 6 August 2014


Page 23

Appendix: Growth forecasts in Latin America

Source: BBVA Research. *Forecasts

2011 2012 2013 2014* 2015*

Argentina 8.6 0.9 2.9 -1.0 0.2

Brazil 2.7 1.0 2.5 1.3 1.6

Chile 5.8 5.4 4.1 2.9 3.8

Colombia 6.6 4.0 4.7 4.9 4.8

Mexico 3.9 3.8 1.1 2.5 3.5

Paraguay 4.3 -1.2 14.4 4.9 4.3

Peru 6.5 6.0 5.8 4.1 5.9

Uruguay 7.3 3.7 4.4 2.7 2.9

Mercosur 3.5 1.3 2.4 0.4 1.2

Pacific Alliance 4.8 4.2 2.5 3.1 4.0

Latin America 4.1 2.6 2.5 1.6 2.5

GDP growth (% YoY)

Economy & Finance

Latam Economic Outlook: Third Quarter 2014