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Country Risk Quarterly Report | December 2013

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Markets continue to adapt to the incoming Tapering by the Federal Reserve through an ongoing re-balancing in international portfolios. The EU peripheral assets were among the most benefited, supported …

Markets continue to adapt to the incoming Tapering by the Federal Reserve through an ongoing re-balancing in international portfolios. The EU peripheral assets were among the most benefited, supported by some signs of bottoming out of the sovereign rating cycle.

Complacency should be ruled out as economic growth expectations remain fragile and debt levels remain high especially in developed markets. The still necessary de-leveraging process and fiscal consolidation will continue challenging for economic growth

The Emerging Markets assets have initially absorbed the initial uncertainty about the end of the ultra-loose Monetary Policy in the USA during last June through flexible exchange rates and lower vulnerability levels. Looking ahead, we expect the US tapering to advance gradually, supported and guidance by the improvements in the communication skills by the western Central Bankers

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  • 1. Country Risk Quarterly Report BBVA Research Cross-Country Emerging Markets Unit December 2013
  • 2. Country Risk Quarterly Report – December 2013 Summary Financial Markets & Global Risk Aversion • Uncertainty about the timing of the US Tapering announcement increased during the quarter with analyst still debating on the timing of the end of ultra loose monetary policy Sovereign Markets & Ratings Update • Risk premia in most developed markets have continued the downward trend. CDS in Peripheral European countries have reached levels not observed since the beginning of the fiscal crisis in the first half of 2010 • European peripheral countries seem to be the most benefited from the easing of tensions supported also by the improvement in macroeconomic conditions in some important countries as Spain and Germany • However, the appetite for EM assets continues to be weaker than at the beginning of the year due to the mixed data coming from some of the largest EM (India, Brazil). Chinese economic data improved during the quarter • Despite some fine tuning in the safest sovereigns (downgrades in France and Netherlands), there are incipient signs of a reversal in the EU periphery credit rating cycle (such as the improvement in the Spain’s outlook by all the three agencies) • The positive momentum of the rating cycle remains in most EMs, with the upgrade of Peru and Colombia by Fitch. However, the negative trend in EM Europe continues, as the same agency downgraded Croatia Our own country risk assessment • The volatility period surrounding the last May-June about the US Tapering has started to recede. The improvement in communication skills by Western Central Bankers has provided some cushion, preparing financial markets to the beginning of policy normalization • Although improving, the Developed Economies continue to face important challenges including the improvement of public finances and economic growth • The Emerging Markets situation have also improved thanks to the better tone of financial markets and a historically low levels of vulnerability, including sound public, external and private balance sheet positions and lower levels of FX denominated liabilities (except in Eastern Europe). Flexible exchange rates have enhanced the exchange rate role as shock absorber but complacency is out of the question 2
  • 3. Country Risk Quarterly Report – December 2013 Index 1. International Financial Markets , Global Risk Aversion and Capital Flows 2. Sovereign Markets & Ratings Update 3. Macroeconomic Vulnerability and In-house assessment of country risk on a Regional basis Annex – Methodological appendix 3
  • 4. Country Risk Quarterly Report – December 2013 Section 1 Financial Markets Stress BBVA Research Financial Stress Map • The improvement in communication skills Source: BBVA 2007 2008 2009 2010 2011 2012 2013 Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan CDS Sovereign Equity (volatility) USA CDS Banks Credit (corporates) Interest Rates Exchange Rates Ted Spread Financial Tension Index CDS Sovereign Europe Equity (volatility) CDS Banks Credit (corporates Interest Rates Exchange Rates Ted Spread Financial Tension Index EM Europe G2 2007 2010 EM Europe Financial Tension Index Czech Rep Poland Hungary Russia nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan nan Mexico Brazil Chile Colombia Perú EM Asia Financia Tension Index China India Indonesia Malaysia Philippines 2011 2012 2013 Nan Nan EM Latam Financial Tension Index Latam 2009 Europe Financial Tension Index Turkey EM Asia 2008 USA Financial Tension index nan nan nan nan nan nan nan nan nan nan nan nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan Nan by the US Fed Officials and the end of the uncertainty about the new governor has led to a calmer period in the US markets. • Europe´s Financial stress eased in most of Financial Tension Index’s components, except the interest rate component whose volatility increased due to the ECB surprised reduction in the ECB repo. • The Emerging Markets Financial Tensions indexes decoupling receded once the international portfolio re-balancing moderated and markets started to digest the new scenario for the US monetary policy No Data Very Low Tension (<1 sd) Low Tension (-1.0 to -0.5 sd) Neutral Tension (-0.5 to 0.5) High Tension (0.5 to 1 sd) Very High Tension (>1 sd) 4
  • 5. Country Risk Quarterly Report – December 2013 Section 1 Capital Flows Update BBVA Country Portfolio Flows Map • Portfolio re-allocation continued during the quarter (Country Flows over total Assets) Source: BBVA Research through EPFR data Asia LATAM EM Eur Western Europe G4 2008 ### ### ### 0.50 1.20 3.00 USA Japan Canada UK Sweeden Norway Denmark Finland Germany Austria Netherlands France Belgium Italy Spain Ireland Portugal Greece Poland Czech Rep Hungary Turkey Russia Mexico Brazil Chile Colombia Peru Peru Argentina China India India Korea Thailand Indonesia Philippines Hong Kong Singapore 2009 2010 2011 2012 2013 # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # although net capital outflows have visibly moderated from Q3 since most the rebalancing has been already achieved (95% of the excess has been corrected) and Fed’s action has been priced in # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # • The ongoing portfolio re-balancing process continued (although at slower pace) and the adjustment looks now near completion # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # • Institutionals strongly rebalanced their positions from EM treasuries into DM’s equity: liquid bond positions in E. Europe and LatAm were undone in exchange for equity and some under-priced treasuries from the Periphery (Spain). Retailers followed on European equity too but remained neutral on their position in EMs # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Sharp Capital Outflows (below -2 %) Strong Capital Outlows (between -1 % and -2 %) Moderate Capital Outflows (between 0 and -1 %) Moderate Capital Inflows (between 0 and 1 %) Strong Capital Inflows (between 1 % and 2 %) Booming Capital Inflows (greater than 2 %) 5
  • 6. Country Risk Quarterly Report – December 2013 Section 2 Sovereign Markets Update Sovereign CDS spreads Asia LATAM EM Europe Developed Markets 2007 2008 • European periphery’s CDS spreads had Nov. 2013 Source: Datastream and BBVA Research remarkably decreased in the last quarter, being Greece, Portugal, Spain and Italy the most benefited (4000bp, 170bp, 130bp and 90bp lower than their respective maxima of 2013) End of Month 2009 2010 2011 2012 2013 USA UK Norway Sweden Austria Germany France Netherlands Italy Spain Belgium Greece Portugal Ireland Turkey Russia Poland Czech Republic Hungary Bulgaria Romania Croatia Mexico Brazil Chile Colombia Peru Argentina China Korea Thailand Indonesia Malaysia Philippines Sovereign CD Swaps Map: It shows a color map with 6 different ranges of CD Swaps quotes (darker >500, 300 to 500, 200 to 300, 100 to 200, 50 to 100 and the lighter below 50 bp) 31 26 13 14 28 21 51 36 • Most EM Europe’s CDS remained 189 161 7773 46 643 346 124 201 166 84 60 275 128 184 358 105 196 85 128 134 1177 stable through the last quarter. Russia had the strongest decrease, meanwhile Croatia suffered the strongest rise • Latin America sovereign CDS spreads 681 have also remained stable after the rise they suffered in the previous two quarters • Most of Asian sovereigns spreads 883 1860 72 60 119 933 experienced a reversal and decreased during this quarter after being the region that suffered the strongest increase in the previous one 221 108 104 0 50 00 200 300 400 500 600 1 150 250 350 450 550 6
  • 7. Country Risk Quarterly Report – December 2013 Section 2 Sovereign Credit Ratings Update Sovereign Rating Index 2007-2013 Source: BBVA Research by using S&P, Moodys and Fitch Data AAA 20 AA+ 19 AA 18 AA17 A+ 16 A15 A14 BBB+ 13 BBB 12 BBB11 BB+ 10 BB 9 BBB+ 8 B 7 B- 6 CCC+ 5 CCC 4 CCCCC3 D 2 1 0 AAA 20 AA+ 19 AA 18 AA17 A+ 16 A 15 A-14 BBB+ 13 BBB 12 BBB11 BB+ 10 BB 9 BB-8 B+ 7 B 6 B- 5 CCC+ 4 CCC 3 CCCCC2 D 1 0 AAA 20 AA+ 19 AA 18 AA17 A+ A 16 A-15 14 BBB+ 13 BBB 12 BBB11 BB+ 10 BB BB-9 B+ 8 B 7 B- 6 CCC+ 5 CCC 4 CCCCC 3 D 2 AAA 20 AA+ 19 AA18 AA17 A+16 A 15 A- 14 13 BBB+ 12 BBB BBB11 10 BB+ BB 9 BB- 8 B+ 7 B 6 B- 5 CCC+ 4 CCC 3 CCCCC 2 D 1 1 0 0 AAA 20 AA+ 19 AA18 AA17 A+ A 16 A- 15 14 BBB+ 13 BBB 12 BBB11 BB+ BB10 BB- 9 B+ 8 B 7 B- 6 CCC+ 5 CCC 4 CCCCC 3 D 2 1 0 AAA 20 AA+ 19 AA 18 AA17 A+ 16 A 15 A-14 13 BBB+ 12 BBB 11 BBB10 BB+ BB 9 BB-8 B+ 7 B 6 B- 5 CCC+ 4 CCC 3 CCCCC2 D 1 0 Sovereign Rating Index: An index that translates the three important rating agencies ratings letters codes (Moody´s, Standard & Poor´s and Fitch) to numerical positions from 20 (AAA) to default (0). The index shows the average of the three rescaled numerical ratings. • Developed Economies: France suffered a new downgrade, this time by S&P, who also downgraded Netherlands. On the other hand, S&P upgraded Greece by two notches and S&P and Fitch improved their outlook for Spain • Emerging Markets: Peru and Colombia were upgraded again, this time by Fitch, and Croatia was downgraded also by Fitch 7
  • 8. Country Risk Quarterly Report – December 2013 Section 2 Sovereign downgrade Pressures Map Rating Agencies Downgrade Pressure Map Nov. 2013 (actual minus CDS-implied sovereign rating, in notches) End of Month Source: BBVA Research Asia LATAM EM Europe Developed Markets 2007 USA UK No rway Sweden A ustria Germany France Netherlands Italy Spain B elgium Greece P o rtugal Ireland Turkey Russia P o land Czech Rep Hungary B ulgaria Ro mania Cro atia M exico B razil Chile Co lo mbia P eru A rgentina China Ko rea Thailand Indo nesia M alaysia P hilippines 2008 2009 2010 2011 2012 2013 USA UK Norway Sweden Austria Germany France Netherlands Italy Spain Belgium Greece Portugal Ireland Turkey Russia Poland Czech Rep Hungary Bulgaria Romania Croatia Mexico Brazil Chile Colombia Peru Argentina China Korea Thailand Indonesia Malaysia Philippines • The gap between implicit and observed ratings in Europe’s periphery is shrinking thanks to the decrease in most CDS spreads • In Emerging Europe, downgrade risk remained stable in most of the cases although continues to be high in Hungary and Croatia • Downgrade pressure in Latin-America continue to be small. It is worth noting the case of Chile, who had a negative gap one year ago. The table does not reflect the most recent upgrade of Colombia (December), which is in line with the previous negative gap • In Asia, downgrade pressure is in the neutral area, with some minor downgrade pressures in China -6 -3 0 3 6 9 12 Downgrade Pressure Map: The map shows the difference of the current ratings index (numerically scaled from default (0) to AAA (20)) and the implicit ratings according to the Credit Default Swaps. We calculate implicit probabilities of default (PDs) from the observed CDS and the estimated equilibrium spread. For the computation of these PDs we follow a standard methodology as the described in Chan-Lau (2006) and we assume a constant Loss Given Default of 0.6 (Recovery Rate equal to 0.4) for all the countries in the sample. We use the resulting PDs in a cluster analysis to classify each country at every point in time in one of 20 different categories (ratings) to emulate the same 20 categories used by the Rating Agencies. 8
  • 9. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk Update: Core Europe Europe Core Countries: Vulnerability Radar 2013 (Relative position for the Emerging Developed countries. Max Risk=1, Min Risk=0) *Include Austria, Belgium, France, Germany, Denmark, Norway and Sweden Source: BBVA Research Rule of law Contr ol o f cor rup tion GDP Gro wth 1 .0 0 .9 Inflation Un em ploymen t Rate 0 .8 Po litical stabil ity 0 .7 0 .6 Stru ctu ral Deficit (% GDP) 0 .5 Eq uity Mar kets 0 .4 0 .3 Interest r ate-GDP Difer en tial 2 01 2-1 6 Private credit risk and banking liquidity is below risk thresholds. Public finance vulnerability indicators are also quite low. 0 .2 Real Housing Prices Gro wth 0 .1 Pu blic Debt (% GDP) 0 .0 Pr ivate Cr edit Gr owth Fin an ci al l iqui dity (Credi t/Depo sits) Cor por at e cred it (% GDP) Ho useho ld credi t (%GDP) Cur r. Accoun t Defici t (%GDP) Debt Held by No n Residents (% tot al ) Equity markets are currently slightly above the risk threshold for this year Fin an ci al Needs (% GDP) Shor t T. Debt Pr essur e* Exter nal Debt (% GDP) RER Ap pr eciatio n Europe Core 20 13 Low GDP Growth is still the main vulnerability Europe Core 20 12 Developed: (ST Public Debt/ Total Public Debt) Emerging : (Reserves to ST External Debt) 1: High vulnerability 0: Low vulnerability Risk Thresholds Developed 2013 Vulnerability Radar: Shows a static and comparative vulnerability for different countries. For this we assigned several solvency , liquidity and macro variables and we reorder in percentiles from 0 (lower ratio among the countries to 1 maximum vulnerabilities.) Furthermore Inner positions in the radar shows lower vulnerability meanwhile outer positions stands for higher vulnerability. 9
  • 10. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk Update: Europe Periphery I Europe Periphery I: Vulnerability Radar 2013 (Relative position for the Developed Market countries. Max Risk=1, Min Risk=0) *Include Spain and Italy Source: BBVA Research Rule of law Contr ol o f cor rup tion GDP Gro wth 1 .0 0 .9 Inflation Un em ploymen t Rate 0 .8 Po litical stabil ity 0 .7 0 .6 Stru ctu ral Deficit (% GDP) 0 .5 Eq uity Mar kets 0 .4 0 .3 Structural Public Deficit, housing prices growth, and Private credit growth are all at minimum risk levels. Interest r ate-GDP Difer en tial 2 01 2-1 6 0 .2 Real Housing Prices Gro wth 0 .1 Pu blic Debt (% GDP) 0 .0 Pr ivate Cr edit Gr owth Fin an ci al l iqui dity (Credi t/Depo sits) Cor por at e cred it (% GDP) Ho useho ld credi t (%GDP) Cur r. Accoun t Defici t (%GDP) Debt Held by No n Residents (% tot al ) Fin an ci al Needs (% GDP) Shor t T. Debt Pr essur e* Exter nal Debt (% GDP) RER Ap pr eciatio n Europe Periphery I 2 013 Europe Periphery I 2 012 Risk Thresholds Developed 2013 Developed: (ST Public Debt/ Total Public Debt) Emerging : (Reserves to ST External Debt) 1: High vulnerability 0: Low vulnerability Interest rate-GDP differential is on the rise due to lower GDP growth. Inflation is at very low historical levels. Activity and employment indicators remain poor, together with Public Debt and public finance liquidity indicators Vulnerability Radar: Shows a static and comparative vulnerability for different countries. For this we assigned several solvency , liquidity and macro variables and we reorder in percentiles from 0 (lower ratio among the countries to 1 maximum vulnerabilities.) Furthermore Inner positions in the radar shows lower vulnerability meanwhile outer positions stands for higher vulnerability. 10
  • 11. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk Update: Europe Periphery II Europe Periphery II: Vulnerability Radar 2013 (Relative position for the Developed Market countries. Max Risk=1, Min Risk=0) *Include Greece, Ireland and Portugal Source: BBVA Research Rule of law Contr ol o f cor rup tion GDP Gro wth 1 .0 0 .9 Inflation Un em ploymen t Rate 0 .8 Po litical stabil ity 0 .7 0 .6 Stru ctu ral Deficit (% GDP) Structural public deficit well below the risk threshold. Private credit growth, household credit and real housing prices continue to adjust 0 .5 Eq uity Mar kets 0 .4 0 .3 Interest r ate-GDP Difer en tial 2 01 2-1 6 0 .2 Real Housing Prices Gro wth 0 .1 Pu blic Debt (% GDP) 0 .0 Pr ivate Cr edit Gr owth Fin an ci al l iqui dity (Credi t/Depo sits) Cor por at e cred it (% GDP) Ho useho ld credi t (%GDP) Cur r. Accoun t Defici t (%GDP) Debt Held by No n Residents (% tot al ) Fin an ci al Needs (% GDP) Shor t T. Debt Pr essur e* Exter nal Debt (% GDP) RER Ap pr eciatio n Europe Periphery II 2013 Europe Periphery II 2012 Developed: (ST Public Debt/ Total Public Debt) Emerging : (Reserves to ST External Debt) 1: High vulnerability 0: Low vulnerability Equity Markets growth continue above risk thresholds for the year. Inflation at very low historical levels Risk Thresholds Developed 2013 Public and External debt vulnerability still growing. Banking liquidity is worsening with respect to previous quarter Vulnerability Radar: Shows a static and comparative vulnerability for different countries. For this we assigned several solvency , liquidity and macro variables and we reorder in percentiles from 0 (lower ratio among the countries to 1 maximum vulnerabilities.) Furthermore Inner positions in the radar shows lower vulnerability meanwhile outer positions stands for higher vulnerability 11
  • 12. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk Update: Emerging Europe Emerging Europe: Vulnerability Radar 2013 (Relative position for the Emerging Market countries. Max Risk=1, Min Risk=0) Source: BBVA Research Rule of law Contr ol o f cor rup tion GDP Gro wth 1 .0 0 .9 Inflation Un em ploymen t Rate 0 .8 Po litical stabil ity 0 .7 0 .6 Stru ctu ral Deficit (% GDP) 0 .5 Eq uity Mar kets 0 .4 0 .3 Most of the vulnerabilities are below their corresponding risk thresholds and are stable with respect to previous quarter. Interest r ate-GDP Difer en tial 2 01 2-1 6 0 .2 Real Housing Prices Gro wth 0 .1 Pu blic Debt (% GDP) 0 .0 Pr ivate Cr edit Gr owth Fin an ci al l iqui dity (Credi t/Depo sits) Cor por at e cred it (% GDP) Ho useho ld credi t (%GDP) Cur r. Accoun t Defici t (%GDP) Debt Held by No n Residents (% tot al ) Fin an ci al Needs (% GDP) Shor t T. Debt Pr essur e* Exter nal Debt (% GDP) RER Ap pr eciatio n Emerging Europe 2 013 Emerging Europe 2 012 Developed: (ST Public Debt/ Total Public Debt) Emerging : (Reserves to ST External Debt) 1: High vulnerability 0: Low vulnerability Private Credit growth further accelerating in Turkey and Russia. Current account problems in some countries Risk Thresholds Emerging 20 13 Public and external debt levels still high. Poor growth place risks on debt dynamics through interest rate-GDP differentials Vulnerability Radar: Shows a static and comparative vulnerability for different countries. For this we assigned several solvency , liquidity and macro variables and we reorder in percentiles from 0 (lower ratio among the countries to 1 maximum vulnerabilities.) Furthermore Inner positions in the radar shows lower vulnerability meanwhile outer positions stands for higher vulnerability 12
  • 13. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk Update: Latam Latam: Vulnerability Radar 2013 (Relative position for the Emerging Market countries. Max Risk=1, Min Risk=0) Source: BBVA Research Rule of law Contr ol o f cor rup tion GDP Gro wth 1 .0 0 .9 Inflation Un em ploymen t Rate 0 .8 Po litical stabil ity 0 .7 0 .6 Private credit growth has clearly moderated with respect to previous quarter. Stru ctu ral Deficit (% GDP) 0 .5 Eq uity Mar kets 0 .4 0 .3 Interest r ate-GDP Difer en tial 2 01 2-1 6 0 .2 Real Housing Prices Gro wth 0 .1 Pu blic Debt (% GDP) 0 .0 Pr ivate Cr edit Gr owth Fin an ci al l iqui dity (Credi t/Depo sits) Cor por at e cred it (% GDP) Ho useho ld credi t (%GDP) Cur r. Accoun t Defici t (%GDP) Developed: (ST Public Debt/ Total Public Debt) Emerging : (Reserves to ST External Debt) 1: High vulnerability 0: Low vulnerability Economic growth weakens in some countries Debt Held by No n Residents (% to tal) Fin an ci al Needs (% GDP) Shor t T. Debt Pr essur e* Exter nal Debt (% GDP) RER Ap pr eciatio n Latam 2013 Current Account vulnerability is rising again with respect to previous quarter, although is still below risk threshold Latam 2012 Risk Thresholds Emerging 20 13 Vulnerability Radar: Shows a static and comparative vulnerability for different countries. For this we assigned several solvency , liquidity and macro variables and we reorder in percentiles from 0 (lower ratio among the countries to 1 maximum vulnerabilities.) Furthermore Inner positions in the radar shows lower vulnerability meanwhile outer positions stands for higher vulnerability. 13
  • 14. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk Update: Asia Emerging Asia: Vulnerability Radar 2013 (all data for 2012, Relative position for the Emerging Market countries. Max Risk=1, Min Risk=0) Source: BBVA Research GDP Gro wth Rule of law Contr ol o f cor rup tion Po litical stabil ity Eq uity Mar kets Real Housing Prices Gro wth 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Pr ivate Cr edit Gr owth Fin an ci al l iqui dity (Credi t/Depo sits) Cor por at e cred it (% GDP) Ho useho ld credi t (%GDP) Cur r. Accoun t Defici t (%GDP) Inflation Un em ploymen t Rate Stru ctu ral Deficit (% GDP) Interest r ate-GDP Difer en tial 2 01 2-1 6 Activity indicators continued to be mixed but still among the most solid in the Emerging Markets Pu blic Debt (% GDP) Debt Held by No n Residents (% tot al ) Private Credit and housing prices risks growth keep on rising in China Fin an ci al Needs (% GDP) Shor t T. Debt Pr essur e* Exter nal Debt (% GDP) RER Ap pr eciatio n Emerging Asia 2 013 Emerging Asia 2 012 Structural fiscal deficits above the risk thresholds in some countries Risk Thresholds Emerging 20 13 Developed: (ST Public Debt/ Total Public Debt) Emerging : (Reserves to ST External Debt) 1: High vulnerability 0: Low vulnerability Vulnerability Radar: Shows a static and comparative vulnerability for different countries. For this we assigned several solvency , liquidity and macro variables and we reorder in percentiles from 0 (lower ratio among the countries to 1 maximum vulnerabilities.) Furthermore Inner positions in the radar shows lower vulnerability meanwhile outer positions stands for higher vulnerability 14
  • 15. -1 0.0 Risk Thresholds 40 100 20 50 0 0 Household Debt 2013 Corporate Sector Debt 2013 (% GDP) (% GDP, excluding bond issuances) Source: BBVA Research and BIS Source: BBVA Research and BIS 150 .0 130 .0 250 .0 110 .0 90.0 200 .0 70.0 150 .0 50.0 100 .0 30.0 10.0 50.0 0.0 China India Indonesia Malaysia Philippines Thailand 60 176 1032 316 381 250 China India Indonesia Malaysia Philippines Thailand 300 Argentina Brazil Chile Colombia Mexico Peru Source: BBVA Research and IMF 140 Argentina Brazil Chile Colombia Mexico Peru (% GDP) Source: BBVA Research and IMF 245 External Debt 2013 (% GDP) Bulgaria Croatia Hungary Poland Romania Russia Turkey Gross Public Debt 2013 Bulgaria Croatia Hungary Poland Romania Russia Turkey 80 United States Canada Japan Australia Korea Norway Sweden Denmark Finland UK Austria France Germany Netherlands Belgium Italy Spain Ireland Port ugal Greece Czech Rep China India Indonesia Malaysia Philippines Thailand Argentina Brazil Chile Colombia Mexico Peru Bulgaria Croatia Hungary Poland Romania Russia Turkey 100 United States Canada Japan Australia Korea Norway Sweden Denmark Finland UK Austria France Germany Netherlands Belgium Italy Spain Ireland Port ugal Greece Czech Rep China India Indonesia Malaysia Philippines Thailand Argentina Brazil Chile Colombia Mexico Peru United States Canada Japan Australia Korea Norway Sweden Denmark Finland UK Austria France Germany Netherlands Belgium Italy Spain Ireland Port ugal Greece Czech Rep 120 Bulgaria Croatia Hungary Poland Romania Russia Turkey United States Canada Japan Australia Korea Norway Sweden Denmark Finland UK Austria France Germany Netherlands Belgium Italy Spain Ireland Port ugal Greece Czech Rep Country Risk Quarterly Report – December 2013 Section 3 Public and Private Debt Chart Gallery 200 150 15
  • 16. Country Risk Quarterly Report – December 2013 Section 3 Private Credit Pulse Private credit colour map (1997-2013 Q4) (yearly change of private credit-to-GDP ratio) Source: BBVA Research and Haver Asia LATAM Europe EM Western Europe G4 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ### ### ### ### ### ### … US Japan Canada UK Denmark Netherlands Germany France Italy Belgium Greece Spain Ireland Portugal Iceland Turkey Poland Czech Rep Hungary Romania Russia Bulgaria Croatia Mexico Brazil Chile Colombia Argentina Peru Uruguay China Korea Thailand India Indonesia Malaysia Philippines Hong Kong Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # • Credit-to-GDP ratio continues rising in the US, and it is starting to show signs of a rapid acceleration in Japan. Credit ratio also continues to grow fast in Greece limiting the necessary de-leveraging process # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # • Turkey and Russia continue showing signs of a rapid expansion of private credit, although the most recent data from Q4 in Turkey (not included in this report) shows that it is already moderating. The rest of the countries in Emerging Europe continue experiencing their deleveraging process # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # • The growth of private credit in Latin America is slowing down its pace throughout the whole region # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # • In Asia, credit growth continues to be fast in China and Hong Kong. There are no signs of excess credit growth in the rest of the countries # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Booming: Credit/GDP growth is higher than 5% Excess Credit Growth: Credit/GDP growth between 3%-5% High Growth: Credit/GDP growth between 2%-3% Mild Growth: Credit/GDP growth between 1%-2% Stagnant: Credit/GDP is declining betwen 0%-1% De-leveraging: Credit/GDP growth declining Non Available 16
  • 17. Country Risk Quarterly Report – December 2013 Section 3 Real Housing Prices Pulse Real housing prices colour map (1997-2013 Q4) (yearly change of real housing prices) Asia LATAM Europa Emergente Europa Occidental G4 Source: BBVA Research, BIS and Global Property Guide 9 7 4 3 0.5 -2 US Japan Canada UK Denmark Netherlands Germany France Italy Belgium Greece Spain Ireland Portugal Iceland Turkey Poland Czech Rep Hungary Romania Russia Bulgaria Croatia Mexico Brazil Chile Colombia Argentina Peru Uruguay China Korea Thailand India Indonesia Malaysia Philippines Hong Kong Singapore 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 # # # # # # # # # # # # # # # • Real housing prices growth continues its recovery in the US and the UK. Germany continues to lead housing prices growth in Europe. First signs of recovery in Ireland • Housing prices continue to freeze in most Emerging Europe countries, with some exceptions as Turkey (although housing prices are not growing as fast as credit) • In Latin America, housing prices are growing almost everywhere, with the exceptions of Mexico and Argentina. Colombia and Peru are the ones who could call for some concern, since prices have been booming for several quarters, especially in Peru # # # # # # # # • Housing prices growth has slowed its pace all over Emerging Asia, with the exception of China, where prices have accelerated its growth rate in the last quarter # # # Booming: Real House prices growth higher than 8% Excess Growth: Real House Prices Growth between 5% and 8% High Growth: Real House Prices growth between 3%-5% Mild Growth: Real House prices growth between 1%-3% Stagnant: Real House Prices growth between 0% and 1% De-Leveraging: House prices are declining Non Available Data 17
  • 18. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk Update: Western Europe Europe Core: Sovereign Rating Europe Periphery I: Sovereign Rating Europe Periphery II: Sovereign Rating (Rating agencies and BBVA scores +-1std dev) (Rating agencies and BBVA scores +-1 std dev) (Rating agencies and BBVA scores +.1 std dev) Source: Standard & Poors, Moody´s, Fitch and BBVA Research Source: Standard & Poors, Moody´s, Fitch and BBVA Research Source: Standard & Poors, Moody´s, Fitch and BBVA Research 21 20 AAA 19 AA+ AA 18 AA-17 A+ 16 A 15 A- 14 13 BBB+ 12 BBB 11 BBB10 BB+ BB 9 BB- 8 B+ 7 B 6 5 B4 CCC+ 3 CCC2 CCC1 CC 0 2004 21 20 AAA 19 AA+ AA 18 17 AAA+ 16 A 15 A- 14 13 BBB+ 12 BBB 11 BBB10 BB+ BB 9 BB- 8 B+ 7 B 6 B- 5 4 CCC+ CCC3 2 CCC1 CC 0 Rating Agencies BBVA Models Average 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 21 AAA 20 AA+ 19 AA 18 AA17 A+ 16 A 15 A- 14 BBB+ 13 BBB 12 BBB11 BB+ 10 BB 9 BB- 8 B+ 7 B 6 B- 5 4 CCC+ CCC3 2 CCCCC 1 Rating Agencies BBVA Models Average Rating Agencies BBVA Models Average 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EM Europe: Sovereign Rating Latam: Sovereign Rating Emerging Asia: Sovereign Rating (Rating agencies and BBVA scores) (Rating agencies and BBVA scores) (Rating agencies and BBVA scores) Source: Standard & Poors, Moody´s, Fitch and BBVA Research Source: Standard & Poors, Moody´s, Fitch and BBVA Research Source: Standard & Poors, Moody´s, Fitch and BBVA Research 21 AAA 20 AA+ 19 AA 18 AA17 A+ 16 A 15 A- 14 BBB+ 13 BBB 12 BBB11 BB+ 10 BB 9 BB- 8 B+ 7 B 6 B- 5 CCC+ 4 CCC3 CCC2 CC 1 21 AAA 20 AA+ 19 AA 18 AA17 A+ 16 A 15 A- 14 BBB+ 13 BBB 12 BBB11 BB+ 10 BB 9 BB- 8 B+ 7 B 6 B- 5 4 CCC+ CCC3 2 CCCCC 1 Rating Agencies BBVA Models Average 0 2004 21 AAA 20 AA+ 19 AA18 AA17 A+ 16 A 15 A- 14 13 BBB+ 12 BBB 11 BBB10 BB+ BB 9 BB- 8 B+ 7 B 6 B- 5 4 CCC+ 3 CCC 2 CCCCC 1 Rating Agencies BBVA Models Average 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 Rating Agencies BBVA Models Average 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 18
  • 19. Country Risk Quarterly Report – December 2013 Section 3 Regional Risk: CD Swaps Update Europe Core: CD Swap 5 year Europe Periphery I: CD Swap 5 year Europe Periphery II: CD Swap 5 year (equilibrium: average of 4 alternative models + 0.5 Standard deviation) (equilibrium: average of 4 alternative models + 0.5 Standard deviation) (equilibrium: average of 4 alternative models + 0.5 Standard deviation) 160 160 600 140 600 140 Equilibrium CD Swap 120 500 Equilibrium CD Swap 500 100 400 100 80 60 60 40 200 0 2010 2011 2012 2013 1000 1000 100 800 800 600 400 200 200 200 20 2009 1200 400 300 40 20 1400 Equilibrium CD Swap 600 300 100 80 1400 1200 120 2008 1600 CD Swap 400 0 2007 1600 CD Swap CD Swap 0 2007 0 2007 0 2008 2009 2010 2011 2012 2013 0 2008 2009 2010 2011 2012 2013 EM Europe: CD Swap 5 year LATAM: CD Swap 5 year EM Asia: CD Swap 5 year (equilibrium: average of 4 alternative models + 0.5 Standard deviation) (equilibrium: average of 4 alternative models + 0.5 Standard deviation) (equilibrium: average of 4 alternative models + 0.5 Standard deviation) 500 500 500 450 450 400 400 350 500 500 450 450 400 400 400 400 350 350 350 350 350 300 300 300 300 300 300 250 250 250 250 250 200 200 200 200 200 200 150 150 150 150 150 150 100 100 100 100 100 100 CD Swap 450 CD Swap Equilibrium CD Swap Equilibrium CD Swap 50 0 2007 50 0 2008 2009 2010 2011 2012 2013 250 50 0 2007 50 0 2008 2009 2010 2011 2012 2013 500 CD Swap Equilibrium CD Swap 50 0 2007 450 50 0 2008 2009 2010 2011 2012 2013 19
  • 20. Country Risk Quarterly Report – December 2013 Section 3 Vulnerability Indicators: Developed Economies Vulnerability Indicators* 2013: Developed Countries Source: BBVA Research, Haver, BIS, IMF and World Bank Fiscal Sustainability External Sustainability Liquidity Management Macroeconomic Performance Credit and housing Private debt Institutional Interest rate Current Short Debt Held Private Real Structural GDP Gross RER Gross GDP Consume Unemploym Equity NF Financial WB Control Account External Term by non Credit to Housing Househol WB Political WB Rule of Primary growth Public Appreciati Financial Growth r prices ent Rate Markets Corporate liquidity Corruption Balance Debt (1) Public Residents GDP Prices d Debt (1) Stability (7) Law (7) Balance (1) differential Debt (1) on (2) Needs (1) (4) (4) (5) Growth (4) Debt (1) (6) (7) (1) Debt (3) (3) Growth (4) Growth (4) 2013-17 United States -2.7 -1.8 108 -2.2 103 -0.4 25 19 32 1.7 2.4 7.2 7.5 6.2 12.6 78 79 59 -0.6 -1.4 -1.6 Canada -1.7 0.2 87 -3.5 72 -3.6 16 13 24 1.5 1.5 7.3 3.8 0.2 3.8 94 55 108 -1.1 -1.9 -1.8 Japan -8.7 -1.2 245 0.9 44 -19.5 59 49 9 1.9 0.1 3.8 8.6 -1.8 63.0 66 144 46 -0.9 -1.6 -1.3 Australia -0.6 -1.2 32 -2.3 81 -3.0 4 3 72 2.6 2.2 5.8 2.5 3.0 18.4 109 60 122 -1.0 -2.0 -1.7 Korea 1.7 -2.1 50 5.6 33 5.4 1 3 14 2.6 1.6 2.9 0.2 -1.2 0.0 85 74 130 -0.2 -0.5 -1.0 Norway -8.6 -1.7 30 11.6 143 -4.5 -8 4 39 0.7 2.0 3.4 -1.1 1.9 10.6 86 128 111 -1.3 -2.2 -1.9 Sweden -1.9 -1.5 42 5.2 184 1.9 4 3 47 0.7 -0.1 7.9 3.1 -0.1 17.5 86 89 299 -1.2 -2.3 -1.9 Denmark -1.6 0.5 47 6.0 194 -0.2 10 7 46 0.2 1.3 5.9 -7.3 2.9 14.7 140 90 387 -0.9 -2.4 -1.9 Finland -0.7 -1.2 47 6.0 194 1.0 8 6 91 0.2 1.3 5.9 2.2 -6.7 25.6 67 94 154 -1.4 -2.2 -1.9 UK -1.9 -0.3 90 -3.0 381 3.1 12 6 32 1.4 2.7 7.8 -7.7 1.4 12.5 92 103 106 -0.4 -1.6 -1.7 Austria 0.3 0.1 74 2.8 204 1.5 8 6 83 0.4 2.0 4.9 -5.1 1.3 21.0 55 89 155 -1.3 -1.3 -1.8 France 0.0 -0.1 93 -1.6 206 -0.6 18 13 64 0.2 1.1 11.2 -1.4 -3.9 23.5 55 156 142 -0.6 -1.4 -1.4 Germany 2.7 0.0 80 6.5 166 0.3 8 8 61 0.6 1.7 6.9 -6.2 4.8 19.1 57 90 68 -0.8 -1.8 -1.6 Netherlands -0.1 0.0 85 11.3 316 1.6 12 9 54 -1.1 3.2 8.8 -0.7 -7.3 16.0 126 93 117 -1.2 -2.1 -1.8 Belgium 1.0 1.0 100 -3.0 237 0.9 18 16 57 0.2 1.4 9.0 -0.3 -1.7 19.0 57 199 74 -0.9 -1.6 -1.4 Italy 3.7 2.4 133 0.1 122 0.6 28 25 35 -1.9 1.4 12.2 -1.6 -6.4 15.5 45 116 91 -0.5 0.0 -0.4 Spain 1.4 2.2 85 0.6 176 0.8 18 14 29 -1.3 0.8 26.0 -14.8 -8.8 19.2 79 173 139 0.0 -1.0 -1.0 Ireland -1.3 0.4 123 4.9 1032 -0.9 13 6 64 -0.3 1.2 13.3 -18.7 2.1 29.3 105 293 139 -0.9 -1.4 -1.7 Portugal 1.1 1.2 129 1.0 238 -0.2 23 18 60 -1.6 0.6 17.7 -9.2 -3.7 17.9 91 149 157 -0.7 -0.9 -1.0 Greece 4.3 1.0 176 -1.0 223 -1.8 20 15 68 -3.9 -0.9 27.9 8.4 -10.4 37.2 66 74 118 0.2 0.3 -0.4 *Vulnerability Indicators: (1) % GDP (2) Deviation from 4 years average (3) % of total debt (4) % year on year (5) % of Total Labor Force (6) Financial System Credit to Deposit (7) Index by World Bank Governance Indicators 20
  • 21. Country Risk Quarterly Report – December 2013 Section 3 Vulnerability Indicators: Emerging Economies Vulnerability Indicators* 2013: Emerging Countries Source: BBVA Research, Haver, BIS, IMF and World Bank Fiscal Sustainability External Sustainability Interest rate Structural Gross GDP growth Primary Public differential Balance (1) Debt (1) 2013-17 Bulgaria Czech Rep Croatia Hungary Poland Romania Russia Turkey Argentina Brazil Chile Colombia Mexico Peru China India Indonesia Malaysia Philippines Thailand 0.2 -0.7 -2.8 1.9 -0.3 0.7 0.2 1.8 -1.5 3.3 -1.0 0.1 -0.5 0.9 -0.3 -4.3 -1.4 -2.1 0.5 -2.5 -0.1 -0.2 1.7 1.3 -0.1 -0.8 -1.2 2.0 -5.5 2.4 -2.0 -1.1 -0.2 -2.8 -7.7 -4.5 -5.2 -2.4 -1.9 -4.8 17 48 58 80 58 38 12 37 44 59 12 34 41 17 15 53 22 56 52 38 Current Account Balance (1) 1.5 -1.7 -4.0 1.9 -1.4 -0.4 1.6 -6.8 -0.5 -3.6 -4.0 -3.1 -2.0 -4.9 2.4 -4.2 -3.5 4.3 2.8 -0.9 Liquidity Management Reserves to Debt Held RER Gross External Short Term by non Appreciati Financial Debt (1) External Residents on (2) Needs (1) Debt (3) (3) 91 53 105 148 69 74 31 42 32 21 44 21 30 27 7 19 30 34 29 39 0.0 -1.9 -1.6 -1.4 -0.6 0.5 2.2 0.6 -11.3 -9.4 -6.3 -2.5 0.7 -8.7 9.4 -11.1 -11.5 -0.3 4.2 2.6 4 11 11 21 12 12 2 9 9 17 1 4 11 2 6 13 4 10 8 8 1.4 8 2.3 1.7 1.5 1.5 5.2 1.0 1.3 12.1 1.0 3.4 2.9 8.3 6.2 3.0 2.0 4.4 10.9 2.5 47 33 34 68 53 48 19 35 32 18 16 28 33 65 … 7 55 29 39 10 Macroeconomic Performance GDP Consumer Unemployme Growth prices (4) nt Rate (5) (4) 0.6 -1.0 -0.7 0.4 1.2 1.9 1.4 3.7 4.5 2.6 4.2 3.6 1.2 5.2 7.7 4.2 5.6 4.6 7.0 4.2 -0.4 2.7 2.4 2.6 1.3 4.8 7.2 7.5 17.2 6.5 2.4 2.9 3.5 3.1 2.8 10.0 7.0 2.1 3.0 2.5 11.2 7.8 20.0 10.1 13.7 4.8 5.6 9.0 7.0 5.5 6.0 10.3 5.1 6.0 4.1 11.8 5.9 3.2 8.7 1.2 Credit and housing Private debt Private Real Equity NF Credit to Housing Household Markets Corporate GDP Prices Debt (1) Growth (4) Debt (1) Growth (4) Growth (4) -2.2 1.2 -2.8 -0.3 0.4 -3.4 6.0 10.4 1.6 4.2 2.6 3.3 2.8 2.3 9.2 -1.7 1.1 3.8 0.2 -2.6 -10.1 0.0 -7.3 0.6 -6.2 -2.4 0.7 4.7 1.0 5.4 4.7 9.3 0.2 10.8 8.7 -2.7 2.0 3.2 7.4 5.2 40.8 0.4 5.6 0.4 15.0 0.3 0.3 12.2 95.1 -11.6 -9.6 0.0 3.1 -26.6 -1.9 3.3 1.3 8.1 15.8 6.5 24 33 38 30 36 21 14 15 8 16 29 17 15 11 31 9 57 94 2 27 96 50 37 89 81 53 31 34 -37 48 24 28 21 86 44 13 -28 24 Institutional Financial WB Control WB Political WB Rule of liquidity Corruption Stability (7) Law (7) (6) (7) 101 84 88 150 105 112 121 118 76 124 179 186 77 89 158 79 93 89 61 104 -0.3 -1.0 -0.6 -0.7 -1.0 -0.1 0.8 1.2 -0.1 -0.1 -0.3 1.4 0.7 0.9 0.5 1.2 0.6 0.0 1.2 1.2 0.2 -0.2 0.0 -0.3 -0.6 0.3 1.0 -0.2 0.5 0.1 -1.6 0.4 0.4 0.4 0.5 0.6 0.7 -0.3 0.6 0.3 0.1 -1.0 -0.2 -0.6 -0.7 0.0 0.8 0.0 0.7 0.1 -1.4 0.4 0.6 0.6 0.5 0.1 0.6 -0.5 0.5 0.2 *Vulnerability Indicators: (1) % GDP (2) Deviation from 4 years average (3) % of total debt (4) % year on year (5) % of Total Labor Force (6) Financial System Credit to Deposit (7) Index by World Bank Governance Indicators 21
  • 22. Country Risk Quarterly Report – December 2013 Annex Methodology: Indicators and Maps • Financial Stress Map: It stress levels of according to the normalized time series movements. Higher positive standard units (1.5 or higher) stands for high levels of stress (dark blue) and lower standard deviations (-1.5 or below) stands for lower level of market stress (lighter colors) • Sovereign Rating Index: An index that translates the three important rating agencies ratings letters codes (Moody´s, Standard & Poor´s and Fitch) to numerical positions from 20 (AAA) to default (0) . The index shows the average of the three rescaled numerical ratings • Sovereign CD Swaps Map: It shows a colour map with 6 different ranges of CD Swaps quotes (darker >500, 300 to 500, 200 to 300, 100 to 200, 50 to 100 and the lighter below 50 bps) • Downgrade Pressure Map: The map shows the difference of the current ratings index (numerically scaled from default (0) to AAA (20)) and the implicit ratings according to the Credit Default Swaps. We calculate implicit probabilities of default (PDs) from the observed CDS and the estimated equilibrium spread. For the computation of these PDs we follow a standard methodology as the described in Chan-Lau (2006) and we assume a constant Loss Given Default of 0.6 (Recovery Rate equal to 0.4) for all the countries in the sample. We use the resulting PDs in a cluster analysis to classify each country at every point in time in one of 20 different categories (ratings) to emulate the same 20 categories used by the Rating Agencies. The map and the graph plot the difference between the actual sovereign rating index and the CDS-implied sovereign rating, in notches. Higher positives differences account for Downgrade potential pressures and negative differences account for Upgrade potential. We consider the +-3 notches area as the Neutral one • Vulnerability Radars & Risk Thresholds Map: — A Vulnerability Radar shows a static and comparative vulnerability for different countries. For this we assigned several dimensions of vulnerabilities each of them represented by three vulnerability indicators. The dimensions included are: Macroeconomics, Fiscal, Liquidity, External, Excess Credit and Assets, Private Balance Sheets and Institutional. Once the indicators are compiled we reorder the countries in percentiles from 0 (lower ratio among the countries) to 1 (maximum vulnerabilities) relative to its group (Developed Economies or Emerging Markets). Furthermore Inner positions (near 0) in the radar shows lower vulnerability meanwhile outer positions (near 1) stands for higher vulnerability. Besides we compare the positions of the country with risk thresholds in red whose values have been computed according to our own analysis or empirical literature — The Distance to Risk Map: Shows in different colours a summary table of vulnerability radars. Darker colours stand for indicators above risk thresholds (developed or emerging depending the country). Lighter colours reflect safe values in the sense of a high distance to the risk 22 thresholds. Dimensions are computed as the geometric average of the three indicators included in each of the dimensions
  • 23. Country Risk Quarterly Report – December 2013 Annex Methodology: Indicators and Maps Risk Thresholds Table Risk Thresholds Risk Thresholds Risk Developed Emerging Direction Economies Vulnerability Dimensions Economies 1.5 4.0 10.0 3.0 10.0 10.0 Lower Higher Higher BBVA Research BBVA Research BBVA Research -4.2 3.6 73.0 -0.5 1.1 43.0 Lower Higher Higher Baldacci et Al (2011). Assesing Fiscal Stress. IMF WP 11/100 Baldacci et Al (2011). Assesing Fiscal Stress. IMF WP 11/100 Baldacci et Al (2011). Assesing Fiscal Stress. IMF WP 11/100 17.0 84.0 21.0 40.0 Higher Higher Baldacci et Al (2011). Assesing Fiscal Stress. IMF WP 11/100 Baldacci et Al (2011). Assesing Fiscal Stress. IMF WP 11/101 0.6 Higher Lower Baldacci et Al (2011). Assesing Fiscal Stress. IMF WP 11/100 Baldacci et Al (2011). Assesing Fiscal Stress. IMF WP 11/100 4.0 200.0 5.0 6.0 60.0 10.0 Lower Higher Higher BBVA Research BBVA Research EU Commission (2012) and BBVA Research 84.0 90.0 130.0 84.0 90.0 130.0 Higher Higher Higher Chechetti et al (2011). "The real effects of debt". BIS Working Paper 352 & EU Comission (2012) Chechetti et al (2011). "The real effects of debt". BIS Working Paper 352 & EU Comission (2013) EU Commission (2012) and BBVA Research 8.0 8.0 20.0 8.0 8.0 20.0 Higher Higher Higher IMF Global Financial Stability Report IMF Global Financial Stability Report IMF Global Financial Stability Report 0.2 (9th percentil) 0.6 (9th percentil) 0.6 (8th percentil) -1.0 (8th percentil) -0.7 (8th percentil ) -0.6 (8 th percentil) Lower Lower Lower World Bank Governance Indicators World Bank Governance Indicators World Bank Governance Indicators Research Macroeconomics GDP Inflation Unemployment Fiscal Vulnerability Ciclically Adjusted Deficit ("Strutural Deficit") Expected Interest rate GDP growth diferential 5 years ahead Gross Public Debt Liquidity Problems Gross Financial Needs Debt Held by Non Residents Short Term Debt Pressure Publi Short Term Debt as % of Total Publi Debt (Developed) Reserves to Short term debt (Emerging) 9.1 External Vulnerability Current Account Balance (% GDP) External Debt (% GDP) Real Exchange Rate (Deviation from 4 yr average) Private Balance Sheets Household Debt (% GDP) Non Financial Corporate Debt (% GDP) Financial liquidity (Credit/Deposits) Excess Credit and Assets Private Credit to GDP (annual Change) Real Housing Prices growth (% yoy) Equity growth (% yoy) Institutions Political Stability Control of Corruption Rule of Law 23
  • 24. Country Risk Quarterly Report – December 2013 Annex Methodology: Models and BBVA country risk • BBVA Research Sovereign Ratings Methodology: We compute our sovereigns ratings by averaging four alternatives sovereign rating models developed at BBVA research: - Credit Default Swaps Equilibrium Panel Data Models: This model estimate actual and forecasts equilibrium levels of CD Swaps for 40 developed and emerging markets. The long run equilibrium CD Swaps are the result of four alternative panel data models. The average of these equilibrium values are finally are finally converted to a 20 scale sovereign rating scale. The CD Swaps equilibrium are calculated by a weighting average of the four CD Swaps equilibrium model estimations (30% for the linear and quadratic models and 15% for each expectations model to correct for expectations uncertainty). The weighted average is rounded by 0.5 standard deviation confidence bands. The models are the following - Linear Model (35% weight): Panel Data Model with fixed effects including Global Risk Aversion, GDP growth, Inflation, Public Debt and institutional index for developed economies and adding External debt and Reserves to Imports for Emerging Markets - Quadratic Model (35% weight): It is similar to the Linear Panel Data Model but including a quadratic term for public (Developed and emerging) and external debt (Emerging) - Expectations Model (15% weight): It is similar to the linear model but public and external debt account for one year expected values - Quadratic Expectations Model (15% weight): Similar to the expectations model but including quadratic terms of public debt and external debt expectations - Sovereign Rating Panel Data Ordered Probit with Fixed Effects Model: The model estimates a sovereign rating index (a 20 numerical scale index of the three sovereign rating agencies) through ordered probit panel data techniques. This model takes into account idiosyncratic fundamental stock and flows sustainability ratios allowing for fixed effects , thus including idiosyncratic country specific effects - Sovereign Rating Panel Data Ordered Probit without Fixed Effects Model: The model estimates a sovereign rating index (a 20 numerical scale index of the three sovereign rating agencies) through ordered probit panel data techniques. This model takes into account idiosyncratic fundamental stock and flows sustainability but fixed effects are not included, thus all countries are treated symmetrically without including the country specific long run fixed effects - Sovereign Rating Individual OLS models: These models estimates the sovereign rating index (a 20 numerical scale index of the three sovereign rating agencies) individually. Furthermore , parameters for the different vulnerability indicators are estimated taken into account the own history of the country independent of the rest of the countries 24
  • 25. Country Risk Quarterly Report – December 2013 Annex Methodology: Models and BBVA country risk BBVA Research Sovereign Ratings Methodology Diagram Source: BBVA Research BBVA Research Sovereign Ratings (100%) Equilibrium CD Swaps Models (25%) Panel Data Model Fixed Effects (25%) Panel Data Model NO Fixed Effects (25%) Individual OLS Models (25%) Panel Data Linear Model (35%) Panel Data Quadratic Model (35%) Panel Data Expectations Model (15%) Panel Data Quadratic & Expectations Model (15%) 25
  • 26. Country Risk Quarterly Report – December 2013 This report has been produced by Emerging Markets Unit, Cross-Country Analysis Team Chief Economist for Emerging Markets Alicia García-Herrero +852 2582 3281 alicia.garcia-herrero@bbva.com.hk Chief Economist, Cross-Country Emerging Markets Analysis Álvaro Ortiz Vidal-Abarca +34 630 144 485 alvaro.ortiz@bbva.com Gonzalo de Cadenas +34 606 001 949 gonzalo.decadenas@bbva.com David Martínez Turégano +34 690 845 429 dmartinezt@bbva.com With the assistance of: Carrie Liu carrie.liu@bbva.com Alfonso Ugarte Ruiz + 34 91 537 37 35 alfonso.ugarte@bbva.com Edward Wu edward.wu@bbva.com 26
  • 27. Country Risk Quarterly Report – December 2013 BBVA Research Group Chief Economist Jorge Sicilia Emerging Economies: Alicia García-Herrero alicia.garcia-herrero@bbva.com.hk Cross-Country Emerging Markets Analysis Álvaro Ortiz Vidal-Abarca alvaro.ortiz@bbva.com Asia Stephen Schwartz stephen.schwartz@bbva.com.hk Mexico Carlos Serrano carlos.serrano@bbva.com Latam Coordination Juan Ruiz juan.ruiz@bbva.com Argentina Gloria Sorensen gsorensen@bbva.com Chile Jorge Selaive jselaive@bbva.com Colombia Juana Téllez juana.tellez@bbva.com Peru Hugo Perea hperea@bbva.com Venezuela Oswaldo López oswaldo.lopez@bbva.com Developed Economies: Rafael Doménech r.domenech@bbva.com Spain Miguel Cardoso miguel.cardoso@bbva.com Europe Miguel Jiménez mjimenezg@bbva.com US Nathaniel Karp nathaniel.karp@bbvacompass.com Global Areas: Financial Scenarios Sonsoles Castillo s.castillo@bbva.com Economic Scenarios Julián Cubero juan.cubero@bbva.com Financial Systems & Regulation: Santiago Fernández de Lis sfernandezdelis@grupobbva.com Financial Systems Ana Rubio arubiog@bbva.com Financial Inclusion David Tuesta david.tuesta@bbva.com Regulation and Public Policies María Abascal maria.abascal@bbva.com Recovery and Resolution Policy José Carlos Pardo josecarlos.pardo@bbva.com Global Regulatory Coordination Matías Viola matias.viola@bbva.com Innovation & Processes Clara Barrabés clara.barrabes@bbva.com Contact details: BBVA Research Paseo Castellana, 81 – 7th floor 28046 Madrid (Spain) Tel. + 34 91 374 60 00 and + 34 91 537 70 00 Fax. +34 91 374 30 25 bbvaresearch@bbva.com www.bbvaresearch.com BBVA Research Asia 43/F Two International Finance Centre 8 Finance Street Central Hong Kong Tel: +852 2582 3111 E-mail: research.emergingmarkets@bbva.com.hk 27