Latin America Economic Outlook. First Quarter 2014
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Latin America Economic Outlook. First Quarter 2014

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The global cycle is improving and the risks are more balanced again. Global GDP growth will reach 2.9% in 2013, 3.6% in 2014 and 3.9% in 2015. ...

The global cycle is improving and the risks are more balanced again. Global GDP growth will reach 2.9% in 2013, 3.6% in 2014 and 3.9% in 2015.
Volatility returned to the Latam markets, but from now on differentiation will increase depending on the solidity of the fundamentals.
Latam GDP growth will expand from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. The divergence in growth within the region will become increasingly marked: the Pacific Alliance will grow nearly 4% in 2014 and 2015, more than double the pace in Mercosur.
External deficits will start to decline in 2014, and remain financed by long-term capital. However, the region has suffered a loss of competitiveness in the last five years.
The majority of countries have good buffers to protect themselves from the Fed’s tapering. However, it is crucial that reforms continue to be pushed through to avoid weakening the long-term growth drivers.

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Latin America Economic Outlook. First Quarter 2014 Latin America Economic Outlook. First Quarter 2014 Presentation Transcript

  • Latam: increasing differentiation Juan Ruiz BBVA Research│Chief Economist for South America Latam Economic Outlook – First quarter of 2014│ Madrid, 17 February 2014
  • Latam Economic Outlook / February 2014 Key messages 1 The global cycle is improving and the risks are more balanced again. Global GDP growth will reach 2.9% in 2013, 3.6% in 2014 and 3.9% in 2015. 2 Volatility returned to the Latam markets, but from now on differentiation will increase depending on the solidity of the fundamentals. 3 Latam GDP growth will expand from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. The divergence in growth within the region will become increasingly marked: the Pacific Alliance will grow nearly 4% in 2014 and 2015, more than double the pace in Mercosur. 4 External deficits will start to decline in 2014, and remain financed by long-term capital. However, the region has suffered a loss of competitiveness in the last five years. 5 The majority of countries have good buffers to protect themselves from the Fed’s tapering. However, it is crucial that reforms continue to be pushed through to avoid weakening the long-term growth drivers. Page 2
  • Latam Economic Outlook / February 2014 Synopsis 1 Global economy: more growth and more balanced risks 2 Growth expanding in 2014 and 2015, with increasing differentiation within the region 3 Latin America has buffers to protect itself against the Fed’s tapering, but reforms are now even more necessary Page 3
  • Latam Economic Outlook / February 2014 Improvement in the global economic cycle, especially in the advanced economies Manufacturing Confidence Indicator (PMI) Source: BBVA Research and Markit 60 58 The improvement in the global cycle is largely due to the contribution from the developed economies, particularly the US 56 54 The eurozone is also starting to post moderate growth 52 50 The situation in the EMs is more diverse, but some – such as China – are maintaining stable rates of growth 48 Global Advanced economies ene-14 ago-13 mar-13 oct-12 may-12 dic-11 jul-11 feb-11 sep-10 46 BBVA Eagles EAGLES is the group of emerging economies that will make the biggest contribution to global GDP in the next 10 years. The group comprises China, India, Indonesia, Brazil, Russia, Korea, Turkey, Mexico and Taiwan. Page 4
  • Latam Economic Outlook / February 2014 The US starts to unwind monetary stimulus, but in a gradual and orderly fashion US: Federal funds futures and long-term interest-rates (%) Source: BBVA Research y Bloomberg 3.2 0.35 2.8 0.30 0.25 2.4 The acceleration in activity has allowed the Fed to start to reduce bond purchases (tapering) 0.20 2.0 0.15 Jan-14 Nov-13 Sep-13 Jul-13 0.05 May-13 1.2 Mar-13 0.10 Jan-13 1.6 Our scenario includes a first increase in interest rates in the second half of 2015 The Fed’s communications policy and its forward guidance have avoided additional increases in long-term interest rates and cooled expectations regarding short-term rates 10-year Treasury note yield at constant maturity (Avg % pa, left) Federal funds rate implied by the 12-month futures prices (% pa, right) Page 5
  • Latam Economic Outlook / February 2014 The reduced liquidity affects all the EMs, but the differentiation will be considerable EMs: dependency on short-term financing and currency weakness Source: BBVA Research y Bloomberg Funding Gap (CA+FDI, avg.2Q´132Q'12, % GDP) 10 TWN The EMs have suffered a drop in capital inflows, currency depreciation and a fall in their asset prices 8 6 4 2 0 -2 -4 CHI KOR PHI MASYA BRA CHL THA MEX Domestic shocks in some of the large EMs have been more to blame for this than tapering IND TUR -6 -8 From now on, differentiation will continue to be considerable, with the worst impact on the economies that are more vulnerable to external factors -10 0 10 20 30 FX depreciation (4-Feb-14 vs. avg. Dec-12, %) Page 6
  • Latam Economic Outlook / February 2014 Acceleration of global activity in 2014 and 2015 Forecasts for global growth (%) Source: BBVA Research 6 4.8 5 4 3 3.6 5.2 5.4 Upwards revisions for US growth forecasts in 2014 3.9 2.9 2.52.5 1.9 1.8 2 Increased contribution to global growth from the developed economies than in 2013, but the EMs still account for two-thirds of the growth 1.1 1 0 -0.4 13 14 15 13 14 15 13 14 15 13 14 15 -1 World US Eurozone Growth in China will remain around 7.5% in 2014 and 2015, but the vulnerabilities will become more evident Eagles* Forecasts in Feb 2014 Forecasts in Nov 2013 EAGLES is the group of emerging economies that will make the biggest contribution to global GDP in the next 10 years. The group comprises China, India, Indonesia, Brazil, Russia, Korea, Turkey, Mexico and Taiwan Page 7
  • Latam Economic Outlook / February 2014 More balanced global risks than three months ago, and fewer risks in the US Withdrawal of monetary stimulus in the US and capital flow adjustments Adjustments in China and in other EMs (*) Stable risk Less risk eurozone Banking union, political instability and deflation risk Stable risk (*) Uneven performance from country to country Page 8
  • Latam Economic Outlook / February 2014 Synopsis 1 Global economy: more growth and more balanced risks 2 Growth expanding in 2014 and 2015, with increasing differentiation within the region 3 Latin America has buffers to protect itself against the Fed’s tapering, but reforms are now even more necessary Page 9
  • Latam Economic Outlook / February 2014 Volatility returned to Latam markets, but we see differentiation from now on Variations in EM exchange rates (%) Source: BBVA Research and Bloomberg Volatility also affected Latam: currency depreciation, higher sovereign spreads and weaker equity markets 10% 8% 6% However, capital flows into the region have not reversed, just slowed 4% 2% We expect contagion from the sharp currency depreciation in Argentina to be limited, with only a moderate effect on Brazil and Uruguay 0% -2% CHI COL PER MEX BRA TUR IND 17-Dec to 20-Jan 20-Jan to 11-Feb INDO RSA The markets already appear to be starting to differentiate on the basis of macro fundamentals and solid policies Market expectation for the next 12 months Page 10
  • Latam Economic Outlook / February 2014 Growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015 Latam*: GDP growth (% YoY) Source: BBVA Research 10 9 Activity will accelerate in 2014 as Mexico leaves behind temporary negative shocks … 8 7 6.0 … and external demand gradually recovers in line with global growth 6 5 4.0 4 2.6 3 2.2 2.6 2.5 2 In the longer term, regional growth will start to converge to its potential, around 3.5% 1 0 2010 Latam 2011 2012 2013 Pacific Alliance 2014 2015 Increasing divergence: Pacific Alliance will grow 3.8% in 2014 and 3.7% in 2015, more than double the rate in Mercosur Mercosur * Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela Page 11
  • Latam Economic Outlook / February 2014 The Andean countries and Paraguay will continue to post the fastest growth Latam countries: GDP growth (%) Source: BBVA Research 14.0 12.0 Mexico will see strong growth in 2014 after the downturn in the construction sector in 2013 10.0 8.0 6.0 Brazil will record moderate growth of 2.5% in 2014, reflecting the negative impact of tighter monetary policy and structural problems 4.0 2.0 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 0.0 ARG BRA CHI COL MEX PAR PER URU Latam MCS PA Forecasts in February 2014 Forecasts in November 2013 Page 12
  • Latam Economic Outlook / February 2014 Pressure on fiscal deficits will continue, but they will remain manageable Latam: Fiscal deficits (% GDP) Source: BBVA Research and Haver Analytics 0.5 0.0 -0.5 -1.0 Only moderate growth in internal demand and lower raw materials prices will continue to put pressure on fiscal balances -1.5 -2.0 -2.5 -3.0 -3.5 Fiscal deficits should start to ease from 2015 onwards, as growth and external demand recover -4.0 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 -4.5 ARG BRA CHI COL MEX PAR PER URU Latam Forecasts in February 2014 Forecasts in November 2013 Page 13
  • Latam Economic Outlook / February 2014 External deficits will start to shrink in 2014 Latam: Balance on current account (% GDP) Source: BBVA Research and Haver Analytics 2.0 1.0 0.0 Deficits will start to decline, particularly in those countries with a bigger foreign trade gap (Peru, Uruguay) -1.0 -2.0 -3.0 The outlook for exports will improve as the supply problems in the export sector in some countries improve … -4.0 -5.0 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 -6.0 ARG BRA CHI COL MEX PAR PER URU Latam Forecasts in February 2014 ….as well as due to currency depreciation and the recovery in global growth Forecasts in November 2013 Page 14
  • Latam Economic Outlook / February 2014 As a whole, the region has lost a degree of competitiveness in the last few years Growth in exports of manufactured goods: Latam vs. world (% YoY) Source: BBVA Research and WITS 40 35 30 25 20 15 10 5 0 -5 -10 -15 Indicators show a worse performance in the last five years in terms of competitive advantage in more sophisticated manufactured goods The gains in share of manufactured goods of 2002-2007 gave way to share erosion in 2007-2012, except in Mexico 2002- 20072007 2012 2002- 20072007 2012 2002- 20072007 2012 2002- 20072007 2012 2002- 20072007 2012 2002- 20072007 2012 ARG BRA CHI C0L MEX PER Exports growth in the country of: Total manufacturing Non-basic manufacturing World exports growth of: Total manufacturing Recent deterioration related to currency appreciation, pressures on labour costs and insufficient progress in productivity Non-basic manufacturing Page 15
  • Latam Economic Outlook / February 2014 Inflation is in line with central bank targets, except in Uruguay Deviation of YoY inflation vs. central bank target (pp) Source: BBVA Research and Haver Analytics 5 4 3 2 1 0 -1 -2 -3 -4 -5 Gradual convergence of inflation with central bank’ central target, except in Brazil and Uruguay BRA CHI MEX COL PER Sep-15 May-15 Jan-15 Sep-14 May-14 Jan-14 Sep-13 May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 Contained demand pressure and more moderate food prices will help to contain inflation Currency depreciation will in general terms have a limited pass-through to inflation URU Page 16
  • Latam Economic Outlook / February 2014 Divergence in the tone of monetary policy in 2014 and 2015 due to different rates of inflation and different stages in the cycle Official interest rates in countries with inflation targets (%) Source: BBVA Research and Haver analytics 14 In future, tighter monetary policy in Brazil and Uruguay due to the pressures on inflation 12 10 The Pacific Alliance countries will continue to diverge in 2014, in line with their individual stages in the cycle 8 6 4 The divergence between nominal and real interest rates will continue between Brazil and the Pacific Alliance countries 2 BRA CHI COL MEX Sep-15 May-15 Jan-15 Sep-14 May-14 Jan-14 Sep-13 May-13 Jan-13 Sep-12 May-12 Jan-12 Sep-11 May-11 Jan-11 Sep-10 May-10 Jan-10 0 Interest rates will rise in 2015, due to inflation (Brazil) or cyclical improvement (Pacific Alliance) PER Page 17
  • Latam Economic Outlook / February 2014 Relatively stable exchange rates in 2014 and 2015, with the exception of Brazil and Uruguay Variation in exchange rate vs. USD in countries with inflation targets (% Jan-Dec) Source: BBVA Research and Haver Analytics 20 Contained depreciation: most of the impact of tapering in the US was priced-in by the markets in 2013 15 10 The principal exception will be Brazil: sharp depreciation in 2014 and 2015 due to higher inflation and efforts to recover part of the loss of competitiveness... 5 0 -5 BRA CHI COL MEX PAR PER FX depreciation in 2013 Expected FX depreciation in 2014 Expected FX depreciation in 2015 URU Uruguay will also be dragged by higher inflation than its neighbours and the currency depreciation experienced by its trade partners Page 18
  • Latam Economic Outlook / February 2014 Synopsis 1 Global economy: more growth and more balanced risks 2 Growth expanding in 2014 and 2015, with increasing differentiation within the region 3 Latin America has buffers to protect itself against the Fed’s tapering, but reforms are now even more necessary Page 19
  • Latam Economic Outlook / February 2014 The region has reduced its vulnerability to external shocks, both in terms of flows … External deficits, in the majority of cases financed by FDI, less volatile in periods of market turbulence Eliminating the cyclical component, the structural deficits in Latam will not exceed 3% of GDP: sustainable given the outlooks for growth in the region Deficit on CA and financing with FDI (% GDP) Balance on current account , cyclical and structural component (% GDP) Source: BBVA Research and Haver Analytics Source: BBVA Research and Haver Analytics 2.0 7 1.0 6 0.0 -1.0 5 -2.0 4 -3.0 3 -4.0 2008-2012 2013f 2020f CHI COL Current Account Deficit MEX PER FDI URU 2008-2012 2013f 2020f BRA 2008-2012 2013f 2020f ARG 2008-2012 2013f 2020f 0 2008-2012 2013f 2020f 1 2008-2012 2013f 2020f -5.0 2 Argentina Brazil Chile Colombia Peru Uruguay Structural Component Cyclical Component Estimated Page 20
  • Latam Economic Outlook / February 2014 … and in stocks. Also, some countries still have room for manoeuvre for their economic policies High levels of international reserves … … and substantial reduction in public- and private-sector debt with less foreign-currency exposure Deficit and public-sector debt (% PIB) Source: BBVA Research, Haver Analytics and national statistics Source: BBVA Research and Haver Analytics 35 7 Reserves*/GDP (%) 30 25 6 Months of imports (right)* Reserves*/short-term funding needs** 5 20 4 15 3 10 2 5 1 0 ARG BRA CHI COL MEX PER URU * International reserves include IMF FCL lines in the case of Colombia and Mexico and sovereign funds in the case of Chile and Peru ** The need for short-term financing is the sum of the deficit on current account in 2014, short-term debt and long-term debt maturities in 2014 Estimated net public debt in 2013 (% of GDP) International reserve indicators 50% ARG 40% URU MEX BRA 30% COL 20% 10% PER 0% CHI -10% 0% 1% 2% 3% 4% 5% Expected fiscal deficit in 2014 (% of GDP) Page 21
  • Latam Economic Outlook / February 2014 Flexible exchange rates have already acted as the first buffer against external shocks Exchange-rate pass-through to inflation: impact on inflation of 10% currency depreciation Source: BBVA Research and IMF 5.0 A flexible exchange rate is the first buffer against an external shock, and has already started to act 4.0 3.0 If this is to work as a buffer, it is crucial to reduce dollar exposure, as the region has done 2.0 1.0 Uruguay Peru Mexico Colombia Chile Brazil 0.0 The credibility of monetary policies has also helped to reduce the exchange-rate passthrough to inflation Page 22
  • Latam Economic Outlook / February 2014 Attention will increasingly be focused on fundamentals: getting second-round reforms underway is vital Investment efficiency in Latam: pp of growth for each point in the Investment/GDP Source: BBVA Research and IMF 0.45 1993-96 2004-07 Less favourable global financial conditions will focus attention on the different fundamentals in the EMs 2011-15 0.40 0.35 Of the countries integrated in the financial markets, Brazil appears to be in a weaker position in terms of fundamentals vs. the Pacific Alliance 0.30 0.25 0.20 The future outlook will depend on progress made in reforms, that will prevent any weakening of the growth drivers 0.15 0.10 0.05 0.00 ARG BRA CHI COL MEX PER URU Page 23
  • Latam Economic Outlook / February 2014 Key messages 1 The global cycle is improving and the risks are more balanced again. Global GDP growth will reach 2.9% in 2013, 3.6% in 2014 and 3.9% in 2015. 2 Volatility returned to the Latam markets, but from now on differentiation will increase depending on the solidity of the fundamentals. 3 Latam GDP growth will expand from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. The divergence in growth within the region will become increasingly marked: the Pacific Alliance will grow nearly 4% in 2014 and 2015, more than double the pace in Mercosur. 4 External deficits will start to decline in 2014, and remain financed by long-term capital. However, the region has suffered a loss of competitiveness in the last five years. 5 The majority of countries have good buffers to protect themselves from the Fed’s tapering. However, it is crucial that reforms continue to be pushed through to avoid weakening the long-term growth drivers. Page 24
  • Latam: increasing differentiation Juan Ruiz BBVA Research│Chief Economist for South America Latam Economic Outlook – First quarter of 2014│ Madrid, 17 February 2014
  • Latam Economic Outlook / February 2014 Annex: Latam growth forecasts GDP growth (% YoY) Source: BBVA Research Argentina Brazil Chile Colombia Mexico Paraguay Peru Uruguay Mercosur Pacific Alliance LATAM 2011 8.9 2.7 5.9 6.6 4.0 4.3 6.9 6.5 3.4 4.8 4.0 2012 1.9 1.0 5.6 4.2 3.7 -1.2 6.3 3.9 1.3 4.2 2.6 2013 5.1 2.2 4.0 4.1 1.1 13.4 5.0 3.7 2.2 2.3 2.2 2014 2.8 2.5 4.0 4.7 3.4 5.3 5.6 3.5 1.5 3.8 2.5 2015 2.1 1.9 4.5 5.1 3.0 4.2 5.9 3.6 1.8 3.7 2.6 Page 26