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European and Spanish Economic Outlook

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Global economy: a gradual acceleration supported by growth in developed economies. …

Global economy: a gradual acceleration supported by growth in developed economies.
Europe: the slow recovery continues, the risk of deflation is very low, but…
Spain: upside risks for the first time since the beginning of the crisis.
Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth.

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  • 1. European and Spanish Economic Outlook Jorge Sicilia Chief Economist, BBVA Group March 2014
  • 2. European and Spanish Economic Outlook, March 2014 Main messages 1 2 3 The global economic cycle is improving and we expect a moderate acceleration in growth in 2014-15, supported by growth in developed economies Some economic policy uncertainties have been resolved but there are still risks, although not of a systemic nature, as was the case in the past The slow recovery in the eurozone continues, thanks to favourable economic policies and an improvement in the financial environment. The comprehensive review should eventually help to reduce financial fragmentation For the first time since the beginning of the crisis, the bias to our forecasts for the Spanish economy is to the upside. The recovery is being driven by exports, import substitution and the recovery in new lending The scope of the reforms needs to be expanded, if they are to underpin a robust and sustained recovery and, within a reasonable period, replace the jobs destroyed 4 5 Page 2
  • 3. European and Spanish Economic Outlook, March 2014 Index Section 1 Global economy: a gradual acceleration supported by growth in developed economies Section 2 Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3 Spain: upside risks for the first time since the beginning of the crisis Section 4 Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth Page 3
  • 4. European and Spanish Economic Outlook, March 2014 Main messages Global GDP growth (%) Source: BBVA Research The global expansion will continue in 2014-15, but this time around with higher contributions from advanced economies Growth risks are more balanced, with an upward bias in the US However, downside risks remain: the exit from QE and flows to emerging markets, the uneven recoveries and vulnerabilities in EM, and, still, the eurozone 2.8 -0.4 5.2 4.0 3.2 3.0 3.6 3.9 -2 -1 0 1 2 3 4 5 6 2008 2009 2010 2011 2012 2013 (e) 2014 (f) 2015 (f) Adv. Economies Emerging economies Baseline Jan14 Baseline Oct-13 Page 4
  • 5. European and Spanish Economic Outlook, March 2014 The global momentum is improving Manufacturing PMIs Source: BBVA Research based on Markit Economics BBVA Financial Stress Index Source: BBVA Research BBVA GAIN Source: BBVA Research 46 48 50 52 54 56 58 60 Oct10 Mar11 Aug11 Jan12 Jun12 Nov12 Apr13 Sep13 Feb14 Global Advanced economies BBVA Eagles -0.5 -0.1 0.3 0.7 1.1 -0.12 -0.08 -0.04 0.00 0.04 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Emerging Markets, left axis Developed Markets, right axis 0.0 0.2 0.4 0.6 0.8 1.0 1.2 3monthsago Current 3monthsago Current Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Actual Estimates Page 5
  • 6. European and Spanish Economic Outlook, March 2014 Fed’s forward guidance and ECB’s room for manoeuvre should anchor the global financial scenario The tightening of liquidity conditions is impacting on EM; anyway, differentiation remains US: the sustained recovery and the fiscal agreement provide upward bias to our scenario for the US (between 2.5% and 3.0%) The eurozone: positive growth with an increasing contribution from domestic demand China: growth momentum is supported by recent stimulus measures and improving external demand The global economic cycle is improving Page 6
  • 7. European and Spanish Economic Outlook, March 2014 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Developed EM Tapering talks The portfolio re-balancing away from EM to DM, triggered by Fed tapering but reinforced by idiosyncratic risks Capital flows to Emerging and Developed Markets (Cumulative since 2012, as % of AUM) Source: BBVA Research, IMF and EPFR Tapering + Idiosyncratic factors Politics and/or policy mismanagement also played a role: doubts on Brazil and China, and idiosyncratic factors in Argentina and Turkey Despite sound fundamentals across EM, investors remain alert with respect to those countries more reliant on capital flows Differentiation between EMs is playing a role Page 7
  • 8. European and Spanish Economic Outlook, March 2014 Risk measure: EM and European periphery EMBI and European periphery bond spread vs. Germany Source: Bloomberg and BBVA Research The re-balancing of portfolios is benefiting the European periphery Relative risk perception of European periphery (vs. EM) is decreasing Growth perspective is also improving across Europe, particularly in some periphery countries 100 105 110 115 120 125 130 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 10Y US BOND (lhs) EM FX index (rhs) Fed Tapering ECB OMT & Fed QE3 European debt cris (ECB SMP) EM slowdon US downgrade Page 8
  • 9. European and Spanish Economic Outlook, March 2014 Portfolio flows show a strong preference for peripheral Europe, mainly supported by institutional investors Country flows into European markets (Accumulated country flows as a %AUM) Source BBVA Research through EPFR data Country flows into peripheral Europe by type of investor (Accumulated country flows as a %AUM) Source BBVA Research through EPFR data -5,00 0,00 5,00 10,00 15,00 20,00 25,00 Total Europe Core Total Peripheral Europe -5,00 0,00 5,00 10,00 15,00 20,00 25,00 30,00 35,00 Retail Total Institutional Total Page 9
  • 10. European and Spanish Economic Outlook, March 2014 Interconnected risk events with the potential to impact on global growth (*) Heterogeneous developments among countries QE exit and disruptive effects of portfolio re-balancing Adjustment in China and other EM (*) The eurozone Switching from banking union towards strong disinflation (and deflation risks) Page 10
  • 11. European and Spanish Economic Outlook, March 2014 Index Section 1 Global economy: a gradual acceleration supported by growth in developed economies Section 2 Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3 Spain: upside risks for the first time since the beginning of the crisis Section 4 Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth Page 11
  • 12. European and Spanish Economic Outlook, March 2014 EMU: annual contribution to GDP growth (pp) Source: Eurostat and BBVA Research Gradual recovery with domestic demand playing an increasing role -10 -8 -6 -4 -2 0 2 4 6 2008 2009 2010 2011 2012 2013 2014 2015 Domestic Demand Exports Imports Net exports GDP Exports will remain as the main driver of growth in both 2013 and 2014 Domestic demand has weighed on growth in 2013... ... but will contribute to the recovery in 2014 Page 12
  • 13. European and Spanish Economic Outlook, March 2014 GDP growth by country (%) Source: BBVA Research -0,4 1,1 1,9 0,5 1,8 2,0 0,2 1,1 1,6 -1,8 0,8 1,5 -1,2 0,9 1,9 -2,5 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2,0 2,5 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 EMU Germany France Italy Spain Current Forecast (February 14) Previous Forecast (November 13) Widespread mild recovery across countries Germany: slight upward revision. Mild recovery on track, supported by domestic fundamentals France: despite upward revision, GDP is set to remain virtually flat in 2013, while any moderate recovery in 2014 will be dependent on the implementation of economic policy Italy: unchanged forecast. Though activity is likely to have stabilised over 2H13, sharp downward in 2013. Slight growth in 2014, but downside risks increase Page 13
  • 14. European and Spanish Economic Outlook, March 2014 The fiscal stance is less restrictive EMU: Fiscal consolidation by country (pp of GDP) Source: BBVA Research 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 France Italy Spain Portugal Fiscal Consolidation 2013 Revised Fiscal Consolidation 2014 Revised Fiscal Consolidation 2013 Previous Fiscal Consolidation 2014 Previous The European Commission revised deficit targets in May 2013, implying slower austerity Apart from this direct effect, some countries are more relaxed about meeting their fiscal targets Less austerity is probably also having an impact on confidence Page 14
  • 15. European and Spanish Economic Outlook, March 2014 EZ: HICP inflation (% y/y) Source: Eurostat and BBVA Research -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 20% 40% 60% 80% Eurozone. GDP and prices Source: Eurostat and BBVA Research -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 -6 -4 -2 0 2 4 6 Jan-96 Oct-96 Jul-97 Apr-98 Jan-99 Oct-99 Jul-00 Apr-01 Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 GDP (%y/y, LHS) GDP(t-2,%y/y,LHS) HICP(%y/y,RHS) In a “normal” world, inflation should stabilise first and then pick up in late 2014 Page 15
  • 16. European and Spanish Economic Outlook, March 2014 • Fewer than 10% of HICP items at negative inflation rates over three consecutive months, declining to 5% over six consecutive months • The trimmed mean inflation statistic suggests that, on average, inflation will remain relatively stable at slightly above 1% YoY over the next 2 1/2 years EZ: proxy of deflation (% CPI items with persistent negative m/m swda rates) Source BBVA Research EZ: measures of trend inflation Source BBVA Research -1 0 1 2 3 4 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Europe (Trimmed means) Europe (core CPI) Is this price stability? Still far from outright deflation 0 5 10 15 20 25 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 3 consecutive months 6 consecutive months 9 consecutive months 12 consecutive months Page 16
  • 17. European and Spanish Economic Outlook, March 2014 The probability of deflation increases under more extreme situations EZ: Distribution of probability of inflation (average 2014) Source BBVA Research Baseline scenario Inflation Prob. of deflation Monetary restriction (M3 growth = 0.9%) 1% 7.5% 0,8% 14% Monetary restriction + shock (M3 growth = 0.9%; growth <-1) 0,8% 14% Unanchored expectations (M3 growth = 0.9%; growth <-1) 0,28% 47%0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 Base scenario Monetary-restriction scenario Monetary restriction + negativeGDP shock All the previous and unanchored inflation expectations Page 17
  • 18. European and Spanish Economic Outlook, March 2014 Eurozone goes from one constraint (financial fragmentation) to another (low inflation and difficult debt adjustment) Uneven adjustment across countries: under a deflationary scenario, the debt burden increases Asymmetry Inflation expectations in the medium term are well below 2% (1.5% in 2016) The median contribution of inflation to the reduction in debt to disposable income (ratio) was almost 70% in episodes associated with a banking crisis Against this background, tensions could (re)emerge Page 18
  • 19. European and Spanish Economic Outlook, March 2014 Will the ECB change its mind towards QE? • Rates were kept unchanged. They retain a downward bias • Mr. Draghi once again used verbal intervention to strengthen his forward guidance • Inflation significantly below 2% for a long period of time (1.5% for 2016) • Mr. Draghi seemed to downplay the potential role of other instruments available for eventual further policy action ECB: No action taken (and none foreseen) Latest What do we expect? Policy pause until 2016 Once it has become clear that the ECB is ready to accept inflation of 1.5% in 2016 without taking further action, the expectation of further (decisive) measures in the short-term in the absence of sizeable shocks is very low Any and all liquidity measures remain on the table (SMP non-sterilisation) in the event of an unwarranted tightening in money markets Do not expect a weakening of the euro Page 19
  • 20. European and Spanish Economic Outlook, March 2014 March, SRM agreement March, ECB AQR methodology End of the year, SSM SSM/AQR results (possibly before Nov. 2014) April, EBA stress test methodology April, Last EU Parliamentary session. Tight deadline to endorse SRM & BBRD (April) End of the year: Tentative deadline for IGA national ratifications (80% threshold), Progress on Banking Union Eurozone: event calendar and pending issues Elections May, European elections OMT Pending on ECJ decision Peripheral countries Portugal: exiting the programme or asking for another programme? (April) Greece: additional package (Summer) Italy: uncertainty over the new government Spain: further fiscal adjustments needed, while facing increasing political uncertainty Page 20
  • 21. European and Spanish Economic Outlook, March 2014 • ECB as the ultimately responsible regulatory authority for all eurozone banks • Direct supervisor of top 130 banks • National authorities will supervise the less significant entities • Start: 04/11/2014 • Prudential (Basel III), resolution framework (bail- in), harmonised deposit protection rules • Start: 2014 - 2016 • Start: unknown • New Single Resolution Authority in co-operation with national resolution authorities • Single Resolution Fund funded by bank contributions • Start: 2015 - 2016 Common Rules Single Supervision Single Resolution Single Depo Guarantee Scheme Pillar I Pillar II Pillar III Pillar IVSetting up a robust supranational framework ? Banking union is progressing and will be a key factor in 2014 Page 21
  • 22. European and Spanish Economic Outlook, March 2014 BU is a milestone in European history. The highest transfer of sovereignty since the euro Banking union is a necessary condition but is not sufficient on its own. We also need fiscal and political union Single Supervision Single Rulebook Single Resolution Backstops Single supervisory criteria will stop regulatory ring- fencing practices Common rules are developed from a preventive perspective A centralised resolution authority will apply the same criteria for resolution actions The bail-in and the Resolution Fund will reduce the reliance on sovereign. Still uncertainty on the common backstop The banking union is a true game changer, and it is advancing Page 22
  • 23. European and Spanish Economic Outlook, March 2014 Progress on banking union: the ECB (SSM) has announced the main features of its comprehensive assessment Valuation Supervisory Risk Assessment to review key risks, including liquidity, leverage and funding Asset Quality Review (AQR) to analyse the quality of banks’ assets, collateral valuation and provisions Stress Test to examine the resilience of banks’ balance sheets to stress scenarios In principle, details point to a balanced exercise with a sufficiently wide scope However, some issues require further clarification: bail-in, stress test methodology (April 2014), publication of data to replicate the exercise… Transparency is pivotal to eliminating all concerns over the solvency of the European banking sector Composed of 3 pillars • The exercise should be strict enough to dispel any doubts on the resilience of the balance sheets • Particular attention should be paid to the AQR. Is it happening? Up to a point, but it is a good start Page 23
  • 24. European and Spanish Economic Outlook, March 2014 Single Supervision needs Single Resolution Single Supervision Single Resolution IDENTIFY LEGACY PROBLEM (2014) AQR + Stress Test SOLVE THE LECAGY PROBLEM (2014-15) • Private/partial bail-in (if state aid) • Public national/ESM/direct recap? FULLY OPERATIVE SRM (2016) • Single authority • Bail-in • Single Fund • Common backstop? When the ECB identifies problems in a particular entity, the Single Resolution Fund will act as a private backstop after a minimum bail-in Page 24
  • 25. European and Spanish Economic Outlook, March 2014 Banking union is expected to reduce fragmentation Composite measure of EZ financial fragmentation* Source: BBVA Research and Bloomberg -2,0 -1,0 0,0 1,0 2,0 3,0 4,0 5,0 6,0 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 ! Break the ‘doom loop’ between sovereigns and banks Strengthen the monetary union by reinforcing the institutional architecture Restore the monetary policy transmission channel Page 25
  • 26. European and Spanish Economic Outlook, March 2014 Index Section 1 Global economy: a gradual acceleration supported by growth in developed economies Section 2 Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3 Spain: upside risks for the first time since the beginning of the crisis Section 4 Spain: commitment to the reform process is crucial to consolidate “recent” market development and increase potential growth Page 26
  • 27. European and Spanish Economic Outlook, March 2014 The Spanish economy’s recovery is confirmed … Spain: GDP growth and MICA-BBVA forecasts (% QoQ) Source: BBVA Research based on INE After three years in recession, domestic demand started to make a positive contribution to growth again in the second half of 2013… … as a consequence of improved fundamentals, less restrictive fiscal policy, reduced uncertainty and increased import substitution The available information points to growth of at least 0.4% in 1Q14 -1.5 -1.0 -0.5 0.0 0.5 1.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14(f) CI at 60% CI at 40% CI at 20% Data (f: MICA-BBVA Research forecast) Page 27
  • 28. European and Spanish Economic Outlook, March 2014 … and, in spite of the uncertainty regarding the deficit in 2013 … The significant fiscal consolidation efforts in 2012 and 2013 … … have resulted in containment of the public deficit at around 7.0% of GDP The wider the deviation from the target deficit for 2013, the greater the effort that will have to be made in 2014 9.1 3.0 5.2 6.8 1.8 1.6 6,7 -0.3 0.9 5.8 -0.7 0.0 5.1 0 2 4 6 8 10 12 14 Deficit 2011 Passivefiscalpolicy Fiscaleffort Deficit2012 Passivefiscalpolicy Fiscaleffort Deficit2013 Passivefiscalpolicy Fiscaleffort Deficit2014 Passivefiscalpolicy Fiscaleffort Deficit2015 2012 2013 (e ) 2014 (f) 2015 (f) (*) Without factoring in aid to financial institutions (e) estimate; (f) forecast General government: expected fiscal tightening* (% GDP) Source: BBVA Research based on INE Page 28
  • 29. European and Spanish Economic Outlook, March 2014 … the risks are to the upside for the first time … Spain: GDP growth forecasts, 2014 (% YoY) Source: BBVA Research based on Consensus Forecast Inc. Economic policy decisions have eliminated the risk scenarios The differential performance of the Spanish economy confirms this improvement in the trends If these trends are confirmed, growth could be even stronger than we are forecasting 0 5 10 15 20 25 30 35 40 45 50 (< -1,2) (-1,2;-0,8) (-0,8;-0,4) (-0,4;0) (0;0,4) (0,4;0,8) (0,8;1,2) (>1,2) Relativefrequency GDP Growth forecast July-2013 (mean: 0,2%) Feb-2013 (mean:0,3%) Jan-2014 (mean: 0.7%) BBVA Research (Jan-14) Page 29
  • 30. European and Spanish Economic Outlook, March 2014 ... as economic recovery has been in line with the stylised facts from previous cycles,… Export growth Investment in machinery and equipment Gross operating surplus New credit operations (flow) Employment growth GDP growth Growth in stock of credit Declining Variables that precede the cycle . = . Lagging variables Page 30
  • 31. European and Spanish Economic Outlook, March 2014 ..., and this time without a currency depreciation, so competitiveness gains are not merely temporary Spain: Export growth, exchange rate movement and ULC (% change over the next 14 quarters after exports reached lowest level) Source: BBVA Research based on Consensus Forecast Inc. -20 -10 0 10 20 30 40 50 1994 2009 Total Export Growth Currency depreciation (-) / appreciation (+) vs. dollar REER based on ULC Page 31
  • 32. European and Spanish Economic Outlook, March 2014 Spanish exports have grown in the last year despite the recession in the EU This is partly due to an increase in the share of exports to BBVA-EAGLEs countries and other developed economies... ... but also to gains in Spanish competitiveness in both price and quality Total exports (annual cumulative change 1Q12-3Q13 in %, seasonally adjusted) Source: BBVA Research based on INE data (*): Data until 2Q13 Upside risks: 1. Exports will continue to expand Page 32 -5% 0% 5% 10% 15% Norway Sweden Finland France Ireland* United Kingdom Italy Denmark Germany Belgium European Union Euro area Austria Switzerland Netherlands Portugal Spain
  • 33. European and Spanish Economic Outlook, March 2014 Upside risks: 1. Exports will continue to expand Spain: growth and breakdown of goods exports by broad geographical area Source: BBVA Research based on Datacomex We expect the recovery to continue to be driven by the increase in exports The deceleration in exports is a temporary phenomenon, and will reverse in a scenario of stronger global growth The slowing momentum in EMs has been offset by the recovery in the EMU 0 10 20 30 40 50 60 -24 -18 -12 -6 0 6 12 EMU EAGLEs Nominal growth, 1Q13 average % YoY (LHS) Nominal growth, 4Q13 average % YoY (LHS) Share over total exports in 2013 (%, RHS) Page 33
  • 34. European and Spanish Economic Outlook, March 2014 Upside risks: 1. Exports will continue to expand Spain: growth and breakdown of goods exports by geographical area in 2013 Source: BBVA Research based on Datacomex European destinations still account for a large share of goods exports However, destinations outside Europe and North America have grown strongly … … representing 34.5% of total exports in 20130 6 12 18 24 30 36 42 48 54 -5 0 5 10 15 20 25 30 35 40 EMU Restofworld EU(excl.EMU) EAGLEs NorthAmerica Oceania Export growth by main geographical area in 2013, goods % YoY nominal (LHS) Composition of goods exports by destination in 2013, % of total (RHS) Page 34
  • 35. European and Spanish Economic Outlook, March 2014 Upside risks: 1. Exports will continue to expand Spain: export growth and composition by product category, volume (YoY, %) Source: BBVA Research based on Datacomex Likewise, a large proportion of product categories (73%) experienced positive export growth in 2013 About 50% of the export basket expanded at a rate above 5% YoY in real terms Some key sectors for the Spanish economy, e.g. motor vehicles, chemicals and machinery & equipment, are growing at a very healthy pace 0 2 4 6 8 10 12 14 16 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 Syntheticfibres Machine-tools Metalproductsforconstr. Glassandglassproducts Otherchemicalproducts Leatherproducts Motorvehicles Otherclothingandacces. Navigationinstruments Electricaldistributionequip. Officemachineryandequip. Ironandsteelproducts Footwear Electricalwires Otherspecificmachinery Domesticappliances Made-uptextiles,exc.apparel Otherwoodenproducts Personalcare Pesticidesandagrochemicals Livestockproducts Starchproducts Othermachineryandmech.… Furniture Knittedfabrics Paints Musicalinstruments Textiles Othertextilearticles Plastics Textileyarns Productsfromrefinedoil Export growth in 2013, % YoY volumes (LHS) Composition of exports by product category in 2013, % of total (RHS) 118% Page 35
  • 36. European and Spanish Economic Outlook, March 2014 Upside risks: 1. Exports will continue to expand Regions: average annual growth in exports of goods due to diversification (2009-2012) (%, Spain: weighted average) Source: BBVA Research Export growth is based on improvements in competitiveness and, above all, on diversification On average, 75% of the growth in exports during the crisis was due to product and geographical diversification This export diversification prevented even greater negative GDP growth -5 0 5 10 15 20 GAL C&L BAL ARA EXT RIO SPA NAV VAL CLM BC CAT MAD CANT AST AND MUR CAN Diversification by destination Product diversification Combined effect Page 36
  • 37. European and Spanish Economic Outlook, March 2014 For the first time in two decades, price competitiveness gains have been recorded in the prices of domestic products against imports... .... and they have been reinforced by a relative demand for imports that is more elastic to the relative price It is estimated that these processes explain 42% of the fall in imports Spain: imports of goods and services and change in relative prices (%, 1Q08-3Q13) Source: BBVA Research based on Eurostat Upside risks: 1. Import substitution will continue GER EST IRL ESP FRA ITA CYP LUX MLT HOL AUS POR SLV SLQ -20 -15 -10 -5 0 5 10 15 20 -10 -5 0 5 10 15 Growthrateofimports(1Q08-3Q13) Relative price of imports. Growth rate Page 37
  • 38. European and Spanish Economic Outlook, March 2014 Upside risks 2. Net savings by firms have improved The maintenance of savings in the private sector and the reduction of investment... ... which has improved the position of companies to increase investment once a less uncertain environment is consolidated … have facilitated a deleveraging process with the rest of the world over the last five years... Spain: net foreign borrowing (-) / lending (+) needs (% of GDP) Source: BBVA Research, based on INE data -15% -10% -5% 0% 5% 10% 2007 2013 (f) Public sector Financial and non-financial companies Households Total Page 38
  • 39. European and Spanish Economic Outlook, March 2014 Spain: Rating by agencies and BBVA Research models Source: BBVA Research Upside risks 2. More certainty and fewer financial tensions Improved international perceptions of the Spanish economy have enabled Spain to reduce its dependence on ECB funding Reduced financial tensions are reflected in the economy with a lag of 6-9 months A permanent 100bp drop in sovereign interest rates implies up to one percentage point more growth for the economy 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Rating Agencies BBVA Models Average AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC CCC- CC Page 39
  • 40. European and Spanish Economic Outlook, March 2014 Upside risks 3. More dynamic investment Spain: exports and investment in equipment and machinery (2008=100) Source: BBVA Research based on INE The recovery we expect in the EMU and the continuing export growth … … should translate into an increase in private-sector investment In fact, investment in equipment and machinery had grown 6.3% by 4Q1360 70 80 90 100 110 120 130 140 dic-99 sep-00 jun-01 mar-02 dic-02 sep-03 jun-04 mar-05 dic-05 sep-06 jun-07 mar-08 dic-08 sep-09 jun-10 mar-11 dic-11 sep-12 jun-13 mar-14 dic-14 sep-15 Goods and services exports Investment in equipment and machinery Page 40
  • 41. European and Spanish Economic Outlook, March 2014 Average evolution of consumption + investment and credit stock (C+I=100 at the trough, average of crises in Finland, Japan, Norway, Spain and Sweden) Source: Biggs et al (2009) 94 96 98 100 102 104 106 108 110 112 98 100 102 104 106 108 110 112 t-3 t-2 t-1 t t+1 t+2 t+3 Consumption + Investment (left) Credit Stock (right) -10 -8 -6 -4 -2 0 2 4 6 98 100 102 104 106 108 110 112 t-3 t-2 t-1 t t+1 t+2 t+3 Consumption + Investment (left) Credit Flow (right) Average evolution of consumption + investment and credit flow (C+I=100 at the trough, average of crises in Finland, Japan, Norway, Spain and Sweden) Source: Biggs et al (2009) Upside risks 4. Improvement in new lending flows Page 41
  • 42. European and Spanish Economic Outlook, March 2014 Private-sector: new loans and repayments (Quarterly figures, EUR mn) Source: Bank of Spain and BBVA Research 100000 150000 200000 250000 300000 350000 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 New Business Repayments and write-offs Upside risks 4. Improvement in new lending flows Spanish statistics on new loans include ‘novations’ (changes in terms and conditions), so refinanced operations are included The forecast suggests that new lending may have bottomed-out in the first half of 2013. In the future, refinancing will play a less important role However, new lending will not exceed repayments until the end of 2015, so private-sector deleveraging has to continue Page 42
  • 43. European and Spanish Economic Outlook, March 2014 Spain: GDP (Growth, %) Source: BBVA Research based on INE Upside risks 5. GDP is now growing -0,8 -0,6 -0,4 -0,2 0,0 0,2 0,4 0,6 0,8 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14(f) 2Q14(f) 3Q14(f) 4Q14(f) 1Q15(f) 2Q15(f) 3Q15(f) 4Q15(f) GDP – QoQ growth GDP – QoQ growth - Forecast As scheduled, GDP began growing after exports, savings, investment in M&E, and new credit flows started going up Growth will average around 1% in 2014, and will slowly accelerate towards an annualised pace of 2% by the end of this year Exports should accelerate and substitute more modest domestic demand growth Page 43
  • 44. European and Spanish Economic Outlook, March 2014 Spain: LFS employment (Variation in annual average, %) Source: BBVA Research based on INE Upside risks 5. Changes in the labour market -3.1 0.0 1.1 -3.1 0.4 1.0 -3,5 -3,0 -2,5 -2,0 -1,5 -1,0 -0,5 0,0 0,5 1,0 1,5 2013 2014 2015 Spain Outlook 4Q13 Spain Outlook 1Q14 Net job-creation has started sooner than we expected, partly as a reflection of wage moderation Had labour institutions been in better shape at the beginning of the crisis, a million job losses could have been avoided In 2014, employment will be created for the first time since the beginning of the crisis; and labour market reform has prevented the destruction of 300,000 jobs Page 44
  • 45. European and Spanish Economic Outlook, March 2014 Spain: housing investment, compared with previous recessions (Maximum during expansion = 100) Source: BBVA Research, based on INE data The real-estate cycle: this time is different 40 50 60 70 80 90 100 110 120 130 140 Q Q+1 Q+2 Q+3 Q+4 Q+5 Q+6 Q+7 Q+8 Q+9 Q+10 Q+11 Q+12 Q+13 Q+14 Q+15 Q+16 Q+17 Q+18 Q+19 Q+20 Q+21 Q+22 Q+23 Q+24 Q+25 Q+26 Q+27 Q+28 Q+29 Q+30 Q+31 Q+32 Mar-80 Sep-90 Dec-06 The recovery of investment in the real-estate sector tends to run ahead of the cycle... ... however, the current excess of supply will make it unlikely that this time it will accompany the recovery (effect vs. cause) The ambitious reform process must also ensure an efficient redistribution of resources between sectors Page 45
  • 46. European and Spanish Economic Outlook, March 2014 Spain: Housing market variables (% average 2004-07) Source: BBVA Research based on Ministry of Public Works 0 5 10 15 20 25 30 35 40 45 Employment Permits Housing starts Completed houses The real-estate cycle: this time is different Supply-side correction has already taken place Housing starts in 2013 were only 5% of those observed at the peak of the cycle Consequently, housing investment has suffered a large correction: in 2013 it was 4.4% of GDP, compared to 12.5% in 2006 Page 46
  • 47. European and Spanish Economic Outlook, March 2014 Spain: home purchases (%, y/y) Source: BBVA Research based on Ministry of Public Works The real-estate cycle: this time is different Although demand has adjusted considerably, interest by foreigners has recently improved Citizens from the UK or Germany have led the charge, but non-traditional clients (such as the Russians and Chinese) have also appeared The improvement in domestic demand fundamentals leads us to believe that sales could have reached their minimum in 2013 -60 -40 -20 0 20 40 60 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Foreign Domestic Page 47
  • 48. European and Spanish Economic Outlook, March 2014 Spain: Real prices in the housing sector (100 = peak of the cycle) Source: BBVA Research based on Ministry of Public Works 60 70 80 90 100 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 # quarters Sep-78 Dec-91 Sep-07 4Q13 The real-estate cycle: this time is different From the peak, house prices have fallen about 37.5% in real terms, the largest correction of any of the recent crises In the coming years, a growing demand scenario is expected, within an environment of reducing housing supply In the coming quarters, further declines in house prices will be limited: the overall fall from peak to trough will be around 40% Page 48
  • 49. European and Spanish Economic Outlook, March 2014 Spain: Real prices in the housing sector (%, fall from maximum in real terms) Source: BBVA Research based on Ministry of Public Works -50-45-40-35-30-25-20-15-10-50 ARA MUR CLM MAD RIO CANT CAT VAL AND ESP CYL CAN GAL BAL NAV PV EXT AST The real-estate cycle: this time is different The real estate market displays increasingly heterogeneous behaviour among regions Market behaviour is closely related to the level of oversupply and exposure to foreign demand In some regions, housing prices have accumulated several quarters of growth: Madrid, Balearic Islands, Canary Islands and Navarra Page 49
  • 50. European and Spanish Economic Outlook, March 2014 Spanish banking system: Capital ratios Source: BBVA Research based on Bank of Spain 5% 6% 7% 8% 9% 10% 11% 12% 13% 2007 2008 2009 2010 2011 2012 jun-13 Total Capital Ratio Tier 1 ratio Leverage (Equity/Assets) The financial system. Solvency: capital is now higher and of better quality Recapitalisation of weak entities with public funds; bail-in of subordinated debt • Capital increases: Popular, Sabadell • AT1 issuance: BBVA • Liabilities management exercises Disposal of non-core assets (equity participations, real estate, etc.) Deleveraging / RWA optimisation Page 50
  • 51. European and Spanish Economic Outlook, March 2014 The financial system. Solvency: what will be the impact of the comprehensive assessment on Spanish banks? Spain 2012-13 Supervisory Risk Assessment to review key risks, including liquidity, leverage and funding Asset Quality Review (AQR) to analyse the quality of the banks’ assets, collateral valuation and provisions Stress Test to examine the resilience of the banks’ balance sheets to stress scenarios Auditors and property appraisers checked all the portfolios, the classification of loans and collateral valuations Bank of Spain definitions of non-performing loans and forbearance are similar those of the EBA Stress test conducted by Oliver Wyman. Capital needs covered by private or public (€39bn, ESM credit line) capital injections ECB 2014 Spanish entities went through a similar exercise, so no major surprises are expected in the ECB comprehensive assessment Page 51
  • 52. European and Spanish Economic Outlook, March 2014 Real estate exposures net of provisions (EUR bn) Source: Bank of Spain 0 50 100 150 200 250 Dec-11 Asset sales and others Transfer to Sareb Provisions Royal Decree Laws Dec-12 Credits Foreclosures Asset quality: entities have made a big effort to improve asset quality Real estate accounted for 60% of total defaulted assets The worst-affected entities have transferred 90% of their assets to Sareb, and are subject to restructuring plans The exposure was unevenly distributed among entities (from 2% to 26% of total credit) The banks have almost finished cleaning-up real estate exposures, in particular the sound entities Page 52
  • 53. European and Spanish Economic Outlook, March 2014 Germany France Spain Italy Commercial policy 1.66 -- -- -- ECB official rate 1.03 1.24 1.29 1.47 Spread 12 months (12m-Euribor) 0.59 1.21 1.6 -0.06* Spread EMU (10y EMU-Euribor) 0.35 0.69 0.44 0.5 Spread sovereign (10y country-10y EMU) 0.17 0.46 1.22 1.05 CE Regulation 290/2009 0.15 0.54 -0.16 -- -- Does not differ significantly from zero * Not significant at 20% confidence Interest rates on new bank lending (%) (to non-financial corporations, less than EUR1mn, less than one year) Source: ECB 94% of the new loans in Spain have a term of up to one year Determinants of interest rates on new bank lending (to non-financial corporations) Source: BBVA Research based on ECB and Bloomberg The price of credit is affected by the sovereign risk premium. The solution to this is banking union Liquidity: the situation has improved, but current problems are related to European fragmentation Page 53 2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 Sep.2008 Jan.2009 May.2009 Sep.2009 Jan.2010 May.2010 Sep.2010 Jan.2011 May.2011 Sep.2011 Jan.2012 May.2012 Sep.2012 Jan.2013 May.2013 Sep.2013 Jan.2014 Euro Area Germany Spain Italy France
  • 54. European and Spanish Economic Outlook, March 2014 Net income and loan loss provisions (€bn) Source: BBVA Research based on Bank of Spain -20 -10 - 10 20 30 40 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Provisions Net income 72bn -57bn Profitability: on average, the system is unlikely to return to the pre-crisis levels Average profitability will not return to the pre- crisis levels In the future there will be lower interest rates, higher risk aversion, stricter regulation and supervision and less buoyant liquidity However, dispersion among entities can be higher, as banks that anticipate these changes will show a better performance Banks that have already diversified geographically will be in a better position Page 54
  • 55. European and Spanish Economic Outlook, March 2014 Desirable solution Complete the restructuring Overcapacity Deleverage of the private sector Quick resolution of intervened institutions, as international experience shows that public banks can be inefficient Networks should adapt to the new size of the market. Number of branches and employment have been reduced by 23% and 15% respectively (vs. 35% and 28% expected by the end of the process) Compatible with the provision of credit to solvent demand, by most capable institutions (those with access to liquidity) Problem An efficient implementation of current plans is crucial for the success of the restructuring Risks: The restructuring is almost finished, but there are some pending issues Page 55
  • 56. European and Spanish Economic Outlook, March 2014 Changes in the corporate insolvency law will facilitate corporate debt restructuring New RDL on corporate debt restructuring Source: BBVA Research based on BOE Measures  Possibility of individual debt refinancing agreements  Simplified procedures for collective debt refinancing agreements  Reduction in the level of required majorities to impose refinancing agreements on dissident creditors  BoS needs to develop new provisioning framework for refinanced loans  In case of insolvency, fresh money with privileged status and old debt non-subordinated  Takeover exemption when creditors convert into equity  Other measures: including fiscal benefits… New measures announced last week remove obstacles to agreements between financial creditors and debtors Spanish Financial System • Increases legal certainty • If restructuring ends in insolvency, financial creditors are not in a worse position • Foreseeable better provisioning framework • Conversion of debt into equity raises new issues (management, capital consumption..) Corporates • Deleveraging of worst quality loans • Adjustment of debt to companies’ financial capacity • New funding for viable business plans Page 56
  • 57. European and Spanish Economic Outlook, March 2014 Credit to the private sector (% GDP) Source: ECB and Bank of Spain Pending issues: deleverage is much needed in terms of stocks 8% 10% 6% 7% 7% 6% 30% 63% 60% 28% 38% 40% 40% 52% 46% 11% 41% 22% 33% 48% 39% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% Dec-00 Dec-08 Dec-13 Dec-00 Dec-08 Dec-13 Spain EMU Consumption Housing Businesses Real estate businesses Rest of businesses 4 3 % Businesses Private-sector leverage is excessive. Spanish levels are above those of EMU Deleveraging will continue in terms of the stock of outstanding credit Compared to EMU, the most significant differences are in real estate businesses and mortgages Page 57
  • 58. European and Spanish Economic Outlook, March 2014 Activity declines at some companies, so they no longer have any demand for credit This is a common pattern in Spanish crises, and investment is starting to improve The most promising sectors are those related to exports There is asymmetric information: some clients have to resort to another financial entity that does not know them Projects have higher risk due to the economic situation Financial fragmentation affects funding conditions. Regulation and supervision are stricter CreditDemand Economic situation and uncertainty: businesses are not investing The restructuring affects a limited number of entities, which do not have access to liquidity Pending issues: deleverage. What factors are affecting the supply of credit? Page 58
  • 59. European and Spanish Economic Outlook, March 2014 Index Section 1 Global economy: a gradual acceleration supported by growth in developed economies Section 2 Europe: the slow recovery continues, the risk of deflation is very low, but… Section 3 Spain: upside risks for the first time since the beginning of the crisis Section 4 Spain: commitment to the reform process is crucial to consolidate “recent” market improvement and increase potential growth Page 59
  • 60. European and Spanish Economic Outlook, March 2014 The need to broaden the scope of the reform agenda GDP growth and job-creation Source: BBVA Research and Lebergott (1964) Assumptions for the USA and the EMU are consistent with BBVA Research’s scenario. The Spanish scenario has been built assuming both that productivity per worker rises 0,6% (as was the case between 1992 and 2007) and that GDP grows on average by 2,5% 80 85 90 95 100 105 Pico 2 4 6 8 10 12 14 16 18 años Levelofemploymentatthebeginningof thecrisis=100 Spain, 2007-2025EMU, 2007-2017USA., 2007-2014 USA 1929-1940 Peak years The recovery in employment will be very sensitive to economic growth The objective should be to introduce the necessary reforms to increase economic growth to close to or above 2.5% Unless this happens, job-creation will be limited and the recovery slow Page 60
  • 61. European and Spanish Economic Outlook, March 2014 Spain: what else can be done? A. Encourage a gradual deleveraging Spain: cyclical and structural components of the current account balance (% of GDP) Source: BBVA Research -12 -10 -8 -6 -4 -2 0 2 4 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013(p) 2014(p) 2015(p) 2016(p) 2017(p) 2018(p) 2019(p) 2020(p) Cyclical component Structural component Adjusted current account Observed current account * Provisions for loan losses, repossessed assets, early retirements, restructuring charges and other Deleveraging must continue, in both the private and public sectors, but at a pace consistent with economic recovery,… …, so that the impact of the fiscal consolidation effort on growth is minimised and public finances remain sustainable Huge balance sheet clean-up in the banking sector: total provisions of €239bn* have been charged against results since 2008 Page 61
  • 62. European and Spanish Economic Outlook, March 2014 Spain: what else can be done? B. Improve the composition of foreign financing Spain: FDI (% GDP) Source: BBVA Research based on Banco de España Page 62 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 Average 2000-2008 Average 2009-2012 Strategic plan to improve competitiveness, … …, increase the attraction of Spain to international investors, in terms of physical capital … …, human capital and technological capital)
  • 63. European and Spanish Economic Outlook, March 2014 Temporary Employment Rate (% of workers with a temporary contract) Source: BBVA Research Spain: what else can be done? C. Improvements in the labour reform UEM17 Bel Ger Est Irl Gre Spa Fra Ita Cyp Lux Mal Nl Aus Por Esl Slvk Fin 0 5 10 15 20 25 30 0 5 10 15 20 25 30 2012 2008 Page 63 Promote reforms that make it more attractive to sign open-ended contracts,… …, improve the efficiency of both active and passive labour market policies… …, and raise the quality of human capital
  • 64. European and Spanish Economic Outlook, March 2014 Spain: what else can be done? D. Improve our competitiveness EU: current account and unit labour costs change 4T08-2T13 Fuente: BBVA Research and Eurostat BE CZ DK DE EE IE EL ES FR IT CYLV LT LU HU MT NL AT PL PT RO SI SK FI SE UK NO -10 -5 0 5 10 15 20 -20 -10 0 10 20 30 Changeinthecurrentaccountbalanceover GDP(pp) Change in unit labor costs (%) Productivity gains since the beginning of the crisis have been significant (more than 12%) and generalised, across both non-tradables and… … manufactures (growing by well over 20%) Page 64
  • 65. European and Spanish Economic Outlook, March 2014 Spain: what else can be done? D. Improve our competitiveness Effect on a firm’s exporting probability of an exogenous change in each determinant (%) source: BBVA Research based on ESEE, Fundación SEPI 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Size Skilled labor Competition Foreign ownership R&D and adoption K per worker The most important determinant of internationalisation is a firm’s size An increase of 10 workers (on average, from 50 to 60 employees) would raise the firm’s exporting probability by 1.69% Barriers to a firm’s growth remain in the tax system or in regulation, especially in services or in the labour market Key to tackle them to improve growth incentives Page 65
  • 66. European and Spanish Economic Outlook, March 2014 Main messages 1 2 3 The global economic cycle is improving and we expect a moderate acceleration in growth in 2014-15, supported by growth in developed economies Some economic policy uncertainties have been resolved but there are still risks, although not of a systemic nature, as was the case in the past The slow recovery in the eurozone continues, thanks to favourable economic policies and an improvement in the financial environment. The comprehensive review should eventually help to reduce financial fragmentation For the first time since the beginning of the crisis, the bias to our forecasts for the Spanish economy is to the upside. The recovery is being driven by exports, import substitution and the recovery in new lending The scope of the reforms needs to be expanded, if they are to underpin a robust and sustained recovery and, within a reasonable period, replace the jobs destroyed 4 5 Page 66
  • 67. European and Spanish Economic Outlook Jorge Sicilia Chief Economist, BBVA Group March 2014
  • 68. European and Spanish Economic Outlook, March 2014 Appendix: Capital flows to Emerging Markets Página 68
  • 69. European and Spanish Economic Outlook, March 2014 -4,0 -2,0 0,0 2,0 4,0 USA Canada Sweeden Denmark Germany Netherlands Belgium Spain Portugal Poland Hungary Russia Brazil Colombia Argentina India Thailand Philippines Singapore Portfolio re-balancing away from EM assets continues as anticipated last summer. EU Periphery has benefited the most Portfolio Flows June 13 (Country Flows over Total Assets) Source: BBVA Research through EPFR Portfolio Flows July-Feb* 13 (Country Flows over Total Assets, average, * Feb estimated) Source: BBVA Research through EPFR -4,0 -2,0 0,0 2,0 4,0 USA Canada Sweeden Denmark Germany Netherlands Belgium Spain Portugal Poland Hungary Russia Brazil Colombia Argentina India Thailand Philippines Singapore BBVA Country Portfolio Flows Map (Country Flows over total Assets ) Source: BBVA Research through EPFR data 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 # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # PeruPeru # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Argentina # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # China # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # IndiaIndia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Korea # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Thailand # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Indonesia # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Philippines # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Hong Kong # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # Singapore # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # # 2012 2013 2014 G4WesternEuropeEMEurLATAMAsia 2008 2009 2010 2011 ### ### ### 0.50 1.20 3.00 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 %) Sharp Capital Outflows (below -2 %) Singapore Page 69
  • 70. European and Spanish Economic Outlook, March 2014 Emerging Market flows have entered the “Undershooting” phase. Further adjustment? -20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0% 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 Current (Since May 2013) Lehman Brothers (since Aug-2008) weeks Capital outflows from emerging markets, tapering vs. LB’s episode (Cumulative as % of AUM) Source: BBVA Research, IMF and EPFR Emerging Markets: Cumulative Net Capital Flows (Cumulative since 2005, US$ bn) Source: BBVA Research, IMF and EPFR -200 -100 0 100 200 300 400 500 600 700 800 2006 2007 2008 2009 2010 2011 2012 2013 2014 Page 70
  • 71. European and Spanish Economic Outlook Jorge Sicilia Chief Economist, BBVA Group March 2014

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