LatAm Economic Outlook 2Q13: Latin America remains strong
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LatAm Economic Outlook 2Q13: Latin America remains strong

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The world economy continues to grow, but there is an increasing uneveness between the ...

The world economy continues to grow, but there is an increasing uneveness between the
different areas, especially within developed countries
The international backdrop continues to present major challenges for the region, including
moments of extreme market volatility, a downward trend in commodity prices and increased
capital inflows
Domestic demand will underpin sustainable growth in the region. Latin American GDP will
grow at 3.5% in 2013 and 3.7% in 2014, if Brazil finally recovers
Central banks will maintain a wait-and-see stance in 2013, and begin to raise interest rates
early in 2014. The exceptions are Mexico, with a reduction of the rates in the third quarter,
and Brazil, where upward adjustment will continue
The region should promote reforms to increase productivity and consolidate long-term
growth. If the region wants to consolidate its high rates of growth, it has to recognize that
sustainable per capita income growth cannot be based solely on capital accumulation and
increasing employment: productivity also has to improve

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  • 1. Latin America remainsstrongJuan RuizBBVA Research│Chief Economist for South AmericaLatam Economic Outlook–Second Quarter 2013│ Madrid, 14th May 2013
  • 2. Latam Economic Outlook / May 2012Page 2The world economy continues to grow, but there is an increasing uneveness between thedifferent areas, especially within developed countriesThe international backdrop continues to present major challenges for the region, includingmoments of extreme market volatility, a downward trend in commodity prices and increasedcapital inflowsDomestic demand will underpin sustainable growth in the region. Latin American GDP willgrow at 3.5% in 2013 and 3.7% in 2014, if Brazil finally recoversCentral banks will maintain a wait-and-see stance in 2013, and begin to raise interest ratesearly in 2014. The exceptions are Mexico, with a reduction of the rates in the third quarter,and Brazil, where upward adjustment will continueThe region should promote reforms to increase productivity and consolidate long-termgrowth. If the region wants to consolidate its high rates of growth, it has to recognize thatsustainable per capita income growth cannot be based solely on capital accumulation andincreasing employment: productivity also has to improveMain messages12345
  • 3. Latam Economic Outlook / May 2012Page 31. A more uneven global scenario2. Latin America remains strong3. Latin America must not lose sight of the long-term pictureContents
  • 4. Latam Economic Outlook / May 2012Page 4BBVA Financial Stress IndicatorSource: BBVA ResearchEurozone: political gridlock in Italy; Bail-outin Cyprus; Portugal’s Constitutional Courtruling on some austerity measuresUSA: political deadlock over long-term fiscalpolicyChina: deeper-than-expected slowdown andincreasing risks of local debt and shadowbanking-0.50.00.51.01.52.02.53.0Apr-08Oct-08Apr-09Oct-09Apr-10Oct-10Apr-11Oct-11Apr-12Oct-12Apr-13US EurozoneMarkets remained immune to risk events
  • 5. Latam Economic Outlook / May 2012Page 5US: labour marketSource: BBVA Research and HaverPrivate spending continues resilient despitefiscal cliff and sequesterGrowth in private consumption is underpinnedby employment rise, though theunemployment rate decreases slowlyQuantitative easing will continue shoring upgrowth until prospects for labour marketimproves56789050100150200250300350400Jan-12Feb-12Mar-12Apr-12May-12Jun-12Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12Jan-13Feb-13Mar-13Apr-13Total private employment (change in thousands, SA), LHSUnemployment rate (LRS)Yet growth losses momentum in someregions. In the US the slowdown is shallow ...
  • 6. Latam Economic Outlook / May 2012Page 6China: contribution to GDP growth(NSA, percentage points)Source: BBVA Research and HaverIn Q1 GDP growth disappointed, despitestronger external demandThe change in the Chinese model towardsconsumption continuesAuthorities are committed to sustainedgrowth. Room for manoeuvre underpinned bylack of inflationary pressuresModerate slowdown in China-20246810Mar-11Jun-11Sep-11Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Net exports Investment Consumption
  • 7. Latam Economic Outlook / May 2012Page 7Germany’s exports slows, despite resilienceof emerging marketsIn France, uncertainty over taxation policy,fiscal consolidation plans and lack of reformsdampens confidenceEasing financial tensions will support growth,especially if accompanied by measures tobolster credit access and diminish financialfragmentation38424650545862663842465054586266Mar-11Jun-11Sep-11Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Italy France GermanyManufacturing confidence (PMI)Source: BBVA Research and HaverGrowth disappoints in Europe. The slowdownhits Europe’s core economies
  • 8. Latam Economic Outlook / May 2012Page 80200400600800100012001400160018002000Fed QE1 Fed QE2 Fed QE3 BoJ QQE0%5%10%15%20%25%30%Agency debt MBS Gov.bonds Other Share of economy (%, rhs))Monetary expansion in US and JapanUSD bln and % GDPSource: BBVA Research, HaverIn the next two years, the BoJ will inject asmuch liquidity as the Fed has been injectingsince 2008Monetary expansion aims at stamping outdeflation and bolster Japan’s growthHowever, it will not be enough. Bolsteringgrowth also requires reforms and changes infiscal policyA new factor arises: massive monetaryexpansion in Japan
  • 9. Latam Economic Outlook / May 2012Page 9-4000-3000-2000-10000100020003000400050006000Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13Brazil Latam ex BrazilQE QE2 QE3QE2 AnnouncedDraghi hints atsaving the euroECB LTRO QE BoJ… that will continue feeding Latam with capitalinflowsCapital inflows to Latin America, fixed income and equity (million of dollars, moving average of 4 weeks)Source: BBVA Research and EPFR
  • 10. Latam Economic Outlook / May 2012Page 10Global growth boosted by emerging marketsAdvanced economies will grow slowly,especially the eurozone, where recovery is notlikely until 2014Latin America accelerates its growth towardsits potential; China will continue growing fast,but the balance of risks is tilted to thedownsideGlobal GDP growth (%)Source: BBVA Research y Haver3,33,91,82,3-0,115,66-202468-2024682013 2014 2013 2014 2013 2014 2013 2014World USA Eurozone Eagles*May-13 Feb-13The sound globalgrowth belies regional differences
  • 11. Latam Economic Outlook / May 2012Page 111. A more uneven global scenario2. Latin America remains strong3. Latin America must not lose sight of the long-term pictureContents
  • 12. Latam Economic Outlook / May 2012Page 12Growth will be underpined by domestic demand: theregion will grow at 3,5% in 2013 and 3,7% in 2014GDP growth of 2,9% in 2012 was draggeddown by Brazil (0,9%)Recovery in Brazil is necessary, althoughgrowth forecasts are biased downwardsLatam*: GDP growth (%)Sourcee: BBVA Research* Weighted average of Argentina, Brasil, Chile, Colombia, Mexico, Panama, Paraguay, Peru,Mexico, Uruguay and VenezuelaConfidence indicators keep a positiveperspective in most of the countries, what willsupport the domestic demand-2.26.24.42.93.5 3.7-3-2-1012345672009 2010 2011 2012 2013 2014
  • 13. Latam Economic Outlook / May 2012Page 13Andean countries will grow particularly strong;Panama and ParaguaySlowdown in Colombia was compensated withfiscal and monetary stimuliFiscal stimuli in Peru compensate theweakness of the external sectorStrong upwards review of the GDP growthforecasts in Panama, due to the strong andcontinued public investmentGDP growth estimations, 2013-2014 (%)Source: BBVA Research02468101220132014201320142013201420132014201320142013201420132014201320142013201420132014ARG BRA CHI COL MEX PAN PAR PER URU LATAMMay 2013 forecasts Feb 2013 forecasts
  • 14. Latam Economic Outlook / May 2012Page 14In general, inflation will be back to the targetrangesInflation is out of the target ranges in most ofthe countries, except in CHI, PAR (under thetarget) and BRA, URU and MEX (over thetarget, although anchored to the target inMEX)Inflation will be within the target ranges in2013 and 2014, except in URUCountries with inflation targets: difference betweeninflation and central bank target (pb)Source: BBVA Research and HaverIn Brazil inflationary pressures will continue toaccumulate in 2013. It will be controledbecause of the tax cut and the interest ratesraise-5-4-3-2-1012345Jan-12Mar-12May-12Jul-12Sep-12Nov-12Jan-13Mar-13May-13Jul-13Sep-13Nov-13Jan-14Mar-14May-14Jul-14Sep-14Nov-14BRA CHI COL MEX PAR PER URU
  • 15. Latam Economic Outlook / May 2012Page 15Central banks will maintain a wait-and-seestance in 2013, except in BRA and MEXBalance between uncertainty on the externalsector and strond domestic demand willdetermine stable interest rates, except in MEXand BRAMexico: interest rate cut, anchored inflationand easing of the monetary policy in thesurrounding economiesBrasil: monetary tightening will be kept due tothe continued inflationary pressuresLess lax monetary policy in 2014, in theAndean countries and Paraguay. Interest ratecut in UruguayMonetary policy rates (%)Source: BBVA Research and Haver024681012Jan-12Mar-12May-12Jul-12Sep-12Nov-12Jan-13Mar-13May-13Jul-13Sep-13Nov-13Jan-14Mar-14May-14Jul-14Sep-14Nov-14BRA CHI COL MEX PAR PER URU
  • 16. Latam Economic Outlook / May 2012Page 16Domestic and international backdrop will keepappreciating pressuresPressions come conditioned by the monetaryexpansion programs of the developedeconomies, now including JapanThe active role of the central banks willcontinue in BRA, COL, PER and URU tomoderate appreciationsExchange rates against USD in countries withinflation targets (% change jan-dec)Source: BBVA Research and Haver-10-8-6-4-20246810BRA CHI COL MEX PAR PER URU2012 2013 (f) 2014 (f)
  • 17. Latam Economic Outlook / May 2012Page 17Improving trend in the fiscal balance, except inthe Andean countriesFiscal balance (% GDP)Source: BBVA Research and HaverDynamism of the domestic demand will leadto increase tax revenue in the regionFiscal balances will improve in the region,except in the Andean countriesFiscal balance worsens in Colombia, due tothe slowdown of the contracyclical fiscalstimuliIn Chile, convergence to structural balance.In Peru, decreased superavit due to thecontracyclical impulse of the publicexpenditure-4-3-2-10123ARG BRA CHI COL MEX PAN PAR PER URU2012 2013 (f) 2014 (f)
  • 18. Latam Economic Outlook / May 2012Page 181. A more uneven global scenario2. Latin America remains strong3. Latin America must not lose sight of the long-term pictureContents
  • 19. Latam Economic Outlook / May 2012Page 19The region has achieved high growth rateswith low levels of vulnerability in recent yearsLatam new normal: higher growth and lowervulnerabilityProgress to medium level of GDP per capitaand credit ratingProgress in reducing the poverty and thesocial inequalityIncreasing middle classSovereign rating by regions: 2007-2012Sourcee: BBVA ResearchAAAAA+AAAA-A+AA-BBB+BBBBBB-BB+BBBB-B+BB-CCC+CCCCCC-CCDEurozone(core)Eurozone(Periphery)Investment gradeEmergingEuropeLatam EM Asia
  • 20. Latam Economic Outlook / May 2012Page 20But the region must improve its productivitySustainable growth due to the accumulationfactor (especially labor force): around 85%of the totalAcumulation of capital benefited byconsensus on prudent economic handling:the effects are disapearingLow saving and investment rates comparedto Emerging AsiaContribution of the labor factor for thereduction in the unemployment rate:also with natural limitsThe challenge: keep the GDP per capita growth rate in LatamThe region has to recognize that sustainablegrowth requires an improvement inproductivityThere does not appear to be consensus inthe region that productivity growth isessential for maintaining GDP growthStructural reforms are needed:improvement of the business climate andmore competitionIt is needed to increase the savings rate tofuel investment in physical (above allinfrastructures) and human capitalUntil now From now on
  • 21. Latam Economic Outlook / May 2012Page 21The world economy continues to grow, but there is an increasing uneveness between thedifferent areas, especially within developed countriesThe international backdrop continues to present major challenges for the region, includingmoments of extreme market volatility, a downward trend in commodity prices and increasedcapital inflowsDomestic demand will underpin sustainable growth in the region. Latin American GDP willgrow at 3.5% in 2013 and 3.7% in 2014, if Brazil finally recoversCentral banks will maintain a wait-and-see stance in 2013, and begin to raise interest ratesearly in 2014. The exceptions are Mexico, with a reduction of the rates in the third quarter,and Brazil, where upward adjustment will continueThe region should promote reforms to increase productivity and consolidate long-termgrowth. If the region wants to consolidate its high rates of growth, it has to recognize thatsustainable per capita income growth cannot be based solely on capital accumulation andincreasing employment: productivity also has to improveMain messages12345
  • 22. Latin America remainsstrongJuan RuizBBVA Research│Chief Economist for South AmericaLatam Economic Outlook–Second Quarter 2013│ Madrid, 14th May 2013
  • 23. Latam Economic Outlook / May 2012Page 23FX markets, percentage change since BoJ QEannouncement (%)Source: BBVA Research, BloombergDebt markets. 10Y Government yield change sinceBoJ QE announcement (4-April, bp)Source: BBVA Research, Bloomberg-3 -2 -1 0 1 2UK poundMexican pesoEuroRenminbiCanada dollarTurkish liraBrazilian realSwiss FrancSwedish KronaJapanese yenUSDappreciationUSDdepreciationAnnex: Japan’s monetary easing has had a positiveeffect on markets though there is volatility risk-100 -80 -60 -40 -20 0 20JapanUKS KoreaCanadaGermanyUSAFranceChinaAustraliaMexicoBrazilItalyIrelandSpainPortugalTurkey