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Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
Latin America: The shadow of China
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Latin America: The shadow of China

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The global cycle remains robust, especially in developed economies, while China is slowing down. The world economy growth will increase from 3% in 2013 to 3.4% in 2014 and 3.8% in 2015. …

The global cycle remains robust, especially in developed economies, while China is slowing down. The world economy growth will increase from 3% in 2013 to 3.4% in 2014 and 3.8% in 2015.
Latam’s financial markets recovered in March and April. Looking ahead, they will be shaped by the effects of the Fed’s withdrawal of monetary stimulus and the pattern of growth in China.
Latam will grow by 2.3% in 2014 and 2.5% in 2015, similar to 2013. Growth will be below the region’s potential and very heterogeneous, with the Pacific Alliance countries performing well above the regional average.
External deficits remain high and the fiscal perspective worsens, but both deficits continue to be manageable, on the whole.
An unlikely scenario of sharp deceleration in China would have a substantially negative effect on South America. The shock would be absorbed better by the Andean countries, which have more scope for countercyclical policies.

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  • 1. Latin America: the shadow of China Juan Ruiz BBVA Research│Chief Economist for South America Latin America Outlook – Second Quarter 2014│ Madrid, 13 May 2014
  • 2. Latin America Outlook / May 2014 Page 2 The global cycle remains robust, especially in developed economies, while China is slowing down. The world economy growth will increase from 3% in 2013 to 3.4% in 2014 and 3.8% in 2015. Latam’s financial markets recovered in March and April. Looking ahead, they will be shaped by the effects of the Fed’s withdrawal of monetary stimulus and the pattern of growth in China. Latam will grow by 2.3% in 2014 and 2.5% in 2015, similar to 2013. Growth will be below the region’s potential and very heterogeneous, with the Pacific Alliance countries performing well above the regional average. External deficits remain high and the fiscal perspective worsens, but both deficits continue to be manageable, on the whole. An unlikely scenario of sharp deceleration in China would have a substantially negative effect on South America. The shock would be absorbed better by the Andean countries, which have more scope for countercyclical policies. Key messages 1 2 3 4 5
  • 3. Latin America Outlook / May 2014 Page 3 1 Global economy: the recovery continues, hand in hand with developed economies 2 Moderate growth in 2014 and 2015, below the region’s potential and very heterogeneous across countries 3 A faster deceleration than anticipated in China would have a significant impact on South America Contents
  • 4. Latin America Outlook / May 2014 Page 4 World GDP growth (% QoQ) Source: BBVA Research Global cycle: growth remains robust at a quarterly 0.8% in the first half of the year Growth is still solid and financial conditions have improved in emerging economies, but world GDP is not accelerating Higher growth in developed economies partly offsets lower growth in emerging economies 0,0 0,2 0,4 0,6 0,8 1,0 1,2 Last MC Current Last MC Current Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Actual Estimates
  • 5. Latin America Outlook / May 2014 Page 5 Tensions have fallen in financial markets since the beginning of the year BBVA financial tensions index in developed and emerging economies Fuente: BBVA Research Markets have moved to the tune of expectations of rises in US interest rates … The Fed’s communication policy and forward guidance has side-stepped further increases in long-term interest rates and has reduced financial tensions … and growth expectations in China, as well as idiosyncratic factors. -0.12 -0.03 0.06 0.15 0.24 0.33 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 2007 2008 2009 2010 2011 2012 2013 2014 Developed (lhs) Emerging (rhs)
  • 6. Latin America Outlook / May 2014 Page 6 Deceleration in China is confirmed, although growth is still above 7% China: GDP growth (% YoY) Source: BBVA Research Doubts about the cyclical strength of the Chinese economy have made themselves felt in 1Q14, but less than anticipated In turn, the authorities are taking measures to contain the vulnerabilities caused by the boosts in 2008-09 Greater loss of cyclical inertia in investment than in consumption 6 7 8 9 10 11 2010 2011 2012 2013 2014 2015 2016 2017 Forecasts in Feb 2014 Forecasts in May 2014 Observed
  • 7. Latin America Outlook / May 2014 Page 7 Raw material prices adjust downwards, especially industrial metals Brent Crude (USD/bl) Source: Bloomberg and BBVA Research Soy bean (USD/mt) Source: Bloomberg and BBVA Research Copper:(USD/lb) Source: Bloomberg and BBVA Research  Adjustments in the medium- and long-term growth scenario in China are impacting on long-term price changes in copper and oil  This adjustment is limited as long as the production costs continue to set a lower limit to prices  Soy bean prices are higher than expected because of the poor harvest in Brazil, while convergence to the downside is expected in the medium-term 70 75 80 85 90 95 100 105 110 115 120 2010 2011 2012 2013 2014 2015 2016 2017 Baseline Feb 2014 Baseline May 2014 300 350 400 450 500 550 600 650 2010 2011 2012 2013 2014 2015 2016 2017 Baseline Feb 2014 Baseline May 2014 2.0 2.5 3.0 3.5 4.0 4.5 2010 2011 2012 2013 2014 2015 2016 2017 Baseline Feb 2014 Baseline May 2014
  • 8. Latin America Outlook / May 2014 Page 8 Aceleration in world activity in 2014 and 2015, with the help of developed countries World growth forecasts (% YoY) Fuente: BBVA Research Forecasts in US and Europe remain steady. Growth is on an upward path Revision to the downside of growth forecasts in the main emerging economies Greater contribution to world growth from developed economies than in 2013, but emerging markets still make up 2/3rds of growth EAGLEs is the group of emerging economies which will contribute most to world GDP in the next 10 years. The group is composed of: China, India, Indonesia, Brazil, Russia, South Korea, Turkey, Mexico and Taiwan. 3.0 3.4 3.8 1.9 2.5 2.5 -0.4 1.1 1.9 5.3 5.3 5.6 -1 0 1 2 3 4 5 6 13 14 15 13 14 15 13 14 15 13 14 15 World US Eurozone Eagles* Forecasts in May 2014 Forecasts in Feb 2014
  • 9. Latin America Outlook / May 2014 Page 9 1 Global economy: the recovery continues, driven by developed economies 2 Moderate growth in 2014 and 2015, below the region’s potential and very heterogeneous across countries 3 A faster deceleration than anticipated in China would have a significant impact on South America Contents
  • 10. Latin America Outlook / May 2014 Page 10 After the idiosyncratic shocks of January- February, there has been a widespread recovery in asset prices in Latam Capital flows to Latam are back on track, after the weakening in January Asset price recovery has virtually recouped the losses since January, but not since May 2013 In Latin America, the markets forget (for the time being) about tapering Sovereign differentials in emerging markets (EMBI, index January 2013=100) Source: Haver and BBVA Research 80 100 120 140 160 180 200 220 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Emerging Asia Emerging Europe LATAM Bernanke speech Start of tapering
  • 11. Latin America Outlook / May 2014 Page 11 Latin America will grow 2.3% in 2014 and 2.5% in 2015, rates similar to 2013 Internal demand has moderated in the last few quarters, particularly investment Activity will gradually recover in 2014-15, supported by an increase in world growth Latam*: GDP growth (% YoY) Source: BBVA Research * Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela Increasing heterogeneity: the Pacific Alliance will grow around 4% in 2014 and 2015, well above the region as a whole In the longer term, regional growth will start converging towards its potential, at around 3.5% 6.0 4.1 2.6 2.4 2.3 2.5 0 1 2 3 4 5 6 7 2010 2011 2012 2013 2014e 2015e Latam Mercosur Pacific Alliance
  • 12. Latin America Outlook / May 2014 Page 12 Peru, Paraguay and Colombia will continue to grow the most Mexico’s growth will rise strongly in 2014, after the rough patch in the construction sector in 2013 Brazil will show moderate growth, of 2% in 2014, held back by monetary tightening and structural problems Latam countries: GDP growth (% YoY) Source: BBVA Research *MCS: Mercosur. **PA: Pacific Alliance. 14.4 0 1 2 3 4 5 6 7 8 9 10 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 ARG BRA CHI COL MEX PAR PER URU Latam MCS* PA** Forecasts in May 2014 Forecasts in Feb 2014
  • 13. Latin America Outlook / May 2014 Page 13 Box 2: Highly dynamic house prices , but no significant risks Steep increase in housing prices in the region. Signs of overvaluation in Brazil and, to a lesser degree, in Colombia All in all, higher housing prices have been closely linked to improved income and, in some countries, land supply problems Housing affordability: Price to family income ratio Source: Global Property Guide and BBVA Research Macroeconomic risks in the event of a price adjustment are low. Mortgage lending is very limited (except in Chile)0 5 10 15 20 25 Portugal Belgium Germany Netherlands Spain Denmark Austria Canada Greece CzechRep. Australia USA Italy Finland Japan France UK Bulgaria Hungary Croatia Turkey Poland Romania Russia Mexico Peru Chile Argentina Colombia Brazil Malaysia Thailand Indonesia Philippines China India Adjusted price to income ratio* Median
  • 14. Latin America Outlook / May 2014 Page 14 Fiscal outlooks worsen in the region, but deficits will be manageable Fiscal balances pressured to the downside by moderation in internal demand and lower raw material prices Latam: Fiscal deficit (% GDP) Source: Haver and BBVA Research Public debt is at sustainable levels Fiscal deficits in some cases will not go down until after 2015 -5 -4 -3 -2 -1 0 1 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 ARG BRA CHI COL MEX PAR PER URU Latam Forecasts in May 2014 Forecasts in Feb 2014
  • 15. Latin America Outlook / May 2014 Page 15 External deficits are high, but will start to diminish in 2014 Deficits will start to fall, especially in countries with a larger external gap (Peru, Uruguay) Worse terms of trade and less demand from China… Latam: Current account balance (% GDP) Source: Haver and BBVA Research … are partly offset by less dynamic internal demand and increased growth in the US -6 -5 -4 -3 -2 -1 0 1 2 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 ARG BRA CHI COL MEX PAR PER URU Latam Forecasts in May 2014 Forecasts in Feb 2014
  • 16. Latin America Outlook / May 2014 Page 16 Inflation in line with central bank targets, apart from Brazil and Uruguay Inflation driven by shocks to food prices and depreciation in the exchange rate Inflation will converge on central bank targets at the end of 2014, with the exception of Uruguay and (although less so) Brazil The depreciation in the exchange rate will generate a generally limited pass through to inflation Inflation driven by shocks to food prices and depreciation in the exchange rate Inflation will converge on central bank targets at the end of 2014, with the exception of Uruguay and (although less so) Brazil Deviation of YoY inflation from central bank target (pp) Source: Haver and BBVA Research The depreciation in the exchange rate will generate a generally limited pass-through to inflation -6 -4 -2 0 2 4 6 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 BRA CHI MEX COL PER URU
  • 17. Latin America Outlook / May 2014 Page 17 Monetary pause in Latam for the rest of 2014, apart from Colombia and Chile. Generalised tightening in 2015 Heterogeneous monetary policy in the region conditioned by inflationary pressures (high in Brazil and Uruguay)… Official interest rates in countries with inflation targets (%) Source: Haver and BBVA Research … and economies’ different positions in the cycle, with Colombia and, to a lesser degree, Mexico, on the rising part of the cycle Increased interest rates in Colombia and cuts in Chile in 2014. Stability in the remaining countries for the rest of 2014 Rises in interest rates across the board in 2015, due to inflation (Brazil & Uruguay), improvement in the cycle (Pacific Alliance) and increases by the Fed 0 2 4 6 8 10 12 14 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 BRA CHI COL MEX PAR PER
  • 18. Latin America Outlook / May 2014 Page 18 Exchange rates will depreciate in 2014 and 2015, with very heterogeneous intensities Variation in the exchange rate against USD in countries with inflation targets (% Jan-Dec) Source: Haver and BBVA Research Greater depreciation in countries with: 1. Greater inflationary pressure (Brazil, Uruguay) 2. Greater exposure to fall in raw material price (Chile, Peru) 3. Greater exposure to China (South America) 4. Less central bank intervention (Chile) 5. Higher external deficits (Peru, Uruguay) Among countries with floating exchange rates, the greatest exchange depreciations in the future will be in Brazil and Uruguay …. … and very moderate in the rest of countries -8 -6 -4 -2 0 2 4 6 8 10 12 BRA CHI COL MEX PAR PER URU Jan-May 2014 Jan-Dec 2014 Jan-Dec 2015
  • 19. Latin America Outlook / May 2014 Page 19 1 Global economy: the recovery continues, driven by developed economies 2 Moderate growth in 2014 and 2015, below the region’s potential and very heterogeneous across countries 3 A faster deceleration than anticipated in China would have a significant impact on South America Contents
  • 20. Latin America Outlook / May 2014 Page 20 A sharp deceleration in China is one of the principal risk scenarios for Latam A very significant risk for Latam is a possible scenario of sharp deceleration in China, although it is unlikely This could be the result of excessive pressure on the parallel banking system, or a sudden tightening in lending conditions China: baseline and risk scenarios (% YoY) Source: BBVA Research Main impact on investment, but also negative effects on consumption4 5 6 7 8 9 10 11 12 1011121314151617 1011121314151617 1011121314151617 GDP Consumption Investment Actual Base scenario Risk scenario
  • 21. Latin America Outlook / May 2014 Page 21 A negative shock in China would affect Latam through three channels Lower external demand Heavy impact on Chile, Peru and Brazil. Residual in the case of Mexico Lower raw materials prices More pronounced effect on industrial metals, linked to investment. Lower impact on foodstuffs Effect of the risk scenario in China on the price of raw material exports (% change from the baseline scenario) Fuente: BBVA Research Drop in household and business confidence This was one of the main transmission channels after Lehman Brothers went bankrupt Transmission channels to Latam -18% -16% -14% -12% -10% -8% -6% -4% -2% 0% Oil Soya bean Copper Iron Coal 2014 2015 2016
  • 22. Latin America Outlook / May 2014 Page 22 -1.4 -1.2 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 ARG BRA CHI COL PER 2014 2015 2016 2017 The impact on South America would be substantial, better weathered by the Andean countries Substantial impact in the region, apart from Mexico. Reduction in South American growth of around 1pp in 2014 and 2015 Internal demand strongly affected by the fall in confidence. Effect mitigated in countries with leeway for countercyclical policies (Colombia, Chile, Peru) Latam: impact on growth of the risk scenario in China (difference in pp from baseline scenario) Source: BBVA Research Relatively low impact in Argentina because of the smaller drop in foodstuff prices compared to metals and energy
  • 23. Latin America Outlook / May 2014 Page 23 The global cycle remains robust, especially in developed economies, while China is slowing down. The world economy growth will increase from 3% in 2013 to 3.4% in 2014 and 3.8% in 2015. Latam’s financial markets recovered in March and April. Looking ahead, they will be shaped by the effects of the withdrawal of monetary stimulus by the Fed and the pattern of growth in China. Latam will grow by 2.3% in 2014 and 2.5% in 2015, similar to 2013. Growth will be below the region’s potential and very heterogeneous, with the Pacific Alliance countries well above the regional average. External deficits remain high and the fiscal perspective worsens, but both deficits continue to be manageable on the whole. An unlikely scenario of sharp deceleration in China would have a substantial negative effect on South America. The shock would be absorbed better by the Andean countries, which have more scope for countercyclical policies. Key messages 1 2 3 4 5
  • 24. Latin America: the shadow of China Juan Ruiz BBVA Research│Chief Economist for South America Latin America Outlook – Second Quarter 2014│ Madrid, 13 May 2014
  • 25. Latin America Outlook / May 2014 Page 25 Appendix: Growth forecast in Latin America Source: BBVA Research. *Forecasts 2011 2012 2013 2014* 2015* Argentina 8.6 0.9 3.0 2.8 2.1 Brasil 2.7 1.0 2.3 2.0 1.6 Chile 5.8 5.4 4.1 3.4 4.3 Colombia 6.6 4.0 4.3 4.7 4.8 Mexico 4.0 3.7 1.3 3.4 3.0 Paraguay 4.3 -1.2 14.4 5.3 4.2 Peru 6.5 6.0 5.6 5.2 5.6 Uruguay 7.3 3.7 4.4 3.2 3.3 Mercosur 3.5 1.3 2.3 1.1 1.5 Pacific Alliance 4.9 4.2 2.6 3.8 3.7 Latam 4.1 2.6 2.4 2.3 2.5 GDP growth (% YoY)

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