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BBVA EAGLEs Emerging And Growth Leading Economies Economic Outlook Annual Report 2014

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This annual report not only revises, for the fourth consecutive year, our classification of key emerging economies, but also improves on the EAGLEs methodology to achieve that goal. First, we incorporate virtually all emerging countries in the analysis (including frontier ones). Second, we use a more accurate definition of what is a developed market. Third, our benchmark for a country to be in the Nest group of the EAGLEs is now more stable.

After rethinking the EAGLEs concept and estimating potential growth for all of those countries, 7 countries remain being EAGLEs, namely China, India, Indonesia, Russia, Brazil, Turkey and Mexico (Korea and Taiwan are upgraded to developed economies). All EAGLEs outperform the G6 average threshold of contributing USD490bn to global growth in the next ten years. EAGLEs and Nest countries are expected to contribute 65% of global growth in the next ten years, led by China (30%) and India (11%), while the G7 group will add 19%.

Special topics

Factors behind portfolio flows in emerging markets.

Updating our projections for the middle classes.

Are EAGLEs and Nest countries ready for income transition?

Credit deepening

Trends in South-South trade and global value chains

Published in: Economy & Finance
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BBVA EAGLEs Emerging And Growth Leading Economies Economic Outlook Annual Report 2014

  1. 1. BBVA EAGLEs Emerging And Growth Leading Economies Economic Outlook Annual Report 2014 Cross-Country Emerging Markets, BBVA Research March 2014
  2. 2. Index Key takeaways in 2013 Rethinking EAGLEs for the next decade Special Topics EM markets portfolio flows: changing underlying forces The EM Middle-Class revolution will accelerate Are EAGLEs & Nest ready for income transition EM credit deepening: In the search for a healthy path Trends in South-South trade and global value chains
  3. 3. 45 46 47 48 49 50 51 52 53 54 55 01/12 02/12 03/12 04/12 05/12 06/12 07/12 08/12 09/12 10/12 11/12 12/12 01/13 02/13 03/13 04/13 05/13 06/13 07/13 08/13 09/13 10/13 11/13 12/13 01/14 Global EAGLEs G7 Expansion / contraction threshold After a long period of time, the external environment is finally gaining momentum… Manufacturing PMIs (2012-14) (simple average for EAGLEs* and G7 groups) Source: Haver
  4. 4. -3 -2 -1 0 1 2 3 4 5 6 7 8 9 China Philippines Nigeria Indonesia Bangladesh Vietnam Qatar Kazakhstan Peru India Malaysia Colombia Chile Turkey Singapore Iraq Pakistan S.Arabia HongKong Australia Thailand Korea Brazil Taiwan Argentina US UK Egypt S.Africa Canada Japan Russia Poland Mexico Germany France Spain Netherlands Iran Italy Estimation / data Forecasts (March 2013) + - - - - - - - - - - - - - - - - + - Significant Upward Revision Significant Downward Revision + + …but local EM drivers disappointed Real GDP growth in 2013 (in %) Source: IMF and BBVA research
  5. 5. Index Key takeaways in 2013 Rethinking EAGLEs for the next decade Special Topics EM markets portfolio flows: changing underlying forces The EM Middle-Class revolution will accelerate Are EAGLEs & Nest ready for income transition EM credit deepening: In the search for a healthy path Trends in South-South trade and global value chains
  6. 6. 6 Rethinking BBVA EAGLEs All emerging economies IMF criteria and groupings Avg contribution of non-G7 developed economies (with GDP > USD 100bn) 45 countries; discretionary exclusion Consensus from different sources Lowest contribution of a G6 economy (one country) NowBefore Candidates Definition of EM Nest threshold More candidates to be considered Stable and clear criteria A mix of macro and institutions Extension and stability of the threshold Implications
  7. 7. 7 Maintaining our robust methodology… Emerging Economies Developed Economies Current GDP Level GDP Level in 10 years BBVA Research & IMF forecasts Step 2: Calculating Incremental GDP Labor - Growth rate (10 yrs) = Current Size (“Initial size matters”) Potential Growth (“long run dynamics”) Final Size X Capital Technology Step 1: Estimating GDP level in the next decade GDP Level in 10 years Current GDP Level = Incremental GDP Institutions
  8. 8. 8 …but new thresholds broaden the scope in 2014 members G6 economies average Non-G7 developed economies (with GDP > USD 100bn average) NEST countries EAGLEs Rest of emerging economies USD 490bn USD 157bn China, India, Indonesia Russia, Brazil Turkey & México Saudi Arabia, Nigeria, Thailand, Colombia, Phillippines Malaysia, Irak, Vietnam, Bangladesh, Poland, Iran, Peru South Africa, Chile, Kazkhsthan, Qatar & Argentina Rest of Emerging Markets BBVA World Economic Groups and Incremental GDP thresholds: 2013-2023 Source: BBVA Research,
  9. 9. 9 A bird’s eye to EAGLEs contribution… Contribution to world growth in the next ten years and current GDP size (2013) (PPP-adj. 2013 USD) Source: BBVA Research, IMF USDtn USDbn18 15 12 9 6 3 0 3 6 9 12 15 China Nest US India EAGLEs-5* OtherEMs Non-G7DMs G6 2013-2023 2013 30.3% of world growth 13.5% 11.6% 11.4% 9.7% 8.3% 8.0% 7.1% Current Size (2013) Increase (2013-23) 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 500 1000 1500 Indonesia Russia Brazil Korea Japan Turkey Germany Mexico UK G6average 2013-2023 2013 Current Size (2013) Increase (2013-23) China and India play in another league The rest of the EAGLE`s are consolidating over time
  10. 10. 10 … and the new list of Nest members Contribution to world growth 2013-2023 and current GDP size (2013 USD bn and 2013 USD PPP adjusted) Source: BBVA Research, IMF 2400 2100 1800 1500 1200 900 600 300 0 300 600 S.Arabia Nigeria Taiwan Thailand France Australia Colombia Spain Canada Philippines Malaysia Iraq Vietnam Pakistan Bangladesh Poland Italy Egypt Iran Peru S.Africa Chile Kazakhstan Qatar Argentina Non-G7DMs 2013 2013-2023 Current Size (2013) Increase (2013-23)
  11. 11. 11 EAGLE’s contribution growth map… Regional contribution to world growth in the next ten years (%) Source: BBVA Research, IMF The EAGLE´s & Nest are geographicaly balanced Eastern Europe Western Europe 7.2% Africa 5.7% 6.2% America Middle East 4.1% Japan 1.7% Latin America 6.9% North 12.5% Oceania 1.1% Asia exJapan 54.7% G7 Non-G7 Developed Eagles Nest Other Emerging
  12. 12. 12 …with a bias to the Asia-Pacific region Regional contribution to world growth in the next ten years (%) Source: BBVA Research, IMF - Western Europe 7.2% Africa 5.7% Eastern Europe 6.2% Latin America 6.9% North America 12.5% Middle East 4.1% Japan 1.7% Oceania 1.1% Asia exJapan 54.7% The center of gravity is moving to the Asia Pacific Region (77%)
  13. 13. Index Key takeaways in 2013 Rethinking EAGLEs for the next decade Special Topics EM markets portfolio flows: changing underlying forces The EM Middle-Class revolution will accelerate Are EAGLEs & Nest ready for income transition EM credit deepening: In the search for a healthy path Trends in South-South trade and global value chains
  14. 14. -4 -3 -2 -1 0 1 2 3 4 2012 2013 2014 Local Global/Regional 40% 40% 60% 40% 60% 40% 60% Portfolio Flows to Emerging Markets (2012-2014) (median flows and contributions, flows to total assets) Source: BBVA Research and EPFR and IMF Risk On (Draghi + QE3) Risk Off Tapering Adjustment Geopolitics 40% 40% 60% 40% 40% 60% Global “push” factors Local “pull” factors Global “push” factors have been the dominant force driving portfolio flows to EM… … but Local and Regional “pull” factors are becoming more relevant EM Portfolio Flows: changing underlying forces…
  15. 15. -200 -100 0 100 200 300 400 500 600 700 800 900 2005 2006 2007 2008 2009 2010 2011 2012 2013 Portfolio Flows to Emerging Markets (2012-2014) (cumulative from 2005) Source: BBVA Research, EPFR and IMF Ultra loose Monetary Policy in western countries (“push”) and EM atractiveness (“pull”) prompted “excess” flows into Emerging Markets … … which sharply corrected with the FED announcement of the Tapering… We have already corrected previous excesses entering into the “Under-shooting” area Draghi&QE3 FEDTapering EM Portfolio Flows: … with limited room to the downside
  16. 16. 16 The EM Middle class revolution will accelerate and poverty will drop significantly Population by GDP pc in EM (1980-2025) (Eagles and Nest countries) Source: BBVA Research Millions of people 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Affluent High Middle Class Medium Middle Class Low Middle Class Poor and Low Income Slow Motion Fast Track Middle Classes will continue in Fast Track… …overcoming Poverty, Poor and Low income Classes!!! The Revolution of EM “Middle Class” is accelerating reaching near 3bn people. Some of them will jump faster joining the affluent classes For the first time Poverty drop below Middle Classes
  17. 17. 17 Change of population by GDP pc: 2013 to 2025 (millions of people by countries and Groups) Source: BBVA Research *EAGLE’s 5: Indonesia, Russia, Brazil, Turkey and Mexico 63 167 68 219 37 -600 -400 -200 0 200 400 600 800 China India EAGLEs-5* Nest G7 Affluent High Middle-Class Medium Middle-Class Low Middle-Class Poor&Low Income TOTAL New 1100 mln Middle Class living in EAGLE’s countries Nest will add 255 mln new Middle Class Eagles & Nest reducing poverty by 1000 mln New 195 mln Rich People in Eagles & Nest countries The EM Middle class revolution will accelerate and poverty will drop significantly…
  18. 18. 18 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% G7average Korea Russia Turkey Mexico Brazil China Indonesia India Qatar Poland Argentina Malaysia Chile Kazakhstan Iran Peru Thailand Colombia SouthAfrica Iraq Egypt Philippines Vietnam Nigeria Pakistan Bangladesh DMs EAGLEs Nest Affluent High Middle-Class Medium Middle-Class Low Middle-Class Poor&Low Income … in some places more than in others (EM Middle Class heterogeneity) Population by GDP pc: 2013 (millions of people by countries and Groups) Source: BBVA Research
  19. 19. 19 Are EAGLE’s and Nest ready for income transition?: different positions, different challenges… Demographics, urbanization, high investment returns, Basic Manufacturing low wages Middle income Tertiarisation, Manufacturing diversification & sophistication, increasing middle classes, financial deepening Factor accumulation moderation, wages rise, need of higher education, technological skills and infrastructure High income Diversification, sophistication, complexity, innovation, welfare systems Population aging, fiscal sustainability, increasing inequality, excessive leverage 2,000-8,000 PPP-adj. USD India, Indonesia, Bangladesh, Egypt, Iraq, Nigeria, Pakistan, Philippines, Vietnam 10,000-21,000 PPP-adj. USD Malaysia, Russia, Argentina, Chile, Poland, Brazil, Iran, Kazakhstan, Mexico, Turkey, China, Thailand, Colombia, S. Africa, Peru >22,000 PPP-adj. USD Qatar, Saudi Arabia Developed Economies Drivers Risks Macro and institutional, social unrest, poverty, basic services, increasing inequality Low income
  20. 20. 20 Economic development and population dynamics Source: BBVA Research, UN, World Bank, UNU-WIDER *Low Income = India, Indonesia, Bangladesh, Egypt, Iraq, Nigeria, Pakistan, Philippines and Vietnam; Middle Income 1 = China, Thailand, Colombia, South Africa and Peru; Middle Income 2 = Brazil, Iran, Kazakhstan, Mexico and Turkey; Middle Income 3 = Malaysia, Russia, Argentina, Chie and Poland Share of population with 15-64 (%) GINI inequality index (latest) 50 55 60 65 70 75 2010 2025 2010 2025 2010 2025 2010 2025 2010 2025 Low Income Mid.Inc. 1 Mid.Inc. 2 Mid.Inc. 3 G7 0,0 0,1 0,2 0,3 0,4 0,5 0,6 0,7 Low Income Mid.Inc. 1 Mid.Inc. 2 Mid.Inc. 3 G7 Are EAGLE’s and Nest ready for income transition?: different positions, different challenges…
  21. 21. 21 GDP per capita and Global Competitiveness Index (GCI) in selected economies Source: BBVA Research, WEF 6 7 8 9 10 11 12 3.0 3.5 4.0 4.5 5.0 5.5 6.0 GDPpercapita(2013) (naturallogsofPPP-adj.USD) Global Competitiveness Index (2013-2014) (from 1 to 7) EAGLEs Nest G7 Other DMs Korea China Italy Poland Bangladesh Pakistan Nigeria India Philipp. Vietnam Indonesia Egypt Mexico Brazil Chile Argentina PeruColombia Malaysia Canada Thailand UK Japan US Germany France Turkey Russia Qatar Spain Australia S.Arabia Netherlands Iran Kazakhstan S.Africa Are EAGLE’s and Nest ready for income transition?: policy room to change development paths…
  22. 22. 22 Quality of overall infrastructure (1-7) in EAGLEs, Nest and G7 countries (2013-2014) Source: BBVA Research, WEF H-I = High income countries; no data available for Iraq; discontinuous lines represent group averages Are EAGLE’s and Nest ready for income transition?: infrastructure will play a crucial role… 1 2 3 4 5 6 7 Bangladesh Nigeria Pakistan Vietnam India Philippines Indonesia Egypt China Thailand Colombia S.Africa Peru Brazil Iran Kazakhstan Mexico Turkey Malaysia Russia Argentina Chile Poland S.Arabia Qatar Italy France Japan UK Germany Canada US Low-income Middle-income H-I G7
  23. 23. 23 … and Credit Deepening will help to finance development as long as it follows a healthy path Credit to the private sector and GDP per capita (2013) (credit to GDP and GDP per capita PPP adjusted) Source: BBVA Research and IMF Note: the trend represents long-term relation between GDP per capita and the ratio of credit regardless of other variables which play a relevant in our model; the size of the bubbles are proportional to the absolute value of GDP 0 25 50 75 100 125 150 175 200 225 7,5 8,0 8,5 9,0 9,5 10,0 10,5 11,0 11,5 Credittoprivatesector(%GDP) GDP per capita (natural logs) Emerging Developed
  24. 24. 24 Trends in South-South trade and Global Value Chains (GVCs): South-South trade on the rise… Distribution of world exports according to origin and destination (% of total) Source: BBVA Research, IMF/DOTS 1980s-90s Present Note: 1980s-90s corresponds to the 1980-1999 average and Present to the 2010-2012 average North-North 61% South- South 6% South-North 16% North- North 40% South- South 15% South- North 24% North-South 17% North-South 20%
  25. 25. 25 South-South trade flows by regions (USD bn) (2012) Source: BBVA Research, IMF/DOTS 573 217 354 12 0 52 Intra Trade Exports Imports 37 28 69 24 111 99 12 35 60 44 Total South-South Trade: 2.92 tn EM AsiaAfrica M.East EM Europe Latam Trends in South-South trade and GVCs: …gravitating around the Asian Factory Further progress in trade liberalization Rapid economic growth of Southern countries Development of global value chains
  26. 26. Exports by regional trade network : 2000 & 2009 (gross value and value added basis, tn USD) Source: BBVA Research, OECD 0.4 1.6 1.2 0.3 0.9 0.7 1.2 2.5 1.2 0.9 1.9 0.9 1.1 2.2 1.1 0.8 1.6 0.8 3.6 5.2 1,6 2.6 3.8 1.1 0 1 2 3 4 5 6 7 8 9 10 11 12 2000 2009 Change 2000 2009 Change Gross value Value added South -> South South -> North North -> South North -> North Trends in South-South trade and GVCs: countries should pursuit VA gains… Increase value retention drain through foreign inputs or imports of final products Increase domestic connectivity with other activities Increase diversification in commodities and manufacturers Upgrade technological content most of them merely “assemblers”
  27. 27. 27 Current GDP size and expected change in the next decade (PPP-adj. 2013 USD) Source: BBVA Research, IMF 0 3 6 9 12 15 18 21 24 27 China US EU-28 India ASEAN Mercosur Pacific Alliance G6average GCC* 2013-2023 2013 Trends in South-South trade and GVCs: strategic alliances can help
  28. 28. Thank you!
  29. 29. DISCLAIMER This document has been prepared by BBVA Research Department, it is provided for information purposes only and expresses data, opinions or estimations regarding the date of issue of the report, prepared by BBVA or obtained from or based on sources we consider to be reliable, and have not been independently verified by BBVA. Therefore, BBVA offers no warranty, either express or implicit, regarding its accuracy, integrity or correctness. Estimations this document may contain have been undertaken according to generally accepted methodologies and should be considered as forecasts or projections. Results obtained in the past, either positive or negative, are no guarantee of future performance. This document and its contents are subject to changes without prior notice depending on variables such as the economic context or market fluctuations. BBVA is not responsible for updating these contents or for giving notice of such changes. BBVA accepts no liability for any loss, direct or indirect, that may result from the use of this document or its contents. This document and its contents do not constitute an offer, invitation or solicitation to purchase, divest or enter into any interest in financial assets or instruments. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind. In regard to investment in financial assets related to economic variables this document may cover, readers should be aware that under no circumstances should they base their investment decisions in the information contained in this document. Those persons or entities offering investment products to these potential investors are legally required to provide the information needed for them to take an appropriate investment decision. The content of this document is protected by intellectual property laws. It is forbidden its reproduction, transformation, distribution, public communication, making available, extraction, reuse, forwarding or use of any nature by any means or process, except in cases where it is legally permitted or expressly authorized by BBVA.

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