Unearthing opportunities in an uncertain world

Diamonds in the rough
Unearthing opportunity in un uncertain world
Irene Mia
Regional Director
Latin America & the Caribbean
Cali, May 24th, 2013

2
Outline
I. Introduction
 The state of the world
II. Diamonds in the rough
 Africa
 Asia
 Latin America
IV. Conclusions
 The emergence of the developing
world

3
Key points for the global economy in 2013
• After a series of crises and setbacks, global economy is mending

US economic fundamentals are strengthening
◦ Jobs market is on a modest upswing
◦ Housing is clearly recovering

China is recovering from a slow 2012
◦ Boom years are over, but so is the slump
 European debt crisis is stabilising…
◦ …but austerity is killing the economy
◦ Euro zone remains big drag on global growth
 Most emerging markets were weak in 2012…slowly improving this year
• Central banks are supporting the recovery in a big way
• Don’t expect a brisk recovery, though; many risks remains
 Debt levels still high; fiscal woes in the US; tensions in Middle East, China, Korea

4
Key points for the medium term
• Recoveries from recessions with financial crises take four to six years
 Banks are recapitalising (especially in the US) but have further to go
in Europe
 Consumers are reducing debt
(again, especially in the US), freeing up
funds to spend; but more deleveraging ahead
• Euro zone: From acute to chronic
 Merkel says Europe will struggle for years!!!
 Expect more flare-ups, like Cyprus
 Risk of one or more countries leaving the euro zone within five years remains high
• Consumer spending in emerging markets will accelerate
 Wages have been rising; more disposable income; will offset slowing exports
 Greatest opportunities for revenue growth are still in Asia

5
US clawing out of the hole
• Much better than Europe
 2.1% GDP growth in 2013
 Personal balance sheet
adjustment done?
 Consumers borrowing again
◦ Especially for cars
 Business borrowing also rising
• But economy still compromised
 Jobs recovery still behind the
curve
 Fiscal policy has potential to
derail 2013
◦ Long-term outlook frightening
 A new normal?
◦ Ageing society, fiscal strains,
productivity woes, question over
returns to innovation
Source: US Fed

6
Euro zone: From critical to chronic
•GDP to contract by 0.7% in 2013
Underlying levels of sovereign
debt
◦ Still very high for many countries,
especially on the periphery; years to
resolve
 Fiscal austerity
◦ Difficult balancing act
► Growth vs markets
◦ Will keep growth at 1% or less for some
time
 Financial catastrophe and break-
up?
◦ Reduced probability of market panic
◦ Euro zone break-up much less likely
◦ ECB, bail-out funds, political will have all
progressed
2-year government bond yield, %. Source: Haver
“Whatever it
takes”

7
Politics not yet consistent with long-term euro survival
• Sustainable euro zone requires:
 Either:
◦ Willingness for on-going transfers between core and periphery
 Or:
◦ Willingness for deep one-off adjustment in periphery living standards to
restore competitiveness
◦ Willingness to reform rigid periphery markets to allow long-run
competitiveness
◦ Willingness to pool sovereignty to address asymmetric shocks
◦ Willingness to recognise insolvency and deal with it
• Gradual recovery, depressing muddle, renewed crisis
 There are signs of life
◦ Where are Italy, France?

8
Adjustment is slowly happening, but not where it counts
Unit labour costs, index, (2005 =100).
Source: OECD.

9
Surging ahead…or still digging out?
Sources: National governments, Haver, EIU
The cost of the crisis
Difference, in % terms, of real output per head
before the recession started in 2007 compared
with 2012.
%

10
Hitting a BRICS wall? Cyclical and structural troubles
Quarterly real GDP growth % change year on year.
Source: Haver Analytics.
But some improvement in 2013 as
conditions strengthen among trading
partners and investor risk tolerance
improves

11
Africa: Fulfilling its potential?

12
Africa at a glance
• Africa is small: just 3% of the global
economy
 But includes fastest growing markets
in the world
• In an ageing world, SSA’s fertility rates
remain high
 5.2 per female, cf global average of
2.5
• By 2100, on current trends
 Nigeria’s population rises to 700m
 950m in China
• Around 90m households earn more than
US$5,000 a year (PPP)
• Governance is improving
• Key sectors
 banking, retail, infrastructure,
agriculture, services (healthcare,
education etc)
Source: EIU.

13
The engines of growth
• Rising external demand – especially from
China and India – also good for
commodity prices
• Rising internal demand – driven by
urbanisation and “consumerisation”
• The macro outlook is favourable
 Fastest growing region in the world,
apart from China and India, in 2012-13
• Businesses can no longer afford to ignore
Africa – but risks remain
Mining
Manuf actur ing
Ser vices
Agr icultur e
Other s
2000
US$681m
Mining
Manufacturing
Services
Agriculture
Others
2010
US$9.3bn
Chinese FDI in Africa

14
The demographic dividend
Population in 2011
• Nigeria – 166m
• Ethiopia – 76m
• DRC – 68m
• South Africa – 49m
• Tanzania – 45m
• Kenya – 42m
• Uganda – 35m
• Ghana – 25m
• Mozambique – 24m
• Angola – 20m

15
Key risks: Infrastructure
Ports, Air transport, Retail distribution, Power, Road, Rail,
Telephones, IT. 100=riskiest

16
Key risks: Legal & regulatory
Fairness of judiciary, Speediness of process, Enforceability of
contracts, Confiscation, Bias against foreigners; IPR. 100=riskiest

17
Asia: The world’s growth dynamo?

18
China is changing
• Recent data disappointing
 Now expect just 8% growth this
year
◦ Some discrepancies
between income and
spending, housing market
and investment
• Longer-term trend for softening
 China is 6-7% economy
 Rebalancing towards consumer
demand
 Rising wages
• Lower level manufacturing will be
shed to Asia
• RMB internationalisation for trade
set to rise sharply
Sources: Haver, EIU.

19
ASEAN: Steady economic progress
• ASEAN GDP growth should hold up well
through 2012, despite the importance of trade
and the downturn in the West
• Indonesia attracting real attention from
investors – domestically driven growth
• Philippines making welcome headway against
traditional problems like fiscal deficits & graft
• Strong growth in the “poor cousins” – Laos,
Myanmar & Cambodia
2012 GDP
(%)
Inflation
(%)
Brunei 1.5 1.6
Cambodia 6.0 4.4
Indonesia 5.9 5.3
Laos 7.7 7.0
Malaysia 4.0 2.4
Myanmar 5.0 5.7
Philippines 3.4 3.6
Singapore 3.0 3.9
Thailand 6.0 3.2
Vietnam 5.7 13.8

20
ASEAN rising
Becomes world’s fourth
biggest economy
Source: Economist Intelligence Unit
GDP, US$m (PPP)

21
ASEAN: Near, medium and...
• Indonesia (near):
 Bigger population than Brazil
 Strong domestic demand
 Rich natural resources
 BUT: Uncertain political outlook
• Philippines (medium):
 Outsourcing boom
 Big domestic market
 Economic fundamentals look a bit better
 Improved politics (but still a shambles)
 BUT: Old problems persist
(infrastructure,
private consumption led) -2
0
2
4
6
8
10
12
14
16
1996
1998
2000
2002
2004
2006
2008
2010
C hina Ph ilippine s
(GDP growth, y on y)

22
...long term
• Myanmar (long):
 Huge, untapped potential
 10th largest gas reserves in the world
 Population of 80m
 60% chance that gradual reform will continue
 Foreign aid kick-starts development
 Western sanctions eased
 Opportunities in tourism, minerals,
healthcare, education, and consumer goods
 Joining Asian’s apparel supply chain?
Bangladesh, Sri Lanka, Myanmar, Cambodia
 BUT:
 Appalling infrastructure and v low education levels
 Whole reform process could go backwards

23
Latin America: On the rise?

24
Mapping growth in 2013-17
3.4%
3.8%
6.3%
5.8%
4.5%
4.8%
Source: Economist Intelligence Unit,
CountryData.
3.8%
2.8%
5.8%
• Expected regional growth of 3.6% in 2013
(compared to 3% for the previous year),
and an average of nearly 4% for 2014-17
period
• Recent slowdown is cyclical rather than
structural, with future growth sustained by
sound macro policies in most countries,
resilient domestic demand and a modest
pick-up in global growth
• Recovery in China will benefit producers
of soft and hard commodities, as demand
will sustain prices at high levels
• Widening current account deficits has
increased LAT’s vulnerability to shifts in
market sentiment

25
The demographic dividend
Population (Million)
Source: Economist Intelligence Unit, CountryData.

26
The rise of the consumer market
GDP per head ($ at PPP)• Rise of middle class through
greater economic stability,
increases in minimum wages and
conditional cash transfer
programmes
• Gini index has fallen over past
decade, with 41 and 18 million
people falling out of poverty and
extreme poverty, respectively
• Young median age compared to
rest of world (in Brazil, average is
less than 30 years, 30% are 14
years or younger), but aging
nonetheless
• Urbanization rate, up to 79% (Brazil
& Chile, above 85%)

27
Integrated regional market and diversified export markets
 Latin American markets increasingly integrated by a
series of trade agreements (Mercosur, Andean
Community, the newly signed Pacific Alliance,
Caricom)
And stretching out to other regions using its strategic
location close to the US and with a Pacific outreach:
US (NAFTA, CAFTA-DR, trade agreements with
Chile, Colombia and Panama)
Asia (APEC, Trans-Pacific Partnership Agreement,
several bilateral agreements between Mexico, Chile
and Peru notably with Asian countries)
% of total % of total
US 23.0 US 56.1
EU 65.1 China 19.6
China 8.5 EU 17.4
Canada 3.4 Japan 7.0
Leading markets Leading suppliers

28
 China has increased its share in Latin
America’s trade from 1% in 1880 to 11% in
2011, becoming third trading partner after
the US (21%) and the EU (13%)
 Main trading partners for countries like
Brazil or Chile
 China was the third investors in the region
in 2010 (mostly extraction and natural
resources but also diversifying in
infrastructure and manufactures)
 China is also an increasing source of
funding: Chinese banks have lent more
than USD 75bn from 2005 to 2012 to the
region
China-Latin America: A growing relationship
Diversifying and increasing exports to
Asia, in particular to China. The region
is currently running a trade deficit with
Asia, and would benefit from trade
diversification beyond commodities and
towards more value added products
(notably through business initiatives to
promote intra-industry trade among the
two regions)
Opportunities for enhanced co-
operation in innovation and human
capital development, and to attract more
knowledge-based FDI
BUTAFEWCHALLENGES
REMAIN:

29
Business environment: Lagging behind in reforms
The EIU business environment rankings measure the attractiveness of the business environment in 82 countries worldwide, based on the market
opportunities, policy toward enterprises and FDI, foreign trade and exchange controls, taxes, financing, infrastructure among others.
Among the problematic areas: poor infrastructure, rigid labour markets, insufficient financing,
cumbersome fiscal systems, availability of skilled labour, poor competition, red tape.
2008-12 2013-17 change
North America 8.12 8.30 0.18
Western Europe 7.41 7.42 0.01
Asia & Australasia 5.99 6.34 0.35
Eastern Europe 6.55 6.93 0.38
Latin America 5.81 6.02 0.21
Middle East & Africa 5.50 5.81 0.31
World average 6.56 6.80 0.24

30
Mexico at a glance
• Optimism about structural reforms is growing
• Growth prospects for the medium-longer term are
positive, although short term risks (weak global
recovery, peso appreciation)
• Public spending sustains fiscal deficit, but
manageable
• Inflation stabilises at 2-4% per year
• Despite recent appreciating trend, peso remains
weak relative to other emerging-market
currencies, boosting competitiveness
• Consumer confidence at near 5-year high,
suggesting consumption pick-up in 2013
• US developments remain major source of risk
Key IndicatorsKey Indicators
GDP growth, 2013
(2012 growth)
3.7%
(4.0%)
FDI billion USD, 2013
(% growth)
$23.5
(31.3%)
Public sector balance, 2013 %
of GDP (2012)
-1.4%
(-2.4%)
Disposable income per capita
2013, USD (real %)
$7,031
(3.9%)
Domestic credit growth 2013
(average, 2014-16)
15.9%
(15.6%)
Retail sales billion USD, 2013
(% growth)
$434.8
(13.1%)
Business environment ranking (2013-17): 32 (out of 62)

31
Chile at a glance
• Campaigning for Nov elections dominates politics
• Record of prudent policies unaffected, whoever
wins election; still the region’s star performer
• GDP grows 4.7% in 2013 and 4.8% on average
over five years
• Inflation stays within 2-4% target range, while
peso remains stronger than historical average
• Gov’t focuses more on cash transfers and other
measures to address structural poverty and
regional inequalities
• Energy bottlenecks present key risk for economy
and business operations
GDP growth, 2013
(2012 growth)
4.7%
(5.5%)
(% growth)
$22.0
(-4.3%)
Public sector balance, 2013
% of GDP (2012)
1.5%
(1.4%)
2013, USD (real %)
$9,574
(5.4%)
(average, 2014-16)
9.2%
(9.6%)
(% growth)
$90.7
(9.4%)

32
Colombia at a glance
• Peace talks and pre-election maneuvering
dominate political scene
• Presents one of most stable economic and
business climates, with rising profile among
emerging markets
• GDP gathers pace to 4.3% in 2013 and 4.6%
average over five years
• Prudent policies keep inflation within target 2-
4%
• Peso remains strong, owing to interest-rate
differentials and strong FDI inflows
• Gov’t policies promote social inclusion and
formal job creation, boosting consumer market
potential
GDP growth, 2013
(2012 growth)
4.3%
(3.8%)
(% growth)
$17.4
(6.9%)
% of GDP (2012)
-0.7%
(-0.3%)
2013, USD (real %)
$5,904
(3.4%)
(average, 2014-16)
15.2%
(14.5%)
(% growth)
$121.6
(9.4%)

33
Peru at a glance
• Gov’t maintains pragmatic and broadly
centrist policies despite prior leftist leanings
• GDP growth of 6.2% in 2013 is among
strongest in region, and stays firm
thereafter
• Growth is balanced, supported by strong
investment, robust private consumption
and improving external demand
• Inflationary pressures ease; gov’t continues
to intervene to prevent NSol appreciation
• Firm GDP will further reduce poverty (down
28% in 2011), but inequality remains a
challenge
GDP growth, 2013
(2012 growth)
6.2%
(6.2%)
(% growth)
$10.6
(10.0%)
% of GDP (2012)
1.3%
(1.9%)
2013, USD (real %)
$3,128
(5.1%)
(average, 2014-16)
12.0%
(5.8%)
(% growth)
$85.0
(13.5%)

35
Shifting places
0
20
40
60
80
100
120
140
160
180
1990 2000 2010 2020 2030
Euro USA
Japan China
Brazil India
ASEAN Mid East
Lat Am
Nominal US$ trn. Source: EIU.
GDP in US$ trn
Emerging
markets

36
Retail sales: The rise of emerging-market consumers
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2000 2010 2016
G10 E10
Retail sales, US$m. G10: US, UK, Canada, France, Germany, Italy, Spain, Australia,
NZ, Japan. E10: Brazil, Russia, India, China, Colombia, Indonesia, Vietnam, Egypt,
Turkey, South Africa. Source: EIU

37
Where’s the growth?
Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine
etc. As of April 2013. Source: Economist Intelligence Unit, CountryData.

38
Key economies to watch in next five years
Real GDP, average annual % change, 2013-2017. Source: Economist Intelligence Unit
BRICs
CIVETS
Other EMs
G 7
0 1 2 3 4 5 6 7 8 9
China
India
Nigeria
Vietnam
Indonesia
Turkey
Colombia
Egypt
South Africa
Brazil
Russia
South Korea
Mexico
US
Canada
Germany
France
Japan
UK
Italy

39
Implications for business
• Geographic refocusing
 Emerging markets will become the primary source of revenue and profit
• Doing more with less
 Permanently leaner as low-cost competition increases
◦ Freeing up resources to become more agile
• Balancing the short and long-term
 Surviving today vs. investment in a dramatically changing business

40
Irene Mia
Regional director, Latin American & the Caribbean
EIU Country Analysis
irenemia@eiu.com

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