The economic climate index improves in Latin America,

but worsens in Brazil

The Ifo/FGV Economic Climate Index for Latin America (ECI) - developed in partnership between the German Ifo Institute and the FGV taking as a data source the Ifo World Economic

Survey (WES) – advanced, after having been stable in the last two surveys (July and October 2013). The 8% increase in the ECI (to 95 from 88 points) is explained by both the improvement in assessments of present conditions (PSI) and expectations (EI), but only the latter one went to the zone of favorable assessment

1. Furthermore, all three indicators are below the average of

the last 10 years and, in addition, the region still has to improve its performance to ensure a stable growth trajectory. However, the result does not generalize to all countries in the region.

Among the 11 countries (Chart 2) covered by the Survey, 8 recorded an ECI in zone of favorable assessment (Bolivia, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru and Uruguay). Highlight on the performance of the following countries: Colombia, where the ECI has increased by 22% between the surveys of October 2013 and January 2014 (positive expectations for the performance of the sector of oil and entry of foreign investment); Mexico, which returned to the zone of favorable economic climate, after the drop of the ECI last October (improvement in the U.S. economy has a direct impact on the country). Chile was the only country among the eight that repeated the result of October (caution/waiting for the announcement of the measures of the new government that took office in January 2014).

So, what does explain that ECI in Latin America continues unfavorable? Remember that indicators are weighted by the share of trade chain (exports plus imports) of each country in the region. After Mexico, with 35% share, followed by Brazil (22%) and Argentina, Venezuela and Chile, all with a share of 7%. However, Brazil, Venezuela and Mexico, which explain 36% of the trade chain are all in the unfavorable zone. Therefore, even with the improvement of the indicators of other countries, the weight of these three causes that the ECI in the region still remains unfavorable.

1 From the January 2014 edition, the Economic Climate Index in Latin America will be presented so that numbers below 100 are classified as unfavorable and above 100 as favorable. See methodological note at the end of this report, as well as tables with all indicators.

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Chart 1: Economic Climate Index for world and Latin America

Indice de Clima Econômico América Latina Indice de Clima Econômico Mundo

February 13th

2014

Ifo/FGV Economic

Climate Index for

Latin America¹

88 95

80

96 102

October/2013

January/2014

Expectations

88

Present Situation

II

Venezuela and Argentina show the worst ECI in the region - 20 points and 77 points respectively - and kept the same results of the survey in October for all indicators. Brazil, which had improved the economic climate in the comparison between July and October, although still in negative zone, has worsened again and fell by 6.3% in the index which went to 89 points from 95 points. It is observed that PSI and EI in Brazil also dropped - 6% and 11% respectively - and all indicators are below the historical average of the last ten years.

With the results described above, Brazil, Argentina and Venezuela occupy the last positions in the ranking of Latin America (see table at the end of this report).

A note should be added regarding the crisis in Argentina and its potential impacts within Mercosur. In Brazil, Argentina's crisis can affect the auto industry, but Brazil's total exports to that country does not reach 1% of GDP. Draws attention to the results of the survey the case of Uruguay, which improved the ECI, as well as Paraguay. Here we recall that 6% of Uruguay's exports and 14% of Paraguay's are intended for the Argentine market (year 2012). So "contagion" from Argentina via trade can be offset by other markets, which helps explain why the ECI of these countries seems not to have been affected by the Argentine crisis.

Worldwide the favorable results in the United States and the European Union

consolidate the uptrend of the indicator. The global ECI continued its path of ascension started in October 2012 and reached 114 points in January, remaining 8 points above the average of the last ten years. This improvement is linked to the performance of the United States (19.4% increase in ECI) and the European Union (4.4%). Among the largest economies of the developed countries, Japan recorded a drop in ECI, but remained in positive zone.

Emerging countries in the 2000s, especially after the crisis of 2008, led the growth of the world economy. Now with the recovery of the United States and the European Union and the results in emerging markets, many experts suggest that the situation is reversed. Moreover, rising interest rates in the United States, reduced liquidity in the international market and China growing at lower rates, create an unfavorable scenario for emerging markets.

The survey in January (Chart 3) confirms the earlier view for Brazil and China, although this last one records a drop in ECI, but remains in the favorable zone. This indicates that domestic factors, besides the international scenario, should be considered in the analysis of the BRICS. Anyway, the indicators tend to be lower for BRICs compared to some developed countries.

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Chart 2: Economic Climate Index for Latin America countries

jul/13 out/13 jan/14

III

Special Survey on the change in U.S. monetary policy

Finally it is worth noting that the Ifo Institute conducted a special survey regarding the change in the monetary policy of the United States. The question was: what is the expected impact on economic growth, interest rates, exchange and foreign investment of a less expansionary monetary policy in the United States? In general, the expected impacts are small and the region most affected is expected to be Latin America. The appreciation of the currencies in the region and the entry of foreign capital in the years 2010/2011 and part of 2012 associated with low interests in U.S. would explain this result. Brazil can be highlighted as one of the countries where the change in direction of U.S. policy causes concern.

RANKING OF COUNTRIES

Previous

Position

Present

Position Country

Average ECI of the last 4 quarters

oct-13 jan-14

1 1 Paraguay 144 144

2 2 Peru 126 124

4 3 Colombia 112 120

5 4 Bolivia 108 112

8 5 Ecuador 100 107

3 6 Chile 113 106

6 7 Mexico 106 103

7 8 Uruguay 105 99

9 9 Brazil 100 93

10 10 Argentina 80 73

11 11 Venezuela 25 22

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UniãoEuropéia

EstadosUnidos

Japão Alemanha França ReinoUnido

China Índia Rússia África doSul

Brasil

Chart 3: Economic Climate Index for selected countries/regions

jul/13 out/13 jan/14

IV

APPENDIX

PRESENT SITUATION INDEX (IN POINTS)

PSI jul/11 oct/11 jan/12 apr/12 jul/12 oct/12 jan/13 apr/13 jul/13 oct/13 jan/14 Average 10

years

Latin America 118 104 116 112 98 102 98 102 90 80 88 103

Argentina 150 144 126 100 60 72 78 60 88 74 74 102

Bolivia 84 88 86 100 100 140 116 114 114 116 148 87

Brazil 136 116 126 112 90 98 92 94 66 84 84 124

Chile 172 134 140 152 130 154 172 164 140 140 132 141

Colombia 146 132 166 166 106 122 118 112 106 110 140 119

Ecuador 108 118 150 146 140 120 100 140 120 126 140 91

Mexico 100 84 104 106 104 100 100 114 100 66 82 89

Paraguay 154 126 100 42 84 60 122 158 154 134 140 95

Peru 154 152 152 154 140 136 154 152 140 128 138 143

Uruguay 180 160 168 156 148 120 144 110 130 112 114 138

Venezuela 50 54 66 68 52 52 20 20 20 20 20 64

EXPECTATIONS INDEX (IN POINTS)

EI jul/11 oct/11 jan/12 apr/12 jul/12 oct/12 jan/13 apr/13 jul/13 oct/13 jan/14 Average 10

years

Latin America 106 70 84 96 92 106 120 104 86 96 102 105

Argentina 86 64 60 34 44 122 130 74 56 80 80 91

Bolivia 100 74 86 100 114 100 100 100 100 100 100 92

Brazil 94 74 120 134 118 146 144 128 84 106 94 118

Chile 116 60 54 94 86 80 92 90 36 68 76 115

Colombia 150 86 100 100 46 78 94 100 138 116 136 108

Ecuador 116 82 90 122 60 80 60 100 80 74 74 83

Mexico 106 58 58 86 90 94 126 114 112 112 124 103

Paraguay 114 100 66 78 116 158 158 166 136 122 140 116

Peru 88 96 104 132 94 94 126 114 82 110 126 118

Uruguay 120 74 82 100 100 90 108 80 80 78 86 131

Venezuela 110 88 112 68 84 84 40 36 20 20 20 82

ECONOMIC CLIMATE INDEX (IN POINTS)

ECI jul/11 oct/11 jan/12 apr/12 jul/12 oct/12 jan/13 apr/13 jul/13 oct/13 jan/14 Average 10

years

Latin America 112 87 100 104 95 104 109 103 88 88 95 104

Argentina 118 104 93 67 52 97 104 67 72 77 77 96

Bolivia 92 81 86 100 107 120 108 107 107 108 124 90

Brazil 115 95 123 123 104 122 118 111 75 95 89 121

Chile 144 97 97 123 108 117 132 127 88 104 104 128

Colombia 148 109 133 133 76 100 106 106 122 113 138 114

Ecuador 112 100 120 134 100 100 80 120 100 100 107 87

Mexico 103 71 81 96 97 97 113 114 106 89 103 96

Paraguay 134 113 83 60 100 109 140 162 145 128 140 105

Peru 121 124 128 143 117 115 140 133 111 119 132 131

Uruguay 150 117 125 128 124 105 126 95 105 95 100 135

Venezuela 80 71 89 68 68 68 30 28 20 20 20 73

V

M e t h o d o l o g i c a l N o t e

The Latin America Economic Survey aims for monitoring and forecasting of economic trends, based on quarterly information

supplied by economy experts in their respective countries. The survey is - simultaneously - applied with the same methodology in all

countries of the region, a method that allows the construction of an agile and comprehensive picture of the economic situation in

countries and economic blocks. In January 2014, were consulted 141 experts in 18 countries.

The survey generates information of both qualitative and quantitative nature. The Economic Climate Index (ECI), is the synthesis

indicator, comprised of two items of qualitative nature, the Present Situation Index (PSI) and the Expectations Index (EI), which deal,

respectively, with the general economic situation in the country at the moment and for the upcoming six months.

In the World Economic Survey, by the Ifo Institute, the individual responses are combined for each country without any weighting. To

reach the average value of each index, 9 points are assigned to positive responses (+), 5 to indifferent responses (=) and 1 to negative

responses (-). The Economic Climate Indices represent an arithmetic average of the two indices that comprise it (PSI and EI).

The process of aggregating data for a particular group of countries or continent is made according to the relative share of foreign

trade (exports + imports) in each country regarding the total in the region.

According to specific criteria of the survey, the phase of the business cycle the country is at the moment is determined by a

combination of PSI and EI. When the two indices exceed the average limit of 5 points, the economy is in the "boom" phase. When

both are below 5 points, there is recession. The phase of decrease occurs when the PSI is higher and EI is lower than 5 points. And the

recovery phase with a higher EI and the PSI lower than 5 points.

From the January 2014 edition on, the indicators of this report began to be presented in another scale, obtained by converting the

values of 5 points in the original scale of the Ifo Institute to level 100 (one hundred). The new scale ranges from a minimum of 20

points to a maximum of 180 points. Indicators greater than 100 are in the favorable zone and below 100 in the unfavorable one.