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Latin America: Three Factors Holding Back Growth
23 FEBRUARY 2015BY ERIK NORLAND, SENIOR ECONOMIST, CME GROUP
Three factors that will likely mean slow growth and weak currencies across Latin America in 2015:
1) Lower commodity prices: US Dollar (USD) prices for agricultural, energy and metals exports have fallen across the board and will reduce export revenue to varying degrees in the region.
2) Large current account deficits: In many Latin American nations, trade deficits are larger than historical norms and may require weaker domestic demand (less imports) in order to compensate for sluggish (or negative) growth in export revenue.
3) Rising inflation: most Latin American economies have experienced an increase in inflation. This may hinder the ability and willingness of the region’s central banks to boost demand by easing monetary policy and, in some cases, may lead to more restrictive monetary conditions.
Against this backdrop, there is one countervailing factor: weaker currencies. Nearly all Latin American currencies have been depreciating. This will help offset some of the impact of the decline in commodity prices and may put Latin American countries on the path to smaller current account deficits by making imports more expensive and increasing the competitiveness of the region’s exports.
Currency depreciation has its downside, however. With the exception of Mexico, inflation has been creeping up, even in countries where price increases have been relatively subdued such as Brazil, Chile, Colombia and Peru. Further currency weakness will likely increase inflationary pressures and may lead a number of regional central banks to tighten monetary policy, which may offset some of the gains from weaker exchange rates.
While our overall outlook is for continued below-potential growth in Latin America in 2015, we emphasize that the region is highly diverse, and growth rates and inflation will differ greatly from one country to another. Among the region’s varied economies, we expect that Brazil, Chile, Mexico and Peru will be relative outperformers, while Colombia will slow substantially after many years of impressive growth. Finally, we expect difficult times for Argentina and especially so for Venezuela, where we anticipate a deep recession with the possibility of triple-digit inflation.
Since commodity prices will be a major driver for the different outcomes across Latin America in 2015, this paper will first outline what the impacts are likely to be in the seven largest regional economies. Then we will look at each individual economy more in depth.
Consequences of the Commodity Crash for Latin America
Falling commodity prices will be a dominant theme in Latin America in 2015 and should contribute to a slowing of the region’s economic growth but with disparate impacts that will create interesting opportunities for investors. Oil and copper will trigger the greatest consequences.
Oil: The collapse of oil prices will create highly varied outcomes for Latin American economies in 2015. It will be a boon for net oil importers such as Chile and neutral for producing countries like Argentina, Brazil and Peru that meet most or all of their domestic needs but never developed into net oil exporters. For the oil exporters, however, it’s a different story. By our estimate, if oil prices stay around $45/barrel in 2015, this will shave
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
23 FEBRUARY 2015
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approximately 1.3% off Mexican GDP growth, 4.0% in Colombia and over 10% in Venezuela. To see the details of our back of the envelope calculations, please refer to item 1 in the appendix.
For every $10 move up in oil, we would expect a marginal contribution of approximately +1.5% in Venezuela, 0.7% in Colombia and 0.2% in Mexico and -0.4% in Chile.
Copper will be a major issue as well, especially for Chile. While Chile will likely be a beneficiary of lower oil prices, the decline in copper prices may cancel out those gains if copper prices remain near current levels. Chile is the world’s largest copper producer, mining nearly one third of the world total and producing nearly 3.5x as much as China, the world’s next biggest producer. Just behind China, Peru is the world’s third largest copper producer, responsible for approximately 7% of the world’s supply in 2013.
Our estimates show that if copper prices remain near $2.50/lb, this will shave approximately 2.6% off Chilean GDP in 2015 and about 0.8% from Peruvian GDP, while having little impact on the rest of Latin America.
For every 10% additional decline in copper prices, we would expect to see approximately 1.3% to be taken off Chilean GDP and about 0.4% off Peruvian GDP.
Agriculture: Prices for corn, soybeans, sugar and wheat also plunged in 2014 and 2015. The decline in these commodities will be somewhat detrimental to Argentina, shaving about 1.4% off GDP before any second round effects are taken into account. The decline in sugar prices will also affect Brazil, trimming approximately 0.3% off growth should prices remain near early-February 2015 levels. The impact of the decline in agricultural goods prices should be fairly minor elsewhere in Latin America.
Overall, the drop in commodity prices will hit Venezuela by far the hardest owing to its reliance on energy but truth be told, it won’t be good for any country in Latin America. Colombia and to a lesser extent Mexico also are likely to take a hit from lower oil prices, although much more manageable ones than Venezuela. Peru will see some negative consequences from falling metals prices while in Chile the drop in copper will largely cancel out the gains coming from falling crude oil prices. Finally, the decline in agricultural goods prices will add some strain to Argentina’s already struggling economy while having a marginally negative impact in Brazil, which remains the best insulated economy in Latin American from the fall in commodity prices (see figure 2 for details).
Figure 2: Marginal Impact on 2015 GDP of the decline in commodity prices vs. 2014 averages Marginal Impact on 2015 GDP of the decline in commodity prices vs. 2014 averages
Source: CME Group Estimates based upon data from CIA World Fact Book, www.indexmundi.com, US Grains Council, USDA, Energy Information Administration, US Geological Survey, British Geological Survey
-1.4% -0.3%
-0.1% -4.1%
-1.5% -0.8%
-10.2% -12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
Argentina Brazil Chile Colombia Mexico Peru Venezuela
Oil Copper Agricultural Goods Net Impact
Figure 1: Estimated First Order GDP Impact of Decline in Agricultural Prices from 2014 Averages
Country Corn Soybeans Sugar Wheat Total
Argentina -0.2% -0.9% 0.0% -0.1% -1.3%
Brazil -0.2% -0.2% -0.1% 0.0% -0.5%
Chile 0.0% 0.0% 0.0% 0.0% -0.1%
Colombia 0.0% 0.0% 0.0% 0.0% -0.1%
Mexico -0.1% 0.0% 0.0% 0.0% -0.2%
Peru 0.0% 0.0% 0.0% 0.0% -0.1%
Venezuela 0.0% 0.0% 0.0% 0.0% 0.0%
Source: US Grains Council, www.indexmundi.com, CIA World Factbook
23 FEBRUARY 2015
Figure 3: Copper and Oil Prices: Rising Prices Lifted Boats, Falling Prices Can Sink ThemCopper and Oil Prices: Rising Prices Lifted Boats, Falling Prices Can Sink Them
Source: Bloomberg Professional, CL1 and HG1
0
100
200
300
400
500
600
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Jan
uar
y 1,
20
00
= 1
00
Crude Oil Copper
Figure 4: Soybean, Corn and Wheat PricesSoybean, Corn and Wheat Prices
Source: Bloomberg Professional, S 1, C 1 and W 1
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
0
100
200
300
400
500
600
Jan
uar
y 1,
20
00
= 1
00
Soybean Corn Wheat
The above analysis only considers first order effects on the economy. The second order impacts are more complicated. Latin American currencies have already weakened versus the US Dollar over the past 12 months, partly as a result of weaker commodity prices. The decline in Latin American currencies, which began in 2013, will make the region’s goods and services more competitive. (Please see Figures 5 and 6 below for details.)
However, what is worrisome is that the currency weakness has boosted inflation rates in a number of Latin American countries. Thus far, the inflationary impact of weaker currencies has exceeded the disinflationary effects of weaker commodity prices. Inflation rates moving somewhat higher may limit the scope of Latin America’s central banks to respond to an economic slowdown by lowering interest rates.
In the charts below, we treat the low inflation countries (Brazil, Chile, Colombia, Mexico, and Peru) and the higher inflation countries (Argentina and Venezuela) separately. Paradoxically, falling oil prices are likely to send Venezuelan inflation soaring as the country may have to curtail its fuel subsidies and allow further depreciation of its currency in the face of depleted export revenues and currency reserves.
Figure 5: Latin American Currencies in DeclineLatin American Currencies in Decline
Source: Bloomberg Professional BRL, CLP, COP, MXN and PEN
50
60
70
80
90
100
110
Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15
BRL CLP COP MXN PEN
Peru
Mexico
ColombiaChile
Brazil
Figure 6: Argentina and Venezuela's DevaluationsArgentina and Venezuela's Devaluations
Source: Bloomberg Professional, ARS and VEF
0
20
40
60
80
100
120
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Feb-15
ARS VEF
3
23 FEBRUARY 2015
4
In contrast with the commodity price crash of the 1980s, for the moment the market grades the likelihood of sovereign default as fairly low, except in Venezuela where it appears to be a 55% probability, according to the sovereign CDS market ask price. Five-year default probabilities for Brazil, Chile, Colombia, Mexico, and Peru range from 1.1% to 2.1%. (Please see Figure 7 below for details.) Over the course of 2015 as the consequences of lower commodity prices become more apparent, the market might reevaluate some of these likelihoods upward. Our perspective is that a growing economy eventually leads to the acceleration of wage growth, but with a substantial lag, which works both ways. The impact of a recession appears in decelerating hourly wage growth for a number of years into the economic expansion. Because the Great Recession was particularly deep and also marked by substantial deleveraging in the consumer, business, and government sectors in the post-recession period, hourly wage growth deceleration did not end until 2012 and the subsequent acceleration has been slow. Even though some further acceleration of wage growth is likely in 2015, we would not expect this to result in any material inflationary pressure measured by the core consumer price index
Figure 7: 5Y CDS Spread
Source: Bloomberg Professional, SOVR
7 5Y CDS Spread
2.1% 1.1% 1.8% 1.2% 1.4%
55.4%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Brazil Chile Colombia Mexico Peru Venezuela
Brazil: Sector Outperform
After a significant slowdown from its post-crisis rebound,
Brazil’s growth may be set to pick up again in 2015. We
anticipate 1.5% real GDP growth this year, above the 0.5%
consensus expectation in a recent Banco Central do
Brasil survey of economists. Among the Latin American
countries, Brazil is the most insulated from the impact
of falling commodity prices. Moreover, its currency has
weakened more than most of its peers, which should boost
exports, especially to the US, which may replace China as
the biggest source of growth for Brazilian merchandise.
Finally, Banco Central do Brasil may have a little bit of
scope to ease policy, in contrast with many of its Latin
American peers.
There are, however, a number of risks associated with this
forecast:
1) Water shortages in Sao Paulo could hurt manufacturing
and business more broadly if the drought is not
alleviated. New investments in water infrastructure
could boost output, however.
2) Weaker-than-expected demand from China could slow
Brazil’s recovery as well.
3) Tax increases and spending cuts that went into effect in
late 2014 and early 2015 might also slow the recovery of
the economy.
4) The rising current account deficit could be corrected
at some point with significantly weaker domestic
demand (i.e. a recession) if Brazil can’t export its way to
recovery. (Please see Figure 9 below for details.)
5) Rising inflation could limit Banco do Brazil’s ability to
ease in the face of soft domestic spending.
Figure 8: Brazil: Real and Nominal GDP YoY
Source: Bloomberg Professional, BZGDYOY% and BZGDGDPQ
Brazil: Real and Nominal GDP YoY
-5
0
5
10
15
20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Real Nominal
23 FEBRUARY 2015
Figure 9. Brazil: Current Account as % of GDP
Source: Bloomberg Professional, BZCA%GDP
Brazil: Current Account % of GDP
-5
-4
-3
-2
-1
0
1
2
3
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 10: Brazil: Short Rates and Inflation
0
15
30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Short Term Rate (Selica)
Source: Bloomberg Professional, BZSELICA and BZPIIPCY
Brazil: Short Rates and Inflation
Inflation
Chile: Caught Between Copper and Oil
Chile appears to be skating on the edge of a recession.
(Please see Figure 11 below for details). The lag impact
of a weaker Chilean Peso (CLP) may help Chile avoid an
outright downturn but one cannot rule out the possibility.
Chile’s economy will benefit from the collapse in oil prices
but will be hampered by the drop in copper prices. For
the moment, the collapse in oil prices (-60%) has been
much deeper than the drop in copper prices (-30%). If
copper prices fall further and oil prices rebound, that could
be a toxic mix for Chile and could tip the economy into
recession. As such, Chile’s fate remains to some extent
in the hands of the Chinese and their demand for copper,
which is Chile’s main export. Slowing growth in China is
bad news for Chileans.
Banco Central de Chile will almost certainly have to
tighten policy in 2015. Short rates have fallen below the
rate of inflation, which has been increasing. (Please see
Figure 12 below for details.) The decline in oil prices will
put some downward pressure on inflation but this will
be counteracted to some extent by the lag impact of the
weakness of the Chilean Peso.
Unlike many of its peers, Chile’s current account deficit
has been shrinking but it is still relatively large by historical
standards. (Please see Figure 13 below for details.) The
lag impact of a more favorable exchange rate will help to
narrow the gap, but we expect some softness in domestic
demand.
Figure 11: Chile: Real and Nominal GDP YoY
Source: Bloomberg Professional, CLGDPSA% and CLGDYCUR
11 Chile: Real and Nominal GDP YoY
Real Nominal
-10
-5
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 12: Chile: Short Rates and Inflation
Short Rates
Source: Bloomberg Professional, CHIBNOM and CNPISYO
Chile: Short Rates and Inflation
Inflation
0
2
4
6
8
10
2010 2011 2012 2013 2014
5
23 FEBRUARY 2015
6
Figure 13: Chile: Current Account % of GDP
-6
-4
-2
0
2
4
6
8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg Professional, EHCACL
Chile: Current Account % of GDP
Figure 14: Colombia Real and Nominal GDP YoY
Source: Bloomberg Professional, COCIPIBY and COCUPIBY
14 Colombia: Real and Nominal GDP YoY
Real Nominal
0
2
4
6
8
10
12
14
16
18
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Colombia: From Success to Distress?
Colombia has been one of the great success stories of the
past fifteen years with falling rates of inflation and robust
economic growth spurred by dramatically lower levels of
violence. (Please see Figure 14 below for details.) In the
long term, we remain optimistic on Colombia but we do see
growth taking a stumble in 2015, with expansion slowing
into the 0-2% range. Lower oil prices will take a bite out
of Colombia’s economy. Some of this will be offset by the
weakening of the Colombian Peso versus the US Dollar.
Colombia’s central bank has been proactively tightening
policy for some time and for the moment the rate of
inflation remains under control. (Please see Figure 15
below for details.) Even so, the potential for further interest
rate raises remains. Colombia is running a large current
account deficit and the weakness in COP hasn’t yet begun
to correct it. (Please see Figure 16 below for details.)
Running a current account deficit is not a problem so long
as the corresponding capital account surplus is being
productively invested, but with the declines in commodity
prices foreign investors may be less forthcoming during
the next few years.
The combination of that deficit and the weakness in oil
prices may put further downward pressure on COP and
might induce the central bank to tighten policy further.
Colombia also has some delicate geopolitical considerations
to navigate. First, it has to deal with the increasingly chaotic
situation on its border with Venezuela. Second, it is still
in talks to end decades of on-and-off violence with FARC.
These factors also need to be monitored when looking at
Colombia’s markets and economy.
Figure 15: Colombia Short Rates and Inflation
0
3
6
9
12
15
18
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Short Term Rate Inflation
Source: Bloomberg Professional, COMM30D and COCPIYOY
Colombia: Short Rates and Inflation
Figure 16: Colombia Current Account % of GDP
Source: Bloomberg Professional, EHCACO
Columbia: Current Account % of GDP
-5
-4
-3
-2
-1
0
1
2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
23 FEBRUARY 2015
7
Mexico: Slow growth to remain slow
Mexico’s growth rate has been slow the past several years
and it appears likely to remain slow in 2015, perhaps in the
1.5-2.5% range as a base case scenario. (Please see Figure
17 below for details.) Fortunately, the country is not as
dependent upon oil as it once was. The collapse in oil prices
appears likely to shave more than 1% off economic growth
in 2015 but the good news is that some of that is likely to
be offset by the lag impact of a weaker currency, which
should boost exports to the United States, Mexico’s main
trading partner. Additionally, US economic growth appears
likely to be robust in 2015. (Please see our article on US
Economic Outlook 2015.) Moreover, Banco de Mexico has
done an exemplary job of containing inflation. Even so, its
policy rate is currently below the rate of inflation and one
cannot rule out a few rate hikes over the course of 2015,
especially if MXN were to weaken further. (Please see
Figure 18 below for details.)
Mexico’s current account deficit is near its historical
average and doesn’t appear to be alarming. (Please see
Figure 19 below for details.) That said, it may also serve as
a restraint on economic growth, though not to the same
extent as elsewhere in Latin America.
Finally, there is the issue of Mexico’s stability. The level
and pervasiveness of violence calls into question the
government’s control over large sections of the country as
well as the attractiveness of certain regions of Mexico as a
business and tourist destinations. This may also hamper
foreign investment and economic growth in 2015 unless
the government is able to improve the security situation.
Figure 17: Mexico Real and Nominal GDP YoY
Source: Bloomberg Professional, MXGDP and MXGRGDP
17 Mexico: Real and Nominal GDP YoY
Real Nominal
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 18: Mexico: Short Rates and Inflation
Source: Bloomberg Professional, MXONBR and MXCPYOY
18 Mexico: Short Rates and Inflation
0
2
4
6
8
10
2008 2009 2010 2011 2012 2013 2014
Short Term Rate (Central Bank Overnight) Inflation
Figure 19: Mexico: Current Account % of GDP
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg Professional, EHCAMX
Mexico: Current Account % of GDP
23 FEBRUARY 2015
8
Peru: Potential for a Currency Devaluation
Peru’s currency, the New Sol, has depreciated to a much
lesser degree than its Latin American counterparts. This is
problematic given Peru’s enormous current account deficit
(Figure 20), relatively slow growth (Figure 21) and the
likely impact of weaker commodity prices. As such, we see
economic growth remaining weak, probably around 1% real
growth in GDP, with a significant risk (35%) of a recession.
Given the disinflationary influence of lower commodity
prices, a relatively strong currency (for the moment) and
slow economic growth, we don’t see much short-term risk
of the central bank tightening policy. This is especially true
given that the policy rate is already positive in real terms.
(Please see Figure 22 below for details.) Nevertheless, if
the New Sol does begin to weaken dramatically, it will put
upward pressure on inflation and may limit the ability and
willingness of the central bank to ease policy.
In this environment we see a significant risk that the New
Sol will catch up with its Latin American peers on the
downside during 2015. At its current level it will be difficult
for Peru to compete in the export market and to redress its
current account deficit.
Figure 20: Peru: Current Account % of GDP
-6
-5
-4
-3
-2
-1
0
1
2
3
4
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: Bloomberg Professional, EHCAPE
Peru: Current Account % of GDP
Figure 21: Peru: Real and Nominal GDP YoY
Source: Bloomberg Professional, PRGDPYOY and PRDFYOY
21 Peru: Real and Nominal GDP YoY
-5
0
5
10
15
20
25
2008 2009 2010 2011 2012 2013 2014
Real Nominal
Figure 22: Peru: Short Rates and Inflation
Source: Bloomberg Professional, PSDR1T and PRCPYOY
22 Peru: Short Rates and Inflation
-3
0
3
6
9
12
15
18
21
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Short Term Rate Inflation
23 FEBRUARY 2015
9
Argentina: Cry for Me
Argentina enters 2015 under challenging circumstances.
Inflation is soaring (notice the gap between nominal and
real GDP in Figure 23) and the central bank appears to
be behind the curve, having just begun tightening policy
during the last few months. (Please see Figure 24 below
for details.) Moreover, the country is once again in default
and appears to be unwilling to negotiate with its creditors
ahead of the 2016 elections. Finally, the government of
President Cristina Kirchner is enveloped in a scandal
involving an alleged cover up of Iranian involvement in the
July 18, 1994 attack on the Asociacion Mutual Israelita
Argentina in Buenos Aires. Irrespective of the veracity
of these allegations, the surrounding controversy could
hamper the government’s ability to deal with Argentina’s
economic challenges. As such, we expect a year of
stagnant to negative growth in Argentina accompanied
by further increases in inflation and significant currency
devaluation.
Although Argentina is largely insulated from the collapse
in oil and copper prices, declining prices for agricultural
goods will likely detract Argentina’s growth prospects in
2015. Additionally, although Argentina’s current account
deficit is reasonably small, since the country remains
largely cut off from the global capital markets, funding that
deficit is a challenge, especially in light of dwindling foreign
currency reserves and the large gap between the official
and black market exchange rates. (Please see Figure 25
below for details.)
Figure 23: Argentina: Real and Nominal DGP YoY
Source: Bloomberg Professional, ARGQPYOY and ARCUYOY
23 Argentina: Real and Nominal GDP YoY
Real Nominal
-20
-10
0
10
20
30
40
50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Argentina: Real and Nominal GDP YoY
Figure 24: Argentina: Short Rates and Inflation
Source: Bloomberg Professional, BAIBAP2W and ARWPIYOY
24 Argentina: Short Rates and Inflation
-15
0
15
30
45
60
75
90
105
120
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Two Week Buenos Aires Interbank Inflation
Figure 25: Argentina: Current Account % of GDPArgentina: Current Account % of GDP
Source: Bloomberg Professional, EHCAAR
-6
-4
-2
0
2
4
6
8
10
12
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
23 FEBRUARY 2015
10
Venezuela: Muy Duro (Very Difficult)
Venezuelan President Nicolas Maduro finds himself in an
unenviable situation. Inflation is soaring (Figure 26) and
real growth is stagnant (Figure 27). Officially, inflation is
around 70% and appears headed toward 100%. The price
of oil, responsible for the near totality (96%) of Venezuela’s
export earnings, has collapsed. Currency reserves are
running out so quickly that the central bank converted a
loan from China into foreign exchange reserves. In January,
Maduro visited China, Qatar and Russia to ask for loans
and aid to stave off an impending default on Venezuela’s
debt. Shortages of basic goods from toilet paper to
tampons are creating social unrest. To make matters
worse, Venezuela employs three official exchange rates
that apply to different kinds of goods. Officially, there are
6.30 Bolivars to the US Dollar. On the black market, one
US Dollar buys 175 Bolivars. Finally, the government’s
yawning budget deficit is being financed to a large extent
by the printing of money, in the vein of the Weimar Republic
(though not on the same scale).
We forecast a deep recession –possibly -10% for GDP in
real terms—for 2015, with hyperinflation and a massive
devaluation of the Bolivar. Oil traders be warned: the
potential for unrest in Venezuela raises the very real
specter of supply disruptions.
Figure 26: Venezuela: Short Rates and Inflation
Source: Bloomberg Professional, VNBOPROM and VZCPYOY%
26 Venezuela: Short Rates and Inflation
0
15
30
45
60
75
90
2008 2009 2010 2011 2012 2013 2014
Short Term Rate Inflation
Figure 27: Venezuela: Real and Nominal GDP YoY
Source: Bloomberg Professional, VNGGYOY and VNGRYOY%
27 Venezuela: Real and Nominal GDP YoY
-40
-30
-20
-10
0
10
20
30
40
50
60
70
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Real Nominal
Conclusion: Slow Growth with Diverse Economic and Currency Outcomes
2015 will likely be a subpar year for Latin America as the
region grapples with lower commodity prices and large
trade deficits. That said, outcomes will vary significantly
across the region. Among the relatively low inflation
countries, we look to Brazil as being the most likely to
outperform, followed by Mexico and Chile, while Colombia
and Peru will be more challenged.
Latin American currencies have weakened a great deal
since early 2014 as a result of weaker commodity prices, a
generally stronger dollar, as well as generally slow growth
in the region. If 2015 proves to be a “risk-off” environment
(global equities decline), then Latin American currencies
are likely to remain weak. If 2015 proves to be a “risk-on”
environment, Latin American currencies might be in a
position to rebound. In the latter case, BRL might be
the biggest beneficiary for two reasons: 1) it has by far
the highest interest rates among traded Latin American
currencies, and 2) BRL has underperformed its peers and
therefore might have the greatest potential to rebound.
Although they would benefit, to varying degrees, if carry
trades return to favor, we would be comparatively less
optimistic about the remaining Latin American currencies.
Chile, Colombia, Mexico and Peru all have much lower
interest rates than Brazil, making them relatively less
attractive than Brazil from a carry trade perspective.
Peru’s New Sol looks particularly challenged in light of
the country’s enormous current account deficit, relatively
low interest rates and the fact that the currency hasn’t
declined versus USD.
23 FEBRUARY 2015
11
Appendix: Back of the Envelope Calculations for Commodity Price Decline GDP Impacts
Figure 1: Latin American Oil Consumption, Production and GDP
Production Millions of Barrels/ Day
Consumption Millions of Barrels/Day
Production - Consumption mb/d
Production - Consumption Annualized
Value of -$60 Change from High (Millions USD)
GDP (Millions USD)
GDP Impact of a $60 drop in the price of crude to $45/barrel (Millions USD)
Argentina 0.72 0.7 0.02 7.3 -438 484600 -0.1%
Brazil 2.65 2.81 -0.16 -58.4 3504 2190000 0.2%
Chile 0.02 0.36 -0.34 -124.1 7446 291700 2.6%
Colombia 0.97 0.29 0.68 248.2 -14892 369200 -4.0%
Mexico 2.94 2.14 0.8 292 -17520 1327000 -1.3%
Peru 0.16 0.17 -0.01 -3.65 219 210300 0.1%
Venezuela 2.49 0.78 1.71 624.15 -37449 367500 -10.2%
Source: Energy Information Administration and the CIA World Factbook with CME Group Calculations
Figure 2: Latin American Copper Production and GDP
Copper Production by Millions of Tons
$ Value of Production (Millions of USD) at 2014 Average Price of $3.10/lbs
$ Value of Production (Millions of USD) at Current Price of $2.50/lbs Difference
GDP (Millions USD)
GDP Impact of copper price decline
Argentina 134 916 739 -177 484600 0.0%
Brazil 220 1504 1213 -291 2190000 0.0%
Chile 5700 38956 31416 -7540 291700 -2.6%
Colombia 1 7 6 -1 369200 0.0%
Mexico 480 3280 2646 -635 1327000 0.0%
Peru 1300 8885 7165 -1720 210300 -0.8%
Venezuela 0 0 0 0 367500 0.0%
Source: US Geological Survey, British Geological Survey, CIA World Fact Book, CME Group
Figure 3: Latin American Corn Production and GDP
Metric Tons of Production (000s)
Conversion Metric Tons to Bushels
Production in Bushels (000s)
2013-2014 Average Price in Cents
February 2, 2015 Price in Cents
Lost Value in USD Millions
GDP in USD Millions
Marginal GDP Impact
Argentina 23000 39.37 905464 496 370 -1141 484600 -0.2%
Brazil 75000 39.37 2952600 496 370 -3720 2190000 -0.2%
Chile 1400 39.37 55115 496 370 -69 291700 0.0%
Colombia 1750 39.37 68894 496 370 -87 369200 0.0%
Mexico 23000 39.37 905464 496 370 -1141 1327000 -0.1%
Peru 1800 39.37 70862 496 370 -89 210300 0.0%
Venezuela 1300 39.37 51178 496 370 -64 367500 0.0%
23 FEBRUARY 2015
12
Sources for Agricultural Goods:
Index Mundi
http://www.indexmundi.com/agriculture/?commodity=wheat&graph=production
US Grains Council
http://www.grains.org/buyingselling/conversion-factors
Additional Sources: Bloomberg Professional and CME Group
Copyright © 2015 CME Group. All rights reserved.
Figure 4: Latin American Soybean Production and GDP
Metric Tons of Production (000s)
Conversion Metric Tons to Bushels
Production in Bushels (000s)
2013-2014 Average Price in Cents
February 2, 2015 Price in Cents
Lost Value in USD Millions
GDP in USD Millions
Marginal GDP Impact
Argentina 29575 39.37 1164309 1320 960 -4192 484600 -0.9%
Brazil 29000 39.37 1141672 1320 960 -4110 2190000 -0.2%
Chile 43 39.37 1693 1320 960 -6 291700 0.0%
Colombia 272 39.37 10708 1320 960 -39 369200 0.0%
Mexico 3325 39.37 130899 1320 960 -471 1327000 0.0%
Peru 2 39.37 79 1320 960 0 210300 0.0%
Venezuela 257 39.37 10118 1320 960 -36 367500 0.0%
Figure 5: Latin American Sugar Production and GDP
Metric Tons of Production (000s)
Conversion Metric Tons to Pounds
Production in Pounds (000s)
2013-2014 Average Price in Dollars
February 2, 2015 Price in Dollars
Lost Value in USD Millions
GDP in USD Millions
Marginal GDP Impact
Argentina 2000 2204 4408000 16.91 14.22 -119 484600 0.0%
Brazil 36800 2204 81107200 16.91 14.22 -2182 2190000 -0.1%
Chile 300 2204 661200 16.91 14.22 -18 291700 0.0%
Colombia 2300 2204 5069200 16.91 14.22 -136 369200 0.0%
Mexico 6890 2204 15185560 16.91 14.22 -408 1327000 0.0%
Peru 1200 2204 2644800 16.91 14.22 -71 210300 0.0%
Venezuela 490 2204 1079960 16.91 14.22 -29 367500 0.0%
Figure 6: Latin American Wheat Production and GDP
Metric Tons of Production (000s)
Conversion Metric Tons to Bushels
Production in Bushels (000s)
2013-2014 Average Price in Cents
February 2, 2015 Price in Cents
Lost Value in USD Millions
GDP in USD Millions
Marginal GDP Impact
Argentina 12000 36.74 440880 637 493 -635 484600 -0.1%
Brazil 6300 36.74 231462 637 493 -333 2190000 0.0%
Chile 1620 36.74 59519 637 493 -86 291700 0.0%
Colombia 15 36.74 551 637 493 -1 369200 0.0%
Mexico 3660 36.74 134468 637 493 -194 1327000 0.0%
Peru 230 36.74 8450 637 493 -12 210300 0.0%
Venezuela 0 36.74 0 637 493 0 367500 0.0%
