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Alicia Garcia Herrero Chief Economist Emerging Markets BBVA United Nations University, Tokyo March 2014 What to Expect from Latin American Economies in the Current Global Context?

What to Expect from Latin American Economies in the Current Global Context?

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Latin America has changed both in politics and economics. It is now better prepared to weather global instability. Volatility has returned to Latam markets, but we expect differentiation going forward, based on fundamentals. Most countries have good buffers to withstand the Fed’s tapering. Latam GDP growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. Growth differences within the region will increase: the Pacific Alliance will grow close to 4% in 2014 and 2015, more than double the pace in Mercosur. Regional growth will remain relatively high for its income level, converging to its potential in most countries. We expect growth for the region to converge to nearly 4% in the medium-long run. However, it is crucial that reforms continue to be pushed through to avoid weakening drivers of long-term growth.

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Page 1: What to Expect from Latin American Economies in the Current Global Context?

Alicia Garcia Herrero

Chief Economist Emerging Markets BBVA

United Nations University, Tokyo March 2014

What to Expect from Latin American Economies in the Current Global Context?

Page 2: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 2

Main messages Latin America has changed both in politics and economics. It is now better prepared to weather global instability.

Volatility has returned to Latam markets, but we expect differentiation going forward, based on fundamentals. Most countries have good buffers to withstand the Fed’s tapering

Latam GDP growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. Growth differences within the region will increase: the Pacific Alliance will grow close to 4% in 2014 and 2015, more than double the pace in Mercosur.

Regional growth will remain relatively high for its income level, converging to its potential in most countries. We expect growth for the region to converge to nearly 4% in the medium-long run.

However, it is crucial that reforms continue to be pushed through to avoid weakening drivers of long-term growth

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Page 3: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 3

1 Latam structural situation in a new world

2 Latam breaks with the past

3 Short-term perspectives

4 Strengths and vulnerabilities

Contents

Page 4: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 4

Beyond China and India, some Latin American countries are world players EAGLEs (excluding China and India)* vs G6 Economies: current economic size and contribution to World economic growth 2012-2022** in billion USD adjusted by PPP ** Size of the bubble are proportional to 2012 level; below country labels Source: BBVA Research and IMF WEO

Incr

emen

tal G

DP

2012-2

022

Indonesia1219 Brazil

2363Russia2520

Korea1618

Japan4623

Turkey1126

Germany3207 Mexico

1768UK

2335 Taiwan905

G6 avg.2620

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1300

EAGLEs

Advanced

Note: EAGLEs members, according to January 2013 forecast.

Page 5: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 5

Other smaller ones also globally relevant • As many as 15 economies in the NEST (contributing more to global GDP than smallest G6, Italy)

• Egypt relegated from the EAGLEs; Chile and Ukraine advanced from the group of other EM to NEST

Note: NEST members, according to January 2013 forecast.

Nest, G6 and Other Economies: current economic size and contribution to World economic growth 2012-2022 (%)* in billion USD adjusted by PPP ** Size of the bubble are proportional to 2012 level; below country labels Source: BBVA Research and IMF WEO

Incr

emen

tal G

DP

2012-2

022

G6 avg.2620

Egypt540

Nigeria453

Thail.655

Australia967

S.Arabia744

France2260

Canada1451

Colombia500

Vietnam322

Malaysia498

Poland806

Spain1415

Bang.307

S.Africa580

Philip.425

Iraq156

Peru328

Argentina745

Pakistan517

Iran1002

Chile322

G6 min.(Italy)1808

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Nest

Advanced

Others

Page 6: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 6

Pacific trio taken together also huge • Colombia, Peru and Chile belong to the Nest, with average expected growth of around 5% for the

next 10 years. • The three countries are characterized by their reform drive, prudent macroeconomic policies and

increasing integration with the global economy (including the Asia-Pacific region).

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Chile

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EAGLEs and Latam: increase of GDP in the next 10 years (PPP-adjusted bn USD) Source: BBVA Research and IMF (WEO)

Latam: current GDP size and increase in the next 10 years (PPP-adjusted bn USD) Source: BBVA Research and IMF (WEO)

Page 7: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 7

New middle class to support domestic demand but trend much bigger in Asia than in LATAM

• Latam economies face intense competition from Asia, as the region where middle classes will increase the most.

Emerging Markets: middle classes ranges by area (2010 PPP-adjusted USD) Source: BBVA Research

0

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2010 2020 2010 2020 2010 2020 2010 2020 2010 2020

East Asia South Asia LatAm Em.Europe Africa

High MC Medium MC Low MC

East Asia = China, Indonesia, Korea, Malaysia, Philippines, Thailand, Vietnam South Asia = India, Bangladesh, Pakistan LatAm = Brazil, Mexico, Argentina, Chile, Colombia, Peru Em. Europe = Russia, Turkey, Poland, Ukraine Africa = Egypt, Nigeria, South Africa

Middle class: High (25,000-40,000 USD), Medium (15,000-25,000 USD) & Low (5,000-15,000 USD).

Page 8: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 8

1 Latam in the EAGLEs

2 Latam breaks with the past

3 Short-term perspectives

4 Strengths and vulnerabilities

Contents

Page 9: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 9

LATAM breaking with the past After decades of poor performance, LATAM growing solidly and closing the gap with developed economies. The 2008-09 crisis was the stress test: it was the first big shock without a divergence in terms of per capita GDP.

LatAm: GDP per capita relative to G7 (%) Source: IMF and BBVA Research

LatAm: GDP per capita, relative performance to G7 during recession periods Source: IMF and BBVA Research

20%

22%

24 %

26 %

28 %

30 %

32 %

34 %

36 %

38 %

198

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2 19

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2016

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- 2 - 1 0 1 2 3 4 Recession's average (1981, 1996, 2001) Last Recession, 2009

Years since the beginning of the recession

Page 10: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 10

Why is LATAM breaking with the past? 1) Structural reforms: reforms that began in the 80s are transforming Latin America.

Macroeconomic reforms

• Fiscal consolidation with higher and better taxes

• Independent Central Banks

• Financial reform

• Opening of the Economy

Microeconomic reforms

• From labor protection to targeted transfers to the poor

• Liberalization of internal markets and privatizations

• Receptiveness of FDI

• Pension system reforms

Better Business Climate for investment and more equitable societies

Page 11: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 11

Why is LATAM breaking with the past? 2) Economic stability: While taming inflation in the late 90s, the region made sustained progress in external and public solvency over the years.

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Current Account Fiscal Balance

LatAm: Inflation (CPI, % yearly average) Source: BBVA Research

LatAm: External and Fiscal Balance. (As % of GDP) Source: BBVA Research

LatAm: External Debt (As % of GDP) Source: BBVA Research

Page 12: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 12

Why is LATAM breaking with the past? 3) Institutional stability: Economic change has come along with institutional progress

0%

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LatAm: Political Freedom (Freedom House Index, % of free countries) Source: BBVA Research with Freedom House data

Page 13: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 13

Why is LATAM breaking with the past? 4) Sound banking system: The banking systems have been able to speed up credit

supply, to cut NPL losses and to preserve high capital to assets levels.

Latam: credit as % of GDP Source: BBVA Research,

LatAm: NPL % Source: BBVA Research, GSFR. *Last available information

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ARG BRA CHI COL MEX PER PAR URU VEN

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Page 14: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 14

0.0

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Avg 2003-2010

2011 2012 2013* Avg* 2014-2018

Domestic Demand GDP

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Avg 2003-2010

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Private consumption Investment GDP

5) Supportive domestic demand: LATAM growth rests on the strength of domestic demand. For the first time in decades, growth comes along with the reduction of poverty and inequality, which drives domestic demand up.

Latam: Domestic demand and GDP (%yoy) Source: BBVA Research. LatAM: ARG, BRA, CHI, COL, MEX, PAN, PAR, PER, URU, VEN

Latam: Private Consumption, Investment & GDP (%yoy) Source: BBVA Research. LatAM: ARG, BRA, CHI, COL, MEX, PAN, PAR, PER, URU, VEN

Why is LATAM breaking with the past?

Page 15: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 15

6) Asia and commodities: LATAM countries are also benefiting from Asian demand for commodities.

Trade flows Asia-LATAM (USD millions) Source: BBVA Research y COMTRADE.

Composition of Exports from LATAM to Asia (% total) Fuente: BBVA Research y COMTRADE.

Commodities

70%Other30%

0

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1990 2000 2010

Exports from Asia to Latam Exports from Latam to Asia

Why is LATAM breaking with the past?

Page 16: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 16

1 Latam in the EAGLEs

2 Latam breaks with the past

3 Short-term perspectives

4 Strengths and vulnerabilities

Contents

Page 17: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 17

-2%

0%

2%

4%

6%

8%

10%

CHI COL PER MEX BRA TUR IND INDO RSA

17-Dec to 20-Jan

20-Jan to 11-Feb

Market expectation for the next 12 months

Volatility returned to Latam markets but, recently, more differentiation

Variations in EM exchange rates (%) Source: BBVA Research and Bloomberg

Volatility also affected Latam: currency depreciation, higher sovereign spreads and

weaker equity markets

We expect contagion from the sharp currency depreciation in Argentina to be limited, with only

a moderate effect on Brazil and Uruguay

However, capital flows into the region have not reversed, just slowed

The markets already appear to be starting to differentiate on the basis of macro fundamentals

and solid policies

*RSA: Republic of South Africa

Page 18: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 18

6.0

4.0

2.62.2

2.5 2.6

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2010 2011 2012 2013 2014 2015

Latam Pacific Alliance Mercosur

Growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015

Latam*: GDP growth (%) Source: BBVA Research

* Latam: weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela; Pacific Alliance: Chile, Colombia, México, Peru. Mercosur: Argentina, Brasil, Paraguay, Uruguay, Venezuela

Activity will accelerate in 2014 as Mexico leaves behind temporary negative shocks …

… and external demand gradually recovers in line with global growth

Increasing divergence: Pacific Alliance will grow 3.8% in 2014 and 3.7% in 2015, more than double

the rate in Mercosur

In the longer term, regional growth will start to converge to its potential, around 3.5%

Page 19: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 19

The Andean countries and Paraguay will continue to post the fastest growth

Latam countries: GDP growth (%) Source: BBVA Research

Mexico will see strong growth in 2014 after the downturn in the

construction sector in 2013

Brazil will record moderate growth of 2.5% in 2014, reflecting the negative

impact of tighter monetary policy and structural problems 0.0

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ARG BRA CHI COL MEX PAR PER URU Latam MCS AP

Jan. 2014 Forecast Nov. 2013 forecast

Page 20: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 20

Pressure on fiscal deficits will continue, but they will remain manageable

Only moderate growth in internal demand and lower raw materials prices will continue to put

pressure on fiscal balances

Latam: Fiscal deficits (% GDP) Source: BBVA Research and Haver Analytics

Fiscal deficits should start to ease from 2015 onwards, as growth and external demand

recover -5.0

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ARG BRA CHI COL MEX PAR PER URU Latam

Forecasts in February 2014 Forecasts in November 2013

Page 21: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 21

External deficits will start to shrink in 2014

Deficits will start to decline, particularly in those countries with a bigger foreign trade gap (Peru,

Uruguay)

The outlook for exports will improve as the supply problems in the export sector in some

countries improve …

Latam: Balance on current account (% GDP) Source: BBVA Research and Haver Analytics

….as well as due to currency depreciation and the recovery in global growth

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Forecasts in February 2014 Forecasts in November 2013

Page 22: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 22

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Inflation mainly to converge to central bank targets (Uruguay and Brazil exceptions)

Inflation (%yoy) Source: BBVA Research and Haver

Gradual convergence of inflation with central bank’ central target, except in Brazil and

Uruguay

Contained demand pressure and more moderate food prices will help to contain

inflation

Currency depreciation will in general terms have a limited pass-through to inflation

Page 23: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 23

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Heterogeneous monetary policy due to different inflation and cyclical positions

Official interest rate in IT countries (%) Source: BBVA Research and Haver

In future, tighter monetary policy in Brazil and Uruguay due to the pressures on inflation

The Pacific Alliance countries will follow different paths, in line with their cyclical

positions

The divergence between nominal and real interest rates will continue between Brazil and

the Pacific Alliance countries

Interest rates will rise in 2015, due to inflation (Brazil) or cyclical improvement

(Pacific Alliance)

Page 24: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 24

Relatively stable exchange rates in 2014-2015 with the exception of Brazil and Uruguay

Latam: exchange rate depreciation vis a vis USD (%) Source: BBVA Research and Haver

Contained depreciation: most of the impact of tapering in the US was priced-in by the markets

in 2013

The principal exception will be Brazil: sharp depreciation in 2014 and 2015 due to higher

inflation and efforts to recover part of the loss of competitiveness...

Uruguay will also be dragged by higher inflation than its neighbours and the currency

depreciation experienced by its trade partners -5

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BRA CHI COL MEX PAR PER URU

2013 depreciation 2014 depreciation (forecast)

2015 depreciation (forecast)

Page 25: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 25

1 Latam in the EAGLEs

2 Latam breaks with the past

3 Short-term perspectives

4 Strengths and vulnerabilities

Contents

Page 26: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 26

-5.0

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Argentina Brazil Chile Colombia Peru Uruguay

Structural Component Cyclical Component Estimated

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ARG BRA CHI COL MEX PER URU

Current Account Deficit FDI

Reduced vulnerability to external shocks, both in terms of flows …

Deficit on current account and financing with FDI (% GDP) Source: BBVA Research and national statistics

Balance on current account , cyclical and structural component (% GDP) Source: BBVA Research and Haver Analytics

External deficits, in the majority of cases financed by FDI, less volatile in periods of

market turbulence

Eliminating the cyclical component, the structural deficits in Latam will not exceed 3% of GDP: sustainable given the outlooks for growth

in the region

Page 27: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 27

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Reserves*/GDP (%)

Months of imports (right)*

Reserves*/short-term funding needs**

… and stocks

Deficit and public-sector debt (% PIB) Source: BBVA Research and Haver Analytics

International reserve indicators Source: BBVA Research, Haver Analytics and national statistics

* International reserves include IMF FCL lines in the case of Colombia and Mexico and sovereign funds in the case of Chile and Peru ** The need for short-term financing is the sum of the deficit on current account in 2014, short-term debt and long-term debt maturities in 2014.

High levels of international reserves … … and substantial reduction in public- and

private-sector debt with less foreign-currency exposure

ARG

BRA

CHI

COL

MEX

PER

URU

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Page 28: What to Expect from Latin American Economies in the Current Global Context?

Latam Outlook / March 2014

Page 28

Flexible exchange rates have already acted as the first buffer against external shocks

Exchange-rate pass-through to inflation: impact on inflation of 10% currency depreciation Source: BBVA Research and IMF

A flexible exchange rate is the first buffer against an external shock, and has already

started to act

If this is to work as a buffer, it is crucial to reduce dollar exposure, as the region has done

The credibility of monetary policies has also helped to reduce the exchange-rate pass-

through to inflation 0.0

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Page 29: What to Expect from Latin American Economies in the Current Global Context?

Thank you!

For comments and questions, please contact me at :

[email protected]

March 2014