Latin America Outlook 3rd QUARTER 2017
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Latin America Outlook
3rd QUARTER 2017
Latin America Outlook 3Q17
Main messages
1. Global growth continues increasing. This is driven
especially advanced economies and China (the latter with
fiscal impulses). However, global risks remain.
2. Slow growth in Latin America. Growth will increase from
-1.2% in 2016 to 0.8% in 2017 and 1.7% in 2018, a slow
recovery from deceleration in the previous years. Recovery
will be driven by Brazil and Argentina’s exit from recession.
Other countries will decelerate in 2017 compared to 2016.
3. Inflation will keep decreasing in South America and will
stop rising in Mexico, driven by stable exchange rates, weak
demand and lower oil and food prices. Consequently, central
banks in most countries in South America will continue cutting
interest rates, whereas in Mexico will remain stable for some
time.
4. Risks for Latam increase on the internal front, but
diminish externally. Political noise and delays in investment
are the most important domestic risks. On the other hand,
risks stemming from vulnerabilities in China and the
normalization of US monetary policy are the main external
risks.
Latin America Outlook 3Q17
GLOBAL Stable growth, with risks still
tilted to the downside
Latin America Outlook 3Q17
4
Global growth driven by
China
Signals of stabilization of
global growth
Some rebalancing from
US towards Europe
Both in the macro as well
as policy fronts
Low inflation in
developed countries
Wage moderation as well
as some correction in
commodity prices
Central banks in
developed countries lean
towards policy
normalization
Moping up liquidity and
increasing policy rates
Complacent financial
markets
Low volatility supports
lower risk aversion
Risks
Decreased in Europe, but
scaling up in China
Positive global momentum
Latin America Outlook 3Q17
Global GDP growth Forecasts based on BBVA-GAIN model (%, qoq)
Confidence indicators remain
very high, stronger than actual
hard data
China and emerging Asia show
strong growth, pushed by
expansionary policies…
… have supported stronger
trade and investment in the last
quarters
Source: BBVA Research
Global growth tends to stabilize
5
0.4
0.6
0.8
1.0
1.2
De
c-1
2
Jun-1
3
De
c-1
3
Jun-1
4
De
c-1
4
Jun-1
5
De
c-1
5
Jun-1
6
De
c-1
6
Jun-1
7
CI 20% CI 40% CI 60%
Point Estimates Period average
Latin America Outlook 3Q17
BBVA Financial Stress Index (normalized)
Volatility has decreased to very
low levels despite uncertainty
about economic policies
Brazil is the exception in
Latam, due to high political
noise
Reversal of expectations of
reflation in US have
maintained low long-term
interest rates
Capital flows to emerging
economies have continued
Risk of complacency in
financial markets
Financial stress remains low
Source: BBVA Research
6
-2.0
-1.0
0.0
1.0
2.0
Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17
Latam Asia Developed
Latin America Outlook 3Q17
Central Banks lean towards policy normalization
Fed expects to hike interest rates an additional 25 bp in 2017 and begin to
reduce its balance sheet before the end of the year…
… but financial markets discount a slower policy normalization
Has taken initial steps towards normalization, changing communication,
but very cautiously..
Reduction of bond purchases would be announced after the summer.
Interest rate hikes around end-2018
Fed
ECB
Communication towards tightening from central banks, point more
clearly towards normalization (except Japan)
Besides inflation, Central Banks are increasingly worried about the
side-effect of abundant liquidity (especially high asset prices)
Global
7
Latin America Outlook 3Q17
US.
2017
2,1
2018
2,2
LATIN AMERICA
2018
1,7
EUROZONE
CHINA 2017
2,0
2018
6,0
2018
1,7
2017
0,8
2017
6,5
WORLD
2018 3,4
2017 3,3
Revised down
Increased
Unchanged
Growth revised up in Europe and China, down in US and Latin
America
8 Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela
Latin America Outlook 3Q17
China: GDP growth (%)
We revised up our growth
forecasts for 2017-18, due to
incoming data and the fiscal
impulse. Gradual deceleration
underway, slower than anticipated
Prudent monetary policy. Fiscal
policy continues to support growth
Risks in the medium run continue
to increase
• Slow rebalancing of growth towards
services and consumption
• Financial fragilities continue to
accumulate due to growth still based
on debt and favoring shadow banking
system.
Source: BBVA Research and CEIC
China: (fiscal) policy impulses effective in the short run
9
7.3
6.9 6.7
6.5
6.0
3
4
5
6
7
8
2014 2015 2016 2017 2018
Forecast in July 2017 Forecast in April 2017
Latin America Outlook 3Q17
Growth revised down in 2017-18
Stimulus measures will probably
not be implemented in the short-
run
Fed: strong labor market and
convergence of inflation to 2%
justify policy normalization
Risks stemming from
protectionism diminish but
uncertainty about economic
policies remain
Source: BBVA Research and BEA
US: GDP growth (%)
US: fiscal impulse hard to materialize
10
2.4
2.6
1.6
2.1 2.2
0
0.5
1
1.5
2
2.5
3
2014 2015 2016 2017 2018
Forecast in July 2017 Forecast in April 2017
Latin America Outlook 3Q17
Commodity prices adjusted down in the short run, on concerns
about strong supply
11
Source: BBVA Research and Bloomberg
BRENT OIL
(USD/B)
SOYBEANS
(USD/mT)
COPPER
(USD/lb)
Oil prices will continue to be dragged by strong supply and
high inventories. We maintain expectations of 60USD/b in the
long run, given lower capital expenditures in exploration.
Strong supply also affects soybean and copper prices in the
short run. No significant changes in long-run view for
commodity prices.
0
20
40
60
80
100
120
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast in July 2017
Forecast in April 2017
300
350
400
450
500
550
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast in July 2017
Forecast in April 2017
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast in July 2017
Forecast in April 2017
Latin America Outlook 3Q17
Global risks most relevant for Latin America are related to US
policies and rebalancing in China
12
3
2
4
1 Lingering uncertainty about economic
policies to be implemented in US, though the
risk of protectionism is reduced
Policy stimulus in China to support investment
continues to accumulate financial vulnerabilities
Risks stemming from monetary policy
normalization, especially in the US, given
divergence with market expectations
Political risks in Europe diminish but remain
around Brexit negotiations, banking problems in
some countries and elections in Italy.
Latin America Outlook 3Q17
LATAM Slow growth
Latin America Outlook 3Q17
Financial markets continue to recover in Latam…
Asset prices and exchange rates
continued to see significant year-
to-date gains, driven by global
factors:
• Diminished worries about US
policies
• A gradual approach to Fed rate
hikes
• Stronger global growth
Despite some correction in
commodity prices
Latam asset prices: percent change in the last 3 months to
July*
14 Source: BBVA Research and DataStream * Change between April 12 and July
12. Exchange rate: local currency per USD. In this case, an increase signals a
depreciation. Country risk premium: EMBI.
-6
-4
-2
0
2
4
6
8
10
12
14
AR
G
BR
A
CH
I
CO
L
ME
X
PA
R
PE
R
UR
U
Exchange rate Stock exchange Country risk premium
Latin America Outlook 3Q17
… with the background of very low volatility in global financial
markets, which could revert quickly
Positive tone in financial markets
with volatility at historical lows
despite increasing economic,
political and geopolitical
uncertainty
An important question is whether
markets are too complacent,
especially given that main central
banks are starting to withdraw
their monetary stimulus
Volatility in developed markets and country risk premium
in Latam
15 Source: BBVA Research, DataStream and Bloomberg
300
400
500
600
700
800
0
5
10
15
20
25
30
35
40
45
Jan-1
5
Ma
r-1
5
Ma
y-1
5
Jul-1
5
Sep-1
5
No
v-1
5
Jan-1
6
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Sep-1
6
No
v-1
6
Jan-1
7
Ma
r-1
7
Ma
y-1
7
Jul-1
7
VIX Index EMBI Latam (rhs)
Latin America Outlook 3Q17
Mildly depreciating exchange rates going forward in most
countries
Relatively stable exchange rates in
the last 3 months. Recovery of
Mexican peso continues, aided by
softer tone from US on trade policy
We continue to expect a mild
depreciation of exchange rates
going forward given easier
monetary policy in South America,
diverging from Fed’s tightening
Some room for further appreciation
in Mexico in the short run. Chile and
Colombia may also see
appreciation in 2018
16 Source: BBVA Research and Haver
Exchange rates to the USD (Index Dec 2016=100)
80
85
90
95
100
105
110
115
120
125
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
ARG BRA CHI COL MEX PAR PER URU
Forecast Actual
depreciation vis-à-vis USD
Latin America Outlook 3Q17
Confidence indicators remain pessimistic throughout the region,
dragged by political noise
17
Source: BBVA Research and Haver
Latam: Confidence indicators for households and firms (values above 50 pts indicate optimism)
Some recent recovery of confidence in Mexico (driven by a
softer tone on trade policy by US) and on Brazil (though there
is a high risk of relapse given high recent political turmoil).
For households, pessimism remains due to weak labor
markets, but there has been some recent recovery of
confidence driven to some extent part by lower inflation.
20
25
30
35
40
45
50
55
60
65
Feb
-15
Jun-1
5
Oct-
15
Feb
-16
Jun-1
6
Oct-
16
Feb
-17
Jun-1
7
Feb
-15
Jun-1
5
Oct-
15
Feb
-16
Jun-1
6
Oct-
16
Feb
-17
Jun-1
7
Feb
-15
Jun-1
5
Oct-
15
Feb
-16
Jun-1
6
Oct-
16
Feb
-17
Jun-1
7
Fe
b-1
5
Jun-1
5
Oct-
15
Feb
-16
Jun-1
6
Oct-
16
Feb
-17
Jun-1
7
Feb
-15
Jun-1
5
Oct-
15
Feb
-16
Jun-1
6
Oct-
16
Feb
-17
Jun-1
7
Feb
-15
Jun-1
5
Oct-
15
Feb
-16
Jun-1
6
Oct-
16
Feb
-17
Jun-1
7
ARG BRA CHI COL MEX PER
Consumer Producer
optimism
pessimism
Latin America Outlook 3Q17
Still low growth in Latam in 2017 and 2018
Recovery after contraction in
2015 and 2016, supported by
Brazil and Argentina coming
out of recession
Stronger growth in 2017-18
driven by: • External sector, supported by
more favorable terms of trade
and stronger global growth
• Investment, especially in places
like Argentina and Colombia
Growth still low in the next
two years, still below
potential, and below
developed economies
18
Source: BBVA Research
* Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay,
Peru, Mexico, Uruguay and Venezuela
Latam: GDP growth (%)
2.8 2.9
0.9
-0.3
-1.2
0.8 1.7
2.7
-4
-3
-2
-1
0
1
2
3
4
5
2012 2013 2014 2015 2016 2017 2018 2019
Latam* Andeans Brazil Mexico
Latin America Outlook 3Q17
Recovery gets stronger in Argentina, but stabilization in Brazil
still carries high political risks
19
Latam countries: GDP growth (%)
Source: BBVA Research
Recent data show the recovery is already
under way in Argentina and recession
finished in Brazil, but with high political
risks in the second case.
In most of the rest of the countries,
activity will decelerate in 2017 relative to
2016, dragged by external shocks and
weak domestic demand.
Main downward revision in Colombia,
given a lower oil price and delay in some
infrastructure projects.
-5
-4
-3
-2
-1
0
1
2
3
4
5
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG BRA CHI COL MEX PAR PER URU Latam Mercosur PacificAlliance
Jul-17 Apr-17
Latin America Outlook 3Q17
Inflation continues to diminish in South America and has peaked
in Mexico
20
Latam: inflation and central bank target ranges (%, yoy)
Source: BBVA Research
Lower inflation in South America due to a stable exchange
rate, weak demand and lower oil and food prices. Inflation will
remain within target ranges in most countries going forward.
In Mexico, inflation continued to increase, given past
depreciation and fuel price hikes. But recent appreciation
has moderated inflation increases, which would have
peaked this July.
0
2
4
6
8
10
12
14
16
18
0
5
10
15
20
25
30
35
40
45
50
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
6
De
c-1
7
De
c-1
8
Argentina (lhs) Brazil Chile Colombia Mexico Paraguay Peru Uruguay
ForecastInflation target
Latin America Outlook 3Q17
More dovish monetary policies in South America, and the end of
rate hikes in Mexico
21
Latam: official interest rates (%)
Source: BBVA Research and Haver
Interest rate cuts will continue in coming months in South
America, on the back of lower inflation and weak demand.
Rate hikes have probably ended in Mexico, and interest
rates would remain stable until mid-2018, while inflation
comes back to Banxico’s target range.
0
2
4
6
8
10
12
14
16
0
5
10
15
20
25
30
35
40
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8 .
ARG (lhs) BRA CHI COL MEX PAR PER
Actual Forecast
Latin America Outlook 3Q17
Fiscal deficits will continue to shrink, except (temporarily) in
Peru
No changes in fiscal scenario in
Argentina, though current
forecasts count Central Bank
financing as part of the deficit
A slower fiscal consolidation path
in Brazil, in line with a slower
growth than expected 3 months
ago
Expected fiscal deficit revised up
in Peru in 2018, to finance
reconstruction works. This
revision complies with the fiscal
rule
22 Source: BBVA Research and Haver
Latam: fiscal balance (%, GDP)
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG BRA CHI COL MEX PAR PER URU Latam
Jul-17 Apr-17
Latin America Outlook 3Q17
Only Mexico and Argentina will have contractionary ex-ante
real interest rates, reflecting inflation rates above central
bank’s target ranges.
Fiscal policy will not be able to support economic activity,
given lack of policy space. Exception will be Peru, where
the fiscal rule allows for extraordinary spending for
reconstruction, in the wake of “el Niño costero” of 2017.
Monetary policy will continue to bear most of the countercyclical
adjustment in South America, given lack of fiscal space
23
Latam: Real interest rates* (%)
Latam: fiscal impulse (Change in the structural primary deficit, % GDP)
Source: BBVA Research and IMF * Inflation and interest rate data refer to July for each year.
Ex-ante real interest rate is computed using yoy inflation rates expected 12 months ahead.
-4
-2
0
2
4
6
8
10
12
14
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG 0 BRA 0 CHI 0 COL 0 MEX 0 PER
Neutral interest rate Real interest rate (ex-ante)
-2
-1.5
-1
-0.5
0
0.5
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG 0 BRA 0 CHI 0 COL 0 MEX 0 PER
Fiscal drag
Fiscal impulse
Source: BBVA Research
Latin America Outlook 3Q17
Current account vulnerability continues to abate in most
countries
External deficits continue to
shrink in countries with the widest
gap, like Colombia, although at a
slower pace than anticipated
Recent drop in commodity prices
and weak demand from
intraregional trade partners has
weighed down on exports
24 Source: BBVA Research and Haver
Latam: current account balance (%, GDP)
-5
-4
-3
-2
-1
0
1
2
3
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG BRA CHI COL MEX PAR PER URU Latam
Jul-17 Apr-17
Latin America Outlook 3Q17
Main messages
1. Global growth continues increasing. This is driven
especially advanced economies and China (the latter with
fiscal impulses). However, global risks remain.
2. Slow growth in Latin America. Growth will increase from
-1.2% in 2016 to 0.8% in 2017 and 1.7% in 2018, a slow
recovery from deceleration in the previous years. Recovery
will be driven by Brazil and Argentina’s exit from recession.
Other countries will decelerate in 2017 compared to 2016.
3. Inflation will keep decreasing in South America and will
stop rising in Mexico, driven by stable exchange rates, weak
demand and lower oil and food prices. Consequently, central
banks in most countries in South America will continue cutting
interest rates, whereas in Mexico will remain stable for some
time.
4. Risks for Latam increase on the internal front, but
diminish externally. Political noise and delays in investment
are the most important domestic risks. On the other hand,
risks stemming from vulnerabilities in China and the
normalization of US monetary policy are the main external
risks.
Latin America Outlook 3Q17
ANNEX
Latin America Outlook 3Q17
Latin America GDP growth forecasts
27 f = forecast
GDP (%yoy) 2014 2015 2016 2017f 2018f
Argentina -2.5 2.6 -2.2 2.8 3.0
Brazil 0.5 -3.8 -3.6 0.6 1.5
Chile 1.9 2.3 1.6 1.3 2.4
Colombia 4.4 3.1 2.0 1.5 2.0
Mexico 2.3 2.7 2.0 1.6 2.0
Paraguay 4.7 3.0 4.0 3.7 3.5
Peru 2.4 3.3 3.9 2.2 3.9
Uruguay 3.2 0.4 1.4 3.2 3.1
Mercosur -0.4 -2.8 -4.1 0.2 1.2
Pacific Alliance 2.6 2.7 2.2 1.6 2.3
Latin America 0.9 -0.3 -1.2 0.8 1.7
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