UBS Investment Research Latin American Economic Focus LatAm by the Numbers (4 th Quarter 2010) What the numbers say: Growth continues to be robust across countries and sectors. Peru, Argentina, Brazil and Chile are leading the way. Mexico, Colombia and especially Venezuela are lagging. Despite domestic demand-led recoveries, inflation remains reasonably stable. Inflation targeting countries show rates well within their target bands (Mexico is an exception on account of one-off factors). Credit is recovering, but growth rates remain at about half of the levels observed before the crisis. The external accounts remain solid, with high and growing capital account surpluses (>3% of GDP) financing both a small current account deficit (<1% of GDP) and large foreign reserve accumulation. Import growth has stabilized at 35% y/y, 6 ppts above export growth. The region is showing an improvement in its fiscal position to -2% of GDP in 2010 from -3.2% in 2009, but this is mostly due to rapidly rising revenue growth. Prior to the crisis, the region’s fiscal balance used to be between 0 and -1% of GDP. Labor markets are improving for the most part, with countries enjoying declining unemployment rates and rising real wages. Debt to GDP ratios have either stabilized or resumed their downward trend. Other key vulnerability indicators are also heading in the right direction. Venezuela is the sole exception. What the numbers mean: A number of countries are in the midst of a virtuous cycle in which growth in wages, employment and credit fuels domestic aggregate demand feeding back into the labor markets. However, there are already a few economies that appear to be at or near overheating territory (Brazil, Chile, Peru and Argentina). Perhaps due to countries’ own political cycles, fiscal retrenchment has been a disappointment. This is particularly true in the face of impressive recoveries and the large stimulus put in place during the crisis. Higher commodity prices have helped countries to grow at a fast pace without developing material current account deficits. Improvements in debt ratios are largely the result of the denominator effect (high growth and real exchange rate appreciation). 12-month outlook: We see regional growth in 2011 slowing to 4.6% from 6.3% in 2010 with countries facing growing bottlenecks, net export contribution to growth becoming even more negative and higher base effects taking place. We expect the inflation targeting Central Banks to resume their hiking cycles throughout 2011, with all of them meeting their 2011 targets. High growth differentials against much of the world and continued currency strength should contribute to deteriorate the region’s current accounts deficit to 1.7% of GDP in 2011 from 0.8% of GDP in 2010. On the fiscal front, we see improvements in Brazil, Chile, Peru and Colombia, stability in Mexico and deterioration in Argentina and Venezuela. We also expect FX stability pretty much across the board, though we continue to characterize the FX policy regimes in Argentina and Venezuela as unsustainable. Labor markets should continue to recover. Our strategists are not believers in the EM equity bubble story. They see underlying value primarily in Brazil. On the fixed income side, we favor local markets over hard currency bonds. Global Economics Research Latin America New York 15 November 2010 www.ubs.com/economics Javier Kulesz Economist [email protected]+1-203-719 1603 Andre Carvalho Economist [email protected]+55-11-3443 6345 Rafael De La Fuente Economist [email protected]+1 203 719 7127 This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 38. ab
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UBS Investment Research
Latin American Economic Focus
LatAm by the Numbers
(4th Quarter 2010) What the numbers say: Growth continues to be robust across countries and
sectors. Peru, Argentina, Brazil and Chile are leading the way. Mexico, Colombia and especially Venezuela are lagging. Despite domestic demand-led recoveries, inflation remains reasonably stable. Inflation targeting countries show rates wellwithin their target bands (Mexico is an exception on account of one-off factors). Credit is recovering, but growth rates remain at about half of the levels observedbefore the crisis. The external accounts remain solid, with high and growing capitalaccount surpluses (>3% of GDP) financing both a small current account deficit(<1% of GDP) and large foreign reserve accumulation. Import growth hasstabilized at 35% y/y, 6 ppts above export growth. The region is showing animprovement in its fiscal position to -2% of GDP in 2010 from -3.2% in 2009, but this is mostly due to rapidly rising revenue growth. Prior to the crisis, the region’sfiscal balance used to be between 0 and -1% of GDP. Labor markets are improvingfor the most part, with countries enjoying declining unemployment rates and risingreal wages. Debt to GDP ratios have either stabilized or resumed their downwardtrend. Other key vulnerability indicators are also heading in the right direction.Venezuela is the sole exception.
What the numbers mean: A number of countries are in the midst of a virtuouscycle in which growth in wages, employment and credit fuels domestic aggregatedemand feeding back into the labor markets. However, there are already a few economies that appear to be at or near overheating territory (Brazil, Chile, Peru andArgentina). Perhaps due to countries’ own political cycles, fiscal retrenchment hasbeen a disappointment. This is particularly true in the face of impressive recoveriesand the large stimulus put in place during the crisis. Higher commodity prices havehelped countries to grow at a fast pace without developing material current accountdeficits. Improvements in debt ratios are largely the result of the denominatoreffect (high growth and real exchange rate appreciation).
12-month outlook: We see regional growth in 2011 slowing to 4.6% from6.3% in 2010 with countries facing growing bottlenecks, net export contribution togrowth becoming even more negative and higher base effects taking place. Weexpect the inflation targeting Central Banks to resume their hiking cyclesthroughout 2011, with all of them meeting their 2011 targets. High growthdifferentials against much of the world and continued currency strength shouldcontribute to deteriorate the region’s current accounts deficit to 1.7% of GDP in2011 from 0.8% of GDP in 2010. On the fiscal front, we see improvements in Brazil, Chile, Peru and Colombia, stability in Mexico and deterioration inArgentina and Venezuela. We also expect FX stability pretty much across theboard, though we continue to characterize the FX policy regimes in Argentina and Venezuela as unsustainable. Labor markets should continue to recover. Ourstrategists are not believers in the EM equity bubble story. They see underlyingvalue primarily in Brazil. On the fixed income side, we favor local markets overhard currency bonds.
What the numbers say: LatAm has recovered impressively from the crisis. In Q2, the region grew by 6.1% y/y and 2.2% q/q. With the exception of Venezuela, all the countries are printing high growth rates. As a rule of thumb, the further south you go in the region, the faster the GDP growth is. High frequency data of economic activity continues to point to strong economies in Q3, especially in Peru.
What the numbers mean: As of Q2, the level of regional economic activity had already surpassed the pre-crisis high by 3.2%. The recovery has been so dramatic that Argentina, Brazil, Chile and Peru have also started to show some signs of overheating. Though performance in Colombia and Mexico is decent, they appear to have at least a couple of quarters to go before overheating becomes a major concern.
12-month outlook: We expect overheating countries to slow towards rates more consistent with their +/-5% medium term averages (somewhat higher for Peru and Chile and somewhat lower for the rest). Growing bottlenecks, more negative net export growth contribution and higher base effects will constrain their performance. We see regional growth in 2011 at 4.6%, down from 6.3% in 2010.
Chart 1: Overall GDP growth Chart 2: Real GDP growth by country (% y/y)
-3-2-101234567
Q1/0
7
Q2/0
7
Q3/0
7
Q4/0
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130y /y % grow th Index Q1-04=100 (RHS)
+3.2% from pre-crisis high
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ARG BRA CHI COL MEX PER VEN
Source: UBS and Haver. Source: UBS and Haver.
Chart 3: Real GDP (sa, Q1-07=100) Chart 4: GDP per capita (USD)
GDP growth by component What the numbers say: Domestic aggregate demand is by far the main driver for growth. Current growth decomposition is in sharp contrast with performance observed during the crisis, where domestic aggregate demand contributed negatively and net exports positively. As in the previous GDP growth section, we can also apply the rule of thumb that the further south you go, the faster domestic aggregate demand growth is.
What the numbers mean: Many countries are in the midst of a virtuous cycle in which higher credit growth, improving conditions in the labor market and accommodative fiscal policies are feeding into something close to an explosion in consumption and investment. However, Mexico but especially Venezuela, face different dynamics.
12-month outlook: There is a bifurcated view here. In the overheating countries (Chile, Peru, Argentina and Brazil), domestic aggregate demand growth is due for a slowdown. It can’t simply sustain double digit growth rates forever. However, in Mexico and to a lesser extent Colombia, we would expect continued strength in some ways playing catch up with their southern neighbours.
Chart 5: LatAm real GDP growth by components (% y/y) Chart 6: Brazil real GDP growth by components (% y/y)
-6
-4
-2
0
2
4
6
8
10
Q1/0
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-3-2-101234567Total consumption Inv estment Net ex ports GDP (RHS)
-6
-4-2
02
46
810
12Q1
/07
Q2/0
7
Q3/0
7
Q4/0
7
Q1/0
8
Q2/0
8
Q3/0
8
Q4/0
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9
Q2/0
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Q3/0
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Q4/0
9
Q1/1
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Q2/1
0
Total consumption Inv estment Net ex ports GDP
Source: UBS and Haver. Source: UBS and Haver.
Chart 7: Argentina real GDP growth by components (% y/y) Chart 8: Mexico real GDP growth by components (% y/y)
-4
-2
0
2
4
6
8
10
12
Q1/0
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Q2/0
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Q3/0
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Total consumption Inv estment Net ex ports GDP
-12-10
-8-6-4-202468
Q1/0
7
Q2/0
7
Q3/0
7
Q4/0
7
Q1/0
8
Q2/0
8
Q3/0
8
Q4/0
8
Q1/0
9
Q2/0
9
Q3/0
9
Q4/0
9
Q1/1
0
Q2/1
0
Total consumption Inv estmentNet ex ports GDP
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 4
GDP growth by component, continued
Chart 9: Chile real GDP growth by components (% y/y) Chart 10: Colombia real GDP growth by components (% y/y)
-20
-15-10
-50
510
1520
25
Q1/0
7
Q2/0
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Q3/0
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Total consumption Inv estment Net ex ports GDP
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-4-2
02
46
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12
Q1/0
7
Q2/0
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Q4/0
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Q1/0
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Q3/0
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Q4/0
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9
Q2/0
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Q3/0
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Q4/0
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Q1/1
0
Q2/1
0
Total consumption Inv estment Net ex ports GDP
Source: UBS and Haver. Source: UBS and Haver.
Chart 11: Venezuela real GDP growth by components (% y/y) Chart 12: Peru real GDP growth by components (% y/y)
-30
-20
-10
0
10
20
30
40
Q1/0
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Q2/0
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Q3/0
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-8-6-4-2024681012Total consumption Inv estment Net ex ports GDP (RHS)
-9
-6-3
03
69
1215
18
Q1/0
7
Q2/0
7
Q3/0
7
Q4/0
7
Q1/0
8
Q2/0
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Q3/0
8
Q4/0
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Q2/0
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Q3/0
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Q4/0
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Q1/1
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Q2/1
0
Total consumption Inv estment Net ex ports GDP
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 5
Consumption What the numbers say: Consumption in Q2 grew by 5.2% y/y and 1.7% q/q. It’s been the most dynamic
component of aggregate demand since the crisis began. Both private and public consumption are important drivers. Recent retail sales numbers continue to point to strength into Q3. This is particularly true in Chile, Argentina and Colombia. Brazil is actually showing some stabilization.
What the numbers mean: In a number of counties, there is a consumption boom going on, especially in durables. The re-emergence of credit, the recovery of employment, wages and accommodative fiscal stance are fuelling these dynamics.
12-month outlook: Consumption will continue to be a key driver in the quarters to come, but a slowdown in the fastest growing economies is bound to happen. Spending growth in autos and other key durables would slow markedly from the current torrid pace. Public spending growth should also ease, especially in the many countries that have put their recent elections behind. At the other end is lagging Mexico, which could play catch-up in the face of signs of recovery in its labor market. However, without credit support, it is unlikely to soar.
Chart 13: LatAm total real consumption Chart 14: Real consumption (Q1-07=100)
-1
0
1
2
3
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Q2/0
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Q4/0
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132y /y % grow th Index Q1-04=100 (RHS)
95
100
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125Q1
/07
Q2/0
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Q3/0
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Q2/1
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ARG BRA CHI COL MEX PER
Source: UBS and Haver. Source: UBS and Haver..
Chart 15: Total consumption by components (% of GDP) Chart 16: Real retail sales (% y/y, 3m ma)
0102030405060708090
100
ARG BRA CHI COL MEX PER VEN
Priv ate consumption Public consumption
-20
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0
10
20
30
40
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Jan-
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May
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May
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ARG BRA CHI COL MEX VEN
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 6
Investment What the numbers say: Investment was the fastest driver for growth in Q2 (up +22.2% y/y and 4.9% q/q sa, not a
total surprise given that it typically tracks the economic cycle but with a higher beta). As a result, investment to GDP ratios have started to increase again after the contraction experienced during the crisis. A particularly weak performance in Mexico weighs on investments at the regional level.
What the numbers mean: Recovery in credit, low financing costs, and an explosion in consumption have created a better environment for companies to invest. That said, overall investment levels are still rather mediocre for the region to approach Asian-style growth rates.
12-month outlook: We expect investment to remain the most important contributor to growth in the quarters to come. This is particularly true in Brazil, Chile and Peru, primarily in energy, mining and key manufacturing sectors. These dynamics can also be fuelled by the various government incentive programs to promote investments.
Chart 17: LatAm total real investment Chart 18: LatAm total real investment (Q1-07=100)
-20-15
-10-5
05
1015
2025
Q1/0
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ARG BRA CHI COL MEX PER
Source: UBS and Haver. Source: UBS and Haver.
Chart 19: Real fixed capital investment growth 2/ Chart 20: Fixed capital investment (% of GDP, 4q ma)
-5
0
5
10
1520
25
30
35
40
ARG BRA CHI COL MEX PER
y /y %, NSA q/q %, SA
15
17
19
21
23
25
27
Q1-0
4
Q3-0
4
Q1-0
5
Q3-0
5
Q1-0
6
Q3-0
6
Q1-0
7
Q3-0
7
Q1-0
8
Q3-0
8
Q1-0
9
Q3-0
9
Q1-1
0ARG BRA CHI COL MEX PER
Source: UBS and Haver.
2/ All data corresponds to Q2-10.
Source: UBS and Haver
Latin American Economic Focus 15 November 2010
UBS 7
Trade What the numbers say: Both export and import growth have recovered fully from the global crisis. Over the past
couple of months, however, we have started to see a decline in y/y growth rates pretty much across the board. Import growth is now outpacing export growth by about 5 percentage points, explaining the slow but steady erosion in the region’s trade surplus.
What the numbers mean: The stabilization in growth rates largely reflect base effects and the completion of the restocking domestically and abroad. Nevertheless, performance on both exports and imports remains quite strong, and supported by commodity prices and large growth differentials with the rest of the world, respectively.
12-month outlook: It is safe to say that net export contribution to growth for most of the countries we follow will be negative in the many quarters to come. This is simply another way of saying that many LatAm economies are growing at above global growth averages. Needless to say that recent currency strength will only worsen these dynamics. Higher commodity prices, though, should continue to support exports when measured in nominal terms. We are now expecting LatAm trade surplus to contract to US$49 billion in 2011 from US$79 billion in 2010.
1/ For Venezuela merchandise exports are reported.
Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 9
Balance of payments and foreign reserves What the numbers say: The region posted a current account deficit of less than 1% of GDP in recent quarters. The
capital account surplus, on the other hand, has been increasing steadily to more than 3% of the region’s GDP in Q2. As a result, countries continue to accumulate reserves at a fast pace. Venezuela, Argentina and Chile are the only three countries showing current account surpluses, but the last two are declining at a relatively fast pace. FDI is recovering nicely in those countries with a more orthodox macro policy.
What the numbers mean: There is no shortage of dollars in the region. This is largely due to high commodity prices and attractive domestic returns in a context of near zero interest rates abroad. So many dollars around have created a number of policy dilemmas for Central Banks as they deal with tradeoffs in policy objectives between low inflation and weaker real exchange rates.
12-month outlook: We expect more of the same in the quarters to come. That is, more capital account surpluses driven by a world flooded with liquidity, being partially offset by relatively small though increasing current account deficits. We expect the region’s current account deficit to increase to 1.7% of GDP from 0.8% in 2010, with virtually all countries showing deterioration.
Chart 29: LatAm balance of payment (% of GDP, 4q ma) Chart 30: Current account (% of GDP, 4q ma)
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-2024681012141618ARG BRA CHI COL MEX PER VEN (RHS)
Source: UBS and Haver. Source: UBS and Haver.
Chart 31: Balance of payments (% of GDP, 4q ma) Chart 32: FDI per country (US$ billion)
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1214ARG BRA CHI COL MEX VEN PER (RHS)
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2004 2005 2006 2007 2008 2009 2010F
10
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50ARG CHI COL MEX PER VEN BRA (RHS)
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 10
Balance of payments and foreign reserves, continued
Chart 33: Terms of trade (Q1-99=100) Chart 34: Degree of openness (4q ma) 1/
90
120
150
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240
Q1-9
9
Q4-9
9
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COL MEX PERVEN (RHS)
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90ARG BRA COL MEXPER VEN CHI (RHS)
Source: UBS and Haver. 1/ Sum of exports and imports as percent of GDP.
Source: UBS and Haver.
Chart 35: FX Reserves (USD billion) Chart 36: Reserves (months of imports, 12m ma)
10
30
50
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130
Jan-
07M
ar-0
7M
ay-0
7Ju
l-07
Sep-
07No
v-07
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08M
ar-0
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ay-0
8Ju
l-08
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08No
v-08
Jan-
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ar-0
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ay-0
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ar-1
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ay-1
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10
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300ARG CHI COL MEX PER VEN BRA (RHS)
0
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08
Apr-0
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ARG BRA CHI COL MEX PER VEN
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 11
Industrial production
What the numbers say: After its dramatic recovery, industrial production growth has finally stabilized at around 10% y/y rates. In September, though, we saw a significant slowdown driven by Brazil and Argentina. Performance across countries has been bifurcated between the outperformers: Brazil, Argentina and Peru and the laggards: Chile, Venezuela and Mexico.
What the numbers mean: The recent slowdown in industrial production owes to a completion of restocking, bottlenecks in key sectors and higher imports.
12-month outlook: Manufacturing is likely to slow to single digits as growth rates in leading sectors such as autos and other durables land from the moon. Recent currency strength could also play a non-trivial role affecting performance.
Chart 37: LatAm industrial production growth Chart 38: Industrial production growth by country (% y/y) 1/
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07
Apr-0
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15% m/m % y /y (RHS)
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Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
ARG BRA CHI COL MEX PER VEN
Source: UBS and Haver. Source: UBS and Haver.
1/ For Argentina we use FIEL’s non-official estimates.
Chart 39: Industrial production (Jan-06=100) Chart 40: Industrial production by country (Jan-06=100) 1/
80
100
120
140
160
180
200
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
LatAm China India US
70
87.5
105
122.5
140
Jan-
06
May
-06
Sep-
06
Jan-
07
May
-07
Sep-
07
Jan-
08
May
-08
Sep-
08
Jan-
09
May
-09
Sep-
09
Jan-
10
May
-10
Sep-
10
ARG BRA CHI COLMEX PER VEN
Source: UBS and Haver. Source: UBS and Haver.
1/ For Argentina we use FIEL’s non-official estimates.
Latin American Economic Focus 15 November 2010
UBS 12
Inflation What the numbers say: Inflation targeting countries show rates well within their target band, though Mexico is an
exception on account of one-off factors that should dissipate in 2011. Within the non-inflation targeting countries, Argentina is experiencing a visible acceleration in its true inflation rate, while Venezuela is showing some stabilization at around 28%.
What the numbers mean: Despite rapid growth, inflation has so far not been much of a threat. Core inflation has essentially been flat and food inflation remarkably tamed in the face of rising international prices. Perhaps, currency strength is playing an important role driving these dynamics.
12-month outlook: We expect a gradual rise due to buoyant aggregate demand, but with the exception of Mexico, which is leaving behind the dual impact of last year's devaluation and this year's tax increases on prices. Under our forecasts, inflation in 2011 would be within Central Banks’ target bands. The risk is to the upside, though, owing in part to the impact that the dramatic increase in soft commodities could have. Food has a particularly high incidence in LatAm CPI baskets. In Argentina, we see inflation becoming an even bigger problem with rates moving into the 35% neighborhood before 2011 is over.
Chart 41: LatAm inflation (% y/y) 1/ Chart 42: LatAm inflation ex Argentina and Venezuela (% y/y)
4
5
6
7
8
9
10
11
Jan-
07
Apr-0
7
Jul-0
7
Oct-0
7
Jan-
08
Apr-0
8
Jul-0
8
Oct-0
8
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
Headline Core
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0Ja
n-07
Apr-0
7
Jul-0
7
Oct-0
7
Jan-
08
Apr-0
8
Jul-0
8
Oct-0
8
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
Headline Core
Source: UBS and Haver.
1/ For Argentina headline inflation we use Province of San Luis’ inflation.
Source: UBS and Haver.
Chart 43: LatAm CPI inflation rate by country (% y/y) Chart 44: Argentina and Venezuela CPI inflation rate (% y/y)
-4
-2
0
2
4
6
8
10
12
Jan-
07
Apr-0
7
Jul-0
7
Oct-0
7
Jan-
08
Apr-0
8
Jul-0
8
Oct-0
8
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
BRA CHI COL MEX PER
0
5
10
15
20
25
30
35
40
Jan-
07
Apr-0
7
Jul-0
7
Oct-0
7
Jan-
08
Apr-0
8
Jul-0
8
Oct-0
8
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
ARG (San Luis prov ince) ARG (INDEC) VEN
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 13
Monetary policy What the numbers say: Central Banks in the fastest growing countries hiked rates in the earlier part of the year but
have all decided to pause in recent meetings in the face of strengthening currencies, a slowdown in their pace of economic activity, and tamed inflation and inflation expectations. Credit growth has been picking up steam, but remains at around half the levels observed before the crisis erupted. Broad money is also growing healthily, partly a reflection of large balance of payment surpluses.
What the numbers mean: These dynamics are just a reflection of the state of the economic recovery in each of the countries. Central Banks may be behind the curve if we take into account countries’ rapid growth rates and their relatively low real interest rates
12-month outlook: We expect more hikes to come in 2011 in all the inflation targeting countries we follow. However, we must confess that with tamed inflation, the Fed to remain on hold for longer and Central Banks more concerned about currency strength, risks are becoming more balanced. We also expect credit growth to continue showing a slow and steady upward trend.
Chart 45: Central banks’ reference rates (%) Chart 46: Central Bank reference rate in real terms (%)
0
2
4
6
8
10
12
14
16
Jan-
08
Apr-0
8
Jul-0
8
Oct-0
8
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
BRA CHI COL MEX PER
-4
-2
0
2
4
6
8
Jan-
08
Apr-0
8
Jul-0
8
Oct-0
8
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
BRA CHI COL MEX PER
Source: UBS and Haver. Source: UBS and Haver.
Chart 47: M2 growth by country (% y/y) Chart 48: Credit growth by country (% y/y)
-10
0
10
20
30
40
50
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov-
08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
Nov-
09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-
10
ARG BRA CHI COL MEX PER VEN
-10%
0%
10%
20%
30%
40%
Jul-0
8
Sep-
08
Nov-
08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
Nov-
09
Jan-
10
Mar
-10
May
-10
Jul-1
0
ARG PER COL BRA MEX CHI VEN
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 14
Fiscal accounts What the numbers say: All countries are showing small deficits in the 2% of GDP neighborhood, a drop in the
bucket relative to the numbers observed in the developed world. However, the region showed a 0.5% of GDP deficit in both 2007 and 2008, deteriorating to 3.2% in 2009. While revenues are rising sharply across the board, the picture on the spending side is more mixed.
What the numbers mean: There is some recovery in the fiscal effort, now that the crisis is behind, but this is: a) rather small relative to the magnitude of the economic recovery, and b) in most cases largely driven by a significant increase in revenues. Politics may have played an important role, as a number of countries are heading or just completed important elections, and incentives to put on the breaks at this juncture aren’t particularly high.
12-month outlook: We see a mixed picture for 2011 with some improvements taking place in Brazil, Chile Colombia, and Peru but deterioration in Argentina, and Venezuela. We see Mexico’s 2% of GDP deficit holding steady.
Chart 51: Fiscal balance (% of GDP, 4q ma) Chart 52: Interest payment (% of GDP)
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
Q1-0
6
Q3-0
6
Q1-0
7
Q3-0
7
Q1-0
8
Q3-0
8
Q1-0
9
Q3-0
9
Q1-1
0
ARG BRA CHI COL MEX PER VEN
0112233445
2004 2005 2006 2007 2008 2009 2010F
5.0
5.5
6.0
6.5
7.0
7.5ARG CHI COL MEX PER VEN BRA (RHA)
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 15
Debt What the numbers say: Government’s debt to GDP ratios have started to resume their slow but steady downward
trends. Venezuela is a notable exception, as the government continues to issue dollar bonds in order to inject dollar liquidity into a seemingly unsustainable FX market. External debt ratios as percent of reserves are also heading south for the most part, as LatAm countries continue to pile foreign reserves as if there is no tomorrow.
What the numbers mean: Declines in government debt ratios are largely due to a denominator effect as a result of high real GDP growth and real exchange rate appreciation pretty much across the board.
12-month outlook: Though each country faces different debt dynamics, we think that the mix of limited net financing needs and rapid dollar GDP growth point to non-rising debt ratios in the quarters to come.
Chart 53: Public debt (% of GDP) Chart 54: Debt 2000 vs 2009 (% of GDP)
0
10
20
30
40
50
60
70
2006 2007 2008 2009 2010F
ARG BRA CHI COL MEX PER VEN
05
101520253035404550
ARG BRA CHI COL MEX PER VEN
2000 2009
Source: UBS and Haver. Source: UBS and Haver.
Chart 55: External debt (% of reserves) Chart 56: Net external public debt (USD billion) 1/
50
100
150
200
250
300
350
400
2006 2007 2008 2009 2010F
ARG BRA CHI COL MEX PER VEN
-200
-150
-100
-50
0
50
100
Q1-0
2
Q4-0
2
Q3-0
3
Q2-0
4
Q1-0
5
Q4-0
5
Q3-0
6
Q2-0
7
Q1-0
8
Q4-0
8
Q3-0
9
Q2-1
0
ARG BRA CHI COL MEX PER VEN
Source: UBS and Haver. Source: UBS and Haver. 1/ Net of foreign reserves.
Latin American Economic Focus 15 November 2010
UBS 16
Labor market What the numbers say: With the exception of Colombia and Mexico, the unemployment rate has been declining to
around 8%. In some countries like Brazil, unemployment is at a multi-year low. Real wage growth has also started to creep higher, particularly in Brazil. Chile is an exception, as real wages are now ‘paying back’ the rapid increase they witnessed during the crisis as a result of the deflation experienced during those days.
What the numbers mean: Much of South America is in the midst of an employment – consumption virtuous cycle that could improve labor market conditions. In Mexico, the increase in employment is somewhat deceptive to the extent that a third of the formal jobs are temporary and concentrated in lower paying sectors.
12-month outlook: The region will continue to generate jobs, though most likely at a slower pace. The picture varies from country to country. We see tighter labor markets in Brazil, Peru, Chile and to a lesser extent in Argentina. Labor conditions are much looser in Colombia and Mexico.
Exchange rates What the numbers say: There has been steady appreciation in the inflation targeting countries. We started to see a
reversal after the implementation of interventionist measures to prevent currency strength. The fact that the Fed’s QE2 announcement is now behind us and that the dollar has started to recover some ground against major currencies may have also taken some of the pressure off the LatAm currencies. In those countries targeting the exchange rate such as Argentina and Venezuela, currencies have remained stable in nominal terms. On a real exchange rate basis, we have witnessed appreciations across the board.
What the numbers mean: A high carry trade in the context of a rebound in risk appetite coupled with better return prospects in the region has led to a large increase in capital inflows pretty much across the board. Measures to tame these inflows have only had a very partial impact.
12-month outlook: We think that current inflows will continue to be significant, but a higher current account deficit, more interventionist measures and rapid reserve accumulation will go a long way to prevent further strengthening. We forecast FX stability pretty much across the board, though we continue to characterize the FX policy regimes in Argentina and Venezuela as unsustainable.
Source: UBS and Haver. Source: UBS and Haver. 1/ Upwards movement corresponds to a real appreciation.
Chart 63: LatAm monthly FX reserves change (USD billion) Chart 64: FX volatility (3m rolling)
-150
-100
-50
0
50
100
150
Jan-
00Se
p-00
May
-01
Jan-
02Se
p-02
May
-03
Jan-
04Se
p-04
May
-05
Jan-
06Se
p-06
May
-07
Jan-
08Se
p-08
May
-09
Jan-
10
-100
-75
-50
-25
0
25
50
75
100Headline 3-mth-ma (RHS)
0.00.51.0
1.52.02.53.0
3.54.0
03-Apr-08
05-Jun-08
07-Aug-08
09-Oct-08
11-D ec-08
12-Feb-09
16-Apr-09
18-Jun-09
20-Aug-09
22-Oc t-09
24-Dec-09
25-Feb-10
29-Apr-10
01-Jul-10
02-Sep-10
04-Nov-10
ARG BRA CHI COL MEX PER
Source: UBS and Haver. Source: UBS and Haver.
Latin American Economic Focus 15 November 2010
UBS 18
Stock markets What the numbers say: LatAm stock markets have done extraordinarily well in both local and dollar terms. In
most cases they are already well above pre-crisis highs. Argentina and Peru have been the leading performers, while Brazil has lagged so far this year.
What the numbers mean: There are a number of fundamental reasons we can list that support this strong showing. However, the indiscriminate rally in the EM and in the LatAm world may suggest that performance had more to do with global risk appetite than with relative domestic fundamentals.
12-month outlook: Our strategists are not believers in the EM equity bubble story. They see underlying value in a number of EM countries and within LatAm primarily in Brazil.
Chart 65: Stock price index (Jan-08=100) Chart 66: Stock price index in USD (Jan-08=100)
20406080
100120140160180200
Jan-
07M
ar-0
7Ju
n-07
Sep-
07De
c-07
Mar
-08
May
-08
Aug-
08No
v-08
Feb-
09M
ay-0
9Ju
l-09
Oct-0
9Ja
n-10
Apr-1
0Ju
l-10
Sep-
10
ARG BRA CHI COL MEX PER VEN
20406080
100120140160180200220
Jan-
07
Mar
-07
Jun-
07Se
p-07
Dec-
07M
ar-0
8M
ay-0
8
Aug-
08No
v-08
Feb-
09
May
-09
Jul-0
9Oc
t-09
Jan-
10Ap
r-10
Jul-1
0Se
p-10
ARG BRA CHI COL MEX PER VEN
Source: UBS and Bloomberg. Source: UBS and Bloomberg
Chart 67: Equity volatility (% 3m) Chart 68: PE ratios
0
5
10
15
20
25
Apr-0
7
Jun-
07
Sep-
07
Dec-
07
Feb-
08
May
-08
Jul-0
8
Oct-0
8
Dec-
08
Mar
-09
Jun-
09
Aug-
09
Nov-
09
Jan-
10
Apr-1
0
Jun-
10
Sep-
10
ARG BRA CHI COL MEX PER VEN
-
5
10
15
20
25
30
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep-
08
Nov-
08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep-
09
Nov-
09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep-
10
ARG BRA CHI COL MEX PER
Source: UBS and Bloomberg. Source: UBS and Bloomberg
Latin American Economic Focus 15 November 2010
UBS 19
Bond markets What the numbers say: So far this year, the market as per the EMBI+ returned nearly 16% with spreads tightening
by around 20 bps to 277 bps. Spreads of the EMBI+ Latin American component (now at around 300 bps) have widened somewhat against the broader EMBI+ index, largely due to Venezuela underperformance. Argentina (+36%) has been the best performer within the EMBI+ YTD.
What the numbers mean: Global risk appetite, continued inflows into EM debt funds, and relatively stronger economic fundamentals, including limited financing needs, explain the markets’ strong performance. But again, like in the equity-markets section before, the tide has lifted all boats rather indiscriminately, with many countries trading up and down together at the whims of the international markets. Even Venezuela, which has seen a major deterioration in credit fundamentals with debt ratios increasing sharply, hasn’t performed as poorly.
12-month outlook: We do expect a supportive global backdrop to continue. However, our strategists believe that hard currency bond spreads have come down a lot and now don’t expect more compression. They see more value in the local markets space.
Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.
Latin American Economic Focus 15 November 2010
UBS 39
Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.
For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request. Company Disclosures
Issuer Name Argentina Brazil Chile Colombia Mexico Peru (Republic of) Venezuela