Presentation "Latin America: A slow recovery. First quarter 2015"

Latin America: A slow recovery

Juan Ruiz

BBVA Research │ Head Economist, Latin America

Latin America Economic Outlook– First quarter 2015 │ Madrid, 19 February 2015

Latin America Economic Outlook / February 2015

Página 2

World growth will continue to move upwards, albeit slowly and very unevenly. The fall in

oil prices is positive for the world economy, but it has varying effects.

Volatility in the region’s financial markets will continue. The Fed rate hikes will have a

negative effect on capital flows into the region, which adds to lower commodity export prices.

Growth in LatAm should increase gradually, from 0.8% in 2014 to 1.5% in 2015 and 2.4%

in 2016, due to the increased global growth and the rise of public investment in the Andean

countries. The Pacific Alliance should grow by 3.6% and 3.8% in 2015-16.

The central banks will continue to show a looser bias, given the cyclical weakness, and

could even disengage from the Fed rate hikes, with the exception of Mexico. Interest rate

cuts are anticipated in Colombia, Peru and Chile.

Exchange rates will continue to depreciate in 2015, in a scenario of lower commodity prices,

and will disengage from the Fed’s monetary policy.

Key takeaways:

1

2

3

4

5


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Global economy: World growth will continue to move upwards slowly and very unevenly

LatAm: gradual recovery, held back by lower commodity prices

Contents

1

2


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Global growth: moderate and uneven acceleration

EAGLES:

China India Indonesia Rusia Brazil Turkey Mexico

US

Mexico

Brazil

Spain

Eurozone

Eagles China

Emerging Asia LatAm 7 LatAm 7:

Argentina Brazil Chile Colombia Mexico Peru

2016

2,8 2,2

2,7

5,2 6,6

6,0

1,8

3,4

2,4

2015

2,9 1,3 5,0 7,0

6,2 1,5

3,5

0,6

2,7

Source: BBVA Research

Global

3,6 3,8

Emerging

Asia:

China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam


Página 5

The fall in oil prices is positive for the world economy

Uneven impact depending on countries

Direct impact on the overall drop in inflation

BBVA Research price forecasts for Brent oil

(USD/bbl, quarterly averages) Source: BBVA Research

40

50

60

70

80

90

100

110

120

130

2010

2011

2012

2013

2014

2015

2016

2017

2018

Actual Forecast Oct 15

Forecast Feb 16


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…although lower oil prices have an uneven impact in LatAm [Box 1]

Positive impact in importing countries and overall drop in inflation

Negative effect in Mexico, partially offset by the increased growth in US

Impact on growth of the revised course of oil prices:

forecasts in February 2015 vs. October 2014

(pp, 2015-16 average) Source: BBVA Research

0.4

-0.3

0.6

-1.1

-0.2

0.4

-0.3

-1.5

-1.0

-0.5

0.0

0.5

1.0

AR

G

BR

A

CH

I

CO

L

ME

X

PE

R

LatA

m


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Monetary policy divergence between the Fed and the ECB increases financial tensions

Increasing financial tensions in a context of divergence between the monetary policies of

the Fed and the ECB

The strength of emerging economies will be testes by the normalisation of monetary policy

in the US

BBVA Research Financial Tensions Index Source: BBVA Research

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-1

1

Jul-11

Jan-1

2

Jul-12

Jan-1

3

Jul-13

Jan-1

4

Jul-14

Jan-1

5

Developed Emerging


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What are the risks of the global scenario?

Emerging Response to the

Fed rate hikes

Source: BBVA Research

China Sharp adjustment

Europe • Stagnation

• Lack of

consensus on

reforms

• Greece

• Russia-Ukraine

Global Destabilisation of

some countries

due to lower oil

prices


Página 9

Contents

Global economy: World growth will continue to move upwards slowly and very unevenly

LatAm: gradual recovery, held back by lower commodity prices

1

2


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The correction in commodity prices also contributed to volatility in LatAm

LatAm: Stock market prices, sovereign spreads (EMBI) and exchange rates (January 2013=100) Source: BBVA Research and Haver Analytics Analytics

Increased volatility in major assets in the region, with corrections in stock markets, sovereign spreads and exchange rates

The two main drivers were the correction of commodity prices and the expectation of the

Fed increasing interest rates 60

80

100

120

140

160

180

May-

13

Jul-13

Sep-1

3

Nov-

13

Jan-1

4

Mar-

14

May-

14

Jul-14

Sep-1

4

Nov-

14

Jan-1

5

Exchange rate

Stock market prices (MSCI)

Sovereign spreads (EMBI)


Página 11

The Fed rate hikes will negatively impact capital flows into the region

Scenarios for capital flows to LatAm

(cumulative figures since 2005, USD bn) Source: BBVA Research and Haver Analytics An increase of QE by the ECB would not offset

the effects of the Fed’s monetary normalisation on LatAm

Different scenarios depending on the pace of normalisation of the Fed’s monetary policy

Capital flows into the region would contract to 3% of GDP (cumulative 2015-17)

0

100

200

300

400

500

3Q

05

2Q

06

1Q

07

4Q

07

3Q

08

2Q

09

1Q

10

4Q

10

3Q

11

2Q

12

1Q

13

4Q

13

3Q

14

2Q

15

1Q

16

4Q

16

3Q

17

Overshooting Fed Delayed Fed

Central Scenario


Página 12

We adjust our estimates of LatAm growth downward by 0.3pp in 2015 (to 1.5% in 2015 and 2.4% in 2016)

LatAm*: GDP growth (% YoY) Source: BBVA Research

* Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, México, Uruguay and Venezuela

Activity data surprised to the downside during the fourth quarter of 2014

Major downward revisions of estimates due to the impact of lower oil prices

The average for the region left the worst of the deceleration behind in 3Q. Regional growth will

increase because of more global growth and the increase in public investment

Heterogeneity: the Pacific Alliance will grow 3.6% in 2015 and 3.8% in 2016, more in line with its potential than the rest of the region

2.5

2.6

0.8

1.5

2.4

-1

0

1

2

3

4

5

2012

2013

2014

e

2015

e

2016

e

LatAm Mercosur Pacific Alliance


Página 13

Strong increase in growth in 2015 in Peru, Chile and Mexico

GDP by country, 2014, 2015 and 2016 (% var. YoY) Source: BBVA Research

Downward adjustments to prospects, especially in Brazil and Colombia

Brazil: strong macroeconomic adjustment in 2015

Colombia: significant impact of lower oil prices, but it will maintain one of the highest

growth rates in the region

-1

0

1

2

3

4

5

6

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

ARG BRA CHI COL MEX PAR PER URU Latam Merco -sur

Alianzadel

Pacífico

Feb-15 Nov-14


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Lower commodity prices worsen the perspective of external balances ...

Current account as a % of GDP Source: BBVA Research and Haver Analytics

Falling oil prices adversely affect the external balances of Colombia, Brazil and Mexico

… and falling metal prices deepen the negative effect in Brazil, while moderating the

positive effect of oil in Peru and Chile

The external vulnerability of the region remains bounded, although it is rising due to lower FDI

into the region -6

-5

-4

-3

-2

-1

0

1

2

201

42

01

52

01

6

201

42

01

52

01

6

201

42

01

52

01

6

201

42

01

52

01

6

201

42

01

52

01

6

201

42

01

52

01

6

201

42

01

52

01

6

201

42

01

52

01

6

201

42

01

52

01

6

ARG BRA CHI COL MEX PAR PER URU Latam

feb-15 nov-14


Página 15

… and also adversely affect fiscal balances

Fiscal balances (% of GDP) Source: BBVA Research and Haver Analytics

The slowdown in demand and lower commodity prices will push tax revenues to the downside

However, some countries would cushion part of this effect, through higher revenues (Chile,

Colombia, after tax reforms) ...

… or by a general adjustment of administered prices and public tariffs (Brazil)

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

2014

2015

2016

ARG BRA CHI COL MEX PAR PER URU Latam

feb-15 nov-14


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The pressure on inflation declines in the region, because of the cyclical weakness and oil prices

LatAm: inflation (% YoY) and target ranges for central banks Source: BBVA Research and Haver Analytics

Pressure will remain on Brazilian inflation, because of the increase in administered prices

and the depreciation of the exchange rate

Colombia will also see the impact of the recent depreciation of the exchange rate on inflation in

2015

0

2

4

6

8

10

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Brazil Chile Colombia Mexico Paraguay Peru Uruguay

Forecast


Página 17

Other than in Mexico, the central banks will continue to show a looser bias and could even disengage from the Fed LatAm: Monetary Policy Rate (%) Source:BBVA Research and Haver Analytics

We anticipate further cuts in Peru, Chile and Colombia

Brazil will not join the Fed rate hikes, although Mexico will do so because it is more

synchronised with the US

0

2

4

6

8

10

12

14

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

Jun

-14

Dec-1

4

Jun

-15

Dec-1

5

Jun

-16

Dec-1

6

BRA CHI COL MEX PAR PER

Forecast


Página 18

Depreciation in 2015, pressured by commodity prices and the Fed

Changes in the exchange rate against the dollar in countries with inflation targets (%) Source: BBVA Research and Haver Analytics

Willingness of central banks in the region to decouple from the Fed not only because of

cyclical weakness and the anchoring of inflation expectations ...

… but also from a greater willingness to allow the exchange rate adjustment, a limited

exchange rate pass-through to inflation…

… and the view that the weakening of the exchange rate would not generate excessive

losses for the non-financial corporate sector in the region (although the available evidence is inconclusive, especially in Peru and Colombia)

-10

-5

0

5

10

15

20

25

Jan

-De

c 1

4

Jan

-De

c 1

5

Jan

-De

c 1

4

Jan

-De

c 1

5

Jan

-De

c 1

4

Jan

-De

c 1

5

Jan

-De

c 1

4

Jan

-De

c 1

5

Jan

-De

c 1

4

Jan

-De

c 1

5

Jan

-De

c 1

4

Jan

-De

c 1

5

BRA CHL COL MEX PER URU


Página 19

World growth will continue to move upwards, albeit slowly and very unevenly. The fall in

oil prices is positive for the world economy, but it has varying effects.

Volatility in the region’s financial markets will continue. The Fed rate hikes will have a

negative effect on capital flows into the region, which adds to lower commodity export prices.

Growth in LatAm should increase gradually, from 0.8% in 2014 to 1.5% in 2015 and 2.4%

in 2016, due to the increased global growth and the rise of public investment in the Andean

countries. The Pacific Alliance should grow by 3.6% and 3.8% in 2015-16.

The central banks will continue to show a looser bias, given the cyclical weakness, and

could even disengage from the Fed rate hikes, with the exception of Mexico. Interest rate

cuts are anticipated in Colombia, Peru and Chile.

Exchange rates will continue to depreciate in 2015, in a scenario of lower commodity prices,

and will disengage from the Fed’s monetary policy.

Key takeaways:

1

2

3

4

5

Latin America: A slow recovery

Juan Ruiz

BBVA Research │ Head economist Latin America

Latin America Economic Outlook– First quarter 2015 │ Madrid, 19 February 2015


Página 21

Appendix: Growth forecasts in Latin America

PIB (% a/a) 2012 2013 2014e 2015* 2016*

Argentina 0.8 2.9 0.1 1.0 2.0

Brasil 1.0 2.5 0.1 0.6 1.8

Chile 5.4 4.1 1.8 3.1 3.9

Colombia 4.0 4.7 4.9 3.6 4.0

México 3.8 1.7 2.1 3.5 3.4

Paraguay -1.2 14.4 3.8 4.2 4.2

Peru 6.0 5.8 2.4 4.8 5.6

Uruguay 3.7 4.4 3.4 2.9 3.0

Mercosur 1.2 2.4 -0.6 -0.1 1.3

Alianza del Pacífico 4.2 2.9 2.6 3.6 3.8

América Latina 2.5 2.6 0.8 1.5 2.4

Source: BBVA Research. *Forecast

GDP (% YoY)

Presentation "Latin America: A slow recovery. First quarter 2015"

Economy & Finance

bbva research global

world growth

lower oil prices

increased growth

increased global growth

us impact

positive impact

world economy uneven