Falling on Hard Times Outlook for Latin America and the Caribbean. Alejandro Werner. Director, Western Hemisphere Department.

Transcription

1 Falling on Hard Times Outlook for Latin America and the Caribbean Alejandro Werner Director, Western Hemisphere Department January 27, 215

2 The global recovery remains uneven and subdued, as solid U.S. growth contrasts with weakness elsewhere. Selected Projections for Real GDP Growth (Percent) Change from Oct. Change from Oct. Change from Oct Jan Jan Jan World Advanced Economies Euro Area United States Japan Emerging Market and Developing Economies Asia BRIC¹ China Europe Latin America and the Caribbean Source: IMF, World Economic Outlook. ¹ BRIC includes Brazil, China, India, and Russia. 2

3 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies Activity in LAC remains in the doldrums, and the medium- term recovery is unlikely l to restore recent high h growth rates. 7 6 Latin America and the Caribbean: Real GDP Growth 1 (Percent) Avg : 2.5% Avg : 4.2% 5 4 Avg : 2.5% Sources: IMF, World Economic Outlook; and IMF staff calculations. 1 Purchasing-power-parity GDP-weighted average. 3

4 The recent slowdown has been particularly sharp in South America 6 Growth Slowdown, (Average growth minus average growth during 23-11, in percentage points) Sout th America Centra al America The Caribbean Nort th America VEN ARG BRA PER CHL URY ECU COL BOL PRY Sources: IMF, World Economic Outlook; and IMF staff calculations. 4

5 with further downward revisions to near-term projections Latin America and the Caribbean: Real GDP Growth (Percent) Change Jan. 215 Change from Oct. 214 Jan. 215 from Oct. 214 Latin America and the Caribbean LA-7 Argentina Brazil Chile Colombia Mexico Peru Venezuela Central America Caribbean Tourism-dependent Commodity exporters Sources: IMF, World Economic Outlook; and IMF staff calculations. 1 PPP-weighted average. 2 Simple average of the countries in the respective group. 5

6 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies led by weakness in investment and exports 16 South America: Real Investment Growth¹ (Percent) 8 South America: Real Export Growth¹ (Percent) Source: IMF, World Economic Outlook. ¹ Simple average of Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, and Venezuela. 6

7 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies against a backdrop of falling commodity prices and worsening terms of ftrade Commodity Prices (Index: 211Q1=1) LA-6: Real Investment and Net Commodity Price Index (Q-o-Q Q percent change, sa s.a., 4-quarter moving average) 1 14 Food Fuel Metals 8 Investment Net commodity price index Q1 25Q1 26Q1 27Q1 28Q1 29Q1 21Q1 211Q1 212Q1 213Q1 214Q1 Sources: IMF, World Economic Outlook; Consensus Forecasts; and IMF staff calculations. Sources: Haver Analytics; and Gruss (214). 1 Simple average of Brazil, Chile, Colombia, Mexico, Peru, and Uruguay. 7

8 which have contributed to currency depreciation, reinforced by a stronger U.S. dollar since mid-214. Change in Exchange Rate vs. Change in Net Commodity Price Index Since April 3, 213 Exchange Rate Indices (Percent change since end-april 213) rate l US$ exchange depreciation) Latin American economies Others Range for LA6 Bloomberg Latin America Currency Index Bloomberg U.S. Dollar Index Ch hange in bilatera (percent, - = Change in net commodity price index (percent) Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Sources: Bloomberg, L.P.; IMF, International Financial Statistics; and IMF staff calculations. Note: The sample includes Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Hungary, India, Indonesia, Israel, South Korea, Malaysia, Mexico, Paraguay, Peru, Philippines, Poland, Romania, South Africa, Thailand, Turkey, and Uruguay. 8

9 Three issues to watch Commodity Growth, Investment, Corporate Prices and Saving Vulnerabilities 9

10 Crude oil has belatedly joined the broad downward trend in commodity markets apparent since mid-211. Change in Commodity Price Indices (Percent) 211Q1-214Q2 214Q2-214Q4 214Q4-Jan. 22, Change in Commodity Market Outlook since October 214 WEO¹ (Percent) Oil Metals Food All commodities -5-6 Oil Metals Sources: Bloomberg, L.P.; and IMF staff calculations Q3 215Q1 215Q3 219 Sources: IMF, World Economic Outlook Global Assumptions; and IMF staff calculations. ¹ The projected commodity prices in the shaded area are based on prices of commodity futures prevailing as of January 5,

11 Cheaper oil should be broadly neutral for LAC at large, but the effect varies greatly across economies Net Oil Exports, 214 (Percent of GDP) Venezuela Bolivia¹ Ecuador Colombia Trinidad and Tobago Mexico Brazil Peru Panama Argentina St. Lucia Chile Uruguay Costa Rica Suriname Guatemala St. Kitts and St. Nevis Belize Bahamas Paraguay Dominican Republic El Salvador St. Vincent and Grenedines Dominica Nicaragua Barbados Grenada Haiti Honduras Jamaica Antigua and Barbuda Guyana Sources: IMF, World Economic Outlook; and IMF staff calculations. ¹ Data for Bolivia include natural gas exports. 11

12 Venezuela is bound to take the largest hit, while oil importers will benefit, especially in Central America and the Caribbean Oil-Related Direct Fiscal Revenue, 213 (Net of oil-related imports, percent of total revenue) Net Oil Importers: Net Oil Exports, vs. 215 (Percent of GDP) 7 Domestic Sales Net Exports ARG¹ BRA CAN COL ECU MEX VEN² -1 Caribbean Central America Others Sources: National authorities; and IMF staff calculations. ¹ Net exports refers to export duties on crude oil and derivatives net of energy imports as the public sector does not export fuels directly. Domestic sales show tax revenues from domestic sale of fuels. ² Includes income from subsidiaries abroad. Source: IMF, World Economic Outlook. ¹ Simple averages across regions. 12

13 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies although some countries dependence on Petrocaribe support represents a risk, as Venezuela s economy slides... Decline in Oil Import Bills and Petrocaribe Exposure (Percentage points of GDP) Projected Petrocaribe financing (215) Projected decline in net oil imports (215 vs. 214) Antigua and Barbuda Belize Dominica Dominican Republic Grenada Guyana Haiti Jamaica Nicaragua itts and Nevis St. K St. Vin ncent and the Grens. Sources: National authorities; and IMF staff estimates. 13

14 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies and offsetting forces in Petrocaribe arrangements play out. Financing conditions provided by Venezuela worsen, as oil price falls Lower Oil Prices Lower pre-subsidy oil import bill Proportion of oil delivery financed on favorable terms 25 % 3 % 4 % 6 % US$ 4 US$ 5 US$ 1 Staff estimates suggest that 1. The net impact of these two offsetting forces is typically positive. 2. The decline in the oil import bill represents a significant offset to a potential reduction in financing from Petrocaribe. 3. But in a few cases, cash flow pressures in the public sector could emerge. 14

15 Cheaper fuel will boost private sector purchasing power in most economies of the region Price Adjustment Mechanisms for Domestic Fuel Expected Pass-through of Recent Oil Price Decline (Percent of total sample of LAC economies) (Percent of total sample of LAC economies) 8 By April 215 By December Market Discretion Formula Regulated Zero pass through Between zero and.5 Between.5 and 1 Full passthrough Sources: National authorities; and IMF staff estimates and calculations. 15

16 and provides a great opportunity to phase out costly and poorly targeted subsidies Fuel Subsidies, average (Percent of GDP) Sources: National authorities; and IMF staff estimates. 16

17 On the downside, lower oil prices cap the potential from future hydrocarbon development projects across LAC... 12, 1, 8, 6, 4, 2, Undiscovered, Recoverable Conventional Oil Resources (Millions of barrels) Central and South America 95 Percent probability 5 Percent probability Middle East and North Afr rica Sub-Saharan Africa and Antarcti ica North Am merica Asia Pa acific Former Soviet Union Eu urope Source: 212 U.S. Geological Survey (USGS). Note: Assessment of undiscovered, technically recoverable conventional oil exclusive of the United States. South Asia Oil and Gas Resources in LAC Oil Shale Oil Gas Shale Gas (billion barrels) (trillion cubic ft.) Venezuela Argentina Mexico Brazil Colombia Ecuador 8.2 Paraguay Chile Peru Trinidad & Tobago Bolivia Sources: EIA; and BP Statistical Review of World Energy. 17

18 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies as energy companies scale back investment plans, in an echo of what started in the mining sector in 213. Top Global Commodities Companies : Average Capital Expenditure (US$ billion) *E 215*E Mining Energy Agriculture Sources: Bloomberg, L.P.; Companies Financial Reports; and IMF staff calculations. Notes: Capex is defined as purchase of fixed assets. Capex is the average capital expenditure in the period. *E: denotes estimate for 214 and 215 based on strategic reports from individual companies, consensus forecasts and media releases. Agriculture companies: Cargill, Syngenta, Monsanto, Potash, Deere Company and Archer Daniels. Energy companies: Exxon Mobil, Chevron, Royal Dutch Shell, PetroChina, China Shenhua, Petrobras, and Pemex. Mining companies: Vale, BHP, Rio Tinto, Fortescue, Coal India, Barrick Gold, Freeport McMoRan, Anglo American, China Shenhua, and Glencore. 18.

19 Recent share price drops anticipate significant pressure on earnings for large oil producers in the region Profitability and Recent Share Price Change in Leverage and Debt-Servicing Capacity of Top Oil Companies Top Oil Companies Change in share price since end-june 214 (percent) Return on equity (year through Sep. 214, percent, right scale) 25 Debt to Equity (percent) EBITDA to Interest Expenses (ratio) ECOPETRO OL Petrobr ras STATO OIL ENI TOTA AL BP Royal Dut tch EC SINOP EXXON MOB BIL na PetroChi ECOPETROL EXXON MOBIL Petrobras PetroChina BP Royal Dutch PEMEX ENI STATOIL SINOPEC Petronas Median Sources: Bloomberg, L.P.; and IMF staff calculations. Note: U.S. dollar share prices. Sources: Bloomberg; and IMF staff calculations. Note: Numbers represent average of last four available quarters (sample ends in 214Q3 for most companies). 19

20 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies while credit risk in major oil-producing companies has partially spilled over to sovereign risk premia. Credit Default Swap (5-year, U.S. dollars) Brazil Mexico Venezuela Petrobras Sovereign Correlation= PEMEX Sovereign Correlation= PDVSA Sovereign Correlation= Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Source: Bloomberg, L.P. Source: Bloomberg, L.P. Source: Bloomberg, L.P. 2

21 Three issues to watch Commodity Growth, Investment, Corporate Prices and Saving Vulnerabilities 21

22 Expectations for longer-term growth have been revised downward dfurther LAC: Projections for Five-Year Ahead Real GDP Growth by WEO Vintage, (Percent) 4.7 LAC LAC excl. ARG and VEN Fall 23 Fall 24 Fall 25 Fall 26 Fall 27 Fall 28 Fall 29 Fall 21 Fall 211 Fall 212 Fall 213 Fall 214 Fall 215 Jan WEO Vintage Source: IMF, World Economic Outlook. 22

23 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies amid a marked slowdown in investment across LAC LA6: Real Investment (Index: 2Q1=1) Latin America: Investment (Percent of GDP) Q1 1995Q2 1996Q3 1997Q4 1999Q1 2Q2 21Q3 22Q4 24Q1 25Q2 26Q3 27Q4 29Q1 21Q2 211Q3 212Q4 214Q1 Sources: Haver Analytics; and Magud, Sosa (215). 1 PPP-weighted average. LA-6 includes Brazil, Chile, Colombia, Mexico, Peru, and Uruguay Avg Avg Avg Avg Sources: IMF, World Economic Outlook; and Magud, Sosa (215). 23

24 that has halted and partially reversed recent progress in overcoming the region s structural t underinvestment tproblem Investment by Region (Percent of GDP) LA7: Investment (Percent of GDP) Africa Asia CIS Europe Latin America 25 Avg. 2-3 Change Avg Brazil Chile Colombia Mexico Peru Uruguay Venezuela Source: IMF, World Economic Outlook. Source: IMF, World Economic Outlook. 24

25 which, in turn, is closely linked to the region s perennially low saving rate and weak productivity Region Mean private saving/gpdi LA7: Contributions to Private Saving Rate (Percentage points, based on regression analysis) 4 3 World Africa Asia and Pacific Europe Middle East and Central Asia Western Hemisphere 16.4 LAC 15.6 LA-7 2. Middle LAC 15. Small islands 13.1 private income (PPP) Per capita ( Terms of trade Previous period private sa aving rate Inflation Real gro owth rate of per capita a GPDI (PPP) Flow of private sector cr redit/gpdi lic saving/gpdi Pub pendency ratio Old-age de Share of urb ban population Source: Grigoli at al (214). World Saving, IMF Working Paper 14/24 Note: GPDI (Gross Private Disposable Income). LAC7: Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela. 25

26 all of which puts a premium on policies to address supply- side constraints t on potential ti growth Learning outcomes (PISA) C hile Mex xico Urug uay Br razil Colom mbia LA6: Structural Indicators¹ (Percentile ranks) Peru Infrastructure quality (WEF) hile xico uay C Mex Urug Peru Colom mbia Br razil Ease of doing business (WB) Colom mbia Peru xico hile uay razil P Mex C Urug Br Priorities differ by country, but generally include: Addressing infrastructure bottlenecks Enhancing educational outcomes Improving the business environment Sources: OECD, PISA (212) ; World Bank, Ease of Doing Business database (215); World Economic Forum, Global Competitiveness Report (214 15); and IMF staff calculations. ¹ The scale reflects the percentile distribution ib tion in all countries for each respective survey; higher scores reflect higher performance; PISA: Program for International Student Assessment; WB: World Bank; WEF: World Economic Forum. 26

27 Three issues to watch Commodity Growth, Investment, Corporate Prices and Saving Vulnerabilities 27

28 Corporate leverage indicators still remain below the highs of the last decade, d despite ongoing re-leveraging since 21 LA5: Nonfinancial Companies Leverage: The Last Decade (Median) (Percent: left scale; Ratio: right scale) Leverage: Recent Quarters (Median) (Percent: left scale; Ratio: right scale) Debt to Equity EBITDA to Interest Expense (right scale) Debt to Equity EBITDA to Interest Expense (right scale) q3 211q4 212q1 212q2 212q3 212q4 213q1 213q2 213q3 213q4 214q1 214q2 214q3 4. Sources: S&P Capital IQ; and IMF staff calculations. Note: Sample includes approximately 1, nonfinancial firms in Brazil, Chile, Colombia, Mexico and Peru. Sources: Bloomberg, L.P.; and IMF staff calculations. Note: Sample includes approximately 5 nonfinancial firms in Brazil, Chile, Colombia, Mexico and Peru. 28

29 but earnings have started to come down, heightening concerns over the outlook for private investment t LA5: Nonfinancial Companies Profitability (Return on Equity) (Median, bottom, and top quartiles) 75th percentile 25th percentile Median Change in Return on Equity by Sector (Percentage points) Change in median ROE 21Q3 (median) 214Q3 (median) q1 211q1 212q1 213q1 214q1 Sources: Bloomberg, L.P.; and IMF staff calculations. Note: Sample includes approximately 5 nonfinancial firms in Brazil, Chile, Colombia, Mexico, and Peru. -15 Consumer Industrials Materials Utilities Sources: Bloomberg, LP L.P.; and dimf staff calculations. l 29

30 Global Outlook LAC Outlook Commodity Prices Growth, Investment, and Saving Corporate Vulnerabilities Policies particularly for firms in the commodity sector. Return on Equity: Oil & Gas and Mining Companies Oil & Gas and Mining Companies q3 Median 25th percentile 75th percentile 29q1 29q3 21q1 21q3 211q1 211q3 212q1 212q3 213q1 213q3 214q1 214q q3 29q1 EBITDA to Interest Expense 29q3 21q1 21q3 211q1 211q3 212q1 212q3 213q1 213q3 214q1 214q3 Sources: Bloomberg, L.P.; and IMF staff calculations. Note: Sample includes approximately 5 nonfinancial firms in mining and oil & gas from Brazil, Chile, Colombia, Mexico and Peru. 3

31 Interest rates have started to edge up amid still-robust bond issuance Foreign Bond Issuance Nonfinancial Corporates (US$ billion) LA5 Nonfinancial Companies: Foreign Issuance and dyield ldfor Maturities ii 1Y Years and dabove 8 7 Peru Colombia Chile Brazil Mexico Total Year Number of Issuances Total Average Value Issuance (US$ mn) (US$ mn) Yield at Issuance (percent) Median 25 th Percentile 75 th Percentile , , , Sources: Dealogic; and IMF staff calculations. Note: Debt issued by nonfinancial companies in U.S. dollars. Sample: Brazil, Chile, Colombia, Mexico and Peru. Residency-based criterion adopted for all sample, except in Brazil where issuance data is based on nationality of issuer. Sources: Dealogic; and IMF staff calculations. Note: Residency-based issuance criterion for all countries except Brazil, which is based on nationality criterion. 31

32 through which firms have locked in low rates for longer, without major near-term repayment pressures. LA5 Nonfinancial Corporate Bond Issuance: Maturity and Yield (Maturity 1 years and above, Percent) Latin America Hard-Currency Nonfinancial Corporate Bonds Outstanding: Maturity Profile (US$ billion) 9 Share of issuance (number) Share of issuance (value) Yield (right scale) 12 7 Mexico Brazil Chile Argentina Peru Colombia Venezuela Others Total Sources: Dealogic; and dimf staff calculations. l Note: Debt issued by nonfinancial companies in U.S. dollars. Sample: Brazil, Chile, Colombia, Mexico and Peru. Residencybased criterion adopted for entire sample, except in Brazil, where issuance data is based on nationality of issuer. Source: Bloomberg. Includes bonds in hard currencies with original maturity of at least one year from nonfinancial Latin American companies. 32

33 However, increasing FX issuance may have created new risks, which need to be monitored closely. LA5: Cumulative Issuance of Foreign Bonds by Nonfinancial Firms since 29 (US$ billion) (US$ billion) FX issuance does not necessarily translate into open FX positions: Tradable Non-tradable 16 Swaps into local currencies 14 Other financial derivatives Natural hedges Brazil Chile Colombia Mexico Peru Sources: Dealogic; and IMF staff calculations. Note: Residency-based issuance criterion for all countries except Brazil, which is based on nationality criterion. Nontradable includes: construction, telecommunications, utilities, telecommunications, amongst other services. Large issuance from firms in the non-tradable sector is in some cases associated to multinational companies with revenues from overseas Nonetheless, some companies may have increased their vulnerability to FX depreciation 33

34 What should policymakers do? Exchange rate flexibility plays a critical role in helping economies adjust to a tougher external environment; recent depreciations i have been helpful. l Fiscal policy in commodity-exporting economies must adjust to a permanent downward shift in prices; countries with fiscal space can smooth the adjustment path, others have little choice. The reduction in oil prices should be used to phase out costly and poorly targeted energy subsidies. Structural reforms are crucial to raise productivity, support higher saving and investment, and thereby promote broad-based economic activity. Close monitoring of corporate financial health will be needed, as lower earnings, rising rates, and a stronger dollar create considerable headwinds. 34

35 Falling on Hard Times Outlook for Latin America and the Caribbean Alejandro Werner Director, Western Hemisphere Department January 27, 215