SHORT AND MEDIUM-TERM PROSPECTS FOR LATIN AMERICA Ignacio Hernando Meeting of International Relations Managers Banco de España, 9 July 215 INTERNATIONAL AFFAIRS
CONTENT 1. The Latin America economy at the current juncture 2. Medium-term prospects and the road ahead 2
1. LATIN AMERICA AT THE CURRENT JUNCTURE. Adjusting to three external shocks The slowdown (and rebalancing) in the Chinese economy The decline in commodity prices The tightening of external financial conditions (as a result of the expected normalization in US monetary policy) COMMODITIES PRICES NOMINAL EXCHANGE RATE AGAINST THE DOLLAR 16 Jan 2 = 1 Jan 213= 15 5 14 13 95 12 9 1 85 8 9 75 8 7 7 65 6 Jan- Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 OVERALL FOOD ENERGY METALS 6 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 BRAZIL MEXICO CHILE COLOMBIA PERU 3
1. LATIN AMERICA AT THE CURRENT JUNCTURE. The reaction of macroeconomic policies Monetary policy trade-offs but, in general, stability of policy rates Fiscal space has significantly shrunk in most countries Prudent management of fiscal policy: spending cuts even in those countries with fiscal space Pro-cyclical adjustment to regain credibility OFFICIAL INTEREST RATES LATIN AMERICA PRIMARY BALANCE 16 14 12 4 3 % GDP 28 215 2 8 6 4 2 1-1 27 28 29 2 211 212 213 214 215 BRAZIL MEXICO CHILE COLOMBIA PERU -2-3 BRAZIL CHILE COLOMBIA MEXICO PERU LATIN AMERICA 4
1. LATIN AMERICA AT THE CURRENT JUNCTURE. Lower growth and higher inflation Regional growth is expected to decline for a fifth consecutive year in 215, whereas inflation is on the rise (by contrast with other EME) GDP GROWTH: EMERGING MARKET ECONOMIES INFLATION GROWTH: EMERGING MARKET ECONOMIES 12 % yoy 8 % yoy 14 7 12 8 6 6 5 4 8 6 4 3 4 2 2 2 2 211 212 213 214 215 216 EMERGING ECONOMIES EMERGING EUROPE 1 2 211 212 213 214 215 216 EMERGING ECONOMIES EMERGING EUROPE EMERGING ASIA (EXCLUDING CHINA) LATIN AMERICA CHINA WEO ABRIL FORECASTS EMERGING ASIA (EXCLUDING CHINA) WEO ABRIL FORECASTS CHINA LATIN AMERICA (right axis) 5
1. LATIN AMERICA AT THE CURRENT JUNCTURE. Assessment 1. The Latin America economy has significantly changed with respect to the 2 th century. Lower vulnerability to external shocks, largely due to more resilient macroeconomic framework 2. However, as tailwinds are gradually vanishing, the risk of mediocre growth is reviving 3. A number of challenges remain; the most relevant one being ending up with the lackluster productivity growth of the region 6
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Productivity Latin America displays a permanent growth gap in relation to Asia, the reason being productivity performance and capital accumulation. The boom in commodity prices allowed for a higher GDP growth but not for a higher productivity growth nor potential growth.
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Investment Average investment to GDP ratios in Latin America are more similar to advanced country ratios than to other emerging economies. Low level of infrastructure limits growth and exports potential and might be a deterrent for FDI. Lack of regional interconnections INVESTMENT/GDP RATIOS GLOBAL COMPETITIVENESS INDEX:INFRASTRUCTURE (-7 Scale; ranking) 5 45 4 35 3 25 2 15 JAPAN GERMANY SPAIN UNITED STATES RUSSIAN F. CHINA CHILE MEXICO BRAZIL COLOMBIA 39 46 49 65 76 84 6 7 9 12 81 84 87 9 93 96 99 2 5 8 11 14 ARGENTINA BRAZIL CHILE MEXICO EMERGING ASIA CHINA ADVANCED ECONOMIES INDIA 87 PERU 88 1 2 3 4 5 6 7 source: World Economic Forum. Global Competitiveness Report 8
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Informality and human capital Substantial reduction in extreme poverty, but labor informality, still very high Inequality remains very high, in part as a result of low intergenerational mobility Remarkable increase in access to education but still margin to improve in quality of education LATIN AMERICA INFORMALITY INTERGENERATIONAL MOBILITY AND INEQUALITY 7 6 5 4 3 2 6 5 4 3 2 Gini Index PERU BRAZIL MEXICO VENEZUELA ARGENTINA CHILE 9'S AVERAGE 'S AVERAGE LAST YEAR AVAILABLE..2.4.6.8 Latin America Intergenerational income persistence 9
2. MEDIUM-TERM PROSPECTS FOR LATIN AMERICA. Low level of regional integration Latin America is a region with a long history of initiatives of political and economic integration but with limited success The level of intra-regional trade is low and decreasing INTRA REGIONAL TRADE 4 % export and import within the area 35 3 25 2 15 5 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 2 212 214 LATIN AMERICA EMERGING ASIA EMERGING EUROPE AFRICA MIDDLE EAST
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Diagnosis Short term: Latin America needs to adjust to a lower growth phase as a result of the end of the commodity super-cycle, the slowdown and rebalancing in China the end of QE Medium term: How to raise potential growth? Productivity and diversification Infrastructure spending Informality and the job market Education How to ensure more inclusive growth? Extreme poverty less of an issue, but redistribution still needed The role of the State: fiscal reforms 11
AUTOR THANK YOU