Latin American Economic Perspectives LASOS 7 October 8, Hotel Intercontinental Buenos Aires, Argentina Gustavo Cañonero Partner & Director, Grupo SBS
AGENDA I. Recent economic trends in LA II. The good, the bad, and the ugly III. Main challenges ahead IV. Existing and emerging opportunities
AGENDA I. Recent economic trends in LA II. The good, the bad, and the ugly III. Main challenges ahead IV. Existing and emerging opportunities 3
GDP Growth (% yoy) Growth Deceleration Post Commodity Boom The economic slowdown after the 8-9 crisis has been severe, with GDP growth falling behind EM pace once again. Terms of trade should be blamed for, but policies now have to accommodate to the new reality 8 6 - Compared GDP Growth (% yoy) - Emerging markets LA-6-6 Advanced Economies 99 99 8 7 6 3 Terms of Trade Almost Explain Growth in LA 6 7 6 - ρ=,7 - - - Change in Terms of Trade (% yoy) Source: SBS Research, IMF, Bloomberg L.P.
Fiscal Deterioration As Well Lower commodity prices have yet to trigger consistent government spending and more prudent fiscal positions. Lower level of public debt than in the past provides room for a gradual adjustment in most cases though General Government Balance (% GDP) General Government Debt (% GDP) 9-8 7-6 -3 - - Emerging markets LA-6 3 6 6 Emerging markets LA-6 Advanced Economies Source: SBS Research, IMF, Bloomberg L.P.
Inflation Seems Now Under Control Despite recent fiscal deterioration, strong monetary institutions have solidified inflation control 6 Compared Inflation Rates (% yoy) 6 Inflation and Budget Decoupling in LA6 Emerging markets LA-6 Advanced Economies 3 - - 3-3 - 99 996 6 6 99 996 6 6 Budget Balance (% of GDP,rhs) Inflation (% yoy) - Source: SBS Research, IMF, Bloomberg L.P. 6
Widening Current Account Deficits The commodity price boom allowed for significant increases in exports, though current account deficits have been widening in recent years as imports remain high 3, Exports to GDP (%) 8 Growth Deceleration and Widening CAD 7, 6, 7,, - - 7, 99 999 9 LA-6 World -6 99 99 Current Account to GDP (%) GDP Growth (% yoy) Source: SBS Research, IMF, Bloomberg L.P. 7
Flirting With a Turn Around Confidence levels seem to have bounced from lows, which could lead to some recovery in consumption (lifting GDP growth). Weak investment remains the regional challenge Consumer Confidence and Retail Sales 3 3 9 9 8 8 3 7 9 3 Consumer Confidence Retail Sales (% yoy, rhs) 7,,,, 7,,,, -, -, -7, -, -, 8 6 - - Contribution to GDP Growth (%) 99 99 997 3 6 9 Exports Investment Consumption Source: SBS Research, Bloomberg L.P., Reuters, Central Banks 8
Important Achievements Reached High growth greatly reduced extreme poverty and helped governments improve living standards, though there are some structural problems to face Dependency Ratio (Old/Labor Force) 6 8 6 Unemployment and Poverty Reduction 99 99 Poverty (% of Population living under $.9 a day) Unemployment (%, rhs) 9 8 7 6 8, 7,7 7, 6,7 6,,7 99 99,,6, 3,8 3, Human Development Indicators 7 OECD 6 OECD 3 3 Source: SBS Research, World Bank 3, 99 99 Teacher- pupil ratio, primary Infant Mortality Rate (per live births, rhs) 9
A Lot of Room for Improvement The region made important advances in terms of competitiveness though there is still much to do, especially in terms of institutions, infrastructure and innovation 88 86 8 8 8 78 76 7 7 7 LA-6 Relative Competitiveness (%) 7 9 3 7 Against Top EM Against Top Business sophistication Market size Technological readiness Performance Relative to Top EM Innovation Financial market development Top EM Institutions 7 6 3 Labor market efficiency Infrastructure Goods market efficiency Macroeconomic Environment Health and primary education Higher education and training LA-6 Source: SBS Research, World Economic Forum
AGENDA I. Recent economic trends in LA II. The good, the bad, and the ugly III. Main challenges ahead IV. Existing and emerging opportunities
Ptential GDP Growth () Sizable Output Gaps Most economies are growing well below their potential levels with huge output gaps in some cases, particularly Brazil and Argentina Effective vs Potential GDP Growth, Output Gap (% of Potential GDP) COL -, -, 3 BRA CHI MEX PER ARG -, -, -, -3, -3, 3 Real GDP Growth (7) -, -, BRA ARG CHI COL PER MEX Source: SBS Research, IMF
Uneven Investment Across Countries Investment is quite uneven throughout the region, with very low levels (again) in Brazil and Argentina. Similarly, import dependency is larger in Colombia, Mexico and Argentina 7 Investment to GDP (6, %) Net Exports to GDP (6, %) 3 - - -3 9-7 - -6 ARG BRA CHI PER MEX COL -7 COL MEX ARG PER BRA CHI Source: SBS Research, IMF, Bloomberg L.P. 3
Inflation Remains Argentina s Identifier Most countries have developed monetary institutions that allowed for the gradual and sustained reduction in inflation rates. Argentina lagged but is now also on its way (jury still undecided?) Countries With High Inflation Countries With Low Inflation 3 3-99 99 Argentina Brazil Peru - 99 99 Mexico Colombia Chile Source: SBS Research, IMF
Primary Balance (% GDP, 6) Sizeable Fiscal Deficits Are The Norm Fiscal imbalances have been well below their debt-stabilizing levels, especially in Argentina and Brazil, demanding action soon. Debt levels are high in Mexico, Brazil and Colombia 3 Primary Deficits and Debt-Stabilizing Levels 6 General Government Net Debt to GDP (%) - - -3 COL MEX PER CHI BRA 3 - - ARG - - -3 - - 3 Debt-Stabilizing Primary Balance (% GDP) - CHI PER ARG COL BRA MEX Source: SBS Research, IMF
And There Are Few Structural Threats Some governments will soon have to introduce reforms to their pension and healthcare systems to ensure sustainability. Brazil and Argentina are leading again 3 Pension System Deficit (% GDP) Healthcare Spending (% GDP) 9 8 7 6 6 6 3 36 6 Argentina Brazil 3 6 6 3 36 6 Brazil Chile Colombia Source: SBS Research, IMF 6
Non-Interest CA (7, % GDP) External Accounts Look Better Than Before Current account imbalances have also widened but external debt dynamics remain ok, not creating the usual risk of the past 7 External Debt to GDP (%) Current Account Imbalances 6 3 3 - - CHI ARG BRA MEX -3 - COL - BRA ARG PER MEX COL CHI -6-6 - - -3 - - 3 Debt-Stabilizing Non-Interest CA (% GDP) Source: SBS Research, IMF 7
Argentina Competitiveness Argentina is the worst performer in LA-6, but has made serious progress on its macro environment and financial market development Performance in Global Competitiveness Rankings Rank Score LA 6 Global 9,,3 Basic Requirem ents 3,, Institutions 3 3,3 3, Infrastructure 8 3,9, Macroeconomic Environment 3,,6 Health and primary education 6,9,6 Efficiency Enhancers 8,, Higher education and training 38,, Goods market efficiency 33 3,, Labor market efficiency 3 3,3 3,9 Financial market development 3,, Technological readiness 66,3, Market size 3,9, Innovation and sophistication 7 3,6 3,7 Business sophistication 78 3,8, Innovation 7 3,3 3,3 Business sophistication Market size Technological readiness Performance Relative to LA-6 Innovation Financial market development LA-6 Institutions 6 3 Labor market efficiency Infrastructure Goods market efficiency Argentina Macroeconomic Environment Health and primary education Higher education and training Source: SBS Research, World Economic Forum 8
Brazil Competitiveness Brazil is also in need of improving its macro environment, but it is not clearly lagging LA-6 in other aspects Performance in Global Competitiveness Rankings Rank Score LA 6 Global 8,,3 Basic Requirem ents,, Institutions 9 3, 3, Infrastructure 73,, Macroeconomic Environment 3,,6 Health and primary education 96,,6 Efficiency Enhancers 6,3, Higher education and training 79,, Goods market efficiency 3,8, Labor market efficiency 3,7 3,9 Financial market development 9 3,7, Technological readiness,6, Market size,7, Innovation and sophistication 6 3,7 3,7 Business sophistication 6,, Innovation 8 3, 3,3 Business sophistication Market size Technological readiness Performance Relative to LA-6 Innovation Financial market development LA-6 Institutions 6 3 Labor market efficiency Infrastructure Goods market efficiency Brazil Macroeconomic Environment Health and primary education Higher education and training Source: SBS Research, World Economic Forum 9
Chile Competitiveness Chile is by far the best performer in the region, clearly out passing LA-6 standards in institutions, infrastructure and macro environment Performance in Global Competitiveness Rankings Rank Score LA 6 Global 33,7,3 Basic Requirem ents 36,, Institutions 3, 3, Infrastructure,8, Macroeconomic Environment 36,,6 Health and primary education 66,8,6 Efficiency Enhancers 3,8, Higher education and training 6,3, Goods market efficiency 39,7, Labor market efficiency 9, 3,9 Financial market development 7,9, Technological readiness 38,, Market size,, Innovation and sophistication 3,9 3,7 Business sophistication,3, Innovation 3, 3,3 Source: SBS Research, World Economic Forum Business sophistication Market size Technological readiness Performance Relative to LA-6 Innovation Financial market development LA-6 Institutions 6 3 Labor market efficiency Infrastructure Goods market efficiency Chile Macroeconomic Environment Health and primary education Higher education and training
Colombia Competitiveness Colombia s scorecard is now in line with the region, having some room to improve institutions and infrastructure Performance in Global Competitiveness Rankings Rank Score LA 6 Global 66,3,3 Basic Requirem ents 9,3, Institutions 7 3, 3, Infrastructure 87 3,8, Macroeconomic Environment 6,8,6 Health and primary education 88,,6 Efficiency Enhancers,, Higher education and training 66,, Goods market efficiency,, Labor market efficiency 88, 3,9 Financial market development 7,6, Technological readiness 6,3, Market size 37,8, Innovation and sophistication 6 3,7 3,7 Business sophistication 6,, Innovation 73 3,3 3,3 Source: SBS Research, World Economic Forum Business sophistication Market size Technological readiness Performance Relative to LA-6 Innovation Financial market development LA-6 Institutions 6 3 Labor market efficiency Infrastructure Goods market efficiency Colombia Macroeconomic Environment Health and primary education Higher education and training
Mexico Competitiveness Mexico is the other regional leader in terms of competitiveness exceeding LA-6 in most categories, but facing weaknesses in education Performance in Global Competitiveness Rankings Rank Score LA 6 Global,,3 Basic Requirem ents 68,6, Institutions 3 3, 3, Infrastructure 6,3, Macroeconomic Environment 3,,6 Health and primary education 76,7,6 Efficiency Enhancers 7,, Higher education and training 8,, Goods market efficiency 7,3, Labor market efficiency 3,8 3,9 Financial market development 36,, Technological readiness 7,, Market size,7, Innovation and sophistication 3,8 3,7 Business sophistication 9,3, Innovation 6 3, 3,3 Source: SBS Research, World Economic Forum Business sophistication Market size Technological readiness Performance Relative to LA-6 Innovation Financial market development LA-6 Institutions 6 3 Labor market efficiency Infrastructure Goods market efficiency Mexico Macroeconomic Environment Health and primary education Higher education and training
Peru Competitiveness Peru has made significant progress in recent years and is now in line with LA-6 standards, though it is still falling behind in terms of technology Performance in Global Competitiveness Rankings Rank Score LA 6 Global 7,,3 Basic Requirem ents 79,, Institutions 6 3, 3, Infrastructure 86 3,8, Macroeconomic Environment 37,,6 Health and primary education 93,,6 Efficiency Enhancers 6,, Higher education and training 8,, Goods market efficiency 7,3, Labor market efficiency 6,3 3,9 Financial market development 3,, Technological readiness 86 3,7, Market size 8,, Innovation and sophistication 3 3,3 3,7 Business sophistication 8 3,8, Innovation 3,8 3,3 Source: SBS Research, World Economic Forum Business sophistication Market size Technological readiness Performance Relative to LA-6 Innovation Financial market development LA-6 Institutions 6 3 Labor market efficiency Infrastructure Goods market efficiency Peru Macroeconomic Environment Health and primary education Higher education and training 3
Elections Will Be Key Drivers of Changes The next months will see important elections in Latin America. Argentina mid-term election could confirm the current path for improvement, while presidential elections in Chile, Paraguay, Colombia, Mexico, Brazil and eventually in Venezuela could set the basis for more positive changes Key Regional Elections Scheduled for 7-8 October 7 Argentina Mid-term Congressional November 7 Chile Presidential, Congress, States Abril 8 Paraguay Presidential and Congressional March-May 8 Colombia Presidential and Congressional July 8 Mexico Presidential and Congressional October 8 Brazil Presidential, Congress, States H 8 Venezuela Elections? Source: SBS Research, IMF
AGENDA I. Recent economic trends in LA II. The good, the bad, and the ugly III. Main challenges ahead IV. Existing and emerging opportunities
Main Challenges Ahead. Leaving behind populism. Last decade commodity boom financed market intervention and anti-capitalist practices. The new reality demand slimmer public sectors, lower taxes, high spending in infrastructure and human capital formation, and a very dynamic private sector. Restoring incentives to invest and guaranteeing macro stability will be key for some countries.. Fiscal consolidation. This is the first fundamental step towards macro stability. In particular in Brazil and Argentina; Colombia and Mexico to a lesser extent but fiscal consolidation needed anyway. 3. Structural challenges. To support productivity and competitiveness more is needed in: infrastructure spending reducing labor market informality and enhancing female participation investing in human capital improving governance and curbing corruption fostering regional trade and financial integration Source: SBS Research, IMF 6
AGENDA I. Recent economic trends in LA II. The good, the bad, and the ugly III. Main challenges ahead IV. Existing and emerging opportunities 7
Existing and Likely Emerging Opportunities. Stability and growth in Peru and Chile. Better accommodated to the reduction in commodity prices, Peru and Chile represent the more stable and better managed economies. A new moderated/pro-business government in Chile is likely to push economic growth to a faster pace.. Fiscal and policy fine-tuning in Colombia and Mexico. Fiscal consolidation should continue in Colombia and Mexico. Recent peace agreement, a new infrastructure agenda, and policy stability should help Colombia adjusting while preserving growth momentum. In Mexico the presidential elections should demonstrate whether policy setbacks are a serious risk. 3. A cultural change after reaching bottom in Argentina and Brazil. Extreme populism finally brought economic and political misery. Argentina is demostrating how normal policies have a pay off. Brazil is starting to consolidate from fear.. Venezuela remains a question mark. But still helped by resources Source: SBS Research, IMF 8
When Past Instability Might Be a Great Advantage!!! Low indebtedness will be Argentina s greatest ally in this reform process, allowing to smooth the costs of the transition % GDP 6 3 Credit to Private Sector (% yoy real) September YTD Consumption 3. 8.9 Commercial. -8. Secured Loans 3..8 Total..3 Foreign Domestic claims of BIS credit to reporting private sector banks Outstanding domestic private debt securities Outstanding international private debt securities Financial system deposits Insurance company assets Mutual fund assets Nonbank financial institutions assets Pension fund assets Stock market capitalization ARG LA Fuente: SBS Research, BIS 9
Main Regional Forecasts Growth slowly picking up, with stable inflation and, hopefully, some fiscal consolidation GDP Growth (% y/y) Inflation (% y/y, eop) 3 ARG BRA CHI COL MEX PER 7 8 9 Potential Growth ARG BRA CHI COL MEX PER 7 8 9 Gen. Govt. Primary Balance (% GDP) - - -3 - - ARG BRA CHI COL MEX PER Fuente: 7Banco 8 Mundial 9 Debt Stabilizing - - -3 - Current Account Balance (% GDP) ARG BRA CHI COL MEX PER 7 8 9 Source: SBS Research, IMF 3
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