Latin America Outlook 1st QUARTER
Main messages 1. Strong global growth continues. Forecasts revised up in in most areas. Growth stabilizing in. 2. Growth recovers in Latin America, reaching close to potential in. Growth will increase from 1,1% in to 1,7% in and 2,5% in. Growth revised up in most countries in, except Colombia and Mexico (stable) and Peru (revised down). Growth will increase in -19 driven by the external sector and investment. 3. Inflationary pressures remain contained, except in Argentina and Mexico. Therefore, interest rate cuts in South America would end at the beginning of (except Argentina, where interest rates will fall in line with inflation, and Mexico, where they will stay put after an additional hike) 4. Exchange rates will depreciate gradually, given Fed s rate hikes and some downward correction in commodity prices. Appreciation is possible in Mexico if risks associated to NAFTA renegotiation and upcoming elections do not materialize. In Colombia, slight appreciation expected when growth resumes.
GLOBAL Positive global momentum gets reinforced, but still with downside risks
Sustained Global growth 01 Improved forecasts for the US, China and the Eurozone There is less short-term uncertainty 04 Contained core inflation Although the downward pressure factors are disappearing 02 More positive perspectives for emerging countries Greater global demand and increase in commodity prices 05 Central banks continue their paths towards normalization The reasons for withdrawing stimuli are materializing 03 More caution in the financial markets Expectations of lower liquidity may reduce flows to emerging markets 06 Global risks Lesser in the short term; no changes in the medium and long term 4
Reasons for optimism in large areas, although with caution UNITED STATES CHINA EUROZONE Growth revised upwards Improvement in the labor market Approval of the tax reform Continuistic changes in the Fed Moderate deceleration Some reforms already underway Positive conclusions at the XIX Congress of the CPC Greater potential growth Greater growth than expected More robust domestic demand Lower political uncertainty Plans for greater integration 5
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Robust and sustained global growth World GDP growth (Forecasts based on BBVA-GAIN, % QoQ) 1.2 1.0 0.8 The global economy continues to grow, supported by the recovery of the industrial sector Confidence indicators continue to improve, and anticipate that the outlook will continue to be positive Private consumption continues to sustain growth in advanced economies and gains momentum in emerging economies 0.6 0.4 CI 20% CI 40% CI 60% Point Estimates Period average Source: BBVA Research 6 6
Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 mar.-13 sep.-13 mar.-14 sep.-14 mar.-15 sep.-15 mar.-16 sep.-16 mar.-17 sep.-17 Caution in financial markets, with moderation of flows to emerging markets Risk appetite indicator (Factor 1 (global), EPFR flow analysis) Investors appetite for emerging (EM) vs developed (DM) (Inflows in EM vs. DM in % of assets under management) 2 1.5 1 Greater appetite for risk 1.3 1.0 0.8 0.5 Taper tamtrun Preference for EM China Brexit Trump 0.5 0.3 0 0.0-0.5-1 -1.5-2 Less appetite for risk -0.3-0.5-0.8-1.0-1.3 Preference for DM Source: BBVA Research, EPFR 7 7
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Contained core inflation Output gap and core inflation (% GDP potential, % YoY) 4 3 2 1 0-1 Reduction of the idle capacity of the economy, but with room to grow without strong inflationary pressures Less reaction of prices to the increase in activity, for several reasons: Globalization Increased flexibility of the labor market Low inflationary expectations Reduced productivity growth -2-3 -4 The increase in the price of oil will push up inflation in the short term, facilitating the normalization of central banks in developed economies US output gap EA output gap US core inflation EA core inflation Source: BBVA Research and the OCDE 8
Easing Tightening Withdrawal of non-conventional monetary policy measures Pre-crisis Crisis Normalization Reduction of purchasing of bonds Hike in interest rates Reinvestment of maturing bonds Interest rate rises Partial reinvestment Fed BoJ ECB 9
Monetary policy normalization: accelerated in the case of the Fed, gradual in the case of the ECB FED Tightening cycle and reduction of the balance in progress Estimated rise of 75pbs in to 2.25% and reduction of its balance sheet by 420bn USD ECB QE reduction, but extension until September No rate hikes are expected until Focus: gain room for manoeuvre Focus: avoid sudden acceleration of long-term rates Elements of uncertainty: Politics: changes in government ministries (Fed, ECB) Macro : possible surprises in inflation Markets: Long-term rates and slope of the curve 10
Generalized upward revision of growth forecasts UNITED STATES EURO ZONE 2.6 2.5 2.2 1.8 CHINA MEXICO 2.0 2.2 6.3 6.0 SOUTH AMERICA WORLD 1.6 2.6 3.8 3.8 Revised up relative to October projections Unchanged Revised down Source: BBVA Research 12
US: stronger economic growth in the short term US: GDP growth (YoY, %) Positive impact of the oil price increase, global demand and the weakness of the dollar on investment and exports 3.5 3.0 2.5 2.0 1.5 2.9 1.5 2.2 2.6 2.5 Positive but limited effect of the tax reform (around 0.2% in ), mainly due to changes in corporate taxation. Doubts about the long-term effect Monetary policy will remain accommodative, despite normalisation 1.0 0.5 0.0 2015 Current Previous Source: BBVA Research based on BEA (Bureau of Economic Analysis) figures 12
China: More moderate slowdown in growth China: GDP growth (YoY, %) 8.0 7.0 6.0 6.9 6.7 6.7 6.3 More moderate slowdown due to ongoing structural reforms and less support from economic policy Despite this, the good economic performance reduces the risk of a sudden adjustment in the short term 5.0 4.0 3.0 2.0 1.0 6.0 Eliminating the growth objective limits imbalances The measures aimed at opening up the economy, together with more qualitative objectives, will drive structural reforms and potential GDP 0.0 2015 Current Previous Source: BBVA Research based on CEIC data 13
Eurozone: Stronger and more balanced growth Eurozone: GDP growth (YoY, %) The increase in disposable income continues to support solid private consumption 3.0 2.5 2.0 1.5 2.0 1.8 2.4 2.2 1.8 Greater support from global demand,with limited impact from the euro s appreciation Easing uncertainty and increased earnings will underpin the recovery in investment Monetary policy will contribute to favourable financial conditions and a relatively stable euro 1.0 0.5 The cyclical improvement will allow the deficit to be reduced by means of a somewhat expansive fiscal policy 0.0 2015 Current Previous Source: BBVA Research based on Eurostat figures 14
1T2014 3T2014 1T2015 3T2015 1T 3T 1T 3T 1T 3T 1T 3T 1T2020 3T2020 1T2014 3T2014 1T2015 3T2015 1T 3T 1T 3T 1T 3T 1T 3T 1T2020 3T2020 1T2014 3T2014 1T2015 3T2015 1T 3T 1T 3T 1T 3T 1T 3T 1T2020 3T2020 Higher forecasts for commodity prices reflect mostly stronger global demand BRENT OIL (USD/B) 120 110 100 90 80 70 60 50 40 30 SOYBEANS (USD/mT) 550 500 450 400 350 300 COPPER (USD/lb) 3.2 3.0 2.8 2.6 2.4 2.2 2.0 Baseline Sep Baseline Dec Source: BBVA Research and Bloomberg Baseline Sep Baseline Dec Baseline Sep Baseline Dic Oil prices increased in higher global demand but also supply effects, geopolitical risks and lower inventories. But we continue to forecast a long-run price of 60 dollars per barrel due to competition from shale oil producers. Copper prices increased significantly due to higher demand and financial flows. The latter should abate gradually going forward. 15
- Probability in the short term + Global risks: lower in the short term Containment of risks associated with high leverage in the short term Potential negative effect of increased protectionism US EZ CHN Political tensions still high, but more contained Negotiation of trade agreements (NAFTA) Signs of over-valuation of certain assets Reduced risk of rapid normalization by the Fed, but uncertainty persists - Severity+ Reduced political uncertainty, but significant question marks remain in several countries (Brexit, Germany, Italy) Managing monetary policy normalization * US: United States; EX: Eurozone; CHN: China. Source. BBVA Research 16
LATAM Growth increases, reaching new potential in -20
ARG BRA CHI COL MEX PAR PER URU Positive mood in financial markets in Latam Asset prices continued to see gains in the last months, extending the trend since the beginning of. Main drivers: Weak dollar Increase in global growth More bullish view on China Higher commodity prices Latam asset prices: percent change in the last 3 months to January 19* 30 25 20 15 10 5 More moderate gains in Mexico, given stumbling blocks to renegotiating NAFTA 0-5 -10-15 In addition, growth prospects increase in Latam -20 Stock Exchange Country Risk Premium Exchange Rate Source: BBVA Research and DataStream * Changes between October 19 and January 19. Exchange rate: local currency per USD. In this case, an increase signals a depreciation. Country risk premium: EMBI. 18
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Latam financial markets benefitted also from low global volatility and higher commodity prices Volatility at historical lows keep supporting risky assets, including emerging markets assets Commodity prices also increase pushed by demand factors, but also include a financial component (copper) and a geopolitical risk premium (oil) Risk of complacency by markets, at a time of increasing rates by the Fed and lower monetary stimulus from other central banks. Volatility in developed markets and commodity prices (index) 130 120 110 100 90 80 70 60 50 40 Copper Oil (Brent) VIX INDEX (right) 45 40 35 30 25 20 15 10 5 0 Source: BBVA Research, DataStream and Bloomberg 19
Dec-16 Dec-16 Dec-16 Dec-16 Dec-16 Dec-16 Dec-16 Dec-16 Gradual exchange rate depreciation in -19 in most countries Stable or appreciating exchange rates in the last 3 months due to favorable global financial conditions. We expect a mild depreciation of exchange rates going forward, given: Increasing US interest rates (versus stability in Latam) Lower global liquidity Moderating commodity prices Mexican and Colombian peso would be the exception. Mexican peso could appreciate if risks related to NAFTA renegotiations and the election do not materialize. Colombian peso could appreciate as growth recovers. Exchange rates to the USD (Index Dec =100) 130 120 110 100 90 80 depreciation with respect to USD ARG BRA CHI COL MEX PAR PER URU Observed Forecast Source: BBVA Research and Haver 20
Dec-15 Jun-16 Dec-16 Jun-17 Dec-15 Jun-16 Dec-16 Jun-17 Dec-15 Jun-16 Dec-16 Jun-17 Dec-15 Jun-16 Dec-16 Jun-17 Dec-15 Jun-16 Dec-16 Jun-17 Dec-15 Jun-16 Dec-16 Jun-17 Confidence indicators continue to recover gradually, but still remain weak Latam: Confidence indicators for households and firms (values above 50 pts indicate optimism) 70 65 60 55 50 45 40 35 30 25 20 Pessimism Optimism Source: BBVA Research and Haver ARG BRA CHI COL MEX PER Consumer Producer Recovery of producer confidence, supported by low volatility in financial markets, higher commodity prices and somewhat lower political noise and uncertainty in some countries (Chile). For households, lower inflation continue to improve sentiment. Also, labor market adjustment seems to be coming to an end in many countries. 21
Latin America on track to an upward growth trend in (1.7%) and (2.5%) Growth recovers in the last months in line with stronger expectations Stronger growth in and driven by 2 factors: External sector, supported by stronger and widespread global growth and higher commodity prices Public and private investment Growth in -20 around the new potential for Latam, below that of the commodity boom years (2004-2013). 6 5 4 3 2 1 0-1 -2-3 -4 Latam: GDP growth (%) 2.7 2.9 0.7-0.1-0.9 1.1 1.7 2.5 2.8 2012 2013 2014 2015 * * * 2020* Latam** Andeans Brazil Mexico Source: BBVA Research * Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela 22
Growth forecasts for revised up in most countries, except México, Colombia (both unchanged) and Peru (revised down) Latam countries: GDP growth (%) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Argentina Brazil Chile Colombia Mexico Paraguay Perú Uruguay Latam Mercosur Pacific Alliance Jan-18 Oct-17 Source: BBVA Research Recent data confirm growth consolidating in Argentina and continuing to recover in Brazil, Chile and Peru. Economic activity remained weak in Colombia and fell (temporarily) in Mexico Growth forecasts revised up on better incoming data and a more favorable external outlook 23
Inflationary pressures remain contained, except in Argentina and Mexico Latam: inflation and central bank target ranges (%, yoy) 40 35 30 25 20 15 10 5 16 14 12 10 8 6 4 2 0 0 Argentina(left) Brazil Chile Colombia Mexico Paraguay Peru Uruguay Inflation Range Inflation Target Observed Forecast Source: BBVA Research Inflation in South America ended at low levels, unseen in almost 3 years, due to exchange rate stability, weak domestic demand and, in many cases, lower food prices. Inflation will remain contained, within central bank targets, except Argentina and Mexico, but in both cases inflation will fall throughout and 24
Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Cycle of interest rate cuts close to end in most countries in South America. Stability expected in Mexico after February Latam: official interest rates (%) 35 30 25 20 15 10 5 0 14 12 10 8 6 4 2 0 ARG (left) BRA CHI COL MEX PAR PER Forecast Observed Source: BBVA Research and Haver Interest rate cuts in South America to end at the beginning of (except in Argentina) given inflation around Central Bank targets or increasing in some cases. In Argentina, interest rates set to fall in line with inflation. In Mexico, after a possible additional rate hike, Banxico will keep interest rates stable for the remainder of, with rate cuts only on. 25
Fiscal deficits will continue to fall. Higher fiscal risks in Brazil. Fiscal deficit in Argentina fall beyond targets in, which will help meet target. Some progress regarding fiscal consolidation in Brazil, but fiscal risks remain high. 0-2 -4 Latam: fiscal balance (%, GDP) -6-8 -10-12 ARG BRA CHI COL MEX PAR PER URU Latam Jan-18 oct-17 Source: BBVA Research and Haver 26
Higher growth will put pressure on external deficits in Latin America in External deficits would start to widen in many countries given an expected increase in imports External deficits expected for Argentina revised up in and, precisely due to strong expected imports. Higher commodity prices would compensate for increasing imports, in countries such as Colombia, Chile and Peru 2 1 0-1 -2-3 -4-5 Latam: current account balance (%, GDP) -6 ARG BRA CHI COL MEX PAR PER URU Latam Jan-18 oct-17 Source: BBVA Research and Haver 27
Main messages 1. Strong global growth continues. Forecasts revised up in in most areas. Growth stabilizing in. 2. Growth recovers in Latin America, reaching close to potential in. Growth will increase from 1,1% in to 1,7% in and 2,5% in. Growth revised up in most countries in, except Colombia and Mexico (stable) and Peru (revised down). Growth will increase in -19 driven by the external sector and investment. 3. Inflationary pressures remain contained, except in Argentina and Mexico. Therefore, interest rate cuts in South America would end at the beginning of (except Argentina, where interest rates will fall in line with inflation, and Mexico, where they will stay put after an additional hike) 4. Exchange rates will depreciate gradually, given Fed s rate hikes and some downward correction in commodity prices. Appreciation is possible in Mexico if risks associated to NAFTA renegotiation and upcoming elections do not materialize. In Colombia, slight appreciation expected when growth resumes.
ANNEX
Latin America GDP growth forecasts GDP (%) 2015 e f f Argentina 2.6-2.2 2.8 3.3 3.3 Brasil -3.5-3.4 1.0 2.1 3.0 Chile 2.3 1.6 1.5 2.7 2.9 Colombia 3.1 2.0 1.5 2.0 3.0 Mexico 3.3 2.9 1.9 2.0 2.2 Paraguay 3.0 4.0 3.9 3.7 3.9 Peru 3.3 4.0 2.3 3.5 3.8 Uruguay 0.4 1.4 3.2 3.3 3.7 Mercosur -2.6-4.0 0.5 1.2 2.4 Pacific Alliance 3.1 2.7 1.8 2.2 2.6 Latin America -0.1-0.9 1.1 1.7 2.5 e= estimates; f = forecast 30