Changing global dynamics

What is it in for Latin American and Chinese relations?

Alicia Garcia Herrero

Chief Economist for Emerging Markets BBVA

CAF-ILAS Annual Conference, Beijing May 8, 2012

Page 2

Many venues of change relevant

1.

The emerging countries’ kingdom

Enormous weight of emerging countries in the global economy in the next ten years

Page 3

• Emerging Asia

contribute close to 58% to global growth in next 10 years

• China

is the highest contributor with almost 30% of global growth

• Latin America more relevant than Europe

Contribution to World economic growth by region between 2011-2021 (%)

Source: BBVA Research and IMF WEO

10.5

Latin America

Africa Australia + New Zealand

North America

Asia (ex.Japan)

Japan

7.8

6.0

4.1

Eastern Europe

57.91.8

1.0

5.8

Western Europe

Middle East

5.0

Page

3

The emerging countries’ kingdom

Page 4

Many venues of change relevant

2. Economic relevance for many countries in the emerging world but fewer creditors!

Emerging economies still absorbing capital with a very big exception: China!

Page 5Page

5

China becoming key source of investment

China will further increase its influence on other EM since it will need to diversify its positive IIP away from reserve assets to FDI and away from the developed world to the emerging world. Key sectors might be infrastructure

and manufacturing

in the future

International Investment Position 2010(% of GDP)

Source: BBVA Research and IMF

-25

-15

-5

5

15

25

35

45

55

65

China Japan Germany

FDI Portfolio Derivatives Other Reserves Total

Page 6

3. Continuous urbanization implies a sustained change in demand for (some) commodities

Infrastructure needs strong and, thereby, the price of commodities (energy and metals)

Many venues of change relevant

Urbanization still underway in the most important region for global growth: Asia

Largest group of emerging markets: Urbanization rate(%, people living in urban area)Source: BBVA Research, WB and Haver

Second largest group: Urbanization rate(%, people living in urban area)Source: BBVA Research, WB and Haver

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Braz

il

Chi

na

Egyp

t

Indi

a

Indo

nesi

a

Kore

a

Mex

ico

Rus

sia

Turk

ey

G6

Aver

age

1990 2009

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Thai

land

Nig

eria

Pola

nd

Col

ombi

a

Sout

h Af

rica

Mal

aysi

a

Viet

nam

Paki

stan

Bang

lade

sh

Arge

ntin

a

Peru

Philip

pine

s

G6

Aver

age

1990 2009

Page 7

Page 8

4. New middle class massively in emerging world

Specially in China followed at large distance by Brazil

Many venues of change relevant

Page 9

New middle class: enormous opportunity to serve new consumption needs

Size of middle income class population (millions of people)Source: BBVA Research

Share of global middle class consumption (2000-2050)(millions)Source: OECD 2010 (“The emerging middle class in developing countries”)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%2000 2010 2020 2030 2040 2050

Others

EU

US

Japan

Other Asia

India

China

0

50

100

150

200

250

300

USA

Ch

ina

Jap

anG

erm

any

UK

Fran

ceIt

aly

Ko

rea

Can

ada

Bra

zil

Ru

ssia

Mex

ico

Ind

iaTa

iwan

Turk

eyIn

do

nes

ia

2010 2020

Page 10

5. Perception of commodity abundance changing?

An attempt to answer this question can be found in recent joint work by

Alicia García-Herrero and

Mario Nigrinis (BBVA) in collaboration

with

Matt Ferchen (Tsinghua

U.) and

KC Fung

(U. of

California)

Many venues of change relevant

Page 11

Export diversification largely reduced but reverse trendExports: Top 5 goods cumulative share

Source: COMTRADE and BBVA Research

In the case of South America there has been a reversal which began 10 years ago, coinciding with the emergence of China as a world powerhouse

20

30

40

50

60

70

80

90

100

1962

1964

1966

1968

1970

1972

1974

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1980

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2008

2010

20

30

40

50

60

70

80

90

100

LATAM South America

20

30

40

50

60

70

80

90

100

1962

1965

1970

1975

1980

1985

1990

1995

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

20

30

40

50

60

70

80

90

100

Argentina Brazil Chile ColombiaMexico Peru Venezuela

Page 12

Diversification away from commodities even more reduced recently

Commodity Exports: Share of total exports (%)Source: COMTRADE and BBVA Research

Commodities have always taken an important share of LATAM exports. After NAFTA, Mexican economy structure changed

0

10

20

30

40

50

60

70

80

90

100

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1983

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1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2008

2010

0

10

20

30

40

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60

70

80

90

100

LATAM South America

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Argentina Brazil Chile Colombia

Mexico Peru Venezuela

Page 13

NAFTA helped changing the structure of Mexican economy

It was only since 2008 that the share of South American economies commodity exports

rose more than the world average. This may imply the following:

LATAM’s

excessive commodity exports: LATAM commodity exports share vs

World averageSource: COMTRADE and BBVA Research

Compared with the rest of the World, South American economies have always been intensive in commodity exports

Relative export diversification worsening since 2008

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Argentina Brazil Chile ColombiaMexico Peru Venezuela

Page 14

US still most important partner for Latin America as a whole but…

US, EU and China: Total imports from LATAM 7 in USD BillionsSource: COMTRADE and BBVA Research

The rise of China is dramatic and in 2010 almost caught up with EU (EZ+UK) as the region second largest partner. Commodities are about half of the total exports

0

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

50

100

150

200

250

300

350

CN EU US

0

50

100

150

200

250

300

350

400

450

500

550

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

50

100

150

200

250

300

350

400

450

500

550Commodities Non commodities

Page 15

China about to catch up for South America and commodities much more important

US, EU and China: Total imports from South America in USD BillionsSource: COMTRADE and BBVA Research

Although the US is still the top export destination, the difference with EU and China is not as large. Commodities dominate export flows. China’s demand was a buffer in 2009

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

20

40

60

80

100

120

CN EU US

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

50

100

150

200

250

300

Commodities Non commodities

Page 16

Intraregional trade could save the day? Growing fast also and relatively focused on manufactured goods

Intraregional trade and Sino imports: in USD BillionsSource: COMTRADE and BBVA Research

LATAM 7

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

20

40

60

80

100

120

Commodities Non Commodities China

South America

0

20

40

60

80

100

120

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100

20

40

60

80

100

120

Commodities Non Commodities China

Page 17

Conclusions

•

There seems to be a growing consensus that excessive concentration of exports may be detrimental for economic development, in particular when concentration is in commodities

Exports concentration as a source of concern

•

Historically LATAM exports have been concentrated in commodities

although a process of diversification did indeed take place until the end of the last century

•

That trend has changed starting 2008 and quite rapidly

What has happened in LATAM?

•

Our results show some evidence that China is indeed behind the renewed concentration on exports on commodities

Is China responsible?

•

Our case of study show that

for commodities like soy bean and non ferrous metals, South American economies are more reliant on Chinese demand than other exporters. For oil and iron ore other countries are more dependent than South American ones

Dependency of Chinese demand

Changing global dynamics

What is it in for Latin American and Chinese relations?

Alicia Garcia Herrero

Chief Economist for Emerging Markets BBVA

CAF-ILAS Annual Conference, Beijing May 8, 2012