Situación España 1T16
• Españ
Situación
Latin America Outlook
2nd QUARTER
2016
Latam Outlook / May 2016
Page 2
The global outlook has improved. but global growth will continue to be low. Financial stress
has been reduced significantly in the last three months. especially in emerging markets. and
commodity prices have recovered. Global growth will increase, but moderately and will remain fragile.
Latam GDP will shrink -1.1% in 2016 and recover to 1.7% in 2017. The fall in 2016 will be dragged
by the sharp recession in Brazil. whereas the Pacific Alliance will grow 2.3%. Recovery in 2017 will be
driven by the external sector (stronger global growth and better terms of trade) and higher investment
in places like Argentina, Peru and Colombia.
The positive effect of the recent recovery of commodity prices will be offset by lower public
expenditure. Public expenditure will be adjusted in most countries given lower tax receipts and to
preserve fiscal rules and sovereign ratings. The main exception will be Brazil, where the necessary
fiscal consolidation is likely to continue to be postponed.
Main Messages
Inflation abates slightly in most countries, helped by the recent appreciation of commodity
prices. Lower inflation and weak domestic demand will allow central banks to wait and see, with
stable interest rates likely for the remainder of this year with the exception of Colombia, where further
hikes are likely. In turn, Mexico will continue to synchronize interest rate hikes with the Fed’s.
Latam Outlook / May 2016
Page 3
External
environment Global scenario improves, but growth will continue to be subdued
Latam Outlook / May 2016
Page 4
Global financial markets calm down in the last three months
Financial stress in financial markets BBVA Research Financial stress index
Financial stress abates since high
reached in January, especially in
emerging markets…
… driven by:
1. Improved macro indicators in
China and lower FX depreciation
pressures
2. Recovery of commodity prices
(especially oil)
3. More gradual expected path of
Fed’s rate hikes
Source: BBVA Research
-2
-1
0
1
2
3
4
5
6
Jun-0
8
No
v-0
8
Apr-
09
Sep-0
9
Feb
-10
Jul-1
0
De
c-1
0
Ma
y-1
1
Oct-
11
Ma
r-1
2
Aug-1
2
Jan-1
3
Jun-1
3
No
v-1
3
Apr-
14
Sep-1
4
Feb
-15
Jul-1
5
De
c-1
5
Ma
y-1
6
Developed Emerging
Latam Outlook / May 2016
Page 5
Global economic scenario was quite negative three months ago…
Source: BBVA Research. Evolution from 11 Nov 2015 to 10 Feb 2016
Fall in oil prices (Brent)
Correction in
Emerging Markets (Increase in EMBI spread)
More uncertain
global growth
-25%
Concerns
on China (fall in reserves)
-6%
Stock markets (MSCI Global stock market index)
-12% +100bp
Latam Outlook / May 2016
Page 6
… but many of those factors have reversed in the last three months
Source: BBVA Research. Evolution from 10 Feb 2016 to 10 May 2016
Increase in
oil price (Brent)
Improved financial
conditions in EM (Fall in EMBI spread)
Lower uncertainty
on global growth
+46%
Less concern on
China (in the short run)
+0.5%
Stock market
rally (MSCI Global stock market index)
+12% -100pb
Latam Outlook / May 2016
Page 7
Oil and copper prices recovered driven in part by less concerns about policy support for growth in China …
… but long-term perspectives for commodity prices suffer given doubts about the pace of structural reforms in China
Commodity prices also benefitted from lower global volatility
Brent oil: (USD/b) Source: BBVA Research and Bloomberg
Soybeans: (USD/mt) Source: BBVA Research and Bloomberg
Copper: (USD/lb) Source: BBVA Research and Bloomberg
0
20
40
60
80
100
120
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast in April 2016 Forecast in January 2016
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast in April 2016 Forecast in January 2016
300
350
400
450
500
550
600
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast in April 2016 Forecast in January 2016
Latam Outlook / May 2016
Page 8
Nevertheless, global growth continues to be subdued, and with warning signs
Global growth (% qoq at annual rate) (Forecasts based on BBVA-GAIN model) Source: BBVA Research Global growth around 3% (annual rate) in the
last quarter has been accelerating, but still far from previous years
Global growth to increase to 3.4% in 2017 but it will still be subdued: • Given adjustment in emerging economies • Developed economies not growing beyond
its potential • Global investment still weak
Global trade growth still decreasing since 2014. Warning: traditional sources of global growth are not working, as well as in previous recoveries.
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%Growth; 1Q16, 2Q16 areforecasts
Average 2000-07
Latam Outlook / May 2016
Page 9
Additional warning sign: global uncertainty shocks are now more frequent …
Immediate effect of uncertainty shocks on financial volatility* Source: BBVA Research
More frequent uncertainty shocks that generate high volatility (frequency has doubled)
Given fragile growth. uncertainty shocks tend to be amplified
-40%
-20%
0%
20%
40%
mar-12 nov-12 jul-13 mar-14 nov-14 jul-15 mar-16
First sign of withdrawal of monetary
stimulus by the Fed
Oil price fall Uncertainty on China
* Effect on VIX (implied volatility of S&P 500) from a model of volatility and global growth. See global outlook for 2Q16 for details.
Source: BBVA Research
Latam Outlook / May 2016
Page 10
… but their impact on growth, though stronger, is also shorter-lived
Effect on growth of a temporary increase in volatility (percentage points)* Source: BBVA Research
* Impact on growth of an increase in volatility caused by and increase in uncertainty. Details in
Global Outlook 2Q16.
Source: BBVA Research
Good news is that even though negative shocks are more frequent, their impact on growth seems now less persistent
This could be in part the result of very accommodative monetary policy in developed economies, which buffer uncertainty shocks …
… but, what will happen when those accommodative monetary policies are withdrawn?
-0.03
-0.02
-0.01
0.00
0.01
m0
m1
m2
m3
m4
m5
m6
m7
m8
m9
m1
0
m1
1
m1
2
m1
3
m1
4
m1
5
m1
6
m1
7
m1
8
m1
9
m2
0
m2
1
m2
2
m2
3
Before 2007 After 2012
Latam Outlook / May 2016
Page 11
Monetary and fiscal stimuli will continue to support growth in the short run. A soft landing continues to be the central scenario
State-owned enterprises: sustained by increasing debt and carrying excess capacity. Without reforms, they will drag medium-term growth by hampering an efficient allocation of resources.
China: gradual adjustment to continue
China: GDP growth (%) Source: BBVA Research
7.7
7.3
6.96.4
5.8
3
4
5
6
7
8
9
2013 2014 2015 2016 2017
Apr-16 Jan-16
Latam Outlook / May 2016
Page 12
After a soft Q1, growth will increase during 2016, with a stronger employment growth
Fed will take into account stronger domestic growth and the drag from the external sector to decide on the timing and speed of further rate hikes. We anticipate 2 more hikes in 2016, but with a downward bias.
US: growth to increase during 2016
US: GDP growth (%) Source: BBVA Research
1.5
2.4 2.42.5
2.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2013 2014 2015 2016 2017
Apr-16 Jan-16
Latam Outlook / May 2016
Page 13
China is currently the main global risk
Source: BBVA Research
Lik
elih
oo
d
Impact
Shock from
China
Impact in
Emerging
Markets from Fed rate
hikes
Europe Brexit
Geopolítics
Periphery
Latam Outlook / May 2016
Page 14
Latam GDP to shrink in 2016 and recover in 2017
Latam Outlook / May 2016
Page 15
Latam main asset prices (Index May 2013=100)
Source: BBVA Research y Haver
Lower global risk aversion and an increase in commodity prices lifted Latam financial markets
Main asset prices and exchange rates in the region showed significant gains since February…
… driven by lower volatility in global financial markets and the ensuing impulse on commodity prices
Going forward, volatility and corrections in financial markets may return, as long as risks on Chinese growth and exchange rates persist, in addition to unexpected changes in Fed’s plans for rate hikes.
40
60
80
100
120
140
160
180
200
220
Au
g-1
3
Nov-1
3
Fe
b-1
4
May-1
4
Au
g-1
4
Nov-1
4
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
Nov-1
5
Fe
b-1
6
Ma
y-1
6
COMMODITIES (CRB) EXCHANGE RATE (DS)
EQUITY (MSCI) EMBI+
Latam Outlook / May 2016
Page 16
Latam: Fiscal balance (%GDP) Public expenditure will be less expansionary than previously anticipated, especially in Argentina, Chile, Peru and México.
Main exception is Brazil, where we expect a less ambitious adjustment of public expenditure due to still-high political uncertainty
Source: BBVA Research and Haver
Public expenditure will be marked down or decelerate sharply in Latam, with the main exception of Brazil
Correction of public expenditure seems unavoidable in countries with very low (or even non-existent) fiscal space, in the context of a significant negative shock to tax revenues from subdued commodity prices.
-12
-10
-8
-6
-4
-2
0
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
ARG BRA CHI COL MEX PAR PER URU Latam
May-16 Feb-16
Latam Outlook / May 2016
Page 17
Latam: Confidence indexes (households and firms) (values over 50 indicate optimism)
optimism
pessimism
Source: BBVA Research and Haver
Confidence indicators remain weak, dragging consumption and investment
Sharp recent fall in household confidence in Argentina (due to rise in utility prices as part of fiscal consolidation) and Colombia. Confidence improves in Peru after the elections
Firms: low confidence on the weak external environment, political noise and uncertainty about economic policies in some countries
Households: pessimism on weak labor markets and still-high inflation
0
10
20
30
40
50
60
70
abr-
14
oct-
14
abr-
15
oct-
15
abr-
16
abr-
14
oct-
14
abr-
15
oct-
15
abr-
16
abr-
14
oct-
14
abr-
15
oct-
15
abr-
16
abr-
14
oct-
14
abr-
15
oct-
15
abr-
16
abr-
14
oct-
14
abr-
15
oct-
15
abr-
16
abr-
14
oct-
14
abr-
15
oct-
15
abr-
16
ARG BRA CHI COL MEX PER
Consumers Producers
Latam Outlook / May 2016
Page 18
Latam GDP to fall in 2016 (-1.1%) and recover gradually starting in 2017 (1.7%)
Latam*: GDP growth (%yoy)
(1) Weighted average of Argentina. Brazil. Chile. Colombia. Mexico. Paraguay. Peru. Mexico. Uruguay and Venezuela
(2) For Argentina. private estimates of GDP are used while official statistics are released
Source: BBVA Research
Growth forecasts revised down despite recovery of commodity prices in 2016 …
… as lower public expenditure in many economies weigh down on growth
Stronger 2017 growth in Latam driven by: 1. The external sector, due to higher global
growth, depreciated exchange rates and improved terms of trade
2. Investment, especially by the private sector in Argentina and infrastructure investment in Peru and Colombia
3.0 2.9
1.1
-0.4
-1.1
1.7
2.3
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2012 2013 2014 2015 2016 2017 2018
Latam (1) Argentina (2) Pacific Alliance Brazil
Latam Outlook / May 2016
Page 19
Growth revised down
in Argentina (monetary
policy) and Uruguay (lower
consumption). Growth
marked down in 2017 in
Brazil, Uruguay
and Chile in 2017
Pacific Alliance will
grow 2.3% in 2016 and
2.8% in 2017,
towards its potential
(3.8%)
Peru, Colombia, Mexico and Paraguay, the most dynamic economies in 2016
Latam countries: GDP growth (%)
Source: BBVA Research
Latin America
maintains strong
heterogeneity in growth
momentum
and forecasts
-5
-4
-3
-2
-1
0
1
2
3
4
5
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
2017
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
20
17
20
15
20
16
2017
20
15
20
16
20
17
20
15
20
16
20
17
ARG* BRA CHI COL MEX PAR PER URU Latam Mercosur PacificAlliance
May-16 Feb-16
Latam Outlook / May 2016
Page 20
0
2
4
6
8
10
12
0
5
10
15
20
25
30
35
40
45
jun
-15
dic
-15
jun
-16
dic
-16
jun
-17
dic
-17
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Argentina (left) Brazil Chile Colombia Paraguay Peru Uruguay
ForecastInflation Target
Inflationary pressures abate somewhat, given recent exchange-rate appreciation
Latam: inflation (%yoy) in inflation-targeting countries
Inflation starts to flex down (except Colombia and Uruguay, but remains above Central Bank targets (bar Mexico and Paraguay)
Inflation will converge to Central Bank’s targets at the end of 2016 or in 2017, given less pressure from FX depreciation and from domestic demand.
Source: BBVA Research and Haver
Latam Outlook / May 2016
Page 21
Persistence of inflation in some countries could delay convergence to inflation targets
Latam: persistence of core inflation*
Persistence of inflation is strongest in Argentina and, to a lesser extent, in Brazil, Colombia and Uruguay. This could delay convergence back to central banks’ inflation targets
* Degree of influence of past core inflation on current core inflation. Based on the
estimation of a Phillips curve where current inflation depends on the output gap, past
inflation, inflation expectations, exchange rate and commodity prices
Source: BBVA Research and Haver
0,0
0,2
0,4
0,6
0,8
ARG BRA CHI COL MEX PER URU
Nevertheless, persistence can diminish drastically if there is a significant change in the conduct of monetary policy (as in Argentina) or in indexation mechanisms.
Latam Outlook / May 2016
Page 22
Official interest rates in inflation-targeting countries (%)
Monetary policy in wait-and-see mode, except in Argentina and Colombia
Source: BBVA Research and Haver
Lower pressure on inflation will allow Central Banks in the region to wait and see, keeping rates stable during 2016 (except Colombia)
Mexico will keep its official interest rate synchronized with the Fed
0
2
4
6
8
10
12
14
16
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
Ju
n-1
5
De
c-1
5
Ju
n-1
6
De
c-1
6
Ju
n-1
7
De
c-1
7
BRA CHI COL MEX PAR PER
Previsión
Latam Outlook / May 2016
Page 23
Exchange rate to the US dollar (Index Dec 2014=100)
Depreciation vis-à-vis US dollar
FX appreciation in February-April driven by lower global risk aversion and return of capital inflows
Going forward, markets will follow closely Fed’s decision on interest rates and any signs of weaker growth in China or a weaker Renminbi.
In Mexico, Colombia and Chile there is some room for appreciation during 2016-17 given improving fundamentals and an expected rise in oil and copper prices.
Source: BBVA Research and Haver
Exchange rates will depreciate going forward, but from a stronger starting point than 3 months ago
80
100
120
140
160
180
200
220
240
dic
-14
dic
-15
dic
-16
dic
-17
dic
-14
dic
-15
dic
-16
dic
-17
dic
-14
dic
-15
dic
-16
dic
-17
dic
-14
dic
-15
dic
-16
dic
-17
dic
-14
dic
-15
dic
-16
dic
-17
dic
-14
dic
-15
dic
-16
dic
-17
dic
-14
dic
-15
dic
-16
dic
-17
dic
-14
dic
-15
dic
-16
dic
-17
ARG BRA CHI COL MEX PAR PER URU
Forecast Actual
Latam Outlook / May 2016
Page 24
Latam: Current account balance (%GDP)
External deficits continue to correct in most countries, in part due to deceleration of domestic demand
Source: BBVA Research and Haver
External deficits (small in Chile and Paraguay) continue to shrink in most countries …
… driven by the depreciation of exchange rates in previous quarters, a weak domestic demand and a gradual improvement of terms of trade
FDI is weakening due to the fall in commodity prices, but still represents a significant share of external financing needs, limiting external vulnerability in the region.
-8
-7
-6
-5
-4
-3
-2
-1
0
201
52
01
62
01
7
201
52
01
62
01
7
201
52
01
62
01
7
201
52
01
62
01
7
201
52
01
62
01
7
201
52
01
62
01
7
201
52
01
62
01
7
201
52016
201
7
2015
201
62
01
7
ARG BRA CHI COL MEX PAR PER URU Latam
May-16 Feb-16
Latam Outlook / May 2016
Page 25
The global outlook has improved. but global growth will continue to be low. Financial stress
has been reduced significantly in the last three months, especially in emerging markets, and
commodity prices have recovered. Global growth will increase but moderately and will remain fragile.
Latam GDP will shrink -1.1% in 2016 and recover to 1.7% in 2017. The fall in 2016 will be dragged
by the sharp recession in Brazil, whereas the Pacific Alliance will grow 2.3%. Recovery in 2017 will be
driven by the external sector (stronger global growth and better terms of trade) and higher investment
in places like Argentina, Peru and Colombia.
The positive effect of the recent recovery of commodity prices will be offset by lower public
expenditure. Public expenditure will be adjusted in most countries given lower tax receipts and to
preserve fiscal rules and sovereign ratings. The main exception will be Brazil. where the necessary
fiscal consolidation is likely to continue to be postponed.
Main Messages
Inflation abates slightly in most countries, helped by the recent appreciation of commodity
prices. Lower inflation and weak domestic demand will allow central banks to wait and see, with
stable interest rates likely for the remainder of this year. with the exception of Colombia, where further
hikes are likely. In turn, Mexico will continue to synchronize interest rate hikes with the Fed’s.
Latam Outlook / May 2016
Page 26
Annex
Latam Outlook / May 2016
Page 27
Latam GDP growth forecasts
GDP (%yoy) 2013 2014 2015 2016f 2017f
Argentina* 2.9 0.5 2.1 -0.4 3.2
Brazil 3.0 0.1 -3.9 -3.0 0.9
Chile 4.0 1.9 2.1 1.7 2.0
Colombia 4.9 4.4 3.1 2.0 3.0
Mexico 1.6 2.3 2.5 2.2 2.6
Paraguay 14.0 4.7 3.0 3.1 3.1
Peru 5.9 2.4 3.3 3.6 4.3
Uruguay 4.6 3.2 1.0 0.7 1.5
Mercosur 3.0 -0.1 -2.8 -3.7 0.8
Pacific Alliance 2.9 2.6 2.7 2.3 2.8
Latin America 2.9 1.1 -0.4 -1.1 1.7
e = estimate; f = forecast