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''What to Expect from Latin American Economies in the Current Global Context?'

Date post:27-Aug-2014
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Latin America has changed both in politics and economics. It is now better prepared to weather global instability. Volatility has returned to Latam markets, but we expect differentiation going forward, based on fundamentals. Most countries have good buffers to withstand the Fed’s tapering. Latam GDP growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. Growth differences within the region will increase: the Pacific Alliance will grow close to 4% in 2014 and 2015, more than double the pace in Mercosur. Regional growth will remain relatively high for its income level, converging to its potential in most countries. We expect growth for the region to converge to nearly 4% in the medium-long run. However, it is crucial that reforms continue to be pushed through to avoid weakening drivers of long-term growth.
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  • What to Expect from Latin American Economies in the Current Global Context? Alicia Garcia Herrero Chief Economist Emerging Markets BBVA United Nations University, Tokyo March 2014
  • Latam Outlook / March 2014 Main messages 1 Latin America has changed both in politics and economics. It is now better prepared to weather global instability. 2 Volatility has returned to Latam markets, but we expect differentiation going forward, based on fundamentals. Most countries have good buffers to withstand the Feds tapering 3 Latam GDP growth will increase from 2.2% in 2013 to 2.5% in 2014 and 2.6% in 2015. Growth differences within the region will increase: the Pacific Alliance will grow close to 4% in 2014 and 2015, more than double the pace in Mercosur. 4 Regional growth will remain relatively high for its income level, converging to its potential in most countries. We expect growth for the region to converge to nearly 4% in the medium-long run. 5 However, it is crucial that reforms continue to be pushed through to avoid weakening drivers of long-term growth Page 2
  • Latam Outlook / March 2014 Contents 1 Latam structural situation in a new world 2 Latam breaks with the past 3 Short-term perspectives 4 Strengths and vulnerabilities Page 3
  • Latam Outlook / March 2014 Beyond China and India, some Latin American countries are world players EAGLEs (excluding China and India)* vs G6 Economies: current economic size and contribution to World economic growth 2012-2022** in billion USD adjusted by PPP ** Size of the bubble are proportional to 2012 level; below country labels Source: BBVA Research and IMF WEO 1300 Incremental GDP 2012-2022 1200 1100 Indonesia 1219 Brazil 2363 Russia 2520 EAGLEs Advanced 1000 900 Korea 1618 800 700 600 Japan 4623 Turkey Germany 1126 3207 Mexico 1768 UK 2335 Taiwan 905 G6 avg. 2620 500 400 300 Note: EAGLEs members, according to January 2013 forecast. Page 4
  • Latam Outlook / March 2014 Other smaller ones also globally relevant As many as 15 economies in the NEST (contributing more to global GDP than smallest G6, Italy) Egypt relegated from the EAGLEs; Chile and Ukraine advanced from the group of other EM to NEST Nest, G6 and Other Economies: current economic size and contribution to World economic growth 20122022 (%)* in billion USD adjusted by PPP ** Size of the bubble are proportional to 2012 level; below country labels Incremental GDP 2012-2022 Source: BBVA Research and IMF WEO 500 G6 avg. 2620 Nigeria Nest 453 Australia France 450 2260 967 Advanced Colombia 400 Others 500 Malaysia Spain Egypt Thail. 498 1415 S.Africa 540 350 655 S.Arabia 580 Iraq 744 Canada 300 G6 min. 156 Argentina 1451 Vietnam 745 (Italy) Iran 322 Poland Bang. 250 1002 1808 307 Philip. 806 425 200 Peru 328 Pakistan Chile 150 517 322 100 Note: NEST members, according to January 2013 forecast. Page 5
  • Latam Outlook / March 2014 Pacific trio taken together also huge Colombia, Peru and Chile belong to the Nest, with average expected growth of around 5% for the next 10 years. The three countries are characterized by their reform drive, prudent macroeconomic policies and increasing integration with the global economy (including the Asia-Pacific region). EAGLEs and Latam: increase of GDP in the next 10 years Latam: current GDP size and increase in the next 10 years (PPP-adjusted bn USD) (PPP-adjusted bn USD) 1200 1100 1000 900 800 700 600 500 400 300 200 100 0 3500 Source: BBVA Research and IMF (WEO) Source: BBVA Research and IMF (WEO) 2012-2022 3000 2012 2500 2000 1500 1000 Venezuela Chile Peru Colombia Argentina Mexico 0 Brazil G6 average Taiwan UK Mexico Germany Turkey Japan Korea Andean-3 Russia Brazil Indonesia 500 Page 6
  • Latam Outlook / March 2014 New middle class to support domestic demand but trend much bigger in Asia than in LATAM Latam economies face intense competition from Asia, as the region where middle classes will increase the most. Emerging Markets: middle classes ranges by area (2010 PPP-adjusted USD) Source: BBVA Research 1400 High MC Medium MC Low MC 1200 East Asia = China, Indonesia, Korea, Malaysia, Philippines, Thailand, Vietnam 1000 South Asia = India, Bangladesh, Pakistan 800 LatAm = Brazil, Mexico, Argentina, Chile, Colombia, Peru 600 400 Em. Europe = Russia, Turkey, Poland, Ukraine 200 Africa = Egypt, Nigeria, South Africa 0 2010 2020 2010 2020 2010 2020 2010 2020 2010 2020 East Asia South Asia LatAm Em.Europe Africa Middle class: High (25,000-40,000 USD), Medium (15,000-25,000 USD) & Low (5,000-15,000 USD). Page 7
  • Latam Outlook / March 2014 Contents 1 Latam in the EAGLEs 2 Latam breaks with the past 3 Short-term perspectives 4 Strengths and vulnerabilities Page 8
  • Latam Outlook / March 2014 LATAM breaking with the past After decades of poor performance, LATAM growing solidly and closing the gap with developed economies. The 2008-09 crisis was the stress test: it was the first big shock without a divergence in terms of per capita GDP. LatAm: GDP per capita relative to G7 (%) Source: IMF and BBVA Research 38 % LatAm: GDP per capita, relative performance to G7 during recession periods Source: IMF and BBVA Research 110 36 % 34 % 105 32 % 100 30 % 28 % 95 26 % 90 24 % Years since the beginning of the recession 22% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 85 20% -2 -1 0 1 2 Recession's average (1981, 1996, 2001) Last Recession, 2009 3 4 Page 9
  • Latam Outlook / March 2014 Why is LATAM breaking with the past? 1) Structural reforms: reforms that began in the 80s are transforming Latin America. Macroeconomic reforms Microeconomic reforms Fiscal consolidation with higher and better taxes From labor protection to targeted transfers to the poor Independent Central Banks Liberalization of internal markets and privatizations Financial reform Opening of the Economy Receptiveness of FDI Pension system reforms Better Business Climate for investment and more equitable societies Page 10
  • Latam Outlook / March 2014 Why is LATAM breaking with the past? 2) Economic stability: While taming inflation in the late 90s, the region made sustained progress in external and public solvency over the years. LatAm: Inflation LatAm: External and Fiscal Balance. LatAm: External Debt (CPI, % yearly average) (As % of GDP) (As % of GDP) Source: BBVA Research Source: BBVA Research Source: BBVA Research 350 350 300 300 250 250 200 200 150 150 50 50 0 0 00's 10's (2010-12) 80's 90's 50 50 0 0 45 45 -2 40 40 -4 -4 35 35 -6 -6 30 30 -8 -8 25 25 -10 100 2 -2 100 2 -10 20 20 -12 -12 15 15 -14 -14 10 10 -16 00's 10's (2010-12) 5 5 -16 80's 90's Current Account Fiscal Balance 0 80's 90's 0 00's10's (2010-12) Page 11
  • Latam Outlook / March 2014 Why is LATAM breaking with the past? 3) Institutional stability: Economic change has come along with institutional progress LatAm: Political Freedom (Freedom House Index, % of free countries) Source: BBVA Research with Freedom House data 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 75 80 90 00 10 Page 12
  • Latam Outlook / March 2014 Why is LATAM breaking with the past? 4) Sound banking system: The banking systems have been able to speed up credit supply, to cut NPL losses and to preserve high capital to assets levels. Latam: credit as % of GDP LatAm: NPL % Source: BBVA Research, Source: BBVA Research, GSFR. *Last available information 90 25 80 20 70 60 15 50 40 10 30 20 5 10 0 ARG 2003 BRA CHI 2012 COL MEX PER PAR URU VEN 0 ARG 2003 BRA CHI COL MEX PER PAR URU VEN 2012 Page 13
  • Latam Outlook / March 2014 Why is LATAM breaking with the past? 5) Supportive domestic demand: LATAM growth rests on the strength of domestic demand. For the first time in decades, growth comes along with the reduction of poverty and inequality, which drives domestic demand up. Latam: Domestic demand and GDP (%yoy) Source: BBVA Research. LatAM: ARG, BRA, CHI, COL, MEX, PAN, PAR, PER, URU, VEN 6.0 Latam: Private Consumption, Investment & GDP (%yoy) Source: BBVA Research. LatAM: ARG, BRA, CHI, COL, MEX, PAN, PAR, PER, URU, VEN 10.0 9.0 5.0 8.0 7.0 4.0 6.0 5.0 3.0 4.0 2.0 3.0 2.0 1.0 1.0 0.0 Avg 20032010 2011 Domestic Demand 2012 GDP 2013* Avg* 20142018 0.0 Avg 20032011 2010 Private consumption 2012 2013* Investment Avg* 20142018 Page 14 GDP
  • Latam Outlook / March 2014 Why is LATAM breaking with the past? 6) Asia and commodities: LATAM countries are also benefiting from Asian demand for commodities. Trade flows Asia-LATAM (USD millions) Composition of Exports from LATAM to Asia Source: BBVA Research y COMTRADE. Fuente: BBVA Research y COMTRADE. (% total) 160,000 140,000 120,000 Other 30% 100,000 Commoditi es 70% 80,000 60,000 40,000 20,000 0 1990 Exports from Asia to Latam 2000 2010 Exports from L
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