Latin America: the shadow of China
Juan Ruiz
BBVA Research│Chief Economist for South America
Latin America Outlook – Second Quarter 2014│ Madrid, 13 May 2014
Latin America Outlook / May 2014
Page 2
The global cycle remains robust, especially in developed economies, while China is slowing down. The world economy growth will increase from 3% in 2013 to 3.4% in 2014 and 3.8% in 2015.
Latam’s financial markets recovered in March and April. Looking ahead, they will be shaped by the effects of the Fed’s withdrawal of monetary stimulus and the pattern of growth in China.
Latam will grow by 2.3% in 2014 and 2.5% in 2015, similar to 2013. Growth will be below the region’s potential and very heterogeneous, with the Pacific Alliance countries performing well above the regional average.
External deficits remain high and the fiscal perspective worsens, but both deficits continue to be manageable, on the whole.
An unlikely scenario of sharp deceleration in China would have a substantially negative effect on South America. The shock would be absorbed better by the Andean countries, which have more scope for countercyclical policies.
Key messages 1
2
3
4
5
Latin America Outlook / May 2014
Page 3
1 Global economy: the recovery continues, hand in hand with developed economies
2 Moderate growth in 2014 and 2015, below the region’s potential and very heterogeneous across countries
3 A faster deceleration than anticipated in China would have a significant impact on South America
Contents
Latin America Outlook / May 2014
Page 4
World GDP growth (% QoQ) Source: BBVA Research
Global cycle: growth remains robust at a quarterly 0.8% in the first half of the year
Growth is still solid and financial conditions have improved in emerging economies, but
world GDP is not accelerating
Higher growth in developed economies partly offsets lower growth in emerging economies
0,0
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0,6
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Last MC Current Last MC Current
Q2-13 Q3-13 Q4-13 Q1-14 Q2-14
Actual Estimates
Latin America Outlook / May 2014
Page 5
Tensions have fallen in financial markets since the beginning of the year
BBVA financial tensions index in developed and emerging economies Fuente: BBVA Research
Markets have moved to the tune of expectations of rises in US interest rates …
The Fed’s communication policy and forward guidance has side-stepped further increases in
long-term interest rates and has reduced financial tensions
… and growth expectations in China, as well as idiosyncratic factors.
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Latin America Outlook / May 2014
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Deceleration in China is confirmed, although growth is still above 7%
China: GDP growth (% YoY) Source: BBVA Research
Doubts about the cyclical strength of the Chinese economy have made themselves felt
in 1Q14, but less than anticipated
In turn, the authorities are taking measures to contain the vulnerabilities caused by the
boosts in 2008-09
Greater loss of cyclical inertia in investment than in consumption
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2010 2011 2012 2013 2014 2015 2016 2017
Forecasts in Feb 2014
Forecasts in May 2014
Observed
Latin America Outlook / May 2014
Page 7
Raw material prices adjust downwards, especially industrial metals
Brent Crude (USD/bl) Source: Bloomberg and BBVA Research
Soy bean (USD/mt) Source: Bloomberg and BBVA Research
Copper:(USD/lb) Source: Bloomberg and BBVA Research
Adjustments in the medium- and long-term growth scenario in China are impacting on long-term price changes in copper and oil
This adjustment is limited as long as the production costs continue to set a lower limit to prices Soy bean prices are higher than expected because of the poor harvest in Brazil, while convergence to the
downside is expected in the medium-term
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Baseline Feb 2014 Baseline May 2014
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Latin America Outlook / May 2014
Page 8
Aceleration in world activity in 2014 and 2015, with the help of developed countries
World growth forecasts (% YoY) Fuente: BBVA Research
Forecasts in US and Europe remain steady. Growth is on an upward path
Revision to the downside of growth forecasts in the main emerging economies
Greater contribution to world growth from developed economies than in 2013, but
emerging markets still make up 2/3rds of growth
EAGLEs is the group of emerging economies which will contribute most to world GDP in the next 10 years. The group is composed of: China, India, Indonesia, Brazil, Russia, South Korea, Turkey, Mexico and Taiwan.
3.03.4
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World US Eurozone Eagles*
Forecasts in May 2014 Forecasts in Feb 2014
Latin America Outlook / May 2014
Page 9
1 Global economy: the recovery continues, driven by developed economies
2 Moderate growth in 2014 and 2015, below the region’s potential and very heterogeneous across countries
3 A faster deceleration than anticipated in China would have a significant impact on South America
Contents
Latin America Outlook / May 2014
Page 10
After the idiosyncratic shocks of January-February, there has been a widespread
recovery in asset prices in Latam
Capital flows to Latam are back on track, after the weakening in January
Asset price recovery has virtually recouped the losses since January, but not since May 2013
In Latin America, the markets forget (for the time being) about tapering
Sovereign differentials in emerging markets (EMBI, index January 2013=100) Source: Haver and BBVA Research
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Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
Emerging Asia
Emerging Europe
LATAM
Bernankespeech
Start of tapering
Latin America Outlook / May 2014
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Latin America will grow 2.3% in 2014 and 2.5% in 2015, rates similar to 2013
Internal demand has moderated in the last few quarters, particularly investment
Activity will gradually recover in 2014-15, supported by an increase in world growth
Latam*: GDP growth (% YoY) Source: BBVA Research
* Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela
Increasing heterogeneity: the Pacific Alliance will grow around 4% in 2014 and 2015, well
above the region as a whole
In the longer term, regional growth will start converging towards its potential, at around
3.5%
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2.6 2.42.3
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2010 2011 2012 2013 2014e 2015e
Latam Mercosur Pacific Alliance
Latin America Outlook / May 2014
Page 12
Peru, Paraguay and Colombia will continue to grow the most
Mexico’s growth will rise strongly in 2014, after the rough patch in the
construction sector in 2013
Brazil will show moderate growth, of 2% in 2014, held back by monetary tightening and structural problems
Latam countries: GDP growth (% YoY) Source: BBVA Research
*MCS: Mercosur. **PA: Pacific Alliance.
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ARG BRA CHI COL MEX PAR PER URU Latam MCS* PA**
Forecasts in May 2014
Forecasts in Feb 2014
Latin America Outlook / May 2014
Page 13
Box 2: Highly dynamic house prices , but no significant risks
Steep increase in housing prices in the region. Signs of overvaluation in Brazil and,
to a lesser degree, in Colombia
All in all, higher housing prices have been closely linked to improved income and, in
some countries, land supply problems
Housing affordability: Price to family income ratio Source: Global Property Guide and BBVA Research
Macroeconomic risks in the event of a price adjustment are low. Mortgage lending is
very limited (except in Chile) 0
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Adjusted price to income ratio* Median
Latin America Outlook / May 2014
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Fiscal outlooks worsen in the region, but deficits will be manageable
Fiscal balances pressured to the downside by moderation in internal demand and lower raw
material prices
Latam: Fiscal deficit (% GDP) Source: Haver and BBVA Research
Public debt is at sustainable levels
Fiscal deficits in some cases will not go down until after 2015
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ARG BRA CHI COL MEX PAR PER URU Latam
Forecasts in May 2014 Forecasts in Feb 2014
Latin America Outlook / May 2014
Page 15
External deficits are high, but will start to diminish in 2014
Deficits will start to fall, especially in countries with a larger external gap (Peru, Uruguay)
Worse terms of trade and less demand from China…
Latam: Current account balance (% GDP) Source: Haver and BBVA Research
… are partly offset by less dynamic internal demand and increased growth in the US
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ARG BRA CHI COL MEX PAR PER URU Latam
Forecasts in May 2014 Forecasts in Feb 2014
Latin America Outlook / May 2014
Page 16
Inflation in line with central bank targets, apart from Brazil and Uruguay
Inflation driven by shocks to food prices and depreciation in the exchange rate
Inflation will converge on central bank targets at the end of 2014, with the exception of
Uruguay and (although less so) Brazil
The depreciation in the exchange rate will generate a generally limited pass through to
inflation
Inflation driven by shocks to food prices and depreciation in the exchange rate
Inflation will converge on central bank targets at the end of 2014, with the exception of
Uruguay and (although less so) Brazil
Deviation of YoY inflation from central bank target (pp) Source: Haver and BBVA Research
The depreciation in the exchange rate will generate a generally limited pass-through to
inflation
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Latin America Outlook / May 2014
Page 17
Monetary pause in Latam for the rest of 2014, apart from Colombia and Chile. Generalised tightening in 2015
Heterogeneous monetary policy in the region conditioned by inflationary pressures (high in
Brazil and Uruguay)…
Official interest rates in countries with inflation targets (%) Source: Haver and BBVA Research
… and economies’ different positions in the cycle, with Colombia and, to a lesser degree,
Mexico, on the rising part of the cycle
Increased interest rates in Colombia and cuts in Chile in 2014. Stability in the remaining
countries for the rest of 2014
Rises in interest rates across the board in 2015, due to inflation (Brazil & Uruguay),
improvement in the cycle (Pacific Alliance) and increases by the Fed
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BRA CHI COL MEX PAR PER
Latin America Outlook / May 2014
Page 18
Exchange rates will depreciate in 2014 and 2015, with very heterogeneous intensities
Variation in the exchange rate against USD in countries with inflation targets (% Jan-Dec) Source: Haver and BBVA Research Greater depreciation in countries with:
1. Greater inflationary pressure (Brazil, Uruguay)
2. Greater exposure to fall in raw material price (Chile, Peru)
3. Greater exposure to China (South America)
4. Less central bank intervention (Chile)
5. Higher external deficits (Peru, Uruguay)
Among countries with floating exchange rates, the greatest exchange depreciations in the
future will be in Brazil and Uruguay ….
… and very moderate in the rest of countries -8
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Latin America Outlook / May 2014
Page 19
1 Global economy: the recovery continues, driven by developed economies
2 Moderate growth in 2014 and 2015, below the region’s potential and very heterogeneous across countries
3 A faster deceleration than anticipated in China would have a significant impact on South America
Contents
Latin America Outlook / May 2014
Page 20
A sharp deceleration in China is one of the principal risk scenarios for Latam
A very significant risk for Latam is a possible scenario of sharp deceleration in China,
although it is unlikely
This could be the result of excessive pressure on the parallel banking system, or a sudden
tightening in lending conditions
China: baseline and risk scenarios (% YoY) Source: BBVA Research
Main impact on investment, but also negative effects on consumption 4
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Latin America Outlook / May 2014
Page 21
A negative shock in China would affect Latam through three channels
Lower external demand
Heavy impact on Chile, Peru and Brazil. Residual in the case of Mexico
Lower raw materials prices
More pronounced effect on industrial metals, linked to investment. Lower impact on
foodstuffs
Effect of the risk scenario in China on the price of raw material exports (% change from the baseline scenario) Fuente: BBVA Research
Drop in household and business confidence
This was one of the main transmission channels after Lehman Brothers went bankrupt
Transmission channels to Latam
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Latin America Outlook / May 2014
Page 22
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0.0ARG BRA CHI COL PER
2014 2015 2016 2017
The impact on South America would be substantial, better weathered by the Andean countries
Substantial impact in the region, apart from Mexico. Reduction in South American growth
of around 1pp in 2014 and 2015
Internal demand strongly affected by the fall in confidence. Effect mitigated in countries with leeway for countercyclical policies (Colombia,
Chile, Peru)
Latam: impact on growth of the risk scenario in China (difference in pp from baseline scenario) Source: BBVA Research
Relatively low impact in Argentina because of the smaller drop in foodstuff prices compared
to metals and energy
Latin America Outlook / May 2014
Page 23
The global cycle remains robust, especially in developed economies, while China is slowing down. The world economy growth will increase from 3% in 2013 to 3.4% in 2014 and 3.8% in 2015.
Latam’s financial markets recovered in March and April. Looking ahead, they will be shaped by the effects of the withdrawal of monetary stimulus by the Fed and the pattern of growth in China.
Latam will grow by 2.3% in 2014 and 2.5% in 2015, similar to 2013. Growth will be below the region’s potential and very heterogeneous, with the Pacific Alliance countries well above the regional average.
External deficits remain high and the fiscal perspective worsens, but both deficits continue to be manageable on the whole.
An unlikely scenario of sharp deceleration in China would have a substantial negative effect on South America. The shock would be absorbed better by the Andean countries, which have more scope for countercyclical policies.
Key messages 1
2
3
4
5
Latin America: the shadow of China
Juan Ruiz
BBVA Research│Chief Economist for South America
Latin America Outlook – Second Quarter 2014│ Madrid, 13 May 2014
Latin America Outlook / May 2014
Page 25
Appendix: Growth forecast in Latin America
Source: BBVA Research. *Forecasts
2011 2012 2013 2014* 2015*
Argentina 8.6 0.9 3.0 2.8 2.1
Brasil 2.7 1.0 2.3 2.0 1.6
Chile 5.8 5.4 4.1 3.4 4.3
Colombia 6.6 4.0 4.3 4.7 4.8
Mexico 4.0 3.7 1.3 3.4 3.0
Paraguay 4.3 -1.2 14.4 5.3 4.2
Peru 6.5 6.0 5.6 5.2 5.6
Uruguay 7.3 3.7 4.4 3.2 3.3
Mercosur 3.5 1.3 2.3 1.1 1.5
Pacific Alliance 4.9 4.2 2.6 3.8 3.7
Latam 4.1 2.6 2.4 2.3 2.5
GDP growth (% YoY)