Latin America Outlook 3rd QUARTER 2017 Latin America Outlook 3 Q17 - - PowerPoint PPT Presentation

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Latin America Outlook 3rd QUARTER 2017 Latin America Outlook 3 Q17 - - PowerPoint PPT Presentation

Feb 21, 2024 17 likes •292 views

Latin America Outlook 3rd QUARTER 2017 Latin America Outlook 3 Q17 Main messages 1. Global growth continues increasing . This is driven especially advanced economies and China (the latter with fiscal impulses). However, global risks remain. 2.

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Latin America Outlook

3rd QUARTER 2017

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Latin America Outlook 3Q17

Main messages

1. Global growth continues increasing. This is driven especially advanced economies and China (the latter with fiscal impulses). However, global risks remain. 2. Slow growth in Latin America. Growth will increase from

  • 1.2% in 2016 to 0.8% in 2017 and 1.7% in 2018, a slow

recovery from deceleration in the previous years. Recovery will be driven by Brazil and Argentina’s exit from recession. Other countries will decelerate in 2017 compared to 2016. 3. Inflation will keep decreasing in South America and will stop rising in Mexico, driven by stable exchange rates, weak demand and lower oil and food prices. Consequently, central banks in most countries in South America will continue cutting interest rates, whereas in Mexico will remain stable for some time. 4. Risks for Latam increase on the internal front, but diminish externally. Political noise and delays in investment are the most important domestic risks. On the other hand, risks stemming from vulnerabilities in China and the normalization of US monetary policy are the main external risks.

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Latin America Outlook 3Q17

GLOBAL

Stable growth, with risks still tilted to the downside

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Latin America Outlook 3Q17 4

Global growth driven by China Signals of stabilization of global growth Some rebalancing from US towards Europe Both in the macro as well as policy fronts Low inflation in developed countries Wage moderation as well as some correction in commodity prices Central banks in developed countries lean towards policy normalization Moping up liquidity and increasing policy rates Complacent financial markets Low volatility supports lower risk aversion Risks Decreased in Europe, but scaling up in China

Positive global momentum

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Latin America Outlook 3Q17

Global GDP growth

Forecasts based on BBVA-GAIN model (%, qoq)

Confidence indicators remain very high, stronger than actual hard data China and emerging Asia show strong growth, pushed by expansionary policies… … have supported stronger trade and investment in the last quarters

Source: BBVA Research

Global growth tends to stabilize

5

0.4 0.6 0.8 1.0 1.2 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 CI 20% CI 40% CI 60% Point Estimates Period average

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Latin America Outlook 3Q17

BBVA Financial Stress Index

(normalized)

Volatility has decreased to very low levels despite uncertainty about economic policies Brazil is the exception in Latam, due to high political noise Reversal of expectations of reflation in US have maintained low long-term interest rates Capital flows to emerging economies have continued Risk of complacency in financial markets

Financial stress remains low

Source: BBVA Research 6

  • 2.0
  • 1.0

0.0 1.0 2.0 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Latam Asia Developed

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Latin America Outlook 3Q17

Central Banks lean towards policy normalization

Fed expects to hike interest rates an additional 25 bp in 2017 and begin to reduce its balance sheet before the end of the year… … but financial markets discount a slower policy normalization Has taken initial steps towards normalization, changing communication, but very cautiously.. Reduction of bond purchases would be announced after the summer. Interest rate hikes around end-2018

Fed ECB

Communication towards tightening from central banks, point more clearly towards normalization (except Japan) Besides inflation, Central Banks are increasingly worried about the side-effect of abundant liquidity (especially high asset prices)

Global

7

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Latin America Outlook 3Q17

US. 2017 2,1 2018 2,2 LATIN AMERICA 2018 1,7 EUROZONE CHINA 2017 2,0 2018 6,0 2018 1,7 2017 0,8 2017 6,5 WORLD

2018

3,4

2017

3,3 Revised down Increased Unchanged

Growth revised up in Europe and China, down in US and Latin America

8 Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela

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Latin America Outlook 3Q17

China: GDP growth

(%)

We revised up our growth forecasts for 2017-18, due to incoming data and the fiscal

  • impulse. Gradual deceleration

underway, slower than anticipated Prudent monetary policy. Fiscal policy continues to support growth Risks in the medium run continue to increase

  • Slow rebalancing of growth towards

services and consumption

  • Financial fragilities continue to

accumulate due to growth still based

  • n debt and favoring shadow banking

system.

Source: BBVA Research and CEIC

China: (fiscal) policy impulses effective in the short run

9

7.3 6.9 6.7 6.5 6.0 3 4 5 6 7 8 2014 2015 2016 2017 2018 Forecast in July 2017 Forecast in April 2017

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Latin America Outlook 3Q17

Growth revised down in 2017-18 Stimulus measures will probably not be implemented in the short- run Fed: strong labor market and convergence of inflation to 2% justify policy normalization Risks stemming from protectionism diminish but uncertainty about economic policies remain

Source: BBVA Research and BEA

US: GDP growth

(%)

US: fiscal impulse hard to materialize

10

2.4 2.6 1.6 2.1 2.2 0.5 1 1.5 2 2.5 3 2014 2015 2016 2017 2018 Forecast in July 2017 Forecast in April 2017

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Latin America Outlook 3Q17

Commodity prices adjusted down in the short run, on concerns about strong supply

11 Source: BBVA Research and Bloomberg

BRENT OIL

(USD/B)

SOYBEANS

(USD/mT)

COPPER

(USD/lb) Oil prices will continue to be dragged by strong supply and high inventories. We maintain expectations of 60USD/b in the long run, given lower capital expenditures in exploration. Strong supply also affects soybean and copper prices in the short run. No significant changes in long-run view for commodity prices.

20 40 60 80 100 120 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Forecast in July 2017 Forecast in April 2017 300 350 400 450 500 550 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Forecast in July 2017 Forecast in April 2017 1.5 1.7 1.9 2.1 2.3 2.5 2.7 2.9 3.1 3.3 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Forecast in July 2017 Forecast in April 2017

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Latin America Outlook 3Q17

Global risks most relevant for Latin America are related to US policies and rebalancing in China

12

3 2 4 1

Lingering uncertainty about economic policies to be implemented in US, though the risk of protectionism is reduced Policy stimulus in China to support investment continues to accumulate financial vulnerabilities Risks stemming from monetary policy normalization, especially in the US, given divergence with market expectations Political risks in Europe diminish but remain around Brexit negotiations, banking problems in some countries and elections in Italy.

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Latin America Outlook 3Q17

LATAM

Slow growth

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Latin America Outlook 3Q17

Financial markets continue to recover in Latam…

Asset prices and exchange rates continued to see significant year- to-date gains, driven by global factors:

  • Diminished worries about US

policies

  • A gradual approach to Fed rate

hikes

  • Stronger global growth

Despite some correction in commodity prices

Latam asset prices: percent change in the last 3 months to July*

14 Source: BBVA Research and DataStream * Change between April 12 and July

  • 12. Exchange rate: local currency per USD. In this case, an increase signals a
  • depreciation. Country risk premium: EMBI.
  • 6
  • 4
  • 2

2 4 6 8 10 12 14 ARG BRA CHI COL MEX PAR PER URU Exchange rate Stock exchange Country risk premium

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Latin America Outlook 3Q17

… with the background of very low volatility in global financial markets, which could revert quickly

Positive tone in financial markets with volatility at historical lows despite increasing economic, political and geopolitical uncertainty An important question is whether markets are too complacent, especially given that main central banks are starting to withdraw their monetary stimulus

Volatility in developed markets and country risk premium in Latam

15 Source: BBVA Research, DataStream and Bloomberg

300 400 500 600 700 800 5 10 15 20 25 30 35 40 45 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 VIX Index EMBI Latam (rhs)

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Latin America Outlook 3Q17

Mildly depreciating exchange rates going forward in most countries

Relatively stable exchange rates in the last 3 months. Recovery of Mexican peso continues, aided by softer tone from US on trade policy We continue to expect a mild depreciation of exchange rates going forward given easier monetary policy in South America, diverging from Fed’s tightening Some room for further appreciation in Mexico in the short run. Chile and Colombia may also see appreciation in 2018

16 Source: BBVA Research and Haver

Exchange rates to the USD

(Index Dec 2016=100)

80 85 90 95 100 105 110 115 120 125 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 ARG BRA CHI COL MEX PAR PER URU Forecast Actual depreciation vis-à-vis USD

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Latin America Outlook 3Q17

Confidence indicators remain pessimistic throughout the region, dragged by political noise

17 Source: BBVA Research and Haver

Latam: Confidence indicators for households and firms

(values above 50 pts indicate optimism)

Some recent recovery of confidence in Mexico (driven by a softer tone on trade policy by US) and on Brazil (though there is a high risk of relapse given high recent political turmoil). For households, pessimism remains due to weak labor markets, but there has been some recent recovery of confidence driven to some extent part by lower inflation.

20 25 30 35 40 45 50 55 60 65 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 ARG BRA CHI COL MEX PER Consumer Producer

  • ptimism

pessimism

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Latin America Outlook 3Q17

Still low growth in Latam in 2017 and 2018

Recovery after contraction in 2015 and 2016, supported by Brazil and Argentina coming

  • ut of recession

Stronger growth in 2017-18 driven by:

  • External sector, supported by

more favorable terms of trade and stronger global growth

  • Investment, especially in places

like Argentina and Colombia

Growth still low in the next two years, still below potential, and below developed economies

18 Source: BBVA Research * Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Mexico, Uruguay and Venezuela

Latam: GDP growth

(%)

2.8 2.9 0.9

  • 0.3
  • 1.2

0.8 1.7 2.7

  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 2012 2013 2014 2015 2016 2017 2018 2019 Latam* Andeans Brazil Mexico

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Latin America Outlook 3Q17

Recovery gets stronger in Argentina, but stabilization in Brazil still carries high political risks

19

Latam countries: GDP growth

(%)

Source: BBVA Research

Recent data show the recovery is already under way in Argentina and recession finished in Brazil, but with high political risks in the second case. In most of the rest of the countries, activity will decelerate in 2017 relative to 2016, dragged by external shocks and weak domestic demand. Main downward revision in Colombia, given a lower oil price and delay in some infrastructure projects.

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 4 5 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 ARG BRA CHI COL MEX PAR PER URU Latam Mercosur Pacific Alliance Jul-17 Apr-17

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Latin America Outlook 3Q17

Inflation continues to diminish in South America and has peaked in Mexico

20

Latam: inflation and central bank target ranges

(%, yoy)

Source: BBVA Research

Lower inflation in South America due to a stable exchange rate, weak demand and lower oil and food prices. Inflation will remain within target ranges in most countries going forward. In Mexico, inflation continued to increase, given past depreciation and fuel price hikes. But recent appreciation has moderated inflation increases, which would have peaked this July.

2 4 6 8 10 12 14 16 18 5 10 15 20 25 30 35 40 45 50 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Argentina (lhs) Brazil Chile Colombia Mexico Paraguay Peru Uruguay Forecast Inflation target

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Latin America Outlook 3Q17

More dovish monetary policies in South America, and the end of rate hikes in Mexico

21

Latam: official interest rates

(%)

Source: BBVA Research and Haver

Interest rate cuts will continue in coming months in South America, on the back of lower inflation and weak demand. Rate hikes have probably ended in Mexico, and interest rates would remain stable until mid-2018, while inflation comes back to Banxico’s target range.

2 4 6 8 10 12 14 16 5 10 15 20 25 30 35 40 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 . ARG (lhs) BRA CHI COL MEX PAR PER Actual Forecast

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Latin America Outlook 3Q17

Fiscal deficits will continue to shrink, except (temporarily) in Peru

No changes in fiscal scenario in Argentina, though current forecasts count Central Bank financing as part of the deficit A slower fiscal consolidation path in Brazil, in line with a slower growth than expected 3 months ago Expected fiscal deficit revised up in Peru in 2018, to finance reconstruction works. This revision complies with the fiscal rule

22 Source: BBVA Research and Haver

Latam: fiscal balance

(%, GDP)

  • 10
  • 9
  • 8
  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 ARG BRA CHI COL MEX PAR PER URU Latam Jul-17 Apr-17

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Latin America Outlook 3Q17

Only Mexico and Argentina will have contractionary ex-ante real interest rates, reflecting inflation rates above central bank’s target ranges. Fiscal policy will not be able to support economic activity, given lack of policy space. Exception will be Peru, where the fiscal rule allows for extraordinary spending for reconstruction, in the wake of “el Niño costero” of 2017.

Monetary policy will continue to bear most of the countercyclical adjustment in South America, given lack of fiscal space

23

Latam: Real interest rates*

(%)

Latam: fiscal impulse

(Change in the structural primary deficit, % GDP)

Source: BBVA Research and IMF * Inflation and interest rate data refer to July for each year. Ex-ante real interest rate is computed using yoy inflation rates expected 12 months ahead.

  • 4
  • 2

2 4 6 8 10 12 14 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 ARG BRA CHI COL MEX PER Neutral interest rate Real interest rate (ex-ante)

  • 2
  • 1.5
  • 1
  • 0.5

0.5 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 ARG BRA CHI COL MEX PER Fiscal drag Fiscal impulse

Source: BBVA Research

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Latin America Outlook 3Q17

Current account vulnerability continues to abate in most countries

External deficits continue to shrink in countries with the widest gap, like Colombia, although at a slower pace than anticipated Recent drop in commodity prices and weak demand from intraregional trade partners has weighed down on exports

24 Source: BBVA Research and Haver

Latam: current account balance

(%, GDP)

  • 5
  • 4
  • 3
  • 2
  • 1

1 2 3 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 ARG BRA CHI COL MEX PAR PER URU Latam Jul-17 Apr-17

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Latin America Outlook 3Q17

Main messages

1. Global growth continues increasing. This is driven especially advanced economies and China (the latter with fiscal impulses). However, global risks remain. 2. Slow growth in Latin America. Growth will increase from

  • 1.2% in 2016 to 0.8% in 2017 and 1.7% in 2018, a slow

recovery from deceleration in the previous years. Recovery will be driven by Brazil and Argentina’s exit from recession. Other countries will decelerate in 2017 compared to 2016. 3. Inflation will keep decreasing in South America and will stop rising in Mexico, driven by stable exchange rates, weak demand and lower oil and food prices. Consequently, central banks in most countries in South America will continue cutting interest rates, whereas in Mexico will remain stable for some time. 4. Risks for Latam increase on the internal front, but diminish externally. Political noise and delays in investment are the most important domestic risks. On the other hand, risks stemming from vulnerabilities in China and the normalization of US monetary policy are the main external risks.

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Latin America Outlook 3Q17

ANNEX

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Latin America Outlook 3Q17

Latin America GDP growth forecasts

27 f = forecast

GDP (%yoy) 2014 2015 2016 2017f 2018f

Argentina

  • 2.5

2.6

  • 2.2

2.8 3.0

Brazil

0.5

  • 3.8
  • 3.6

0.6 1.5

Chile

1.9 2.3 1.6 1.3 2.4

Colombia

4.4 3.1 2.0 1.5 2.0

Mexico

2.3 2.7 2.0 1.6 2.0

Paraguay

4.7 3.0 4.0 3.7 3.5

Peru

2.4 3.3 3.9 2.2 3.9

Uruguay

3.2 0.4 1.4 3.2 3.1

Mercosur

  • 0.4
  • 2.8
  • 4.1

0.2 1.2

Pacific Alliance

2.6 2.7 2.2 1.6 2.3

Latin America

0.9

  • 0.3
  • 1.2

0.8 1.7