Latin America Outlook 4th QUARTER 2017 Latin America Outlook 4 Q17 - - PowerPoint PPT Presentation

Latin America Outlook

4th QUARTER 2017

Latin America Outlook 4Q17

Main messages

1. Global growth continues increasing and becomes more

• widespread. Financial markets still favor emerging
• economies. Global risks still remain alive.

2. Growth recovers in Latin America, but will still be low in 2017-18. Growth is revised up 0.3pp in 2017 to 1.1% and remains unchanged at 1.6% in 2018. Growth in 2018 will be driven by the external sector and infrastructure investment in Argentina, Colombia and Peru. 3. Inflation continues falling in South America and starts to do so in Mexico, driven by stable exchange rates, weak demand and, in some countries, lower food prices. Consequently, central banks will cut interest rates in South America in coming months and at end-2018 in Mexico 4. External risks for Latam decrease somewhat, apart from the possible overvaluation in financial markets. On the internal front, political noise and uncertainty also moderate, but remain high.

Latin America Outlook 4Q17

GLOBAL

Positive global momentum gets reinforced, but still with downside risks

Latin America Outlook 4Q17

Positive global momentum gets reinforced

4

2

Stable and strong growth But some decoupling between optimists soft data and not-so-strong hard data Central banks on path to normalization High uncertainty and different speed in US and Europe A more synchronized recovery Improving in emerging economies Low financial volatility Tailwinds to wane gradually Weak core inflation Some signs of wage gains, but doubts about its sustainability Downward risks Reduced in China and increased in the US in the short run

Latin America Outlook 4Q17

Global GDP growth

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

Confidence indicators improve significantly, and point to a more positive outlook than hard data Trade grows strongly and industrial production continues recovering Signs of stronger consumption despite waning tailwinds

Source: BBVA Research

Global growth: strong and stable in 2H17

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 Dec-17

CI 20% CI 40% CI 60% Point Estimates Period average

Latin America Outlook 4Q17

A more synchronized recovery of global growth across regions

6

Index of growth synchronization between developed and emerging economies

Developed markets:

• Strong US rebound.
• Positive surprises in Europe

Emerging:

• Slight deceleration in China,

though milder than expected. Still supporting growth in rest of Asia.

• Russia and Brazil recover, and do

not drag global growth

• Growth improves in Latam

Growth gets more support from economic policies

Synchronization index is the inverse of the standard deviation of quarterly growth across countries. Lower volatility is associated with higher synchronization of global growth. Source: National sources, Markit Economics and BBVA Research

10 20 30 40 50 60 70 2T10 4T10 2T11 4T11 2T12 4T12 2T13 4T13 2T14 4T14 2T15 4T15 2T16 4T16 2T17

Stable growth in EM, deceleration in DM Increased growth in DM / lower growth in EM Increased growth in DM and EM

Latin America Outlook 4Q17

No warning signs regarding core inflation

7

US and Euro area: wages

(%yoy)

Despite growth and tighter labor market, core inflation remains low Doubts whether recent wage gains will persist. Inflationary pressures remain low. Uncertainty about drivers of inflation: Permanent or temporary changes? Caution at central banks, especially in developed markets. Some more policy space in emerging economies

Source: BBVA Research

US average 1993-2017 Euro area average1996-2017

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 Eurozone USA

Latin America Outlook 4Q17

Central banks on track for a gradual policy normalization

8

FED ECB Balance sheet normalization starting in October and next interest rate hike in December, followed by two more hikes in 2018 Debt purchases to be pared down in 2018, but no interest rate hikes are expected before mid-2019

• In US, due to subdued inflation and

expected changes to FOMC composition in 2018

• In Euro area, bias toward more

gradual tapering (strong euro) and delaying interest rate hikes (low inflation)

High uncertainty

Latin America Outlook 4Q17

Financial markets still favor emerging economies

9 Source: BBVA Research y Bloomberg

Weak dollar and low interest rates support search for yield and emerging market assets Global liquidity will remain high, given gradual policy normalization by Fed and ECB. But these tailwinds will start to wane.

Preference for developed markets Preference for emerging markets emergentes

Index of regional asset relocation

(standardized deviation relative to historical mean)

• 1.25
• 1.00
• 0.75
• 0.50
• 0.25

0.00 0.25 0.50 0.75 1.00 1.25 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

Latin America Outlook 4Q17

Growth in Europe and China revised up. Upward bias in Latin America

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

US

2017

2,1

2018

2,2

SOUTH AMERICA

2018

1,5

EUROZONE CHINA

2017

2,2

2018

6,0

WORLD

2018

3,4

2017

3,4

Revised down Revised up Unchanged 2018

1,8

2017

0,6

2017

6,7

MEXICO

2018

2,0

2017

2,2

Latin America Outlook 4Q17

Hurricanes will have a limited impact on activity and thus we keep unchanged our growth forecasts for 2017-18 Pending issues:

• Tax reform still to be fully spelled
• ut
• Uncertainty about economic policy
• Some signs of financial

vulnerability

• Increased geopolitical risk

Source: BBVA Research and BEA

US: GDP growth

(%)

US: sustained growth despite political uncertainty and hurricanes

11

2.6 2.9 1.5 2.1 2.2 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2014 2015 2016 2017 2018 Current Previous

Latin America Outlook 4Q17

China: GDP growth

(%)

Slight upward revision of our 2017 growth forecast, due to better incoming data on 1S17 Deceleration in 2018 due to lower impulse from economic policies and exchange rate appreciation Uncertainty about the outcome of the upcoming Communist Party Congress Long-run risks remain, even though financial vulnerabilities have improved given recent regulatory measures.

Source: BBVA Research and CEIC

China: more favorable outlook in the short run

12

7.3 6.9 6.7 6.7 6.0 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0 2014 2015 2016 2017 2018 Current Previous

Latin America Outlook 4Q17

Euro area: higher growth due to stronger domestic demand

13 Source: BBVA Research and Eurostat

Euro area: GDP growth

(%)

Consumption and investment strengthen, with limited fallout from euro appreciation Inflation increases slowly towards ECB target Monetary policy normalization will allow it to continue supporting growth Political and banking risks remain (Spain, Italy, support to European project, brexit) but they become more contained.

1.4 1.9 1.8 2.2 1.8 0.0 0.5 1.0 1.5 2.0 2.5 2014 2015 2016 2017 2018 Current Previous

Latin America Outlook 4Q17

Oil and soybean prices on track towards their long-run equilibrium . Copper prices increase temporarily.

14 Source: BBVA Research and Bloomberg

BRENT OIL

(USD/B)

SOYBEANS

(USD/mT)

COPPER

(USD/lb) Oil and soybean prices maintain our view of gradual convergence towards long-run equilibrium prices. We still expect Brent oil prices to converge towards 60USD/b. Copper prices increased strongly in the last months driven by financial flows, which should abate gradually going forward. We keep unchanged our view for long-term 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 October 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 October 2017 300 350 400 450 500 550 600 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Forecast in July 2017 Forecast in October 2017

Latin America Outlook 4Q17

Global risks: rebalancing from China to US in the short run

15 **Other risks: Geopolitics (North Korea); Protectionism

• Likelihood in the short run +
• Impact +

CHN

US EZ

Jun Sep

• Deleveraging risk: still high but more contained in the

short run (more gradual economic slowdown & authorities strategy):

• Need to reform state-owned enterprises
• Managing a soft-landing
• Political controversy & risk of cyclical slowdown
• Financial instability risk: signs of overvaluation in some

assets.

• Fed’s exit risk: low but high uncertainty on interest rate

path

• Political and banking concerns: more contained except

Spain

• ECB’s exit risk: low; very gradual exit starting with

tapering in 2018 Upward bias Downward bias

Latin America Outlook 4Q17

LATAM

Growth recovers, but it is still low

Latin America Outlook 4Q17

Financial markets continued to show gains for Latam assets…

Asset prices continued to see significant gains in the last months, extending the trend since the beginning of 2017, driven mainly by global factors:

• Strong dollar
• Still ample global liquidity
• Increasing global growth
• Higher commodity prices

In addition, economic activity starts to recover in Latam

Latam asset prices: percent change in the last 3 months to October 16*

17 Source: BBVA Research and DataStream * Changes between October 16 and July 17. Exchange rate: local currency per USD. In this case, an increase signals a

• depreciation. Country risk premium: EMBI.
• 30
• 20
• 10

10 20 30 ARG BRA CHI COL MEX PAR PER URU Exchange rate Stock exchange Country risk premium

Latin America Outlook 4Q17

… in and environment of unusually low volatility, which could be abruptly reversed

Volatility at historical lows despite increasing economic, political and geopolitical uncertainty Risk of complacency by markets, at a time of increasing rates by the Fed.

Volatility in developed markets and country risk premium in Latam

18 Source: BBVA Research, DataStream and Bloomberg

300 350 400 450 500 550 600 650 700 750 5 10 15 20 25 30 35 40 45 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 VIX EMBI Latam (right)

Latin America Outlook 4Q17

Limited exchange rate depreciation in 2018

Stable or appreciating exchange rates in the last 3 months. Real exchange rate appreciation in all countries. We continue to expect a mild depreciation of exchange rates going forward, consistent with diverging policy interest rates between US and Latin America Mexican peso could appreciate in 2018 if risks relative to renegotiation

• f NAFTA and local elections

remain contained.

19 Source: BBVA Research and Haver

Exchange rates to the USD

(Index Dec 2016=100)

depreciation with respect to USD

70 80 90 100 110 120 130 90 100 110 120 130 140 150 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 (left) BRA CHI COL MEX PAR PER Observed Forecast

Latin America Outlook 4Q17

Confidence indicators remain pessimistic throughout the region, but improved in the last months

20 Source: BBVA Research and Haver

Latam: Confidence indicators for households and firms

(values above 50 pts indicate optimism)

Some recovery of producer confidence, supported by low volatility in financial markets, higher commodity prices and somewhat lower political noise and uncertainty in some countries. For households, lower inflation has improved sentiment somewhat, which nonetheless remains in pessimistic ranges, dragged by weak labor markets.

20 25 30 35 40 45 50 55 60 65 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 ARG BRA CHI COL MEX PER Consumer Producer

• ptimism

pesimism

Latin America Outlook 4Q17

Growth recovers in Latam, but it will still be low in 2017-18

Recovery after a 5-year deceleration and a GDP contraction in 2015-16 Stronger growth in 2018 driven by:

• External sector, supported by

more favorable terms of trade and stronger global growth

• Investment, especially in places

like Argentina, Colombia and Peru

Growth still low in 2017-18, below potential, and below developed economies

21 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

• 0,4
• 1,2

1,1 1,6 2,5

• 5
• 4
• 3
• 2
• 1

1 2 3 4 5 6 2012 2013 2014 2015 2016 2017* 2018* 2019* Latam* Andeans Brazil Mexico

Latin America Outlook 4Q17

Latam growth revised up in 2017 (1,1%) and unchanged in 2018 (1,6%)

22

Latam countries: GDP growth

(%)

Source: BBVA Research

Recent data confirm recovery under way in Argentina and also in Brazil, Chile and Peru. Economic activity in Mexico surprised to the upside in 1H17, but there are early signs of a deceleration in 2H17. We revise up out growth forecasts for Mexico and Peru in 2017, given the strength of domestic demand in 1H17.

• 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 Mercosul Pacific Alliance Oct-17 Jul-17

Latin America Outlook 4Q17

Inflation continues to diminish in South America and starts to do so in Mexico

23

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 food prices. Inflation will stop falling in Brazil and Chile, but will remain below their central bank target during some time. It will continue to converge to target in Peru and Colombia. Inflation will start to abate in Mexico and will continue to fall in Argentina

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 (left) Brasil Chile Colombia Mexico Paraguay Peru Uruguay Forecast Inflation target

Latin America Outlook 4Q17

Additional interest rate cuts in South America in coming

• months. Rate cuts in Mexico at end-2018.

24

Latam: official interest rates

(%)

Source: BBVA Research and Haver

Interest rate cuts in South America will continue during the rest of 2017 or at the beginning of 2018 (varying by country), given low or declining inflation and weak domestic demand. In Mexico, Banxico will keep interest rates unchanged until 3Q18, when it will start cutting rates, provided inflation returns to the target range and volatility in financial markets does not increase.

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 Observed Forecast

Latin America Outlook 4Q17

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

Increase in our forecast for fiscal deficits in Argentina, due to interest payments and despite the more positive performance of primary deficit targets. A slower fiscal consolidation path in Brazil, due to less ambitious primary deficit targets, compensated with lower interest rate payments. Fiscal outlook improves in Peru and Chile, given higher copper prices.

25 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

• ct-17

jul-17

Latin America Outlook 4Q17

Current account deficits improve in most countries. Better

• utlook in Brazil, Chile and Peru

External deficits continue to shrink in countries with the widest gap, like Colombia, although at a slower pace than anticipated in some cases On the contrary, Argentina’s externa deficit worsens, given strong increase of imports. External outlook in Brazil, Peru and Chile improves, given increase of metal prices.

26 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

• ct-17

jul-17

Latin America Outlook 4Q17

Main messages

1. Global growth continues increasing and becomes more

• widespread. Financial markets still favor emerging
• economies. Global risks still remain alive.

2. Growth recovers in Latin America, but will still be low in 2017-18. Growth is revised up 0.3pp in 2017 to 1.1% and remains unchanged at 1.6% in 2018. Growth in 2018 will be driven by the external sector and infrastructure investment in Argentina, Colombia and Peru. 3. Inflation continues falling in South America and starts to do so in Mexico, driven by stable exchange rates, weak demand and, in some countries, lower food prices. Consequently, central banks will cut interest rates in South America in coming months and at end-2018 in Mexico 4. External risks for Latam decrease somewhat, apart from the possible overvaluation in financial markets. On the internal front, political noise and uncertainty also moderate, but remain high.

Latin America Outlook 4Q17

ANNEX

Latin America Outlook 4Q17

Latin America GDP growth forecasts

29 f = forecast

GDP (%) 2014 2015 2016 2017f 2018f

Argentina

• 2.5

2.6

• 2.2

2.8 3.0 Brasil 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 2.2 2.0 Paraguay 4.7 3.0 4.0 3.7 3.5 Peru 2.4 3.3 4.0 2.4 3.9 Uruguay 3.2 0.4 1.4 3.2 3.1 Mercosur

• 0.4
• 2.8
• 4.1

0.2 1.1 Pacific Alliance 2.6 2.7 2.2 2.0 2.3 Latin America 0.9

• 0.4
• 1.2

1.1 1.6