LATIN AMERICA 4th QUARTER 2016 LATIN AMERICA OUTLOOK 4Q2016 Main - - PowerPoint PPT Presentation

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LATIN AMERICA 4th QUARTER 2016 LATIN AMERICA OUTLOOK 4Q2016 Main - - PowerPoint PPT Presentation

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LATIN AMERICA OUTLOOK 4Q2016 OUTLOOK LATIN AMERICA 4th QUARTER 2016 LATIN AMERICA OUTLOOK 4Q2016 Main messages The global economy is heading for a slow recovery. An inflection point in Latin America. Regional GDP Global GDP growth

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LATIN AMERICA OUTLOOK │ 4Q2016

LATIN AMERICA

OUTLOOK

4th QUARTER 2016

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LATIN AMERICA OUTLOOK │ 4Q2016

2

The global economy is heading for a slow recovery. Global GDP growth will improve slightly from the second half of 2016. Incoming data are positive, with a slow recovery of growth (especially in emerging economies). Quiet financial markets in emerging economies were jolted by the US elections in November. In addition, global risks are still high. Inflation will continue to abate in South America, but will increase in Mexico. Consistent with these trends, central banks in South America will continue to cut interest rates in coming months (except Peru). In turn, rate hikes in Mexico will continue, at a faster pace than that anticipated for the Fed. An inflection point in Latin America. Regional GDP growth will increase from -1.3% in 2016 to 1.3% in

  • 2017. First signs of a turnaround of economic activity are

starting to appear in some countries, but the recovery in 2017 will be gradual. Growth will remain below potential in many countries Risks to growth projections are tilted to the

  • downside. On the external front risks are centered in the

short run on uncertainty around the future economic policy in the US and market reaction after the next interest rate hikes by the Fed. In the medium term, risks are focused on the possibility to implement structural reforms in China.

Main messages

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LATIN AMERICA OUTLOOK │ 4Q2016

GLOBAL

A very gradual recovery

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LATIN AMERICA OUTLOOK │ 4Q2016

GLOBAL FACTORS

Positive data, but risks are still high

4

GLOBAL

Better growth prospects for China and emerging countries Global trade recovers Calm financial markets in developed countries, despite recent shocks Central banks support growth Brexit and other risks in Europe Uncertainty about economic policies in the US Systemic risk in China Geopolitics: Middle East, Russia POSITIVE FACTORS BUT RISKS ARE HIGH

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LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016

GLOBAL GROWTH

Data shows a slight recovery of global growth in second half

  • f 2016

5 Source: BBVA Research

GLOBAL GROWTH (% qoq at annual rate) (Forecasts based on BBVA-GAIN model)

  • Retail sales suggest a strong

impulse for global consumption

  • Confidence indicators more
  • ptimistic, recovering in many

countries, but hard data is still inconclusive

  • Stronger global growth in the second

half of 2016 would also extend to the first quarter of 2017

  • Global growth revised down in 2016,

to 3.0%. Recovery still on for 2017, with slight increase in growth to 3.2%.

GLOBAL

0.4 0.6 0.8 1.0

Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 CI 20% CI 40% CI 60% Point Estimates Period average

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LATIN AMERICA OUTLOOK │ 4Q2016

6

GLOBAL GROWTH

Factors affecting global recovery

Interest rates will remain low for a long time, despite recent hikes, because of cyclical and structural factors. Effectiveness of monetary policies is approaching its limits. Costs are beginning to outweigh benefits of lower rates Fiscal and structural policies should complement monetary policy US and Germany have room for expansionary measures, which are more likely in the US Other countries have scope to modify the composition of public expenditure without expanding it. Slowdown in global growth affects trade The elasticity of trade to GDP growth is lower than before the crisis

  • 1. Shrinking global value

chains (China)

  • 2. Lower global investment
  • 3. Protectionism

Trade to recover very gradually

Central Banks and interest rates Policy Coordination Global trade

GLOBAL

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LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016

INTERNATIONAL FINANCIAL MARKETS

Increased volatility in emerging markets, after the US elections and the recent rate hike by the Fed

7 Source: BBVA Research

BBVA FINANCIAL STRESS INDEX (normalized)

  • Financial stress in emerging

economies rose significantly, given increased uncertainty after the US elections (as the fallout may impact emerging markets more strongly), and the Fed’s rate hike in December..

  • In contrast, financial stress was quite

limited in developed markets. Capital flows even started to be rerouted, especially towards US equity.

SITUACIÓN LATINOAMÉRICA │ 4T2016 GLOBAL

  • 2.0
  • 1.0

0.0 1.0 2.0 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 Latam Emerging Asia Developed countries

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LATIN AMERICA OUTLOOK │ 4Q2016

COMMODITY PRICES

Oil and copper prices on track for a gradual recovery. Soybeans hit in the short run by bumper harvest

8 Source: BBVA Research and Bloomberg

  • Oil and copper prices to recover gradually as current
  • versupply is reduced. Recent OPEC agreement

introduces an upward bias to oil price forecasts.

BRENT OIL (USD/B)

GLOBAL

SOYBEANS (USD/ton) COPPER (USD/lb)

  • Soybean prices adjusted downwards given a bumper

harvest, especially in US and Brazil.

20 40 60 80 100 120 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Forecast in December 2016 Forecast in Augost 2016 300 350 400 450 500 550 600 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Forecast in December 2016 Forecast in Augost 2016 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 December 2016 Forecast in Augost 2016

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LATIN AMERICA OUTLOOK │ 4Q2016

CHINA

Baseline scenario points to gradual deceleration. Slight upward revision of growth in 2016.

9 Source: BBVA Research

  • Domestic demand strengthened by

new monetary and fiscal impulse

  • Additional monetary measures are

postponed, to curb the housing bubble, while macro-prudential measures are brought forward

  • Medium term risks remain:
  • 1. Private corporate leverage and

lack of reforms in State-owned enterprises (SOEs)

  • 2. Real estate market
  • 3. Capital outflows and exchange

rate depreciation spiral

  • 4. Shadow banking

CHINA: GDP GROWTH (%)

GLOBAL

7.8 7.3 6.9 6.6 5.8 3 4 5 6 7 8 9 2013 2014 2015 2016 2017 Nov-16 Aug-16

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LATIN AMERICA OUTLOOK │ 4Q2016

US

Growth revised down in 2016

10

US: GDP GROWTH (%)

  • Downward revision in 2016 due to:
  • 1. Data suggests weak growth in

2H16, after tepid 1S16.

  • 2. Persistent low productivity
  • Fed: we expect two more rate hikes

during 2017, until 1.25%, after the recent increase in December.

  • Uncertainty about economic policies

after the elections.

Source: BBVA Research

GLOBAL

1.7 2.4 2.6 1.6 2.2

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2013 2014 2015 2016 2017 Nov-16 Aug-16

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LATIN AMERICA OUTLOOK │ 4Q2016

RISKS

Global risks: Increasing in advanced economies in the short-term, and in China in the medium-term

11 Source: BBVA Research

GLOBAL

  • Probability in the short term +

Impact

Hard Brexit, European institutions, … EM vulnerability in major economies (funding, protectionism) US policy uncertainty China’s real estate and

  • ther

imbalances

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LATIN AMERICA OUTLOOK │ 4Q2016

LATAM

An inflection point in 2017

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LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016

Volatility returns to Latam financial markets, after the US elections

13 Source: BBVA Research and Haver

  • Main asset prices and exchange

rates continued to show gains until the US elections, continuing a trend started in February

  • Volatility increased after November

8, given uncertainty about economic policies by the new US

  • administration. Gains accumulated

since February were partially

  • reversed. Mexico was particularly

affected, but also Brazil and Argentina.

  • A return of bouts of volatility cannot

be ruled out, if there are surprises in the process of policy normalization by the Fed or growth surprises in China

LATAM

LATAM MAIN ASSET PRICES (index May 2013=100)

50 70 90 110 130 150

Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 COMMODITIES (CRB) EXCHANGE RATE (DS) EQUITY (MSCI) EMBI+

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LATIN AMERICA OUTLOOK │ 4Q2016

Stable FX or moderate depreciations going forward

14 Source: BBVA Research and Haver

  • FX depreciated in most countries in

the region, after the US elections and, to a lesser extent, given a more hawkish outlook by the Fed after its December rate hike.

  • Nevertheless, in some countries, the

increase in commodity prices like oil and copper supported a moderate FX appreciation in December.

  • Going forward, the most likely

scenario is one of relatively stable exchange rates, or limited depreciations, but with volatility around next Fed rate hikes.

LATAM

EXCHANGE RATE TO THE US DOLLAR (Index Dec 2014=100) depreciation vis-à-vis US dollar

80 100 120 140 160 180 200 220 240 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 . ARG BRA CHI COL MEX PAR PER URU

Forecast Actual

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LATIN AMERICA OUTLOOK │ 4Q2016

Producers’ confidence indicators show turnaround in some countries, especially Brazil and Peru

15 Source: BBVA Research and Haver

  • Confidence still at low levels in many countries, but

recover strongly in places where political uncertainty has diminished the most

LATAM

LATAM: CONFIDENCE INDEXES (HOUSEHOLDS AND FIRMS) (values over 50 indicate optimism)

  • Lower inflation was also a positive driver for household

confidence, but has not fully offset the effect of weak labor markets.

20 25 30 35 40 45 50 55 60 65 70 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 ARG BRA CHI COL MEX PER Consumers Producers

  • ptimism

pessimism

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LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016

Latam: an inflection point in 2017, with the beginning of a gradual recovery

16 Source: BBVA Research (1) Weighted average for Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela

  • Growth forecasts marked down by

0.4pp in 2016 and 0.5pp in 2017, relative to four months ago. In 2016 due to weak outturns in Q2 and Q3. In 2017 due to tighter fiscal policy and uncertainty about US economic policies.

  • Growth to increase in 2017 in Latam

driven by:

  • The external sector, due to

depreciated exchange rates and improved terms of trade

  • Investment, especially in

Argentina, Peru and Colombia

  • Growth in 2017 will still be weak,

below potential. But it will break the deceleration trend started in 2013

LATAM

LATAM: GDP GROWTH (%y/y)

2.8 2.9 0.7

  • 0.3
  • 1.3

1.3 2.0

  • 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) Pacific Alliance Brazil

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LATIN AMERICA OUTLOOK │ 4Q2016

Peru, Argentina and Paraguay will display the strongest growth in the region in 2017

17 Source: BBVA Research,

LATAM COUNTRIES: GDP GROWTH (%)

  • Growth revised down in 2016 in

Argentina, Chile, Colombia and México (weak outturns in Q2-Q3) and Uruguay (weak consumption)

LATAM

  • Growth revised down in Colombia

and Mexico in 2017, given a tighter

  • utlook for public expenditure. In

México also due to uncertainty about US economic policies

  • Most countries will display higher

growth in 2017 than in 2016. The main exception will be Mexico.

  • 5.0
  • 4.0
  • 3.0
  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 ARG BRA CHI COL MEX PAR PER URU Latam Mercosur Pacific Alliance

Dec-16 Aug-16

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LATIN AMERICA OUTLOOK │ 4Q2016

Inflation trends down in South America, but increases in Mexico

18 Source: BBVA Research and Haver

LATAM: INFLATION AND CENTRAL BANK TARGET RANGES (%yoy)

  • Inflation to converge gradually to Central Bank targets in

South America.

LATAM

  • Inflation to be dragged down in South America by a

relatively moderate exchange rate depreciation and weak economic activity.

2 4 6 8 10 12 14 16 18 5 10 15 20 25 30 35 40 45 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 . Argentina (left) Brazil Chile Colombia Mexico Paraguay Peru Uruguay

Forecast Inflation Target

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LATIN AMERICA OUTLOOK │ 4Q2016

Lower inflation will allow for more dovish central banks and continuing rate cuts in South America

19 Source: BBVA Research and Haver

OFFICIAL INTEREST RATES (%)

  • Lower inflation in South America and weak growth will

push central banks to continue cutting rates in coming months, except in Peru.

LATAM

  • In Mexico, Banxico will continue to increase interest rates

in 2017, at a faster pace than the Fed

2 4 6 8 10 12 14 16

5 10 15 20 25 30 35 40

Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 . ARG (left) BRA CHI COL MEX PAR PER

Actual Forecast

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LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016

Public expenditure will grow more slowly to sustain credibility of fiscal policy frameworks

20 Source: BBVA Research and Haver

  • Except in Argentina, we anticipate a

somewhat tighter public expenditure in 2017, to fulfill fiscal rules

  • Restricting public expenditure growth

seems inevitable in countries with scant or no fiscal space, having received a sizable negative shock to fiscal revenues from lower commodity prices

  • In Brazil, the approval of a new law

to cap public spending will have a positive impact on the fiscal deficit (and GDP growth) in the medium and long-run.

LATAM

LATAM: FISCAL BALANCE (%GDP)

  • 12
  • 10
  • 8
  • 6
  • 4
  • 2

2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 ARG BRA CHI COL MEX PAR PER URU Latam Dec-16 Aug-16

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LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016

External deficits continue to shrink in most countries

21 Source: BBVA Research and Haver

  • Current account deficits continue to

shrink due to past exchange rate depreciations, weak domestic demand and gradual recovery of terms of trade

  • However, stronger growth in 2017

will slow down the external adjustment in the region

LATAM

LATAM: CURRENT ACCOUNT BALANCE (%GDP)

  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 2015 2016 2017 ARG BRA CHI COL MEX PAR PER URU Latam Dec-16 Aug-16

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LATIN AMERICA OUTLOOK │ 4Q2016

22

The global economy is heading for a slow recovery. Global GDP growth will improve slightly from the second half of 2016. Incoming data are positive, with a slow recovery of growth (especially in emerging economies). Quiet financial markets in emerging economies were jolted by the US elections in November. In addition, global risks are still high. Inflation will continue to abate in South America, but will increase in Mexico. Consistent with these trends, central banks in South America will continue to cut interest rates in coming months (except Peru). In turn, rate hikes in Mexico will continue, at a faster pace than that anticipated for the Fed. An inflection point in Latin America. Regional GDP growth will increase from -1.3% in 2016 to 1.3% in

  • 2017. First signs of a turnaround of economic activity are

starting to appear in some countries, but the recovery in 2017 will be gradual. Growth will remain below potential in many countries Risks to growth projections are tilted to the

  • downside. On the external front risks are centered in the

short run on uncertainty around the future economic policy in the US and market reaction after the next interest rate hikes by the Fed. In the medium term, risks are focused on the possibility to implement structural reforms in China.

Main messages

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LATIN AMERICA OUTLOOK │ 4Q2016

ANNEX

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LATIN AMERICA OUTLOOK │ 4Q2016

Latin America GDP growth forecasts

24 f = forecast

LATAM

GDP (%y/y) 2013 2014 2015 2016f 2017f Argentina 2.4

  • 2.5

2.5

  • 2.0

3.2 Brazil 3.0 0.1

  • 3.8
  • 3.0

0.9 Chile 4.0 1.9 2.3 1.5 1.9 Colombia 4.9 4.4 3.1 2.0 2.4 Mexico 1.6 2.2 2.5 1.8 1.5 Paraguay 14.0 4.7 3.1 3.8 2.9 Peru 5.8 2.4 3.3 3.9 4.1 Uruguay 4.6 3.2 1.0 0.5 0.8 Mercosur 2.9

  • 0.7
  • 2.7
  • 4.0

0.8 Pacific Alliance 2.9 2.6 2.6 2.0 2.0 Latin America 2.9 0.7

  • 0.3
  • 1.3

1.3