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Enestor Dos Santos – Principal Economist for Latin America at BBVA Research
Macroeconomic outlook of the Pacific Alliance
MILADAY - October 2015
Pacific Alliance / MILADAY 2015
Página 2
Pacific Alliance: the real Latam giant
Pacific Alliance: macroeconomic prospects at the current juncture
Index
1
2
Pacific Alliance / MILADAY 2015
Página 3
Pacific Alliance (PA): the real Latam giant
Main contributions to world GDP growth in the next 10 years (PPP adjusted USD billions)Source: BBVA Research and FMI
Main economies in 2013(PPP adjusted USD millions) Source: BBVA Research y and FMI
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Ch
ina
Indi
a
EE
UU
AP
Indo
nes
ia
Bra
sil
Ru
sia
Co
rea
Japó
n
Tur
quía
Ale
man
ia
Re
ino
U.
MEX CHI COL PER13k 5k 4k
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
EE
UU
Ch
ina
Indi
a
Japó
n
Ale
man
ia
AP
Ru
sia
Bra
sil
Re
ino
U.
Fra
ncia
Italia
Co
rea
MEX CHI COL PER
16k 12k
Pacific Alliance / MILADAY 2015
Página 4
0
10
20
30
40
50
60
70
80
CH
I
ME
X
AP
PE
R
Lata
m7
CO
L
AR
G
BR
A
Pacific Alliance: a bloc committed to free trade
Trade openness * ( % GDP, 2008-201 average) Source: COMTRADE and BBVA Research
Latam: free-trade agreementsSourcee: OMC and BBVA Research
* Exports plus imports as a share of GDP.
ARGBRA
URUPAR VEN
MEX
COL
CHIPER
0
10
20
30
40
50
60
70
80
0 10 20 30 40 50 60
% d
el P
IB m
un
dia
l co
n e
l q
ue
se t
ien
e u
n T
LC
*
número de países con los que se tiene un TLC*
*TLC = Tratado de Libre Comercio
Alianza del Pacífico
Pacific Alliance / MILADAY 2015
Página 5
Pacific Alliance: growth based on demographic dynamism and middle classes expansion
Population growth rate(% annual, 2011-21)Source: BBVA Research
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
BRA MEX ANDINOS
Middle classes expansion(millions of people, 2011-21)Source: BBVA Research
Population growth, demographic bonusPopulation growth, demographic bonus
Inequality reductionInequality reduction
Increase of per capita income
Increase of per capita income
Middle classes expansion
0
2
4
6
8
10
12
14
16
18
20
BRA Alianza delPacifico
PER
COL
CHI
MEX
Pacific Alliance / MILADAY 2015
Página 6
Potential growth is high. Certainly higher than in other Latam countries.
Potential growth is high. Certainly higher than in other Latam countries.
However, contribution of productivity to GDP growth is relatively small (around
22%)…
However, contribution of productivity to GDP growth is relatively small (around
22%)…
Pacific Alliance: a high potential growth
Potential growth, next ten years (%)Fuente: BBVA Research
…which means that PA countries should continue focused on adopting reforms to
increase productivity
…which means that PA countries should continue focused on adopting reforms to
increase productivity
0
1
2
3
4
5
6
7
BRA MEX CHI COL PER EEUU UE China
Con reformas
Promedio APPA average
With reforms
Pacific Alliance / MILADAY 2015
Página 7
Human capital: low quality of educationHuman capital: low quality of education
Tax revenues are very dependent on some few commodities
Tax revenues are very dependent on some few commodities
Physical capital: poor infrastructure (energy in Chile)
Physical capital: poor infrastructure (energy in Chile)
PA faces important challengesInfrastructure quality(Index: 0-7, 7 = highest quality)Source: BBVA Research and Banco Mundial
0
1
2
3
4
5
6
BRA MEX CHI COL PEREAGLEs
NEST G7
High informalityHigh informality
Pacific Alliance / MILADAY 2015
Página 8
Pacific Alliance: the real Latam giant
Pacific Alliance: macroeconomic prospects at the current juncture
Index
1
2
Pacific Alliance / MILADAY 2015
Página 9
The external environment has not been as supportive as in the last years
Page 9
1. Commodity prices slumpBrent, USD/barrelSource: BBVA Research
405060708090
100110120130
mar
-08
dic-
08
sep-
09
jun-
10
mar
-11
dic-
11
sep-
12
jun-
13
mar
-14
dic-
14
sep-
15
jun-
16
Data Forecast, Oct-14
Forecast, Apr-15 Current Forecast, Sept-15
Mainly HigherSupply
LowerDemand
Economic Surprises …2. China’s bumpy slowdown and government reactionChina, Industrial Production, y/y, and PMI Source: BBVA Research
5
7
9
11
13
15
46
48
50
52
54
56
Aug
-10
Fe
b-1
1
Aug
-11
Fe
b-1
2
Aug
-12
Fe
b-1
3
Aug
-13
Fe
b-1
4
Aug
-14
Fe
b-1
5
Aug
-15
PMI IPI (rhs)
…as well as expected events
3. Incoming Fed’s tighteningSource: BBVA Research
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
mar
-08
mar
-09
mar
-10
mar
-11
mar
-12
mar
-13
mar
-14
mar
-15
mar
-16
mar
-17
Data Forecast, Oct-14 Current Forecast, Sept-15
Pacific Alliance / MILADAY 2015
Página 10
Growth has fallen, but less so in the PALatam: GDP growth forecastsSource: BBVA Research
Pacific Alliance: MEX, COL, PER, CHIMercosur: BRA, ARG, VEN, PAR, URU
-03
-02
-01
00
01
02
03
04
05
2012 2013 2014 2015 2016
LatAm Pacific Alliance Mercosur
The ugly: low productivity growthThe ugly: low productivity growth
The bad: still highly dependent on commodities and global growth
The bad: still highly dependent on commodities and global growth
The good: lower vulnerability than in the past (flexible exchange rate, inflation
targets, lower external and public debts, etc)
The good: lower vulnerability than in the past (flexible exchange rate, inflation
targets, lower external and public debts, etc)
Pacific Alliance / MILADAY 2015
Página 11
Growth will be around 2.5% in PA countries in 2015 and 2016
Pacific Alliance: GDP growth forecastsSource: BBVA Research
MEX: coupled with the US and pending on the impact of economic reforms
MEX: coupled with the US and pending on the impact of economic reforms
CHI: subdued confidence (labor market, political noise, lower copper prices)
affecting consumption and private sector investment.
CHI: subdued confidence (labor market, political noise, lower copper prices)
affecting consumption and private sector investment.
0
1
2
3
4
5
6
7
Chile Colombia Mexico Peru
2013 2014 2015(f) 2016(f)
PER: Political noise drags private spending. Difficulties to execute public budget. Growth driven by infrastructure and copper production. “El Niño” would
shave around 1pp of 2016´GDP
PER: Political noise drags private spending. Difficulties to execute public budget. Growth driven by infrastructure and copper production. “El Niño” would
shave around 1pp of 2016´GDP
COL: low oil prices will require fiscal adjustment. Construction and
infrastructure investment (4G) will be a source of growth.
COL: low oil prices will require fiscal adjustment. Construction and
infrastructure investment (4G) will be a source of growth.
Pacific Alliance / MILADAY 2015
Página 12
80
90
100
110
120
130
140
150
160
170
180
jun-1
4dic
-14
jun-1
5dic
-15
jun-1
6dic
-16
jun-1
4dic
-14
jun-1
5dic
-15
jun-1
6dic
-16
jun-1
4dic
-14
jun-1
5dic
-15
jun-1
6dic
-16
jun-1
4dic
-14
jun-1
5dic
-15
jun-1
6dic
-16
jun-1
4dic
-14
jun-1
5dic
-15
jun-1
6dic
-16
jun-1
4dic
-14
jun-1
5dic
-15
jun-1
6dic
-16
jun-1
4dic
-14
jun-1
5dic
-15
jun-1
6dic
-16
BRA CHI COL MEX PAR PER URU
Previsiones Observado
Exchange rate depreciation, driven to a great extent by Fed’s liftoff and commodity prices
Exchange rate vs USD in inflation targeting countries (index Dic 2014=100)Source: BBVA Research
Depreciation against USD
Pacific Alliance / MILADAY 2015
Página 13
Inflation is being pushed up by strong depreciation, despite weak activity. CBs to react.
Latam: Inflation (%yoy) and central bank target rangesSource: BBVA Research
0
2
4
6
8
10
Feb
-14
Au
g-14
Feb
-15
Au
g-15
Feb
-14
Au
g-14
Feb
-15
Au
g-15
Feb
-14
Au
g-14
Feb
-15
Au
g-15
Feb
-14
Au
g-14
Feb
-15
Au
g-15
Feb
-14
Au
g-14
Feb
-15
Au
g-15
Feb
-14
Au
g-14
Feb
-15
Au
g-15
Brasil Chile Colombia México Perú Uruguay
Inflation Inflation Target
Pacific Alliance / MILADAY 2015
Página 14
Uncertainty: is there commitment to sustain high long-run growth? Reforms are key.
Latin America: Share of population by incomeSource: BBVA Research
Politics: low approval rates and the risk of the return of populism
Politics: low approval rates and the risk of the return of populism
Middle classes: some may oppose reform if feeling at risk of falling
back to low income
Middle classes: some may oppose reform if feeling at risk of falling
back to low income
Pacific Alliance / MILADAY 2015
Página 15
ARG
BRA
COL
CHI
PAR
PER
URU
VEN
MEX
ECU
BOL
PAN
0
10
20
30
40
50
60
70
80
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Pre
sid
enti
al a
pp
rov
al r
atin
g (
%)
End of current presidential term
Political noise: a significant drag on many economies
Latam: presidential approval ratings and time left until next government Source: BBVA Research and polling agencies
Sep 2015
Pacific Alliance / MILADAY 2015
Página 16
All in all: PA still controls its future …
Medium run:Populism
Long run:Inequality
Short run: lower global liquidity
Medium run: Chinese slowdown
Reforms that enhance productivity:
Physical capital, human capital,
reduce informality
2%-3% growth may be ideal environment to push reforms
(not too high, not too low)
… key to deal with risksStill on time
to implement Reforms 2.0
Enestor Dos Santos – Principal Economist for Latin America at BBVA Research
Macroeconomic outlook of the Pacific Alliance
MILADAY - October 2015
Pacific Alliance / MILADAY 2015
Página 18
Annex: BBVA Forecasts
Page 18
2014 2015(f) 2016(f)GDPCHI 1,9 2,2 2,7COL 4,6 3,1 3,1MEX 2,1 2,5 2,7PER 2,4 2,5 2,8Inflation (eop)CHI 4,6 4,4 4,1COL 3,7 5,2 3,9MEX 4,1 2,5 3,3PER 3,2 4,1 4,2Interest rates (eop)CHI 3,00 3,00 3,00COL 4,50 5,00 5,00MEX 3,00 3,25 3,75PER 3,25 3,75 4,25Exchange rates (eop)CHI 612,9 687,0 670,5COL 2344,0 3000,0 2700,9MEX 14,8 16,5 15,9PER 2,96 3,281 3,42