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Latin America 2.0
Banking on Democracy: Financial Markets and Elections in Emerging Economies.
Javier Santiso, MBA, PhD
Professor of Economics & Vice president, ESADEgeo
Ex Chief Economist Emerging Markets (BBVA, OECD)
2
Politics Matter to Financial Markets: Ukraine 2014
Dow Jones-UBS Commodity Index
Source: JP Morgan Asset Management, 2014..
Russian stock market and currency performance
3
Politics Matter to Financial Markets: Argentina 2014
4
The Shifting Wealth: The World of Yesterday
Banking on Democracy: Markets & Politics
1.
2.
5
Growth Gap between Developing/Emerging & Advanced.
-2
-1
0
1
2
3
4
5
6
Diffe
rence in A
vera
ge
G
row
th (
%)
Global Crisis and the Shifting Wealth of Nations:
An Accelerator of Transition - The World of Yesterday
6
Public Debt and Growth Dynamics.
0
20
40
60
80
100
120
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
Avera
ge %
of
GD
P
Emerging and Developing Advanced
Global Crisis and the Shifting Wealth of Nations:
An Accelerator of Transition – The World of Yesterday
7
Global Crisis and the Shifting Wealth of Nations:
An Accelerator of Transition - The World of Yesterday
Reserve Holdings in USD Billion.
20%
63%
80%
37%
$0
$1.000
$2.000
$3.000
$4.000
$5.000
$6.000
January 1990 November 2009
Miles d
e m
illo
nes
Emerging and Developing Advanced Economies
8
0
100
200
300
400
500
600
700
800
Ja
n-0
8Ja
n-0
8F
eb
-08
Ma
r-0
8A
pr-
08
Ma
y-0
8Ju
n-0
8Ju
l-0
8A
ug
-08
Se
p-0
8O
ct-
08
No
v-0
8D
ec-0
8D
ec-0
8Ja
n-0
9F
eb
-09
Ma
r-0
9A
pr-
09
Ma
y-0
9Ju
n-0
9Ju
l-0
9A
ug
-09
Se
p-0
9O
ct-
09
No
v-0
9D
ec-0
9D
ec-0
9Ja
n-1
0
Ba
sis
Po
ints
EM Markets: Embig weighted of Brazil, Mexico, Russia, Turkey & Phillipines Europe Risk: Median Greece, Ireland, Portugal and Spain
Emerging Markets (big 5) Europe Risk
Public Debt and Sovereign Spreads.
Global Crisis and the Shifting Wealth of Nations:
An Accelerator of Transition – The World of Yesterday
9
Global Crisis and the Shifting Wealth of Nations:
An Accelerator of Transition - The World of Yesterday Sovereign Credit Default Spreads.
0
200
400
600
Mar…
Apr-…
May…
Jun-…
Jul-0
9
Aug…
Sep…
Oct-…
Nov…
Dec…
Jan-…
Feb…
Basis
Po
ints
South Africa Greece
0
100
200
300
400
Ma…
Apr…
Ma…
Jun…
Jul-…
Au…
Se…
Oct…
No…
De…
Jan…
Fe…
Basis
Po
ints
Morocco Ireland
0
50
100
150
200
250
Mar-
09
May-
09
Jul-0
9
Sep-
09
Nov-
09
Jan-
10
Basis
Po
ints
China Italy
0
100
200
300
400
500
600
700
Ma
r-0
9
Ma
y-0
9
Ju
l-09
Se
p-0
9
No
v-0
9
Ja
n-1
0
Ba
sis
Po
ints
Indonesia Hungary
10
The shifting wealth of nations is there to stay
GDP Growth Emerging and Developing
Economies vs. Advanced Economies (%) GDP Growth by World Regions (%)
Source: Based on IMF Forecasts, 2014.
Emerging
Economies
World
Advanced
Economies EU
US
World Latam
China India
+1.4
+5.3
Average growth rate between 2008 and 2018e
+3.4
11
The Shifting Nations: The World of Yesterday
Banking on Democracy: Markets & Politics
1.
2.
12
A Cognitive Crisis: The Political Dimension
28% 37% 40%
71% 61% 58%
20%
30%
40%
50%
60%
70%
80%
Sh
are
of
Wo
rld
GD
P, P
PP
Source: OECD Development Centre 2010 (based on IMF and Bertelsmann Transformation Index data)
Defective or Non-Democracies Democracies
Autocratic States vs. Democracies
13
The democratic wave is scaling up … as the internet wave
Developed
World
World
Developing
World
Number of Democracies* Internet Users per 1,000 inhabitants
*Countries with population >500,000
End of WWI
Rise of Facism End of WWII
Break-up of
Soviet Union
12 80 2000 60 40 20 1900 80 60 40 20 1800
100
80
60
40
20
2012
100
80
60
40
20
0 2008 2005 2000 1995 1990
Finland
Spain
Tunisia
Egypt
Take-off and spread of technologies:
Faster in democratic countries?
Source: Based on Polity IV Project and UIT and Internetworldstats.com, 2014.
14
This is just the beginning: One big innovation wave is ahead of
Industrial Internet
Great Britain United States Industrial
Internet
1900 50
0
WATT’s
steam
engine Steam
Locomotive
Telegraph
Electrical
generators
Indoor
plumbing
Broadcast
Radio
Mobile
Data
1300 50 1650 1700 50 1800 50 2010
0.5
1.0
1.5
2.0
2.5
2020
Web
PC
(GD
P p
er c
ap
ita, %
incre
ase o
n p
revio
us y
ea
r)
Source: Based on Robert Gordon, NBER Working Paper and own projections, 2014..
15
8
8.1
8.2
8.3
8.4
8.5
8.6
8.7
8.8
8.9
9
0
2
4
6
8
10
12
14
16
18
2019
80
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Po
lity
Ind
ex
Nu
mb
er
of c
ou
ntr
ies
Number of Democracies Number of autocracies Average Democracy Score (scale -10 to 10)
The Middle Class Bonus: Strong Supports for Democracy
Source: Banking on Democracy, MIT Press, 2013.
16 Source: Banking on Democracy, MIT Press, 2013.
-0,4
-0,3
-0,2
-0,1
0,0
0,1
0,2
0,3
0,4
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Un
der
wei
ght
O
verw
eigh
t
0 = election month
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
17
Uncertainty during Electoral Periods Embi spread Latin America, bps Source: JP Morgan and BBVA Research
Presidential elections are losing their negative impact on risk premium they used to have in the past: The year 2014 will confirm this trend?
Sovereign spreads in Latin America (EMBI+, bps)
0
200
400
600
800
1000
1200
1400
1600
1800
2000
sep-9
2
jun-9
3
mar-
94
dic
-94
sep-9
5
jun-9
6
mar-
97
dic
-97
sep-9
8
jun-9
9
mar-
00
dic
-00
sep-0
1
jun-0
2
mar-
03
dic
-03
sep-0
4
jun-0
5
mar-
06
dic
-06
sep-0
7
jun-0
8
mar-
09
dic
-09
sep-1
0
Lehman Brothers
Crisis
Mexico and
Brasil's elections Brasil's
elections
Current
elections
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
18
Chile: Political event is not an issue. An Ex-Emerging Market?
During the presidential elections of 2000 and…
Chile: recommendations
(1:overweight, 0:neutral, -1:underweight)
-1,00
-0,50
0,00
0,50
1,00
Jul-97 Jul-98 Jul-99 Jul-00 Jul-01
Presidential election date Chile Presidential Election
Day 0 = 16 Jan 2000
50
100
150
200
250
300
-100 -75 -50 -25 0 25 50 75 100
80
85
90
95
100
105
110
Sovereign Bond Spread (lhs.)
Exchange Rate (basis 100=-100)
Second Round First Round
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
Source: Banking on Democracy, MIT Press, 2013.
19
Chile: Political event is not any more an issue.
... The presidential election of 2006 – Same in 2009-10 and 2013-14
Chile: recommendations
(1:overweight, 0:neutral, -1:underweight)
-1,00
-0,50
0,00
0,50
1,00
Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06
Presidential election date Chile Presidential Election
Day 0 = 15 Jan 2006
0
25
50
75
100
-100 -75 -50 -25 0 25 50 75 100
80
85
90
95
100
105
Sovereign Bond Spread (lhs.)
Exchange Rate (basis 100=-100)
Second Round
First Round
Source: Banking on Democracy, MIT Press, 2013.
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
20
Mexico: Elections and Financial Markets. The Perfect Storms every 6 years (FX Slumps, %)
Source: Banking on Democracy, MIT Press, 2013.
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
-30
-20
-10
0
10
20
30
40
50
60
70
en
e-7
5
en
e-7
7
en
e-7
9
en
e-8
1
en
e-8
3
en
e-8
5
en
e-8
7
en
e-8
9
en
e-9
1
en
e-9
3
en
e-9
5
en
e-9
7
en
e-9
9
en
e-0
1
en
e-0
3
21
Mexico: A risk country before the election date.
In 2000 due to the risk of transparency of the election process.
Mexico Presidential Election
Day 0 = 2 Jul 2000
270
320
370
420
-100 -75 -50 -25 0 25 50 75 100
95
97,5
100
102,5
105
107,5
110
Sovereign Bond Spread (lhs.)
Exchange Rate (basis 100=-100)
Election date
Mexico: recommendations
(1:overweight, 0:neutral, -1:underweight)
-1,000
-0,500
0,000
0,500
1,000
Jul-97 Jul-98 Jul-99 Jul-00 Jul-01
Presidential election date
Source: Banking on Democracy, MIT Press, 2013.
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
22
Mexico: A risk country before the election date.
In 2006 due to the risk of AMLO (López Obrador).
In 2012: Same decoupling maintained.
Mexico Presidential Election
Day 0 = 2 Jul 2006
110
135
160
-100 -75 -50 -25 0 25 50 75 100
98
100
102
104
106
108
110
Sovereign Bond Spread (lhs.)
Exchange Rate (basis 100=-100)
Election date
Mexico: recommendations
(1:overweight, 0:neutral, -1:underweight)
-1,000
-0,500
0,000
0,500
1,000
May-02 May-03 May-04 May-05 May-06
Presidential election date
Source: Banking on Democracy, MIT Press, 2013.
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
23
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
Source: Banking on Democracy, MIT Press, 2013
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Electoral year
Electoral year
Real/Dollar Volatility
Daily change in %, monthly moving average
Plan Real End Plan Real
Electoral year
Source: Bloomberg
0
500
1000
1500
2000
2500 Brazilian & emerging bond spreads
Brazil EMBI+ spread
EMBI+ spread
Source: JP Morgan
24
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
Source: Banking on Democracy, MIT Press, 2013
Wall Street Strategists's Recommendations on Brazil Bond Debt 2002
Rating Change Date
ABNAmro Neutral from Overweight May 1st
Goldman Sachs Neutral from Overweight May 1st
Santander Investments Neutral from Overweight May 3rd
Deutsche Bank Neutral from Overweight May 9th
JP Morgan Chase 1st reduction of overweight June 4th
2d reduction of overwight July 1st
Overweight to marketweight July 22th
Moved to Underweight December 9th
BCP Securities Sell August 8th
Morgan Stanley Downgrade to underperform August 12th
Salomon Smith Barney Changes in marcoeconomic forecast August 20th
UBS Warburg Increased Overweight August 30th
Bear Stearns Cuts to Underweight September 19th
Merrill Lynch Moved to Underweight September 25th
Goldman Sachs Moved to Underweight September 27th
Merrill Lynch Moved back to Marketweight October 4th 2002
Source: Based on JBIC and Wall Street investment banks reports, 2002.
25
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
Source: Banking on Democracy, MIT Press, 2013
0
200
400
600
800
1000
1200
1400
20%
25%
30%
35%
40%
45%
Voter intention for
Lula in the
opinion polls
(left)
bp. Spread Brazil-Emerging Countries and Electoral Polls
2002
Source: Datafolha, JP Morgan
0
20
40
60
80
100Domestic Public Debt Composition
Fixed rate
Interest rate indexed
Exchange rate indexed
Others
Source: Banco Central do Brazil
26
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
Source: Banking on Democracy, MIT Press, 2013
-180
-80
20
120
220
320
420
520
20%
25%
30%
35%
40%
45%
bp
Voter intention for
Lula in the
opinion polls (left)
Spread Brazil-Emerging Countries and Electoral Polls
1994
-100
-50
0
50
100
150
200
20%
22%
24%
26%
28%
30%
32%
pb.
Voter intention
for Lula in the
opinion polls (left)
Spread Brazil-Emerging Countries and Electoral Polls
1998
27
From Lula Preta to Lula de Mel
Brazil 2002 Brazil 2006
2.5
2.7
2.9
3.1
3.3
3.5
3.7
3.9
4.1
1000
1200
1400
1600
1800
2000
2200
2400
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100
Sovereign Bond Spread (lhs.; basis points) Exchange Rate (BRL/US$)
Electiondate
1.9
2
2.1
2.2
2.3
2.4
2.5
100
150
200
250
300
-100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100
Sovereign Bond Spread (lhs.; basis points) Exchange Rate (BRL/US$)
The Brazilian case: Differences among periods although the same candidate in both periods
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
Source: Banking on Democracy, MIT Press, 2013
28
The political cycle and capital markets: Banks’ recommendations in Brazil
From Lula Preta to Lula de Mel
Source: Banking on Democracy, MIT Press, 2013.
Latin America 2.0: A Major Decoupling
The end of the “Election cycle”
29
0
10
20
30
40
50
60
Arg
en
tin
a
Bra
zil
Ch
ile
Co
lom
bia
Me
xico
Pe
ru
Au
stri
a
Be
lgiu
m
De
nm
ark
Fin
lan
d
Fran
ce
Ge
rman
y
Gre
ece
Ire
lan
d
Ital
y
Luxe
mb
ou
rg
Ne
the
rlan
ds
Po
lan
d
Po
rtu
gal
Spai
n
Swe
de
n
Un
ite
d K
ingd
om
Inequality before taxes and transfers Inequality after taxes and transfers
Income inequality before and after taxes and transfers
(Gini coefficient, around 2000)
Brazil still have challenges ahead (as Latin America)
Source: Based on OECD Development Centre.
30
Public spending a on education and performance in PISA b
Argentina
Brazil
Chile
Colombia
Finland
Korea
Lithuania
Macao-China
Mexico
Portugal
Spain
Uruguay
300
400
500
600
0 5.000 10.000 15.000 20.000 25.000
Ave
rage
pe
rfo
rman
ce
Public spending per pupil in primary and secondary education in equivalent USD
Notes: a) Public spending is calculated as average of available data since 2000. b) Countries performance average on the PISA science scale
Education spending per pupil is still five times lower in Latin America than in OECD countries... But quality is as big a problem as quantity
Brazil still have challenges ahead (as Latin America):
A Re-Coupling in 2014?
31
The Changing Face of Political Risk in Emerging Markets
Overt seizures of foreign assets by host countries in emerging markets essentially evaporated by 1980 (with some … Latin exceptions, 2000-2015). However, other political risks to corporate assets (for example from potential regulatory action) have risen dramatically since then.
32
2014: Fasten your Seat Belts ?
33
2014: Fasten your Seat Belts ?
34
Want to Know More?
35
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