Latin America: between

highway to hell &

stairway to heaven

David Franco

Santander - LATAM Chief Strategist for Europe

Milan, 14th June 2018

From QE to QT: tougher financial conditions!

• Shift from quantitative easing into quantitative tightening will have a toll on Latam…

• Latam Financial Conditions respond faster to changes in core bond yields.

• Credit penetration is growing, albeit with significant gaps among Latam countries.

• Financial services have outperformed GDP growth in most cases.

• But a tightening in local financial conditions (through rates and FX) will trigger differentiated

impacts across Latam countries.

Equity volatility (VIX) – EM FX correlation US Financial Conditions vs Latam FX

Tighter US/ Weaker Latam FX

Latam Financial conditions

Sovereign creditworthiness has deteriorated (CDS, 5yr) Policy interest rates: differences from previous levels

Current sovereign stress across the

Latam region is a combination of

external and idiosyncratic factors…

…However, banking cycles are not

synchronized across Latam as shown

by policy rates.

10yr interest rate spreads vs US TSYs

Latam Investors’ Risk-Reward perspective

The MELANCHOLY outlook

Argentina

• Bearish-neutral Bonds

• Bearish FX

• Bearish Equity

Brazil

• Bearish Bonds

• Bearish FX

• Neutral Equity

Mexico

• Neutral Bonds

• Bearish-neutral FX

• Bearish Equity

Argentina

• Bonds: UW

• FX: UW

• Equity: Neutral

Brazil

• Bonds: UW

• FX: Short

• Equity: Neutral

Mexico

• Bonds: OW-Neutral

• FX: Short

• Equity: Short

Investors general perspective

Market position

Latam Investors’ Risk-Reward perspective

The BRIGHTER outlook

Chile

• Neutral Bonds

• Neutral-Bullish FX

• Bullish Equity

Colombia

• Bullish Bonds

• Bullish FX

• Bullish Equity

Peru

• Neutral Bonds

• Bullish FX

• Bullish Equity

Chile

• Bonds: OW

• FX: Long

• Equity: Long

Colombia

• Bonds: OW

• FX: Long

• Equity: Long

Peru

• Bonds: OW-Neutral

• FX: Neutral

• Equity: Long

Investors general perspective

Market position

Latam Financials performance

The MELANCHOLY outlook (drivers)

Argentina

• IMF-social unrest

• Elections

Brazil

• Fiscal challenge

• Elections

Mexico

• NAFTA

• Elections

Latam Financials performance

The BRIGHTER outlook (drivers)

Peru

• Commodities

• Convergence

Chile

• Commodities

• Political stability

Colombia

• Commodities

• Low political risk

Latam Financials: Tailwinds

Non-performing loans across the Latam region

• A stable ration of non-performing loans

is a good signal of limited

vulnerabilities.

• Profitability for the financial sector also

is explained by strong capitalization

ratios.

• In contrast to Europe, the regulatory

requirements remain less restrictive.

• Demographics and still limited

penetration of digital banking also

mean a positive environment

Latam Financials: Headwinds

• Normalization of credit conditions, still elevated leverage ratios and corruption toll on

activity.

The ease of doing business has improved… ….however, corruption remains a key challenge

Thank you!

Summary:

• The ongoing tightening in developed markets led by US Fed rate normalization

and USD repricing is means tougher financial conditions across the Latam

countries. Market positioning from financial investors in general is quickly

adapting to the new risk/reward conditions.

• External stress and idiosyncratic factors running in parallel should produce

differentiated impacts across Latam countries. However, Latam fundamentals in

general have improved versus previous crisis.

• Those countries with bearish outlook given more systemic vulnerabilities

include Argentina, Brazil and Mexico (in that order). Meanwhile the outlook is

brighter for the smaller countries: Colombia, Peru and Chile.