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Pacific Alliance
Potential and
Outlook for the
March
2016
Outlook for the Pacific Alliance / March 2016
Page 2
1 Pacific Alliance: aiming for integration into the global economy
2 Pacific Alliance: outlook and challenges
Outline
Outlook for the Pacific Alliance / March 2016
Page 3
Biggest economies in 2015 (bn. USD, PPP adjusted)
Biggest contributions to GDP growth in the next 10 years (m USD, PPP adjusted)
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
Ch
ina
Un
ite
d S
tate
s
Ind
ia
Japa
n
Ge
rma
ny
AP
Ru
ssia
Bra
zil
Indon
esia
Un
ite
dK
ing
dom
Fra
nce
Ita
ly
MEX CHI COL PER
20k 18k 8k
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Ch
ina
Ind
ia
US
Ind
on
esia
PA
Ru
ssia
Ko
rea
Tu
rke
y
Ge
rma
ny
UK
Bra
zil
Ja
pa
n
MEX CHI COL PER
14k 8k 5k 2k
The Pacific Alliance (PA): the true Latam giant
Source: BBVA Research and IMF Source: BBVA Research and IMF
Outlook for the Pacific Alliance / March 2016
Page 4
ARGBRA
URUPAR
VEN
MEX
COL
CHI
PER
0
10
20
30
40
50
60
70
80
0 10 20 30 40 50 60
% o
f w
orl
d G
DP
wit
h w
hic
h F
ree T
rad
e A
gre
em
en
t s
ign
ed
# of countries with which Free Trade Agreement signed
Number and size of trade agreements signed
Pacific
Alliance
Mercosur
Trade between PA countries is just 4% of their total foreign trade
Pacific Alliance aims also for integration in financial markets and free movement of labor
There is scope to increase trade within PA but, potential is highest in the case of Mexico
Internal trade opportunities are low
for now, tilted on Mexico
Pacific Alliance: committed to integration with the global economy…
Source: BBVA Research and WTO
Outlook for the Pacific Alliance / March 2016
Page 5
Trade agreements signed
with
US
with
EU
with
Japan
with
China
with
EFTA
(Switzerland)
Total
number
of
agreem’ts
Chile 21
Colombia 11
Mexico 18
Peru 16
Brazil 5
... especially with the main economic regions
Outlook for the Pacific Alliance / March 2016
Page 6
PA countries among those with
highest potential to attract FDI
FDI attraction and potential to attract FDI
ChileColombia
Brasil
México*
Perú
Uruguay
Paraguay
México**0
30
60
90
120
0 30 60 90 120
Ran
kin
g o
f F
DI att
racti
on
(2011
-2013)
Ranking of FDI potential (2013)
Countries
High potential
Hig
h a
ttra
ctio
n
Mexico*= current position; Mexico**= expected position after energy reform
Pacific Alliance attracts FDI even beyond its high potential....
FDI potential index:
i. attractiveness of domestic market;
ii. qualified labor force;
iii. availability of natural resources;
iv. infrastructures
FDI attraction:
ranking of inward FDI
both in absolute terms and
relative to country size
Source: BBVA Research and UNCTAD
Outlook for the Pacific Alliance / March 2016
Page 7
Four dimensions of attractiveness for FDI (ranking among 120 countries)
´ ´
0.00
0.20
0.40
0.60
Attractivemarket
Workforce
NaturalResources
Infrastructure
Mexico Chile Colombia Peru
Scale percentiles. 0 = best valued. 1 = Worst Rated
But there is still ample room to improve the attractiveness of Pacific Alliance for FDI flows
Source: BBVA Research and UNCTAD
Some areas with room to improve attractiveness
for FDI:
Labor force qualification
Labor costs
Quality and quantity of infrastructures
Key: education and labor market reform.
Infrastructure investment
Outlook for the Pacific Alliance / March 2016
Page 8
2007 2012 2007 2012 2007 2012 2007 2012
Animal Products
Vegetable Products
Groceries
Mineral Products
Fuels
Chemicals
Plastics
Fur and leather
Wood Products
Textiles
Footwear and headgear
Stone and glass
Metals
Electrical machinery
Transport Equipment
Others
Primary products
Basic Manufacturing
Non Basic Manufacturing
Chile Colombia Mexico Peru
Index of Revealed Comparative Advantage (RCA) by
aggregate sector
Primary products
More complex
manufacturing
Stronger Lower
advantage advantage
Revealed Comparative Advantage of Andeans in primary products; manufactures in Mexico …
Source: WITS and BBVA Research
Outlook for the Pacific Alliance / March 2016
Page 9
… and this pattern also shows up when thinking about most competitive sectors in each country
Chile
• Copper and articles
thereof
• Ores, slag and ash
• Edible fruit and nuts
• Pulp of wood
• Fish and
crustaceans
• Coffee, tea, mate
and spices
• Live trees, plants,
flowers
• Edible fruit and nuts
• Sugar and
confectionery
• Mineral fuels, oils
and bituminous
• Meat and Edible
meat offal
• Plaiting materials
(yarn)
• Furniture
• Motor Vehicles
• Alcoholic beverages
• Tin and articles
thereof
• Plaiting materials
(yarn)
• Ores, slag and ash
• Fishmeal
• Lead and articles
thereof
Colombia Mexico Peru
Outlook for the Pacific Alliance / March 2016
Page 10
1 Pacific Alliance: aiming for integration into the global economy
2 Pacific Alliance: outlook and challenges
Outline
Outlook for the Pacific Alliance / March 2016
Page 11
Latam: GDP growth forecasts
Pacific Alliance: MEX, COL, PER, CHI
-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 Pacific Alliance Brazil
Latam has decelerated, but less so in the Pacific Alliance
Growth forecasts for 2016 and 2017 are revised
down. due to weak domestic demand…
… and a challenging external environment.
including lower commodity prices and concerns
about growth in China
Pacific Alliance will grow around 2.5 in 2016-17,
still below its potential (closer to 4%)
Recovery of growth in 2017 driven by:
1. Stronger global growth;
2. Exchange rate depreciation and improved terms-
of-trade
3. Lower political uncertainty in Brazil
4. Surge of private investment in Argentina and
infrastructure investment in Peru and Colombia Source: BBVA Research
Outlook for the Pacific Alliance / March 2016
Page 12
Potential GDP growth next 10 years (%)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
BRA MEX CHI COL PER US EU China
Average PA
Pacific Alliance: high potential growth
Source: BBVA Research
Besides a high contribution to global growth,
a high potential growth rate, although lower
commodity prices have dented it recently
Commitment to reform will contribute to increase
potential growth
Outlook for the Pacific Alliance / March 2016
Page 13
Population growth rate (% annual, 2011-21)
Increase in middle class (million people, 2011-21)
Increase in middle class
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
BRA MEX Andeans
0
2
4
6
8
10
12
14
16
18
20
BRA Pacific Alliance
PER
COL
CHI
MEX
Dynamism due in part to favorable demography and the rise of the middle class
Source: BBVA Research Source: BBVA Research
Population growth,
demographic dividend
Increase in
per capita income
Progress in decreasing
inequality
Outlook for the Pacific Alliance / March 2016
Page 14
Public debt (gross) %GDP, 2015 Inflation (%, 2015)
0
1
2
3
4
5
6
BRA MEX CHI COL PER
Index (0-7) of competition in the domestic market (7 = maximum competition)
0
10
20
30
40
50
60
BRA MEX CHI COL PER
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
BRA MEX CHI COL PER
... also (and more importantly) due to prudent policies, low interventionism and openness
Source: BBVA Research and FMI Source: BBVA Research and FMI Source: BBVA Research and World Economic Forum
Outlook for the Pacific Alliance / March 2016
Page 15
Quality of infrastructure (Index: 0-7, 7 = maximum quality)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
BRA MEX CHI COL PER Emerging G7
But the Pacific Alliance also faces significant challenges
Source: BBVA Research and World Bank
High informal sector
(labor market, underground economy)
Human capital: quality of education
Physical capital: quantity and quality of
infrastructure (energy in Chile)
Tax revenues highly dependent on a small
number of exported commodities
Outlook for the Pacific Alliance / March 2016
Page 16
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 risks
Still on time
to implement Reforms 2.0
All in all: Pacific Alliance still controls its future …
Outlook for the Pacific Alliance / March 2016
Page 17
The Pacific Alliance (PA) is the sixth biggest economy in the world
and will be the fifth in term of contribution to global growth in the next
10 years.
The PA is committed to trade and financial integration both within the
alliance as well as with the rest of the world. There is ample room to
develop further integration within the AP.
The PA’s potential growth is close to 4% during the next decade.
Growth will be based on continuing reforms and prudent economic
policies.
Growth could be even higher if there are further advances in
reducing the informal sector and increasing investment in
infrastructure and in human capital (education).
1
2
3
4
To summarize …