INTERNATIONAL AFFAIRS

SHORT AND MEDIUM-TERM PROSPECTS FOR LATIN AMERICA

Ignacio Hernando

Meeting of International Relations Managers

Banco de España, 9 July 2015

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CONTENT

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1. The Latin America economy at the current juncture

2. Medium-term prospects and the road ahead

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1. LATIN AMERICA AT THE CURRENT JUNCTURE. Adjusting to three external shocks

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• The slowdown (and rebalancing) in the Chinese economy • The decline in commodity prices • The tightening of external financial conditions (as a result of the expected normalization in US monetary policy)

60

70

80

90

100

110

120

130

140

150

160

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

OVERALL FOOD ENERGY METALS

COMMODITIES PRICES

Jan 2010 =100

60

65

70

75

80

85

90

95

100

105

110

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

BRAZIL MEXICO CHILE COLOMBIA PERU

NOMINAL EXCHANGE RATE AGAINST THE DOLLAR

Jan 2013= 100

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1. LATIN AMERICA AT THE CURRENT JUNCTURE. The reaction of macroeconomic policies

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• Monetary policy trade-offs but, in general, stability of policy rates • Fiscal space has significantly shrunk in most countries • Prudent management of fiscal policy: spending cuts even in those countries with fiscal space • Pro-cyclical adjustment to regain credibility

0

2

4

6

8

10

12

14

16

2007 2008 2009 2010 2011 2012 2013 2014 2015

BRAZIL MEXICO CHILE COLOMBIA PERU

OFFICIAL INTEREST RATES

-3

-2

-1

0

1

2

3

4

BRAZIL CHILE COLOMBIA MEXICO PERU LATIN AMERICA

2008 2015

LATIN AMERICA PRIMARY BALANCE

% GDP

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1. LATIN AMERICA AT THE CURRENT JUNCTURE. Lower growth and higher inflation

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Regional growth is expected to decline for a fifth consecutive year in 2015, whereas inflation is on the rise (by contrast with other EME)

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2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016EMERGING ECONOMIES EMERGING EUROPE

EMERGING ASIA (EXCLUDING CHINA) CHINA

LATIN AMERICA WEO ABRIL FORECASTS

GDP GROWTH: EMERGING MARKET ECONOMIES

% yoy

0

2

4

6

8

10

12

14

1

2

3

4

5

6

7

8

2010 2011 2012 2013 2014 2015 2016EMERGING ECONOMIES EMERGING EUROPE

EMERGING ASIA (EXCLUDING CHINA) CHINA

WEO ABRIL FORECASTS LATIN AMERICA (right axis)

INFLATION GROWTH: EMERGING MARKET ECONOMIES

% yoy

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1. LATIN AMERICA AT THE CURRENT JUNCTURE. Assessment

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1. The Latin America economy has significantly changed with respect to the 20th century. Lower vulnerability to external shocks, largely due to more resilient macroeconomic framework

2. However, as tailwinds are gradually vanishing, the risk of mediocre growth is reviving

3. A number of challenges remain; the most relevant one being ending up with the lackluster productivity growth of the region

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2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Productivity

Latin America displays a permanent growth gap in relation to Asia, the reason being productivity performance and capital accumulation. The boom in commodity prices allowed for a higher GDP growth but not for a higher productivity growth nor potential growth.

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2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Investment

Average investment to GDP ratios in Latin America are more similar to advanced country ratios than to other emerging economies.

Low level of infrastructure limits growth and exports potential and might be a deterrent for FDI. Lack of regional interconnections

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10

15

20

25

30

35

40

45

50

81 84 87 90 93 96 99 02 05 08 11 14ARGENTINA BRAZILCHILE MEXICOEMERGING ASIA CHINAADVANCED ECONOMIES

INVESTMENT/GDP RATIOS

88

87

84

76

65

49

46

39

12

9

7

6

0 1 2 3 4 5 6 7

PERU

INDIA

COLOMBIA

BRAZIL

MEXICO

CHILE

CHINA

RUSSIAN F.

UNITED STATES

SPAIN

GERMANY

JAPAN

GLOBAL COMPETITIVENESS INDEX:INFRASTRUCTURE(0-7 Scale; ranking)

source: World Economic Forum. Global Competitiveness Report

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2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Informality and human capital

Substantial reduction in extreme poverty, but labor informality, still very high

Inequality remains very high, in part as a result of low intergenerational mobility Remarkable increase in access to education but still margin to improve in quality of education

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0

10

20

30

40

50

60

0.0 0.2 0.4 0.6 0.8

Latin America

INTERGENERATIONAL MOBILITY AND INEQUALITY

Gini Index

Intergenerational income persistence

0

10

20

30

40

50

60

70

PERU BRAZIL MEXICO VENEZUELA ARGENTINA CHILE

90'S AVERAGE 00'S AVERAGE LAST YEAR AVAILABLE

LATIN AMERICA INFORMALITY

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2. MEDIUM-TERM PROSPECTS FOR LATIN AMERICA. Low level of regional integration

Latin America is a region with a long history of initiatives of political and economic integration but … with limited success

The level of intra-regional trade is low and decreasing

0

5

10

15

20

25

30

35

40

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

LATIN AMERICA EMERGING ASIA EMERGING EUROPE AFRICA MIDDLE EAST

INTRA REGIONAL TRADE

% export and import within the area

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2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Diagnosis

• Short term:

• Latin America needs to adjust to a lower growth phase as a result of

• the end of the commodity super-cycle,

• the slowdown and rebalancing in China

• the end of QE

• Medium term:

• How to raise potential growth?

• Productivity and diversification

• Infrastructure spending

• Informality and the job market

• Education

• How to ensure more inclusive growth?

• Extreme poverty less of an issue, but redistribution still needed

• The role of the State: fiscal reforms

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THANK YOU

AUTOR