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Latin America: A slow recovery
Juan Ruiz
BBVA Research │ Head Economist, Latin America
Latin America Economic Outlook– First quarter 2015 │ Madrid, 19 February 2015
Latin America Economic Outlook / February 2015
Página 2
World growth will continue to move upwards, albeit slowly and very unevenly. The fall in
oil prices is positive for the world economy, but it has varying effects.
Volatility in the region’s financial markets will continue. The Fed rate hikes will have a
negative effect on capital flows into the region, which adds to lower commodity export prices.
Growth in LatAm should increase gradually, from 0.8% in 2014 to 1.5% in 2015 and 2.4%
in 2016, due to the increased global growth and the rise of public investment in the Andean
countries. The Pacific Alliance should grow by 3.6% and 3.8% in 2015-16.
The central banks will continue to show a looser bias, given the cyclical weakness, and
could even disengage from the Fed rate hikes, with the exception of Mexico. Interest rate
cuts are anticipated in Colombia, Peru and Chile.
Exchange rates will continue to depreciate in 2015, in a scenario of lower commodity prices,
and will disengage from the Fed’s monetary policy.
Key takeaways:
1
2
3
4
5
Latin America Economic Outlook / February 2015
Página 3
Global economy: World growth will continue to move upwards slowly and very unevenly
LatAm: gradual recovery, held back by lower commodity prices
Contents
1
2
Latin America Economic Outlook / February 2015
Página 4
Global growth: moderate and uneven acceleration
EAGLES:
China India Indonesia Rusia Brazil Turkey Mexico
US
Mexico
Brazil
Spain
Eurozone
Eagles China
Emerging Asia LatAm 7 LatAm 7:
Argentina Brazil Chile Colombia Mexico Peru
2016
2,8 2,2
2,7
5,2 6,6
6,0
1,8
3,4
2,4
2015
2,9 1,3 5,0 7,0
6,2 1,5
3,5
0,6
2,7
Source: BBVA Research
Global
3,6 3,8
Emerging
Asia:
China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand Vietnam
Latin America Economic Outlook / February 2015
Página 5
The fall in oil prices is positive for the world economy
Uneven impact depending on countries
Direct impact on the overall drop in inflation
BBVA Research price forecasts for Brent oil
(USD/bbl, quarterly averages) Source: BBVA Research
40
50
60
70
80
90
100
110
120
130
2010
2011
2012
2013
2014
2015
2016
2017
2018
Actual Forecast Oct 15
Forecast Feb 16
Latin America Economic Outlook / February 2015
Página 6
…although lower oil prices have an uneven impact in LatAm [Box 1]
Positive impact in importing countries and overall drop in inflation
Negative effect in Mexico, partially offset by the increased growth in US
Impact on growth of the revised course of oil prices:
forecasts in February 2015 vs. October 2014
(pp, 2015-16 average) Source: BBVA Research
0.4
-0.3
0.6
-1.1
-0.2
0.4
-0.3
-1.5
-1.0
-0.5
0.0
0.5
1.0
AR
G
BR
A
CH
I
CO
L
ME
X
PE
R
LatA
m
Latin America Economic Outlook / February 2015
Página 7
Monetary policy divergence between the Fed and the ECB increases financial tensions
Increasing financial tensions in a context of divergence between the monetary policies of
the Fed and the ECB
The strength of emerging economies will be testes by the normalisation of monetary policy
in the US
BBVA Research Financial Tensions Index Source: BBVA Research
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Jan-1
1
Jul-11
Jan-1
2
Jul-12
Jan-1
3
Jul-13
Jan-1
4
Jul-14
Jan-1
5
Developed Emerging
Latin America Economic Outlook / February 2015
Página 8
What are the risks of the global scenario?
Emerging Response to the
Fed rate hikes
Source: BBVA Research
China Sharp adjustment
Europe • Stagnation
• Lack of
consensus on
reforms
• Greece
• Russia-Ukraine
Global Destabilisation of
some countries
due to lower oil
prices
Latin America Economic Outlook / February 2015
Página 9
Contents
Global economy: World growth will continue to move upwards slowly and very unevenly
LatAm: gradual recovery, held back by lower commodity prices
1
2
Latin America Economic Outlook / February 2015
Página 10
The correction in commodity prices also contributed to volatility in LatAm
LatAm: Stock market prices, sovereign spreads (EMBI) and exchange rates (January 2013=100) Source: BBVA Research and Haver Analytics Analytics
Increased volatility in major assets in the region, with corrections in stock markets, sovereign spreads and exchange rates
The two main drivers were the correction of commodity prices and the expectation of the
Fed increasing interest rates 60
80
100
120
140
160
180
May-
13
Jul-13
Sep-1
3
Nov-
13
Jan-1
4
Mar-
14
May-
14
Jul-14
Sep-1
4
Nov-
14
Jan-1
5
Exchange rate
Stock market prices (MSCI)
Sovereign spreads (EMBI)
Latin America Economic Outlook / February 2015
Página 11
The Fed rate hikes will negatively impact capital flows into the region
Scenarios for capital flows to LatAm
(cumulative figures since 2005, USD bn) Source: BBVA Research and Haver Analytics An increase of QE by the ECB would not offset
the effects of the Fed’s monetary normalisation on LatAm
Different scenarios depending on the pace of normalisation of the Fed’s monetary policy
Capital flows into the region would contract to 3% of GDP (cumulative 2015-17)
0
100
200
300
400
500
3Q
05
2Q
06
1Q
07
4Q
07
3Q
08
2Q
09
1Q
10
4Q
10
3Q
11
2Q
12
1Q
13
4Q
13
3Q
14
2Q
15
1Q
16
4Q
16
3Q
17
Overshooting Fed Delayed Fed
Central Scenario
Latin America Economic Outlook / February 2015
Página 12
We adjust our estimates of LatAm growth downward by 0.3pp in 2015 (to 1.5% in 2015 and 2.4% in 2016)
LatAm*: GDP growth (% YoY) Source: BBVA Research
* Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, México, Uruguay and Venezuela
Activity data surprised to the downside during the fourth quarter of 2014
Major downward revisions of estimates due to the impact of lower oil prices
The average for the region left the worst of the deceleration behind in 3Q. Regional growth will
increase because of more global growth and the increase in public investment
Heterogeneity: the Pacific Alliance will grow 3.6% in 2015 and 3.8% in 2016, more in line with its potential than the rest of the region
2.5
2.6
0.8
1.5
2.4
-1
0
1
2
3
4
5
2012
2013
2014
e
2015
e
2016
e
LatAm Mercosur Pacific Alliance
Latin America Economic Outlook / February 2015
Página 13
Strong increase in growth in 2015 in Peru, Chile and Mexico
GDP by country, 2014, 2015 and 2016 (% var. YoY) Source: BBVA Research
Downward adjustments to prospects, especially in Brazil and Colombia
Brazil: strong macroeconomic adjustment in 2015
Colombia: significant impact of lower oil prices, but it will maintain one of the highest
growth rates in the region
-1
0
1
2
3
4
5
6
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
ARG BRA CHI COL MEX PAR PER URU Latam Merco -sur
Alianzadel
Pacífico
Feb-15 Nov-14
Latin America Economic Outlook / February 2015
Página 14
Lower commodity prices worsen the perspective of external balances ...
Current account as a % of GDP Source: BBVA Research and Haver Analytics
Falling oil prices adversely affect the external balances of Colombia, Brazil and Mexico
… and falling metal prices deepen the negative effect in Brazil, while moderating the
positive effect of oil in Peru and Chile
The external vulnerability of the region remains bounded, although it is rising due to lower FDI
into the region -6
-5
-4
-3
-2
-1
0
1
2
201
42
01
52
01
6
201
42
01
52
01
6
201
42
01
52
01
6
201
42
01
52
01
6
201
42
01
52
01
6
201
42
01
52
01
6
201
42
01
52
01
6
201
42
01
52
01
6
201
42
01
52
01
6
ARG BRA CHI COL MEX PAR PER URU Latam
feb-15 nov-14
Latin America Economic Outlook / February 2015
Página 15
… and also adversely affect fiscal balances
Fiscal balances (% of GDP) Source: BBVA Research and Haver Analytics
The slowdown in demand and lower commodity prices will push tax revenues to the downside
However, some countries would cushion part of this effect, through higher revenues (Chile,
Colombia, after tax reforms) ...
… or by a general adjustment of administered prices and public tariffs (Brazil)
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
2014
2015
2016
ARG BRA CHI COL MEX PAR PER URU Latam
feb-15 nov-14
Latin America Economic Outlook / February 2015
Página 16
The pressure on inflation declines in the region, because of the cyclical weakness and oil prices
LatAm: inflation (% YoY) and target ranges for central banks Source: BBVA Research and Haver Analytics
Pressure will remain on Brazilian inflation, because of the increase in administered prices
and the depreciation of the exchange rate
Colombia will also see the impact of the recent depreciation of the exchange rate on inflation in
2015
0
2
4
6
8
10
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Brazil Chile Colombia Mexico Paraguay Peru Uruguay
Forecast
Latin America Economic Outlook / February 2015
Página 17
Other than in Mexico, the central banks will continue to show a looser bias and could even disengage from the Fed LatAm: Monetary Policy Rate (%) Source:BBVA Research and Haver Analytics
We anticipate further cuts in Peru, Chile and Colombia
Brazil will not join the Fed rate hikes, although Mexico will do so because it is more
synchronised with the US
0
2
4
6
8
10
12
14
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
Jun
-14
Dec-1
4
Jun
-15
Dec-1
5
Jun
-16
Dec-1
6
BRA CHI COL MEX PAR PER
Forecast
Latin America Economic Outlook / February 2015
Página 18
Depreciation in 2015, pressured by commodity prices and the Fed
Changes in the exchange rate against the dollar in countries with inflation targets (%) Source: BBVA Research and Haver Analytics
Willingness of central banks in the region to decouple from the Fed not only because of
cyclical weakness and the anchoring of inflation expectations ...
… but also from a greater willingness to allow the exchange rate adjustment, a limited
exchange rate pass-through to inflation…
… and the view that the weakening of the exchange rate would not generate excessive
losses for the non-financial corporate sector in the region (although the available evidence is inconclusive, especially in Peru and Colombia)
-10
-5
0
5
10
15
20
25
Jan
-De
c 1
4
Jan
-De
c 1
5
Jan
-De
c 1
4
Jan
-De
c 1
5
Jan
-De
c 1
4
Jan
-De
c 1
5
Jan
-De
c 1
4
Jan
-De
c 1
5
Jan
-De
c 1
4
Jan
-De
c 1
5
Jan
-De
c 1
4
Jan
-De
c 1
5
BRA CHL COL MEX PER URU
Latin America Economic Outlook / February 2015
Página 19
World growth will continue to move upwards, albeit slowly and very unevenly. The fall in
oil prices is positive for the world economy, but it has varying effects.
Volatility in the region’s financial markets will continue. The Fed rate hikes will have a
negative effect on capital flows into the region, which adds to lower commodity export prices.
Growth in LatAm should increase gradually, from 0.8% in 2014 to 1.5% in 2015 and 2.4%
in 2016, due to the increased global growth and the rise of public investment in the Andean
countries. The Pacific Alliance should grow by 3.6% and 3.8% in 2015-16.
The central banks will continue to show a looser bias, given the cyclical weakness, and
could even disengage from the Fed rate hikes, with the exception of Mexico. Interest rate
cuts are anticipated in Colombia, Peru and Chile.
Exchange rates will continue to depreciate in 2015, in a scenario of lower commodity prices,
and will disengage from the Fed’s monetary policy.
Key takeaways:
1
2
3
4
5
Latin America: A slow recovery
Juan Ruiz
BBVA Research │ Head economist Latin America
Latin America Economic Outlook– First quarter 2015 │ Madrid, 19 February 2015
Latin America Economic Outlook / February 2015
Página 21
Appendix: Growth forecasts in Latin America
PIB (% a/a) 2012 2013 2014e 2015* 2016*
Argentina 0.8 2.9 0.1 1.0 2.0
Brasil 1.0 2.5 0.1 0.6 1.8
Chile 5.4 4.1 1.8 3.1 3.9
Colombia 4.0 4.7 4.9 3.6 4.0
México 3.8 1.7 2.1 3.5 3.4
Paraguay -1.2 14.4 3.8 4.2 4.2
Peru 6.0 5.8 2.4 4.8 5.6
Uruguay 3.7 4.4 3.4 2.9 3.0
Mercosur 1.2 2.4 -0.6 -0.1 1.3
Alianza del Pacífico 4.2 2.9 2.6 3.6 3.8
América Latina 2.5 2.6 0.8 1.5 2.4
Source: BBVA Research. *Forecast
GDP (% YoY)