Situación España 1T16 2 nd QUARTER Situación 2016 • Españ Outlook Latin America
Latam Outlook / May 2016 Main Messages The global outlook has improved. but global growth will continue to be low. Financial stress has been reduced significantly in the last three months. especially in emerging markets. and commodity prices have recovered. Global growth will increase, but moderately and will remain fragile. Latam GDP will shrink -1.1% in 2016 and recover to 1.7% in 2017. The fall in 2016 will be dragged by the sharp recession in Brazil. whereas the Pacific Alliance will grow 2.3%. Recovery in 2017 will be driven by the external sector (stronger global growth and better terms of trade) and higher investment in places like Argentina, Peru and Colombia. The positive effect of the recent recovery of commodity prices will be offset by lower public expenditure. Public expenditure will be adjusted in most countries given lower tax receipts and to preserve fiscal rules and sovereign ratings. The main exception will be Brazil, where the necessary fiscal consolidation is likely to continue to be postponed. Inflation abates slightly in most countries, helped by the recent appreciation of commodity prices. Lower inflation and weak domestic demand will allow central banks to wait and see, with stable interest rates likely for the remainder of this year with the exception of Colombia, where further hikes are likely. In turn, Mexico will continue to synchronize interest rate hikes with the Fed’s. Page 2
Latam Outlook / May 2016 External environment Global scenario improves, but growth will continue to be subdued Page 3
Latam Outlook / May 2016 Global financial markets calm down in the last three months Financial stress abates since high Financial stress in financial markets BBVA Research Financial stress index reached in January, especially in 6 emerging markets… 5 4 3 … driven by: 2 1. Improved macro indicators in 1 China and lower FX depreciation pressures 0 2. Recovery of commodity prices -1 (especially oil) -2 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 3. More gradual expected path of Fed’s rate hikes Developed Emerging Source: BBVA Research Page 4
Latam Outlook / May 2016 Global economic scenario was quite negative three months ago… -6 % Concerns on China (fall in reserves) -25 % +100 bp -12 % Fall in oil prices Stock markets Correction in (Brent) (MSCI Global stock market index) Emerging Markets (Increase in EMBI spread) More uncertain global growth Source: BBVA Research. Evolution from 11 Nov 2015 to 10 Feb 2016 Page 5
Latam Outlook / May 2016 … but many of those factors have reversed in the last three months +0.5 % Less concern on China (in the short run) +46 % +12 % -100 pb Stock market Increase in Improved financial rally oil price conditions in EM (MSCI Global stock market index) (Brent) (Fall in EMBI spread) Lower uncertainty on global growth Source: BBVA Research. Evolution from 10 Feb 2016 to 10 May 2016 Page 6
Latam Outlook / May 2016 Commodity prices also benefitted from lower global volatility Soybeans: (USD/mt) Copper: (USD/lb) Brent oil: (USD/b) Source: BBVA Research and Bloomberg Source: BBVA Research and Bloomberg Source: BBVA Research and Bloomberg 600 120 3.3 3.1 550 100 2.9 500 80 2.7 2.5 450 60 2.3 400 40 2.1 1.9 350 20 1.7 300 0 1.5 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 1Q2014 3Q2014 1Q2015 3Q2015 1Q2016 3Q2016 1Q2017 3Q2017 1Q2018 3Q2018 1Q2019 3Q2019 1Q2020 3Q2020 Forecast in April 2016 Forecast in January 2016 Forecast in April 2016 Forecast in January 2016 Forecast in April 2016 Forecast in January 2016 … but long -term perspectives for commodity Oil and copper prices recovered driven in part by less concerns about policy support for prices suffer given doubts about the pace of growth in China … structural reforms in China Page 7
Latam Outlook / May 2016 Nevertheless, global growth continues to be subdued, and with warning signs Global growth (% qoq at annual rate) (Forecasts based on BBVA-GAIN model) Global growth around 3% (annual rate) in the Source: BBVA Research last quarter has been accelerating, but still far 6.5% Growth; 1Q16, 2Q16 are from previous years forecasts 6.0% Average 2000-07 5.5% Global growth to increase to 3.4% in 2017 but it 5.0% will still be subdued: • Given adjustment in emerging economies 4.5% • Developed economies not growing beyond 4.0% its potential • Global investment still weak 3.5% 3.0% Global trade growth still decreasing since 2014. Warning: traditional sources of global growth 2.5% are not working, as well as in previous 2.0% recoveries. Page 8
Latam Outlook / May 2016 Additional warning sign: global uncertainty shocks are now more frequent … Immediate effect of uncertainty shocks on financial volatility* Source: BBVA Research First sign of withdrawal of monetary Oil price fall Uncertainty on China stimulus by the Fed 40% 20% 0% -20% -40% mar-12 nov-12 jul-13 mar-14 nov-14 jul-15 mar-16 * Effect on VIX (implied volatility of S&P 500) from a model of volatility and global growth. See global outlook for 2Q16 for details. Source: BBVA Research Given fragile growth. uncertainty shocks tend More frequent uncertainty shocks that generate to be amplified high volatility (frequency has doubled) Page 9
Latam Outlook / May 2016 … but their impact on growth, though stronger, is also shorter-lived Effect on growth of a temporary increase in volatility (percentage points)* Good news is that even though negative Source: BBVA Research 0.01 shocks are more frequent, their impact on growth seems now less persistent 0.00 This could be in part the result of very accommodative monetary policy in developed -0.01 economies, which buffer uncertainty shocks … -0.02 … but, what will happen when those accommodative monetary policies are -0.03 m0 m1 m2 m3 m4 m5 m6 m7 m8 m9 m10 m11 m12 m13 m14 m15 m16 m17 m18 m19 m20 m21 m22 m23 withdrawn? Before 2007 After 2012 * Impact on growth of an increase in volatility caused by and increase in uncertainty. Details in Global Outlook 2Q16. Source: BBVA Research Page 10
Latam Outlook / May 2016 China: gradual adjustment to continue China: GDP growth (%) Source: BBVA Research Monetary and fiscal stimuli will continue to support growth in the short run. A soft landing 9 continues to be the central scenario 8 7.7 7.3 6.9 7 6.4 State-owned enterprises: sustained by 5.8 6 increasing debt and carrying excess capacity. Without reforms, they will drag medium-term 5 growth by hampering an efficient allocation of resources. 4 3 2013 2014 2015 2016 2017 Apr-16 Jan-16 Page 11
Latam Outlook / May 2016 US: growth to increase during 2016 US: GDP growth (%) Source: BBVA Research After a soft Q1, growth will increase during 2016, with a stronger employment growth 3.5 3.0 2.5 2.4 2.4 2.4 2.5 Fed will take into account stronger domestic growth and the drag from the external sector to 2.0 decide on the timing and speed of further rate 1.5 1.5 hikes. We anticipate 2 more hikes in 2016, but with a 1.0 downward bias. 0.5 0.0 2013 2014 2015 2016 2017 Apr-16 Jan-16 Page 12
Latam Outlook / May 2016 China is currently the main global risk Shock from Europe China Brexit Geopolítics Likelihood Periphery Impact in Emerging Markets from Fed rate hikes Impact Source: BBVA Research Page 13
Latam Outlook / May 2016 Latam GDP to shrink in 2016 and recover in 2017 Page 14
Latam Outlook / May 2016 Lower global risk aversion and an increase in commodity prices lifted Latam financial markets Latam main asset prices Main asset prices and exchange rates in the (Index May 2013=100) region showed significant gains since 220 February… 200 180 160 … driven by lower volatility in global financial 140 markets and the ensuing impulse on 120 commodity prices 100 80 60 40 Going forward, volatility and corrections in Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 financial markets may return, as long as risks on Chinese growth and exchange rates persist, in addition to unexpected changes in Fed’s COMMODITIES (CRB) EXCHANGE RATE (DS) plans for rate hikes. EQUITY (MSCI) EMBI+ Source: BBVA Research y Haver Page 15
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