Latin America Outlook 3rd QUARTER 2017 Latin America Outlook 3 Q17 - PowerPoint PPT Presentation

Latin America Outlook 3rd QUARTER 2017

Latin America Outlook 3 Q17 Main messages 1. Global growth continues increasing . This is driven especially advanced economies and China (the latter with fiscal impulses). However, global risks remain. 2. Slow growth in Latin America. Growth will increase from -1.2% in 2016 to 0.8% in 2017 and 1.7% in 2018, a slow recovery from deceleration in the previous years. Recovery will be driven by Brazil and Argentina’s exit from recession. Other countries will decelerate in 2017 compared to 2016. 3. Inflation will keep decreasing in South America and will stop rising in Mexico, driven by stable exchange rates, weak demand and lower oil and food prices. Consequently, central banks in most countries in South America will continue cutting interest rates, whereas in Mexico will remain stable for some time. 4. Risks for Latam increase on the internal front, but diminish externally. Political noise and delays in investment are the most important domestic risks. On the other hand, risks stemming from vulnerabilities in China and the normalization of US monetary policy are the main external risks.

Latin America Outlook 3 Q17 GLOBAL Stable growth, with risks still tilted to the downside

Latin America Outlook 3 Q17 Positive global momentum Low inflation in Global growth driven by Some rebalancing from developed countries China US towards Europe Wage moderation as well Signals of stabilization of Both in the macro as well as some correction in global growth as policy fronts commodity prices Central banks in developed countries lean Complacent financial Risks towards policy markets normalization Decreased in Europe, but Low volatility supports scaling up in China Moping up liquidity and lower risk aversion increasing policy rates 4

Latin America Outlook 3 Q17 Global growth tends to stabilize Global GDP growth Confidence indicators remain Forecasts based on BBVA-GAIN model (%, qoq) very high, stronger than actual 1.2 hard data 1.0 China and emerging Asia show strong growth, pushed by expansionary policies… 0.8 … have supported stronger 0.6 trade and investment in the last quarters 0.4 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 CI 20% CI 40% CI 60% Point Estimates Period average Source: BBVA Research 5

Latin America Outlook 3 Q17 Financial stress remains low BBVA Financial Stress Index Volatility has decreased to very (normalized) low levels despite uncertainty 2.0 about economic policies Brazil is the exception in Latam, due to high political 1.0 noise Reversal of expectations of 0.0 reflation in US have maintained low long-term interest rates -1.0 Capital flows to emerging economies have continued -2.0 Risk of complacency in Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 financial markets Latam Asia Developed Source: BBVA Research 6

Latin America Outlook 3 Q17 Central Banks lean towards policy normalization Communication towards tightening from central banks, point more clearly towards normalization (except Japan) Global Besides inflation, Central Banks are increasingly worried about the side-effect of abundant liquidity (especially high asset prices) Fed expects to hike interest rates an additional 25 bp in 2017 and begin to reduce its balance sheet before the end of the year… Fed … but financial markets discount a slower policy normalization Has taken initial steps towards normalization, changing communication, but very cautiously.. ECB Reduction of bond purchases would be announced after the summer. Interest rate hikes around end-2018 7

Latin America Outlook 3 Q17 Growth revised up in Europe and China, down in US and Latin America US . EUROZONE CHINA 2017 2018 2017 2018 2,0 1,7 2,1 2,2 2017 2018 6,5 6,0 Increased LATIN AMERICA Unchanged Revised down 2017 2018 0,8 1,7 WORLD 2017 2018 3,3 3,4 Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela 8

Latin America Outlook 3 Q17 China: (fiscal) policy impulses effective in the short run China: GDP growth We revised up our growth (%) forecasts for 2017-18, due to incoming data and the fiscal 8 impulse. Gradual deceleration 7.3 underway, slower than anticipated 6.9 7 6.7 6.5 Prudent monetary policy. Fiscal 6.0 policy continues to support growth 6 Risks in the medium run continue 5 to increase • Slow rebalancing of growth towards 4 services and consumption • Financial fragilities continue to accumulate due to growth still based 3 on debt and favoring shadow banking 2014 2015 2016 2017 2018 system. Forecast in July 2017 Forecast in April 2017 Source: BBVA Research and CEIC 9

Latin America Outlook 3 Q17 US: fiscal impulse hard to materialize US: GDP growth Growth revised down in 2017-18 (%) Stimulus measures will probably not be implemented in the short- 3 run 2.6 2.5 2.4 2.2 Fed: strong labor market and 2.1 convergence of inflation to 2% 2 justify policy normalization 1.6 1.5 Risks stemming from protectionism diminish but 1 uncertainty about economic policies remain 0.5 0 2014 2015 2016 2017 2018 Forecast in July 2017 Forecast in April 2017 Source: BBVA Research and BEA 10

Latin America Outlook 3 Q17 Commodity prices adjusted down in the short run, on concerns about strong supply BRENT OIL SOYBEANS COPPER (USD/B) (USD/mT) (USD/lb) 120 3.3 550 3.1 100 500 2.9 80 2.7 450 2.5 60 2.3 400 40 2.1 1.9 350 20 1.7 0 1.5 300 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 July 2017 Forecast in July 2017 Forecast in July 2017 Forecast in April 2017 Forecast in April 2017 Forecast in April 2017 Source: BBVA Research and Bloomberg Oil prices will continue to be dragged by strong supply and Strong supply also affects soybean and copper prices in the high inventories. We maintain expectations of 60USD/b in the short run. No significant changes in long-run view for long run, given lower capital expenditures in exploration. commodity prices. 11

Latin America Outlook 3 Q17 Global risks most relevant for Latin America are related to US policies and rebalancing in China 1 2 Lingering uncertainty about economic Policy stimulus in China to support investment policies to be implemented in US, though the continues to accumulate financial vulnerabilities risk of protectionism is reduced 3 4 Political risks in Europe diminish but remain Risks stemming from monetary policy around Brexit negotiations, banking problems in normalization , especially in the US, given some countries and elections in Italy. divergence with market expectations 12

Latin America Outlook 3 Q17 LATAM Slow growth

Latin America Outlook 3 Q17 Financial markets continue to recover in Latam… Latam asset prices: percent change in the last 3 months to Asset prices and exchange rates July* continued to see significant year- 14 to-date gains, driven by global factors: 12 10 • Diminished worries about US policies 8 • A gradual approach to Fed rate 6 hikes • Stronger global growth 4 2 0 Despite some correction in commodity prices -2 -4 -6 ARG BRA CHI COL MEX PAR PER URU Exchange rate Stock exchange Country risk premium Source: BBVA Research and DataStream * Change between April 12 and July 14 12. Exchange rate: local currency per USD. In this case, an increase signals a depreciation. Country risk premium: EMBI.

Latin America Outlook 3 Q17 … with the background of very low volatility in global financial markets, which could revert quickly Positive tone in financial markets Volatility in developed markets and country risk premium in Latam with volatility at historical lows despite increasing economic, 45 800 political and geopolitical 40 uncertainty 700 35 30 An important question is whether 600 markets are too complacent, 25 especially given that main central 20 banks are starting to withdraw 500 15 their monetary stimulus 10 400 5 0 300 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 VIX Index EMBI Latam (rhs) Source: BBVA Research, DataStream and Bloomberg 15

Latin America Outlook 3 Q17 Mildly depreciating exchange rates going forward in most countries Relatively stable exchange rates in Exchange rates to the USD (Index Dec 2016=100) the last 3 months. Recovery of Mexican peso continues, aided by 125 softer tone from US on trade policy 120 115 We continue to expect a mild 110 depreciation vis-à-vis USD depreciation of exchange rates 105 going forward given easier monetary policy in South America, 100 diverging from Fed’s tightening 95 90 Some room for further appreciation 85 in Mexico in the short run. Chile and Colombia may also see 80 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 Dec-16 Dec-17 Dec-18 appreciation in 2018 ARG BRA CHI COL MEX PAR PER URU Forecast Actual 16 Source: BBVA Research and Haver