Latin America Outlook 2nd QUARTER 2017 Latin America Outlook 2Q17 - PowerPoint PPT Presentation

Latin America Outlook 2nd QUARTER 2017

Latin America Outlook 2Q17 Main messages 1. Global growth keeps increasing , and uncertainty about US policies starts to fade. Nevertheless, global risks remain. 2. The end of GDP deceleration for Latin America. Regional growth will increase from -1.4% in 2016 to 1.1% in 2017 and 1.8% in 2018. Yet, it will remain below potential growth, which is closer to 3%. 3. Inflation will continue to decrease in South America, but will rise in Mexico, though less than expected 3 months ago. We anticipate further interest rate cuts in South America (deeper in Brazil), and they will also be implemented in Argentina and Peru. On the other hand, Mexico will continue hiking rates, but less aggressively than expected. 4. Risks for Latam are tilted to the downside. Short-term risks coming from China and US diminish, though structural, long- term risks in China increase. Domestic risks in the region continue to stem from political noise and delays in infrastructure projects.

Latin America Outlook 2Q17 GLOBAL Stronger growth, but still with significant risks

Latin America Outlook 2Q17 Positive global momentum Main trends continue … … and central scenarios become more likely Recovery of industrial production A strong stimulus to US economy looks less likely… and trade still underway …but so does scenarios with Low volatility in financial markets strong protectionism Headline inflation continues to rise Central banks in developed in advanced economies, but core countries lean towards policy inflation remains stable normalization 4

Latin America Outlook 2Q17 Global growth continues to increase at beginning of 2017 Global GDP growth Confidence indicators remain Forecasts based on BBVA-GAIN model (%, qoq) very high, although hard data 1.2 still do not capture all the improvement in sentiment 1.0 China and developed economies show sign of strong 0.8 growth. However, other emerging economies show mixed signals 0.6 0.4 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 IC 20% GDP Growth IC 40% Average IC 60% Source: BBVA Research 5

Latin America Outlook 2Q17 Financial stress remains low BBVA Financial Stress Index Volatility has decreased (normalized) despite uncertainty about 2.0 economic policies Monetary and fiscal stimulus mask some underlying 1.0 weakness Europe has been the 0.0 exception, with some increase in sovereign spreads, linked to elections in France and the political outlook for the region -1.0 as a whole -2.0 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Latam Asia Developed Source: BBVA Research 6

Latin America Outlook 2Q17 Central banks on the way to policy normalization Official interest rates in the US (Fed) and Eurozone (ECB) (pp) 2.5 2.0 1.5 ECB End of QE ECB 1.0 QE tapering 0.5 0.0 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 FED ECB 7 Source: BBVA Research, FED and ECB Fed continues to increase interest rates, though is The ECB is to start discussing its exit strategy, but still cautious about the economic outlook. very cautiously.

Latin America Outlook 2Q17 Global growth revised up US EURO AREA CHINA 2017 2018 2017 2018 1.7 1.7 2.3 2.4 2017 2018 6.3 5.8 LATIN AMERICA Increased Unchanged Revised down 2017 2018 1.1 1.8 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 2Q17 China: renewed recovery with old engines China: GDP growth We revised up our growth (%) forecasts for 2017-18, due to 8 incoming data and a fiscal impulse. Gradual deceleration underway 7.3 6.9 7 6.7 But medium-term risks are still 6.3 significant: 6 5.8 • Rebalancing of growth towards services and consumption has stalled 5 • Policy missteps could lead to a disorderly deleveraging 4 3 2014 2015 2016 2017 2018 Forecast April 2017 Forecast February 2017 Source: BBVA Research and CEIC 9

Latin America Outlook 2Q17 US: diminished prospects of a pro-growth fiscal impulse Growth increases in 2017 given US: GDP growth (%) pick up in investment. However, private consumption is expected 3.0 to slow down 2.6 2.4 2.5 2.4 2.3 Risks stemming from economic policy continue despite a softer 2.0 tone in the last months 1.6 1.5 1.0 0.5 0.0 2014 2015 2016 2017 2018 Forecast April 2017 Forecast February 2017 Source: BBVA Research and BEA 10

Latin America Outlook 2Q17 We maintain our view of gradual convergence of commodity prices to their long-run equilibrium levels BRENT OIL SOYBEANS COPPER (USD/B) (USD/mT) (USD/lb) 120 600 3.3 3.1 100 550 2.9 80 500 2.7 2.5 60 450 2.3 40 400 2.1 1.9 20 350 1.7 0 300 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 February 2017 Forecast February 2017 Forecast February 2017 Forecast April 2017 Forecast April 2017 Forecast April 2017 Source: BBVA Research and Bloomberg Oil prices will continue to get support from OPEC production No significant changes in our view for long-term commodity agreement, as well as increase in demand. Copper prices will prices. Forecasts mostly unchanged for oil and soybeans benefit from stronger demand and also supply disruptions. relative to February. 11

Latin America Outlook 2Q17 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, especially could delay and slow down reforms to reduce trade policies structural imbalances 3 4 Elections in France and Italy in (the unlikely) Risks stemming from monetary policy case that Eurosceptic platforms prevail normalization , especially in the US 12

Latin America Outlook 2Q17 LATAM A heterogeneous recovery

Latin America Outlook 2Q17 Financial markets continue to recover in Latam, including in Mexico Asset prices and exchange rates Latam asset prices: percent change since the US election * continued to see significant year- 30 to-date gains, driven by: • Diminished worries about US 20 policies • A gradual approach to Fed rate 10 hikes • Stronger global growth • Increased commodity prices 0 • Recovery of growth in some countries -10 -20 -30 ARG BRA CHI COL MEX PAR PER URU Exchange Rate Stock exchange Country risk premium Source: BBVA Research, Haver Analytics and DataStream 14 * Change between November 7 and April 14. Exchange rate: local currency per USD. In this case, an increase signals a depreciation. Country risk premium: EMBI.

Latin America Outlook 2Q17 Stable or mildly depreciating exchange rates, going forward Exchange rates appreciated in most Exchange rates to the USD (Index Dec 2015=100) countries since beginning of 2017. Strong recovery in Mexico 170 We expect a mild depreciation of exchange rates going forward given 150 easier monetary policy in South depreciation vis-à-vis USD America, diverging from Fed’s 130 tightening 110 Some room for further appreciation in Mexico in the short run. Chile and 90 Colombia may also see appreciation in 2018 70 Dec-15 Dec-16 Dec-17 Dec-18 Dec-15 Dec-16 Dec-17 Dec-18 Dec-15 Dec-16 Dec-17 Dec-18 Dec-15 Dec-16 Dec-17 Dec-18 Dec-15 Dec-16 Dec-17 Dec-18 Dec-15 Dec-16 Dec-17 Dec-18 Dec-15 Dec-16 Dec-17 Dec-18 Dec-15 Dec-16 Dec-17 Dec-18 ARG BRA CHI COL MEX PAR PER URU Forecast Actual 15 Source: BBVA Research and Haver

Latin America Outlook 2Q17 Confidence indicators recover in Brazil and Mexico, but remain pessimistic throughout the region Latam: Confidence indicators for households and firms (values above 50 pts indicate optimism) 65 OPTIMISM 60 55 50 45 40 35 PESSIMISM 30 25 20 Jan-15 Jul-15 Jan-16 Aug-16 Mar-17 Jan-15 Jul-15 Jan-16 Aug-16 Mar-17 Jan-15 Jul-15 Jan-16 Aug-16 Mar-17 Jan-15 Jul-15 Jan-16 Aug-16 Mar-17 Jan-15 Jul-15 Jan-16 Aug-16 Mar-17 Jan-15 Jul-15 Jan-16 Aug-16 Mar-17 ARG BRA CHI COL MEX PER Consumer Producer Fuente: BBVA Research y Haver Drop in household confidence in Colombia, after VAT and In Mexico, confidence recovers after softer US tone towards income tax hikes. Significant confidence fall in Peru after trade. Private sector confidence in Brazil recovers after fiscal corruption cases linked to Odebrecht case and the negative reform and a significant fall in inflation. impact of the “coastal El Niño” 16