LATIN AMERICA 4th QUARTER 2016 LATIN AMERICA OUTLOOK 4Q2016 Main - PowerPoint PPT Presentation

LATIN AMERICA OUTLOOK │ 4Q2016 OUTLOOK LATIN AMERICA 4th QUARTER 2016

LATIN AMERICA OUTLOOK │ 4Q2016 Main messages The global economy is heading for a slow recovery. An inflection point in Latin America. Regional GDP Global GDP growth will improve slightly from the second growth will increase from -1.3% in 2016 to 1.3% in half of 2016. Incoming data are positive, with a slow 2017. First signs of a turnaround of economic activity are recovery of growth (especially in emerging economies). starting to appear in some countries, but the recovery in Quiet financial markets in emerging economies were 2017 will be gradual. Growth will remain below potential jolted by the US elections in November. In addition, in many countries global risks are still high. Inflation will continue to abate in South America, but Risks to growth projections are tilted to the will increase in Mexico. Consistent with these trends, downside. On the external front risks are centered in the central banks in South America will continue to cut short run on uncertainty around the future economic interest rates in coming months (except Peru). In turn, policy in the US and market reaction after the next rate hikes in Mexico will continue, at a faster pace than interest rate hikes by the Fed. In the medium term, risks that anticipated for the Fed. are focused on the possibility to implement structural reforms in China. 2

LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL A very gradual recovery

LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL GLOBAL FACTORS Positive data, but risks are still high POSITIVE Systemic risk FACTORS in China Global trade Brexit and other recovers risks in Europe Central banks Uncertainty about support growth economic policies in the US Calm financial markets in developed countries, despite Geopolitics: recent shocks Middle East, Russia Better growth prospects for China and BUT RISKS ARE emerging countries HIGH 4

LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL GLOBAL GROWTH GLOBAL GROWTH (% qoq at annual rate) Data shows a slight (Forecasts based on BBVA-GAIN model) recovery of global growth in second half 1.0 of 2016 • Retail sales suggest a strong 0.8 impulse for global consumption • Confidence indicators more optimistic, recovering in many countries, but hard data is still inconclusive 0.6 • Stronger global growth in the second half of 2016 would also extend to the first quarter of 2017 • Global growth revised down in 2016, 0.4 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 to 3.0%. Recovery still on for 2017, with slight increase in growth to 3.2%. CI 20% CI 40% CI 60% Point Estimates Period average Source: BBVA Research 5

LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL GLOBAL GROWTH Factors affecting global recovery Central Banks and Policy Coordination Global trade interest rates Interest rates will remain low for Fiscal and structural policies should Slowdown in global growth a long time, despite recent hikes, complement monetary policy affects trade because of cyclical and US and Germany have room for The elasticity of trade to GDP structural factors. expansionary measures, which are growth is lower than before the Effectiveness of monetary more likely in the US crisis policies is approaching its limits. Other countries have scope to 1. Shrinking global value Costs are beginning to outweigh modify the composition of public chains (China) benefits of lower rates expenditure without expanding it. 2. Lower global investment 3. Protectionism Trade to recover very gradually 6

LATIN AMERICA OUTLOOK │ 4Q2016 SITUACIÓN LATINOAMÉRICA │ 4T2016 LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL BBVA FINANCIAL STRESS INDEX INTERNATIONAL FINANCIAL MARKETS (normalized) Increased volatility in emerging markets, 2.0 after the US elections and the recent rate 1.0 hike by the Fed • Financial stress in emerging economies rose significantly, given 0.0 increased uncertainty after the US elections (as the fallout may impact emerging markets more strongly), and the Fed’s rate hike in December.. -1.0 • In contrast, financial stress was quite limited in developed markets. Capital flows even started to be rerouted, especially towards US equity. -2.0 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 Latam Emerging Asia Developed countries Source: BBVA Research 7

LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL COMMODITY PRICES Oil and copper prices on track for a gradual recovery. Soybeans hit in the short run by bumper harvest BRENT OIL SOYBEANS COPPER (USD/B) (USD/ton) (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 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 December 2016 Forecast in December 2016 Forecast in December 2016 Forecast in Augost 2016 Forecast in Augost 2016 Forecast in Augost 2016 • Oil and copper prices to recover gradually as current • Soybean prices adjusted downwards given a bumper oversupply is reduced. Recent OPEC agreement harvest, especially in US and Brazil. introduces an upward bias to oil price forecasts. Source: BBVA Research and Bloomberg 8

LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL CHINA Baseline scenario points to gradual deceleration. Slight upward revision of growth in 2016. • Domestic demand strengthened by CHINA: GDP GROWTH (%) new monetary and fiscal impulse • Additional monetary measures are 9 postponed, to curb the housing bubble, while macro-prudential 7.8 8 measures are brought forward 7.3 • Medium term risks remain: 6.9 7 6.6 1. Private corporate leverage and 5.8 6 lack of reforms in State-owned enterprises (SOEs) 5 2. Real estate market 3. Capital outflows and exchange 4 rate depreciation spiral 4. Shadow banking 3 2013 2014 2015 2016 2017 Nov-16 Aug-16 Source: BBVA Research 9

LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL US Growth revised down in 2016 • Downward revision in 2016 due to: US: GDP GROWTH (%) 1. Data suggests weak growth in 3.5 2H16, after tepid 1S16. 2. Persistent low productivity 3.0 • Fed : we expect two more rate hikes 2.6 2.4 2.5 during 2017, until 1.25%, after the 2.2 recent increase in December. 2.0 • Uncertainty about economic policies 1.7 1.6 after the elections. 1.5 1.0 0.5 0.0 2013 2014 2015 2016 2017 Nov-16 Aug-16 Source: BBVA Research 10

LATIN AMERICA OUTLOOK │ 4Q2016 GLOBAL RISKS Global risks: Increasing in advanced economies in the short-term, and in China in the medium-term - Probability in the short term + US policy uncertainty Hard Brexit, European institutions, … China’s real EM estate and vulnerability in other major imbalances economies (funding, protectionism) Impact Source: BBVA Research 11

LATIN AMERICA OUTLOOK │ 4Q2016 LATAM An inflection point in 2017

LATIN AMERICA OUTLOOK │ 4Q2016 LATIN AMERICA OUTLOOK │ 4Q2016 LATAM Volatility returns to LATAM MAIN ASSET PRICES (index May 2013=100) Latam financial markets, 150 after the US elections • Main asset prices and exchange 130 rates continued to show gains until the US elections, continuing a trend started in February • Volatility increased after November 110 8, given uncertainty about economic policies by the new US administration. Gains accumulated since February were partially 90 reversed. Mexico was particularly affected, but also Brazil and Argentina. • A return of bouts of volatility cannot 70 be ruled out, if there are surprises in the process of policy normalization by the Fed or growth surprises in 50 China Apr-15 Jun-15 Apr-16 Jun-16 Dec-14 Feb-15 Aug-15 Oct-15 Dec-15 Feb-16 Aug-16 Oct-16 Dec-16 COMMODITIES (CRB) EXCHANGE RATE (DS) EQUITY (MSCI) EMBI+ 13 Source: BBVA Research and Haver

LATIN AMERICA OUTLOOK │ 4Q2016 LATAM Stable FX or moderate depreciations going forward • FX depreciated in most countries in EXCHANGE RATE TO THE US DOLLAR the region, after the US elections (Index Dec 2014=100) and, to a lesser extent, given a more hawkish outlook by the Fed after its December rate hike. 240 • Nevertheless, in some countries, the 220 increase in commodity prices like oil 200 and copper supported a moderate depreciation vis-à-vis US dollar 180 FX appreciation in December. 160 • Going forward, the most likely 140 scenario is one of relatively stable 120 exchange rates, or limited 100 depreciations, but with volatility 80 around next Fed rate hikes. Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 Dec-14 Dec-15 Dec-16 Dec-17 . ARG BRA CHI COL MEX PAR PER URU Forecast Actual 14 Source: BBVA Research and Haver