LATIN AMERICA 1st QUARTER 2017 LATIN AMERICA OUTLOOK 1Q2017 Main - PowerPoint PPT Presentation

LATIN AMERICA OUTLOOK │ 1Q2017 OUTLOOK LATIN AMERICA 1st QUARTER 2017

LATIN AMERICA OUTLOOK │ 1Q2017 Main messages The global economy still points to Markets recover in South America higher growth, but also more since January, supported by uncertainty and significant risks in commodity prices. But asset prices the long run . still under pressure in Mexico South America will grow 1% in Interest rates will fall further in 2017 and leave 4 years of South America in 2017. But Mexico deceleration behind. Mexico is on will continue to tighten monetary the receiving end of uncertainty policy given rising inflation. about US economic policies. Growth falls to 1% in 2017 2

LATIN AMERICA OUTLOOK │ 1Q2017 GLOBAL Stronger growth, higher uncertainty

LATIN AMERICA OUTLOOK │ 1Q2017 LATIN AMERICA OUTLOOK │ 1Q2017 GLOBAL GLOBAL GROWTH GLOBAL GROWTH (% qoq at annual rate) Increasing global (Forecasts based on BBVA-GAIN model) growth 1.1 0.9 • Better-than-expected data in Q3 in US and China, and stable in Europe • Recovery of industrial production and 0.7 international trade • Increasing confidence levels • Global growth will increase from 0.5 3,0% in 2016 to 3,2% in 2017 and 3,3% in 2018 0.3 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 CI 20% CI 40% CI 60% Point Estimates Period average Source: BBVA Research 4

LATIN AMERICA OUTLOOK │ 1Q2017 GLOBAL GLOBAL UNCERTAINTY Biggest uncertainty is the future course of US economic policy and its global effects • Fiscal policy priorities? Tax cuts vs increased spending Global • Effect of fiscal stimulus on growth and inflation Global inflation? Fiscal expansion comes at time of growth small room for extra growth • Which protectionist measures? , When will International they be implemented? What impact? relations • What will be the reaction from other countries (e.g. China)? Central • Which sector will be deregulated and how? banks and • What will be the impact of policy changes on exchange potential growth ? rates 5

LATIN AMERICA OUTLOOK │ 1Q2017 SITUACIÓN LATINOAMÉRICA │ 4T2016 LATIN AMERICA OUTLOOK │ 1Q2017 GLOBAL BBVA FINANCIAL STRESS INDEX INTERNATIONAL FINANCIAL MARKETS (normalized) Temporary increase of stress in emerging 2.0 financial markets (especially Latam), 1.0 after US elections • Financial stress in emerging economies rose significantly after US 0.0 elections. But increase was temporary, especially in South America. Stress still lingers in China. • In contrast, financial stress remain -1.0 limited in developed markets. -2.0 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Latam Asia Developed Source: BBVA Research 6

LATIN AMERICA OUTLOOK │ 1Q2017 GLOBAL COMMODITY PRICES Commodity prices in line with a gradual recovery going forward. Recent price increase driven by fundamentals BRENT OIL SOYBEANS COPPER (USD/B) (USD/ton) (USD/lb) 550 120 3.2 110 3 500 100 90 2.8 450 80 2.6 70 400 60 2.4 50 350 40 2.2 30 300 2 20 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 November 2016 Forecast in November 2016 Forecast in November 2016 Forecast in February 2017 Forecast in February 2017 Forecast in February 2017 • Oil prices increase faster than expected, given OPEC • No significant changes in long-term view for commodity agreement. Copper prices benefit from financial speculation prices, but we anticipate a slightly faster convergence to and robust fundamentals, especially stronger demand those long-run levels. Source: BBVA Research and Bloomberg 7

LATIN AMERICA OUTLOOK │ 1Q2017 GLOBAL US Growth revised down in 2016 • Growth revised up in 2017: US: GDP GROWTH (%) 1. Lower downward pressure on growth from primary sectors and 3.0 construction 2.6 2.4 2.4 2. Solid employment and wage 2.5 2.3 growth, and recovery of business profits 2.0 1.7 1.6 3. Confidence improves, together 1.5 with market expectations • Fed : we expect two more rate hikes 1.0 during 2017 and additional two in 2018, until 1.75%, given higher 0.5 growth and inflation, but Fed will remain cautious. 0.0 • Uncertainty about economic 2013 2014 2015 2016 2017 2018 policies. feb-17 dec-16 Source: BBVA Research 8

LATIN AMERICA OUTLOOK │ 1Q2017 GLOBAL CHINA Stability gains priority over growth. • China continues stimulus to ensure CHINA: GDP GROWTH (%) growth in the short run. • Additional monetary measures are 7.8 8.0 7.3 postponed, to curb the housing bubble, while macro-prudential 6.9 7.0 6.7 measures are brought forward and fiscal policy continues supporting 6.0 growth 6.0 • Risks remain high: 5.2 5.0 1. Private corporate leverage and lack of reforms in State-owned enterprises (SOEs) 4.0 2. Real estate market 3. Capital outflows and exchange 3.0 rate depreciation spiral 2013 2014 2015 2016 2017 2018 4. Shadow banking feb-17 dec-16 5. Geopolitical risks 6. US trade policy Source: BBVA Research 9

LATIN AMERICA OUTLOOK │ 1Q2017 SITUACIÓN LATINOAMÉRICA │ 1T2017 GLOBAL GLOBAL RISKS Global risks most relevant for Latam centered around China and protectionism South US China Mexico Europe America Expanding populism Protectionism China’s imbalances Geopolitical risks Source: BBVA Research 10

LATIN AMERICA OUTLOOK │ 1Q2017 LATAM North-south divergence

LATIN AMERICA OUTLOOK │ 1Q2017 LATIN AMERICA OUTLOOK │ 1Q2017 LATAM Financial markets LATAM MAIN ASSET PRICES: CHANGE SINCE DAY BEFORE US ELECTIONS (%) recover in South 15 America, but pressure 10 continues in Mexico • Main asset prices and exchange 5 rates registered losses after US 0 elections, especially in Mexico • After initial shock, markets recovered -5 since end of 2016. Asset prices in -10 South America managed to recover levels seen before US elections -15 • Mexican asset prices recovered since January 20, but still remain -20 below levels seen at the beginning of November. -25 -30 ARG BRA CHI COL MEX PAR PER URU Tipo de cambio Mercado bursátil Prima de riesgo país Exchange rate Stock exchange Country risk premium * Change from November 7 until February 6. Exchange rate: local currency vis-a-vis US dollar. An increase represents a depreciation. Country risk premium: EMBI. 12 Source: BBVA Research, Bloomberg and Haver

LATIN AMERICA OUTLOOK │ 1Q2017 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 but (Index Dec 2014=100) corrected afterwards in South America, helped by rising commodity prices. 170 • Going forward, we anticipate 150 moderate depreciations in South depreciation vis-à-vis US dollar America, given smaller interest rate 130 differentials with the US. 110 • Volatility could return to FX markets, 90 depending on economic policies finally adopted in the US. 70 dic-15 dic-16 dic-17 dic-18 dic-15 dic-16 dic-17 dic-18 dic-15 dic-16 dic-17 dic-18 dic-15 dic-16 dic-17 dic-18 dic-15 dic-16 dic-17 dic-18 dic-15 dic-16 dic-17 dic-18 dic-15 dic-16 dic-17 dic-18 dic-15 dic-16 dic-17 dic-18 . ARG BRA CHI COL MEX PAR PER URU Forecast Actual 13 Source: BBVA Research and Haver

LATIN AMERICA OUTLOOK │ 1Q2017 LATAM Confidence drops sharply in Mexico, but remained stable (though pessimistic) in South America LATAM: CONFIDENCE INDEXES (HOUSEHOLDS AND FIRMS) (values over 50 indicate optimism) 70 65 60 optimism 55 50 45 40 35 30 pessimism 25 20 sep-14 ene-15 may-15 sep-15 ene-15 may-16 sep-16 ene-17 sep-14 ene-15 may-15 sep-15 ene-15 may-16 sep-16 ene-17 sep-14 ene-15 may-15 sep-15 ene-15 may-16 sep-16 ene-17 sep-14 ene-15 may-15 sep-15 ene-15 may-16 sep-16 ene-17 sep-14 ene-15 may-15 sep-15 ene-15 may-16 sep-16 ene-17 sep-14 ene-15 may-15 sep-15 ene-15 may-16 sep-16 ene-17 ARG BRA CHI COL MEX PER Consumer Producer • Confidence still at low levels in many countries (but Peru), • In Mexico, falling confidence is directly related to but recover in households in South America, given falling uncertainty about US economic policies and rising inflation inflation 14 Source: BBVA Research and Haver

LATIN AMERICA OUTLOOK │ 1Q2017 LATIN AMERICA OUTLOOK │ 1Q2017 LATAM Growth: different LATAM: GDP GROWTH (%y/y) dynamics in Mexico and South America in 2017 4.0 • South America leaves behind 4 2.8 3.0 2.9 years of deceleration 2.5 • Mexico gets the brunt of the 2.0 1.7 uncertainty about future US economic policies and will decelerate 1.0 0.9 in 2017 1.0 • Growth to increase in 2017 in South America driven by: 0.0  The external sector, due to -0.3 depreciated exchange rates and -1.0 improved terms of trade  Investment, especially in -1.4 -2.0 Argentina, Peru and Colombia • Growth in 2017-18 will still be weak, -3.0 below potential. 2012 2013 2014 2015 2016 2017 2018 2019 Latam South America Mexico Source: BBVA Research Latam: Weighted average for Argentina, Brazil, Chile, Colombia, 15 Mexico, Paraguay, Peru, Uruguay and Venezuela