Latin America: Economic and Political Outlook€¦ · Latin America: Economic and Political Outlook...

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Economics and Country Risk Conference

© 2016 IHS Markit

Carlos Caicedo, Senior Principal Analyst, +44 208 276 4708, [email protected]

Latin America: Economic and Political Outlook27 September 2016

Rafael Amiel, Director Latin America Economics, +1 215 789 7405,

[email protected]

mailto:[email protected]


© 2016 IHS Markit

Latin America: Economic Outlook

Rafael Amiel, Director Latin America Economics, +1 215 789 7405, [email protected]

Presentation Name / Month 2016

2


© 2016 IHS Markit

Latin America: Sound macroeconomic fundamentals still a feature of some countries

• Colombia, Chile, Peru, Uruguay and to some extent Mexico still have a high quality policy framework, based on:

• Fiscal prudence , which led to improved public finances and gave room for countercyclical policies

• Sound monetary policy resulted in relative price stability, which coupled with flexible exchange rate regimes served as buffer to external shocks

• Enhanced debt profile: external accounts in solid shape

• Reduced systemic risk in financial systems, but credit growth is to high

• Brazil has moved away from fiscal prudence and sound monetary management.

• Venezuela is in a full blown economic crisis because of poor macroeconomic management

• Argentina is trying to fix economic policy, this will be painful in the short-term

© 2016 IHS Markit

Weakness/Volatility: Almost all across the region

4

90

100

110

120

130

140

150

160

170

180

190

Jan-14 Mar-14 Jun-14 Sep-14 Nov-14 Feb-15 May-15 Jul-15 Oct-15 Jan-16 Mar-16 Jun-16 Sep-16

Nominal exchange ratesJan 2014 = 100

Brazil Mexico Argentina Peru Chile Colombia Uruguay

© 2016 IHS Markit

-10

-8

-6

-4

-2

0

2

4

6

Brazil Argentina Venezuela Colombia Chile Peru

An

nu

al

perc

en

t ch

an

ge

2015 2016 2017 2018 2019–23

Real GDP growth in South America

5

Source: IHS Markit © 2016 IHS Markit

© 2016 IHS Markit

Brazil economic context: Recession, inflation and wide fiscal deficit, but there may be light at the end of the tunnel

• The change in government improved consumer confidence and business sentiment and this is helping the stabilisation of the economy;

• The government now must prove it is capable to pass needed reforms and do the fiscal adjustment required to put the economy back on the growth path.

6

30

40

50

60

70

Jan-07 May-08 Sep-09 Jan-11 Jun-12 Oct-13 Feb-15 Jun-16

Gross debt Net debt

Brazil: public debt

© 2016 IHS

perc

ento

f G

DP

Source: IHS

130

135

140

145

150

Sep-12 Jun-13 Mar-14 Dec-14 Sep-15 Jun-16

Brazil: monthly index of economic activity

© 2016 IHSNotes: seasonally adjusted series

Source: IHS

10

%

© 2016 IHS Markit

Brazil short term outlook: Improves but not bright

35

40

45

50

55

60

65

Jul-07 May-08 Apr-09 Mar-10 Feb-11 Jan-12 Dec-12 Nov-13 Oct-14 Sep-15 Aug-16

Services Manufacturing Above 50 indicates expansion

Purchasing managers index

© 2016 IHS

ab

ove

50

in

dic

ate

s

ex

pa

ns

ion

Source: IHS Markit Notes: seasonally adjusted series

© 2016 IHS Markit

Confidence crisis: Fixing it, a long way to go

60

70

80

90

100

110

120

Aug-07 Nov-09 Feb-12 May-14 Aug-16

Non seasonally adjusted Seasonally adjusted

Brazil: Consumer confidenceSep. 2005 =100

© 2016 IHSSource: FGV - Fundação Getulio Vargas

60

70

80

90

100

110

120

130

Aug-07 Nov-09 Feb-12 May-14 Aug-16Seasonally Adjsuted Non-seasonally adjusted

Industrial confidence index October 2003=100

© 2016 IHS

Source: FGV

© 2016 IHS Markit

Brazil: Public finances in dire straits

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-07 Aug-08 Mar-10 Oct-11 May-13 Dec-14 Jul-16

Brazil: fiscal primary balance (% of GDP)

© 2016 IHSSource: IHS

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

Jan-07 Aug-08 Mar-10 Oct-11 May-13 Dec-14 Jul-16

Brazil Fiscal balance (%of GDP)

© 2016 IHSSource: IHS

© 2016 IHS Markit

Brazil Labor Market: Bad news ahead

75

80

85

90

95

100

105

110

115

120

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

Feb-07 Apr-08 Jun-09 Aug-10 Oct-11 Dec-12 Feb-14 Apr-15 Jul-16

Job Creation -thousands/year- source MLE left scale

Employment (2008=100), source Central Bank

Labor Market

© 2016 IHS Markit

Brazil: Economy close to bottom

130

132

134

136

138

140

142

144

146

148

150

Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16

Brazil: Monthly index of economic activity

© 2016 IHS

Notes: seasonally adjusted series

Source: IHS

10%

drop

© 2016 IHS Markit 12

Brazil outlook summary

*Annual average, **Billions of US dollars

-125

-100

-75

-50

-25

0

2008 2010 2012 2014 2016 2018

1.52.02.53.03.54.04.5

2008 2010 2012 2014 2016 2018

2008 2010 2012 2014 2016 2018

4

6

8

2008 2010 2012 2014 2016 2018

Real GDP growth (%)

Exchange rate per USD*

Consumer price inflation (%)

Current-account balance**

Source: IHS © 2015 IHS Source: IHS © 2015 IHS


© 2016 IHS 13

Argentina: The macroeconomic environment

Rafael Amiel, Director Latin America Economics, +1 215 789 7405,

[email protected]


© 2016 IHS Markit

The start of the Macri government brought swift changes

• Elimination of currency controls and capital controls.

• Elimination of export tariffs for some grains, reduction of exporting tariff for soybeans (from 35% to 30%) and soy byproducts (from 32% to 27%).

• Import barriers eased by taking down excessive requirements and increased access to foreign exchange.

• Audit and restructuring of the National Statistics Institute

• Central Bank: moves to intense liquidity absorption and modest intervention in the exchange rate market.

• Reduction of electricity and gas subsidies in the city of Buenos Aires and the Buenos Aires province. However, this is currently being fought in court.

• Agreement with holdouts in the New York City court system followed by a successful return to international market for financing.

14

© 2016 IHS Markit

External challenge: Grim outlook for soft-commodities

-40-30-20-10

01020

2014-Q1 2015-Q1 2016-Q1 2017-Q1 2018-Q1 2019-Q1 2020-Q1

Soybean Price (index)

Expected change in soybean price

© 2016 IHS

Perc

en

t, y

ear-

ov

er-

year

Source: IHS

15

-30

-20

-10

0

10

Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16

Exports (y/y, twelve months moving average) Exports (y/y)

12-pt - IHS clustered column - 2015.2

Perc

en

t

Source: IHS

12-pt - IHS line chart - 2015.2

Source: IHS

Customs trade exports

© 2016 IHS

© 2016 IHS Markit

Major challenges remain, gaining control of inflation

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0

5

10

15

20

25

30

35

40

45

50

Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16

City of Buenos Aires San Luis WPI

Argentina: annual inflation rate alternatives

© 2016 IHS

Perc

en

t

Source: IHS

© 2016 IHS Markit

Steep wage increases in early 2016

0

5

10

15

20

25

30

35

40

45

Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16

Formal private sector wages Public sector wages

Wages

© 2016 IHS

Pe

rce

nt,

ye

ar-

ove

r-

ye

ar

Source: IHS

17

+ 31.5% y/y in Q1-

2016

© 2016 IHS Markit

Fiscal management is a top priority

• The return to the external market for financing gives the current administration some breathing room.

• Reduces need to monetize deficits which helps with inflation.

• Increases the risk of further delays in reducing fiscal spending.

• Fiscal moratorium aims at increasing fiscal resources in 2017 and onwards.

-10

-8

-6

-4

-2

0

II-13 IV-13 II-14 IV-14 II-15 IV-15 II-16

Fiscal deficit

Source: IHS © 2016 IHS

US

D,

billio

n

0

50

100

150

2002 2004 2006 2008 2010 2012 2014 2016External debt (% of GDP)

External debt

© 2016 IHS

Perc

en

t

Source: IHS

18


Argentina outlook summary

0

10

20

30

40

50

2007 2009 2011 2013 2015 2017 2019

Consumer price inflation

© 2016 IHS

Perc

en

t

Source: IHS

-15

-10

-5

0

5

2007 2009 2011 2013 2015 2017 2019

Current account balance

© 2016 IHS

Perc

en

t o

f

GD

P

0

5

10

15

20

2007 2009 2011 2013 2015 2017 2019Exchange rate (end-of-period)

Exchange rate (end-of-period)

© 2016 IHS

AR

S:U

SD

1

Source: IHS

-2

0

2

4

6

8

10

2007 2009 2011 2013 2015 2017 2019

Real GDP growth

© 2016 IHS

Perc

en

t

Source: IHS

© 2016 IHS Markit

Venezuela: The deepening of the economic decline will lead to tough policy choices such as goods imports vs external debt service



20


© 2016 IHS Markit

Economic context: Recession, extreme inflation, policy paralysis

• High demand for foreign exchange exacerbated by the complicated exchange rate system.

• Extreme differential between the current 2 exchange rates.

• The administration struggles with high inflation rates and acute scarcity of essential items.

• No official data for CPI in 2016 but money growth is significant.

0

200

400

600

800

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16

DICOM Essential goods

Exchange rates (VEF:USD1)

© 2016 IHS

VE

F:U

SD

1

Source: IHS

21

0

50

100

150

200

Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16

Broad money CPI

Money and inflation

© 2016 IHS

Pe

rce

nt,

ye

ar-

ove

r-ye

ar

Source: IHS

© 2016 IHS Markit

Government debt nearly doubled in the past 7 years

0

20

40

60

80

100

120

140

2007 2009 2011 2013 2015

Total central government debt

© 2016 IHS

US

D, b

illi

on

s

Source: IHS

Public sector external debt

0

5

10

15

20

25

30

35

40

45

50

2007 2009 2011 2013 2015

PDVSA total debt

© 2016 IHS

US

D, b

illi

on

s

Source: IHS

© 2016 IHS Markit

Venezuela needs to issue new debt to cover its expanding debt service, China may help again

17.3

-17.0

-30

-20

-10

0

10

20

2015 2016 2017 2018 2019 2020

Debt service (central government plus PDVSA)

Debt service burden

© 2016 IHS

US

D, b

illi

on

s

Source: IHS

23


Venezuela outlook summary

*End of period, **Billions of US dollars

-40

-20

0

20

40

2008 2010 2012 2014 2016 2018

0.0

500.0

1000.0

1500.0

2008 2010 2012 2014 2016 2018

-20

-10

0

10

2008 2010 2012 2014 2016 2018

0

200

400

600

800

2008 2010 2012 2014 2016 2018

Real GDP growth (%)

Exchange rate per USD* (DICOM)

Annual average inflation rate

Current-account balance**



© 2016 IHS Markit

Mexico Economic Outlook



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© 2016 IHS Markit

Mexico’s economy: Opposing forces to yield modest but stable growth

• Mexico will benefit -in 2017- from faster growth in the US economy through trade, capital inflows, and remittances.

• The drop in oil prices has prompted the government to execute budget cuts, especially in public investment.

• Fiscal spending cuts will constrain growth; in particular lower spending on public infrastructure will drag growth.

• Banxico will hike interest rates in tandem with US Federal Reserve, this will discourage some consumption and investment and constrain overall GDP growth.

• Banxico will keep the spread between Mexican and US rates constant as to avoid capital outflows and thus, defend the Peso from a further depreciation.

26

© 2016 IHS Markit

Mexico’s economy: Opposing forces to yield modest but stable growth (cont)

• Still, exchange rate volatility will continue driven mainly by global risks: US election, US FED normalization of monetary policy, Brexit implementation, systemic risk of European banks and geopolitical risks

• Inflation is not a threat, relative price stability will continue

• Constitutional changes opened Mexico’s oil and gas industries to foreign investment and will eventually reverse the decline in oil production. This will help growth in the medium term.

• The automotive industry is expanding as vehicles assembled in Mexico continue to gain market share in the United States.

• Global automakers are investing in substantial new capacity in Mexico, a number of new plants will start production in 2017, busting output.

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© 2016 IHS Markit

Mexico: High quality policy framework increases resilience to external shocks

• Credible inflation targeting regime

• A flexible exchange rate regime

• External sector, the bright side of Mexico

• Financial system: well capitalized with relatively good asset quality and no bubbles; room for improvement in risk management

• Public finances: still manageable but more action is required

• Public debt: relatively low and manageable in the short and medium-term

• Domestic market moving up slowly, but moving up. Labor market, not too bright

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© 2016 IHS Markit

Latin America: Political Outlook



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© 2016 IHS Markit

Brazil: Some political stability has been regained, but will remain fragile through 2018



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© 2016 IHS Markit

Worse seems to be over

• Impeachment of President Rousseff has removed political uncertainty, but Lava Jato continues to pose threats to the Temer government

• Michel Temer government showing commitment to a pro-business agenda

• Clear investment opportunities in oil and gas, electricity distribution, infrastructure and agribusiness

• Window of opportunity for foreign investors as major domestic players are struggling with debt burden, credit constraints and reputational risk

• Credible economic team favours macroeconomic stability, but austerity to tackle unsustainable fiscal deficit will be resisted by congress and unions

• Best case scenario: Temer’s muddles through to 2018: transition rather than reform

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© 2016 IHS Markit

Temer’s base in congress short of two thirds needed to pass fiscal reforms

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© 2016 IHS Markit

Fulfilling of Temer’s promise not to

run for office in 2018 key to

keeping coalition together

Line-up in Lower House

Temer: 240 deputies

Opposition: 100 deputies

Floating (up for grabs): 173 deputiesSource:

Pork Barrel Politics likely to dictate fate of congressional

bills

© 2016 IHS Markit

To compensate for lack of progress on fiscal front, Temergovernment will seek to attract FDI through economic liberalization

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1

2

3

4

Opening door for

Privatization and private concessions

Local content rules to be eased

Reform of state-run company’s governance

Amendments to oil law will

facilitate FDI participation

in the pre-salt

Improved

regulatory environment

© 2016 IHS Markit

Corporate and sovereign non-payment risk has increased markedly due to economic and political crisis

• Recession, currency depreciation and credit constraints has undermined corporate sector’s cash flow position

• Large fiscal deficit and surging public debt impairing sovereign’s ability to assist economic recovery

• Most states nearly broke and likely to resist austerity drive by federal government

• Pension reform will be key to restore fiscal position to sustainable path

• Privatization and regulatory changes to favour private sector participation in infrastructure will also be needed

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© 2016 IHS Markit

The October 2018 election would be the watershed

• Crisis has brought to fore Brazil’s need for structural reforms

• New government with fresh popular mandate better placed than Temer to pursue reform agenda

• Weakening of left-wing parties likely to facilitate implementation of economic liberalization policies

• However, mainstream parties’ low popularity makes presidential race widely open

• Centre-right parties (PSDB and PMDB) have real chance of gaining office, but no candidate is leading the field yet

• Leftist PT likely to retain core vote, but not enough to reach second round

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© 2016 IHS Markit

Argentina: Macri government has boosted business confidence; 2017 will prove challenging due to restive congress, labour strikes and inflation



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© 2016 IHS Markit

Improved business environment and Macri’s liberal economic policies likely to attract fresh FDI

• Full removal of currency and capital controls has proved reassuring for foreign investors

• Successful negotiations with foreign creditors have ended Argentina's isolation

• Argentina's foreign policy realignment towards deepening of ties with the US and the UK likely to translate into increased FDI inflows

• Increased FDI critical to economic revival and job creation in 2017 and 2018

• Significant opportunities in oil and gas, infrastructure and agribusiness

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© 2016 IHS Markit

Foreign investors are showing significant interest in investment opportunities offered by Argentina

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September’s Business & Investment forum attracted participation of 97 companies from 67 countries

CEOs of Coca Cola, Citi Group, Dubai Investment Development Agency, Siemens, Dow Chemical, WPP and BP (Group Chief Executive) were in attendance

Macri also lobbiedworld leaders at G-20 Summit in early September

© 2016 IHS Markit

President Macri has secured governability by reaching to moderate Kirchnerists and dissident Peronist factions

• Corruption allegations against former president Cristina Fernandez de Kirchner (CFK) has seriously undermined Kirchnerism

• Uncompromising stance of Campora and other radical Kirchnerist groups has resulted in internal split; moderates are favouring constructive opposition

• Sergio Massa, leader of Peronist dissident faction FR, to remain Macri’s key ally in congress, but concessions will be needed to keep him on board

• Macri’s minority position in congress major hurdle to promised fiscal adjustment

• Strong showing at 2017 mid-term elections crucial to Macri’s efforts to make inroads in congress and consolidate his political influence

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© 2016 IHS Markit

Temporary truce with powerful labour unions (CGT) will be at risk if economy does not pick up and inflation remains high

• Labour unions have so far given Macri the benefit of the doubt

• Argentina’s three main unions have now merged into the revamped CGT

• Disruptive national strike are highly likely if promise to bring inflation down by late 2016 is not met

• Recession has caused an increase in redundancies, further exacerbating labour discontent

• Removal of energy subsidies adding to popular discontent

• Previous non-Peronist governments have been turned into lame duck administrations by nationwide industrial action

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© 2016 IHS Markit

Taming of inflation key to maintaining social peace and political stability

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0

10

20

30

40

50

2007 2009 2011 2013 2015 2017 2019

Consumer price inflation

© 2016 IHS

Perc

en

t

Source: IHS

© 2016 IHS Markit

Mexico: Peña Nieto’s last two years in office to be besieged by declining popularity, poor economic performance and worsening public security



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© 2016 IHS Markit

President Enrique Peña Nieto’s approval rating declining sharply; exacerbated by gaffe during Trump’s visit

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0

10

20

30

40

50

60

Dec-12 Apr-13 Nov-13 May-14 Aug-14 Apr-15 Apr-16 Aug-16

Peña Nieto's approval rating

Source: Mitofsky © 2016 IHS

Approval rating of 23% (16 August), worst reading for a Mexican president since 1998

© 2016 IHS Markit

PRI is currently the strongest political party in Mexico, but its stay in office after 2018 is far from certain

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4.10%

6.80%

16.60%

21.50%

23.70%

0% 5% 10% 15% 20% 25%

Jaime Rodriguez (Independent)

Miguel A. Mancera (PRD)

Miguel A. Osorio Chong (PRI)

AMLO (MORENA)

Margarita Zavala (PAN)

Presidential Election 2018- Voting Intention as of August 2016

© 2016 IHS MarkitSource: Consulta Mitofsky

© 2016 IHS Markit

Reversal of reforms unlikely as constitutional changes require two-thirds vote in national Congress and 50% + 1 in states’ legislative chambers

45

• PRI currently controls 41% of the seats in the Lower House and 42% in the Senate.

• Balance of power to change in 2018.

© 2016 IHS Markit

No progress on security front: 1,842 homicides recorded in July 2016, highest since same month in 2012

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20

40

60

80

100

120

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1/1/2015 3/1/2015 5/1/2015 7/1/2015 9/1/2015 11/1/2015 1/1/2016 3/1/2016 5/1/2016 7/1/2016

Homicides Extortion Kidnapping (secondary axis)

Indicadores de Seguridad: 2015-2016 Averiguaciones

© 2016 IHS Markit

Source:SESNSP

© 2016 IHS Markit

Venezuela: Next year will be crunch time as economic and social deterioration reach record levels



47


© 2016 IHS Markit

Economy and business environment to deteriorate further in one-year outlook

• Largest proven oil reserves but production declining.

• Economy to contract 11.2%, inflation 649%, shortages to intensify.

• Hostile business environment: High regulatory burden, foreign exchange and price controls.

• Likely regime change in two-year outlook creates incentives for companies to continue operating in Venezuela.

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© 2016 IHS Markit

Protests, including roadblocks and looting, to intensify in one year outlook threatening government instability

49

• Government blocking Recall referendum (relief valve to economic and social difficulties).

• Social discontent to turn into political violence: Protests: roadblocks and widespread looting.

• Military firmly sided with government (repression): Plays a key economic role and Defence Minister, in charge of food/Ports, is the facto head of government.

• Military to switch sides if protests escalate beyond control of security apparatus, forcing recall referendum or Maduro’s resignation

© 2016 IHS Markit

Pro-business opposition to strengthen while government weakens in two-year outlook

• Opposition gaining ground as Maduro’s popularity continues to plummet.

• Government has lost capacity to win elections: Opposition to win recall referendum/regional elections/presidential election

• Armed Forces to gradually assume a more institutional stance as protests intensify and ruling PSUV loses support in low income areas.

• If protests are contained the military will let Maduro terminate his mandate or engineer a transition within Chavismo in 2017.

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Government’s total control of key institutions gives Maduro the upper hand

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Latin America: Economic and Political Outlook€¦ · Latin America: Economic and Political Outlook...

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Transcript of Latin America: Economic and Political Outlook€¦ · Latin America: Economic and Political Outlook...