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Latin America Outlook - BBVA · Latin America Outlook 2Q17 Main messages 1. Global growth keeps...
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Latin America Outlook 2nd QUARTER 2017
Transcript of Latin America Outlook - BBVA · Latin America Outlook 2Q17 Main messages 1. Global growth keeps...
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
4
Main trends continue …
Recovery of industrial production
and trade still underway
Low volatility in financial markets
Headline inflation continues to rise
in advanced economies, but core
inflation remains stable
… and central scenarios become more likely
A strong stimulus to US economy
looks less likely…
…but so does scenarios with
strong protectionism
Central banks in developed
countries lean towards policy
normalization
Positive global momentum
Latin America Outlook 2Q17
Global GDP growth Forecasts based on BBVA-GAIN model (%, qoq)
Confidence indicators remain
very high, although hard data
still do not capture all the
improvement in sentiment
China and developed
economies show sign of strong
growth. However, other
emerging economies show
mixed signals
Source: BBVA Research
Global growth continues to increase at beginning of 2017
5
0.4
0.6
0.8
1.0
1.2
Ma
r-1
4
Jun-1
4
Sep-1
4
De
c-1
4
Ma
r-1
5
Jun-1
5
Sep-1
5
De
c-1
5
Ma
r-1
6
Jun-1
6
Sep-1
6
De
c-1
6
Ma
r-1
7
Jun-1
7
IC 20%
IC 60%
GDP Growth
Average IC 40%
Latin America Outlook 2Q17
BBVA Financial Stress Index (normalized)
Volatility has decreased
despite uncertainty about
economic policies
Monetary and fiscal stimulus
mask some underlying
weakness
Europe has been the
exception, with some increase
in sovereign spreads, linked to
elections in France and the
political outlook for the region
as a whole
Financial stress remains low
Source: BBVA Research
6
-2.0
-1.0
0.0
1.0
2.0
Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17
Latam Asia Developed
Latin America Outlook 2Q17
7
Official interest rates in the US (Fed) and Eurozone (ECB) (pp)
Source: BBVA Research, FED and ECB
0.0
0.5
1.0
1.5
2.0
2.5
Jan-1
6
Apr-
16
Jul-1
6
Oct-
16
Jan-1
7
Apr-
17
Jul-1
7
Oct-
17
Jan-1
8
Apr-
18
Jul-1
8
Oct-
18
FED ECB
ECB
QE tapering
ECB
End of QE
Fed continues to increase interest rates, though is still cautious about the economic outlook.
The ECB is to start discussing its exit strategy, but very cautiously.
Central banks on the way to policy normalization
Latin America Outlook 2Q17
US
2017
2.3
2018
2.4
LATIN AMERICA
2018
1.8
EURO AREA
CHINA 2017
1.7
2018
5.8
2018
1.7
2017
1.1
2017
6.3
Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela
WORLD
2018
3.4 2017
3.3
Revised down
Increased
Unchanged
Global growth revised up
8
Latin America Outlook 2Q17
China: GDP growth (%)
We revised up our growth
forecasts for 2017-18, due to
incoming data and a fiscal impulse.
Gradual deceleration underway
But medium-term risks are still
significant:
• Rebalancing of growth towards
services and consumption has stalled
• Policy missteps could lead to a
disorderly deleveraging
Source: BBVA Research and CEIC
China: renewed recovery with old engines
9
7.3
6.9 6.7
6.3
5.8
3
4
5
6
7
8
2014 2015 2016 2017 2018
Forecast April 2017 Forecast February 2017
Latin America Outlook 2Q17
Growth increases in 2017 given
pick up in investment. However,
private consumption is expected
to slow down
Risks stemming from economic
policy continue despite a softer
tone in the last months
Source: BBVA Research and BEA
US: GDP growth (%)
US: diminished prospects of a pro-growth fiscal impulse
10
2.4
2.6
1.6
2.3 2.4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
2014 2015 2016 2017 2018
Forecast April 2017 Forecast February 2017
Latin America Outlook 2Q17
We maintain our view of gradual convergence of commodity
prices to their long-run equilibrium levels
11
Source: BBVA Research and Bloomberg
BRENT OIL
(USD/B)
SOYBEANS
(USD/mT)
COPPER
(USD/lb)
Oil prices will continue to get support from OPEC production
agreement, as well as increase in demand. Copper prices will
benefit from stronger demand and also supply disruptions.
No significant changes in our view for long-term commodity
prices. Forecasts mostly unchanged for oil and soybeans
relative to February.
0
20
40
60
80
100
120
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast February 2017Forecast April 2017
300
350
400
450
500
550
600
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast February 2017Forecast April 2017
1.5
1.7
1.9
2.1
2.3
2.5
2.7
2.9
3.1
3.3
1Q
2014
3Q
2014
1Q
2015
3Q
2015
1Q
2016
3Q
2016
1Q
2017
3Q
2017
1Q
2018
3Q
2018
1Q
2019
3Q
2019
1Q
2020
3Q
2020
Forecast February 2017Forecast April 2017
Latin America Outlook 2Q17
Global risks most relevant for Latin America are related to US
policies and rebalancing in China
12
3
2
4
1 Lingering uncertainty about economic
policies to be implemented in US, especially
trade policies
Policy stimulus in China to support investment
could delay and slow down reforms to reduce
structural imbalances
Risks stemming from monetary policy
normalization, especially in the US
Elections in France and Italy in (the unlikely)
case that Eurosceptic platforms prevail
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
continued to see significant year-
to-date gains, driven by:
• Diminished worries about US
policies
• A gradual approach to Fed rate
hikes
• Stronger global growth
• Increased commodity prices
• Recovery of growth in some
countries
Latam asset prices: percent change since the US election *
14 Source: BBVA Research, Haver Analytics and DataStream
* 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.
-30
-20
-10
0
10
20
30
AR
G
BR
A
CH
I
CO
L
ME
X
PA
R
PE
R
UR
U
Exchange Rate Stock exchange Country risk premium
Latin America Outlook 2Q17
Stable or mildly depreciating exchange rates, going forward
Exchange rates appreciated in most
countries since beginning of 2017.
Strong recovery in Mexico
We expect a mild depreciation of
exchange rates going forward given
easier monetary policy in South
America, diverging from Fed’s
tightening
Some room for further appreciation
in Mexico in the short run. Chile and
Colombia may also see
appreciation in 2018
15 Source: BBVA Research and Haver
Exchange rates to the USD (Index Dec 2015=100)
70
90
110
130
150
170
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
De
c-1
5D
ec-1
6D
ec-1
7D
ec-1
8
ARG BRA CHI COL MEX PAR PER URU
Forecast Actual
depreciation vis-à-vis USD
Latin America Outlook 2Q17
Confidence indicators recover in Brazil and Mexico, but remain
pessimistic throughout the region
16
Fuente: BBVA Research y Haver
Latam: Confidence indicators for households and firms (values above 50 pts indicate optimism)
Drop in household confidence in Colombia, after VAT and
income tax hikes. Significant confidence fall in Peru after
corruption cases linked to Odebrecht case and the negative
impact of the “coastal El Niño”
In Mexico, confidence recovers after softer US tone towards
trade. Private sector confidence in Brazil recovers after fiscal
reform and a significant fall in inflation.
20
25
30
35
40
45
50
55
60
65
Jan-1
5
Jul-1
5
Jan-1
6
Aug-1
6
Ma
r-1
7
Jan-1
5
Jul-1
5
Jan-1
6
Aug-1
6
Ma
r-1
7
Jan-1
5
Jul-1
5
Jan-1
6
Aug-1
6
Ma
r-1
7
Jan-1
5
Jul-1
5
Jan-1
6
Aug-1
6
Ma
r-1
7
Jan-1
5
Jul-1
5
Jan-1
6
Aug-1
6
Ma
r-1
7
Jan-1
5
Jul-1
5
Jan-1
6
Aug-1
6
Ma
r-1
7
ARG BRA CHI COL MEX PER
Consumer Producer
OPTIMISM
PESSIMISM
Latin America Outlook 2Q17
End of GDP deceleration in Latam, but growth remains below
potential
Latin America leaves 4-year
deceleration behind it
Stronger growth in 2017-18
driven by: • External sector, supported by
more favorable terms of trade
and stronger global growth
• Investment, especially in places
like Argentina and Colombia
Growth in 2017-19 still below
potential, which is closer to
3%
17
Source: BBVA Research
* Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay,
Peru, Mexico, Uruguay and Venezuela
Latam: GDP growth (%)
2.8 2.9
0.9
-0.3
-1.4
1.1
1.8
2.4
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2012 2013 2014 2015 2016 2017 2018 2019
Latam* Andean Brazil Mexico
Latin America Outlook 2Q17
Recovery under way in Argentina. Brazil leaves recession
behind. Mexico will decelerate less than anticipated.
18
Latam countries: GDP growth (%)
Source: BBVA Research
Recent data show the recovery is already
under way in Argentina and activity is
bottoming out in Brazil.
Economic outlook is less challenging for
Mexico, as the new US administration
seems to be softening its stance on
trade.
Downward revision to growth in Colombia
and Peru, due to weak incoming data and
infrastructure delays. In addition, Peru
suffers the effects of the “coastal El Niño”
-5
-4
-3
-2
-1
0
1
2
3
4
5
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG BRA CHI COL MEX PAR PER URU Latam Mercosur PacificAlliance
Apr-17 Feb-17
Latin America Outlook 2Q17
0
2
4
6
8
10
12
14
16
18
20
0
5
10
15
20
25
30
35
40
45
50
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
De
c-1
5
De
c-1
6
De
c-1
7
De
c-1
8
Argentina (left) Brasil Chile Colombia México Paraguay Perú Uruguay
ForecastInflation target
Inflation continues to abate in South America and will increase
less than anticipated in Mexico
19
Latam: inflation and central bank target ranges (%, yoy)
Source: BBVA Research
Recent exchange rate appreciation and weak demand
effected a lower inflation in South America, except
(temporarily) in Argentina and Peru. Inflation will continue to
come down going forward.
In Mexico, inflation continued to increase, given past
depreciation and fuel price hikes. But recent appreciation
will moderate future inflation increases.
Latin America Outlook 2Q17
Reduction of interest rates in South America will mark
decoupling with Federal Reserve
20
Latam: official interest rates (%)
Source: BBVA Research and Haver
Interest rate cuts will continue in coming months in South
America. Argentina and Peru will also cut rates as inflation
eventually comes down later in 2017.
Mexican central bank will likely hike rates going forward, in
line with the Fed. But policy tightening will be less severe
than anticipated three months ago.
0
2
4
6
8
10
12
14
16
0
5
10
15
20
25
30
35
40
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8
Jun-1
6
De
c-1
6
Jun-1
7
De
c-1
7
Jun-1
8
De
c-1
8 .
ARG (left) BRA CHI COL MEX PAR PER
Actual Forecast
Latin America Outlook 2Q17
Fiscal deficits will continue to shrink, except (temporarily) in
Peru
We continue to expect Brazil and
Argentina to meet their primary
deficit targets. Fast reduction in
interest rates in Brazil induce a
downward revision to our
forecasts for headline fiscal
deficit
Fiscal deficit in Colombia and
Peru to increase above
expectations. • In Colombia, fiscal council allows for
more fiscal space as current account
risks diminish
• In Peru, fiscal deficit would be higher
than anticipated, to address
emergency and reconstruction
expenditure (deviation allowed by
the fiscal rule)
21 Source: BBVA Research and Haver
Latam: fiscal balance (%, GDP)
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG BRA CHI COL MEX PAR PER URU Latam
Apr-17 Feb-17
Latin America Outlook 2Q17
Current account vulnerability continues to abate in most
countries
External deficits continue to
shrink in countries with the widest
gap, like Colombia
Gaps shrink driven by past
exchange rate depreciation,
increasing terms of trade and
global growth
Nevertheless, stronger growth in
2017 will slow down external
adjustment as imports recover
22 Source: BBVA Research and Haver
Latam: current account balance (%, GDP)
-5
-4
-3
-2
-1
0
1
2
3
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
20
16
20
17
20
18
ARG BRA CHI COL MEX PAR PER URU Latam
Apr-17 Feb-17
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
ANNEX
Latin America Outlook 2Q17
Latin America GDP growth forecasts
25 f = forecast
GDP (%yoy) 2014 2015 2016 2017f 2018f
Argentina -2.5 2.6 -2.3 2.8 3.0
Brazil 0.5 -3.8 -3.6 0.9 1.8
Chile 1.9 2.3 1.6 1.6 2.4
Colombia 4.4 3.1 2.0 2.1 2.7
Mexico 2.3 2.6 2.1 1.6 2.0
Paraguay 4.7 3.0 4.1 3.3 3.7
Peru 2.4 3.3 3.9 2.5 3.9
Uruguay 3.2 0.4 1.4 1.9 3.0
Mercosur -0.4 -2.6 -4.4 0.5 1.4
Pacific Alliance 2.6 2.7 2.2 1.8 2.4
Latin America 0.4 -1.3 -2.7 0.9 1.8
