Pacific alliance presentation

Diamonds in the rough Unearthing opportunity in un uncertain world

Irene Mia

Regional Director

Latin America & the Caribbean

Cali, May 24th, 2013

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Outline

I. Introduction The state of the world

II. Diamonds in the rough Africa

Asia

Latin America

IV. Conclusions The emergence of the developing

world

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Key points for the global economy in 2013

• After a series of crises and setbacks, global economy is mending

US economic fundamentals are strengthening ◦ Jobs market is on a modest upswing◦ Housing is clearly recovering

China is recovering from a slow 2012

◦ Boom years are over, but so is the slump

European debt crisis is stabilising… ◦ …but austerity is killing the economy ◦ Euro zone remains big drag on global growth

Most emerging markets were weak in 2012…slowly improving this year

• Central banks are supporting the recovery in a big way

• Don’t expect a brisk recovery, though; many risks remains Debt levels still high; fiscal woes in the US; tensions in Middle East, China, Korea

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Key points for the medium term

• Recoveries from recessions with financial crises take four to six years Banks are recapitalising (especially in the US) but have further to go

in Europe Consumers are reducing debt

(again, especially in the US), freeing up

funds to spend; but more deleveraging ahead

• Euro zone: From acute to chronic Merkel says Europe will struggle for years!!! Expect more flare-ups, like Cyprus Risk of one or more countries leaving the euro zone within five years remains high

• Consumer spending in emerging markets will accelerate Wages have been rising; more disposable income; will offset slowing exports Greatest opportunities for revenue growth are still in Asia

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US clawing out of the hole

• Much better than Europe 2.1% GDP growth in 2013 Personal balance sheet

adjustment done? Consumers borrowing again

◦ Especially for cars Business borrowing also rising

• But economy still compromised Jobs recovery still behind the

curve Fiscal policy has potential to

derail 2013◦ Long-term outlook frightening

A new normal?◦ Ageing society, fiscal strains,

productivity woes, question over returns to innovation

Source: US Fed

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Euro zone: From critical to chronic

•GDP to contract by 0.7% in 2013Underlying levels of sovereign debt

◦ Still very high for many countries, especially on the periphery; years to resolve

Fiscal austerity◦ Difficult balancing act

► Growth vs markets◦ Will keep growth at 1% or less for some

time

Financial catastrophe and break-up?

◦ Reduced probability of market panic ◦ Euro zone break-up much less likely◦ ECB, bail-out funds, political will have all

progressed

2-year government bond yield, %. Source: Haver

“Whatever it takes”

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Politics not yet consistent with long-term euro survival• Sustainable euro zone requires:

Either:◦ Willingness for on-going transfers between core and periphery

Or:◦ Willingness for deep one-off adjustment in periphery living standards to

restore competitiveness◦ Willingness to reform rigid periphery markets to allow long-run

competitiveness◦ Willingness to pool sovereignty to address asymmetric shocks◦ Willingness to recognise insolvency and deal with it

• Gradual recovery, depressing muddle, renewed crisis There are signs of life

◦ Where are Italy, France?

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Adjustment is slowly happening, but not where it counts

Unit labour costs, index, (2005 =100).

Source: OECD.

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Surging ahead…or still digging out?

Sources: National governments, Haver, EIU

The cost of the crisisDifference, in % terms, of real output per head before the recession started in 2007 compared with 2012.

%

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Hitting a BRICS wall? Cyclical and structural troubles

Quarterly real GDP growth % change year on year.

Source: Haver Analytics.

But some improvement in 2013 as conditions strengthen among trading partners and investor

risk tolerance improves

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Africa: Fulfilling its potential?

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Africa at a glance

• Africa is small: just 3% of the global economy But includes fastest growing markets

in the world• In an ageing world, SSA’s fertility rates

remain high 5.2 per female, cf global average of

2.5• By 2100, on current trends

Nigeria’s population rises to 700m 950m in China

• Around 90m households earn more than US$5,000 a year (PPP)

• Governance is improving• Key sectors

banking, retail, infrastructure, agriculture, services (healthcare, education etc)

Source: EIU.

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The engines of growth

• Rising external demand – especially from

China and India – also good for commodity prices

• Rising internal demand – driven by urbanisation and “consumerisation”

• The macro outlook is favourable Fastest growing region in the world,

apart from China and India, in 2012-13

• Businesses can no longer afford to ignore Africa – but risks remain

Mining

Manufacturing

Services

Agriculture

Others

2000US$681m

Mining

Manufacturing

Services

Agriculture

Others

2010US$9.3bn

Chinese FDI in Africa

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The demographic dividend

Population in 2011

• Nigeria – 166m• Ethiopia – 76m• DRC – 68m• South Africa – 49m• Tanzania – 45m• Kenya – 42m• Uganda – 35m• Ghana – 25m • Mozambique – 24m• Angola – 20m

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Key risks: Infrastructure

Ports, Air transport, Retail distribution, Power, Road, Rail, Telephones, IT. 100=riskiest

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Key risks: Legal & regulatory

Fairness of judiciary, Speediness of process, Enforceability of contracts, Confiscation, Bias against foreigners; IPR. 100=riskiest

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Asia: The world’s growth dynamo?

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China is changing

• Recent data disappointing Now expect just 8% growth this

year◦ Some discrepancies

between income and spending, housing market and investment

• Longer-term trend for softening China is 6-7% economy Rebalancing towards consumer

demand Rising wages

• Lower level manufacturing will be shed to Asia

• RMB internationalisation for trade set to rise sharply

Sources: Haver, EIU.

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ASEAN: Steady economic progress

• ASEAN GDP growth should hold up well through 2012, despite the importance of trade and the downturn in the West

• Indonesia attracting real attention from investors – domestically driven growth

• Philippines making welcome headway against traditional problems like fiscal deficits & graft

• Strong growth in the “poor cousins” – Laos, Myanmar & Cambodia

2012 GDP (%)

Inflation (%)

Brunei 1.5 1.6

Cambodia 6.0 4.4

Indonesia 5.9 5.3

Laos 7.7 7.0

Malaysia 4.0 2.4

Myanmar 5.0 5.7

Philippines 3.4 3.6

Singapore 3.0 3.9

Thailand 6.0 3.2

Vietnam 5.7 13.8

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ASEAN rising

Becomes world’s fourth biggest economy

Source: Economist Intelligence Unit

GDP, US$m (PPP)

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ASEAN: Near, medium and...

• Indonesia (near): Bigger population than Brazil Strong domestic demand Rich natural resources

BUT: Uncertain political outlook

• Philippines (medium): Outsourcing boom Big domestic market Economic fundamentals look a bit better Improved politics (but still a shambles)

BUT: Old problems persist (infrastructure, private consumption led) -2

02468

10121416

1996

1998

2000

2002

2004

2006

2008

2010

China Philippines

(GDP growth, y on y)

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...long term

• Myanmar (long): Huge, untapped potential

10th largest gas reserves in the world Population of 80m

60% chance that gradual reform will continue Foreign aid kick-starts development Western sanctions eased

Opportunities in tourism, minerals,healthcare, education, and consumer goods

Joining Asian’s apparel supply chain? Bangladesh, Sri Lanka, Myanmar, Cambodia

BUT: Appalling infrastructure and v low education levels Whole reform process could go backwards

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Latin America: On the rise?

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Mapping growth in 2013-17

3.4%

3.8%

6.3%

5.8%

4.5%

4.8%

Source: Economist Intelligence Unit, CountryData.

3.8%

2.8%

5.8%

• Expected regional growth of 3.6% in 2013 (compared to 3% for the previous year), and an average of nearly 4% for 2014-17 period

• Recent slowdown is cyclical rather than structural, with future growth sustained by sound macro policies in most countries, resilient domestic demand and a modest pick-up in global growth

• Recovery in China will benefit producers of soft and hard commodities, as demand will sustain prices at high levels

• Widening current account deficits has increased LAT’s vulnerability to shifts in market sentiment

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The demographic dividend Population (Million)


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The rise of the consumer market


GDP per head ($ at PPP)• Rise of middle class through greater economic stability, increases in minimum wages and conditional cash transfer programmes

• Gini index has fallen over past decade, with 41 and 18 million people falling out of poverty and extreme poverty, respectively

• Young median age compared to rest of world (in Brazil, average is less than 30 years, 30% are 14 years or younger), but aging nonetheless

• Urbanization rate, up to 79% (Brazil & Chile, above 85%)

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Integrated regional market and diversified export markets Latin American markets increasingly integrated by a series of trade agreements (Mercosur, Andean Community, the newly signed Pacific Alliance, Caricom)

And stretching out to other regions using its strategic location close to the US and with a Pacific outreach:

US (NAFTA, CAFTA-DR, trade agreements with Chile, Colombia and Panama)

Asia (APEC, Trans-Pacific Partnership Agreement, several bilateral agreements between Mexico, Chile and Peru notably with Asian countries)

% of total % of totalUS 23.0 US 56.1EU 65.1 China 19.6China 8.5 EU 17.4Canada 3.4 Japan 7.0

Leading markets Leading suppliers

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China has increased its share in Latin

America’s trade from 1% in 1880 to 11% in 2011, becoming third trading partner after the US (21%) and the EU (13%)

Main trading partners for countries like Brazil or Chile

China was the third investors in the region in 2010 (mostly extraction and natural resources but also diversifying in infrastructure and manufactures)

China is also an increasing source of funding: Chinese banks have lent more than USD 75bn from 2005 to 2012 to the region

China-Latin America: A growing relationship

Diversifying and increasing exports to Asia, in particular to China. The region is currently running a trade deficit with Asia, and would benefit from trade diversification beyond commodities and towards more value added products (notably through business initiatives to promote intra-industry trade among the two regions)

Opportunities for enhanced co-operation in innovation and human capital development, and to attract more knowledge-based FDI

BU

T A

FE

W C

HA

LLE

NG

ES

R

EM

AIN

:

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Business environment: Lagging behind in reforms

The EIU business environment rankings measure the attractiveness of the business environment in 82 countries worldwide, based on the market opportunities, policy toward enterprises and FDI, foreign trade and exchange controls, taxes, financing, infrastructure among others.

Among the problematic areas: poor infrastructure, rigid labour markets, insufficient financing, cumbersome fiscal systems, availability of skilled labour, poor competition, red tape.


2008-12 2013-17 change

North America 8.12 8.30 0.18

Western Europe 7.41 7.42 0.01

Asia & Australasia 5.99 6.34 0.35

Eastern Europe 6.55 6.93 0.38

Latin America 5.81 6.02 0.21

Middle East & Africa 5.50 5.81 0.31

World average 6.56 6.80 0.24

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Mexico at a glance

• Optimism about structural reforms is growing

• Growth prospects for the medium-longer term are positive, although short term risks (weak global recovery, peso appreciation)

• Public spending sustains fiscal deficit, but manageable

• Inflation stabilises at 2-4% per year

• Despite recent appreciating trend, peso remains weak relative to other emerging-market currencies, boosting competitiveness

• Consumer confidence at near 5-year high, suggesting consumption pick-up in 2013

• US developments remain major source of risk

Key IndicatorsKey Indicators

GDP growth, 2013(2012 growth)

3.7%(4.0%)

FDI billion USD, 2013(% growth)

$23.5(31.3%)

Public sector balance, 2013 % of GDP (2012)

-1.4%(-2.4%)

Disposable income per capita 2013, USD (real %)

$7,031 (3.9%)

Domestic credit growth 2013 (average, 2014-16)

15.9% (15.6%)

Retail sales billion USD, 2013 (% growth)

$434.8 (13.1%)

Business environment ranking (2013-17): 32 (out of 62)

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Chile at a glance

• Campaigning for Nov elections dominates politics

• Record of prudent policies unaffected, whoever wins election; still the region’s star performer

• GDP grows 4.7% in 2013 and 4.8% on average over five years

• Inflation stays within 2-4% target range, while peso remains stronger than historical average

• Gov’t focuses more on cash transfers and other measures to address structural poverty and regional inequalities

• Energy bottlenecks present key risk for economy and business operations



4.7%(5.5%)


$22.0(-4.3%)


1.5%(1.4%)


$9,574 (5.4%)


9.2% (9.6%)


$90.7 (9.4%)


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Colombia at a glance

• Peace talks and pre-election maneuvering dominate political scene

• Presents one of most stable economic and business climates, with rising profile among emerging markets

• GDP gathers pace to 4.3% in 2013 and 4.6% average over five years

• Prudent policies keep inflation within target 2-4%

• Peso remains strong, owing to interest-rate differentials and strong FDI inflows

• Gov’t policies promote social inclusion and formal job creation, boosting consumer market potential



4.3%(3.8%)


$17.4(6.9%)


-0.7%(-0.3%)


$5,904 (3.4%)


15.2% (14.5%)


$121.6 (9.4%)


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Peru at a glance

• Gov’t maintains pragmatic and broadly centrist policies despite prior leftist leanings

• GDP growth of 6.2% in 2013 is among strongest in region, and stays firm thereafter

• Growth is balanced, supported by strong investment, robust private consumption and improving external demand

• Inflationary pressures ease; gov’t continues to intervene to prevent NSol appreciation

• Firm GDP will further reduce poverty (down 28% in 2011), but inequality remains a challenge



6.2%(6.2%)


$10.6(10.0%)


1.3%(1.9%)


$3,128 (5.1%)


12.0% (5.8%)


$85.0 (13.5%)


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In conclusion…

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Shifting places

0

20

40

60

80

100

120

140

160

180

1990 2000 2010 2020 2030

Euro USAJapan ChinaBrazil IndiaASEAN Mid EastLat Am

Nominal US$ trn. Source: EIU.

GDP in US$ trn

Emerging markets

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Retail sales: The rise of emerging-market consumers

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

2000 2010 2016

G10 E10

Retail sales, US$m. G10: US, UK, Canada, France, Germany, Italy, Spain, Australia, NZ, Japan. E10: Brazil, Russia, India, China, Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa. Source: EIU

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Where’s the growth?

Real GDP growth; % change, year on year. ASEAN = Association of South East Asian Nations. CIS = Russia, Ukraine etc. As of April 2013. Source: Economist Intelligence Unit, CountryData.

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Key economies to watch in next five years

Real GDP, average annual % change, 2013-2017. Source: Economist Intelligence Unit

BRICs

CIVETS

Other EMs

G 7

0 1 2 3 4 5 6 7 8 9

China

India

Nigeria

Vietnam

Indonesia

Turkey

Colombia

Egypt

South Africa

Brazil

Russia

South Korea

Mexico

US

Canada

Germany

France

Japan

UK

Italy

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Implications for business

• Geographic refocusing Emerging markets will become the primary source of revenue and profit

• Doing more with less Permanently leaner as low-cost competition increases

◦ Freeing up resources to become more agile

• Balancing the short and long-term Surviving today vs. investment in a dramatically changing business

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Irene MiaRegional director, Latin American & the CaribbeanEIU Country [email protected]

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