potential and outlook for the pacific alliance...outlook for the pacific alliance / march 2016 page...

Pacific Alliance

Potential and

Outlook for the

March

2016

Outlook for the Pacific Alliance / March 2016

1 Pacific Alliance: aiming for integration into the global economy

2 Pacific Alliance: outlook and challenges

Outline


Biggest economies in 2015 (bn. USD, PPP adjusted)

Biggest contributions to GDP growth in the next 10 years (m USD, PPP adjusted)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Ch

ina

Un

ite

d S

tate

s

Ind

ia

Japa

n

Ge

rma

ny

AP

Ru

ssia

Bra

zil

Indon

esia

Un

ite

dK

ing

dom

Fra

nce

Ita

ly

MEX CHI COL PER

20k 18k 8k

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Ch

ina

Ind

ia

US

Ind

on

esia

PA

Ru

ssia

Ko

rea

Tu

rke

y

Ge

rma

ny

UK

Bra

zil

Ja

pa

n

MEX CHI COL PER

14k 8k 5k 2k

The Pacific Alliance (PA): the true Latam giant

Source: BBVA Research and IMF Source: BBVA Research and IMF


ARGBRA

URUPAR

VEN

MEX

COL

CHI

PER

0

10

20

30

40

50

60

70

80

0 10 20 30 40 50 60

% o

f w

orl

d G

DP

wit

h w

hic

h F

ree T

rad

e A

gre

em

en

t s

ign

ed

# of countries with which Free Trade Agreement signed

Number and size of trade agreements signed

Pacific

Alliance

Mercosur

Trade between PA countries is just 4% of their total foreign trade

Pacific Alliance aims also for integration in financial markets and free movement of labor

There is scope to increase trade within PA but, potential is highest in the case of Mexico

Internal trade opportunities are low

for now, tilted on Mexico

Pacific Alliance: committed to integration with the global economy…

Source: BBVA Research and WTO


Trade agreements signed

with

US

with

EU

with

Japan

with

China

with

EFTA

(Switzerland)

Total

number

of

agreem’ts

Chile 21

Colombia 11

Mexico 18

Peru 16

Brazil 5

... especially with the main economic regions


PA countries among those with

highest potential to attract FDI

FDI attraction and potential to attract FDI

ChileColombia

Brasil

México*

Perú

Uruguay

Paraguay

México**0

30

60

90

120

0 30 60 90 120

Ran

kin

g o

f F

DI att

racti

on

(2011

-2013)

Ranking of FDI potential (2013)

Countries

High potential

Hig

h a

ttra

ctio

n

Mexico*= current position; Mexico**= expected position after energy reform

Pacific Alliance attracts FDI even beyond its high potential....

FDI potential index:

i. attractiveness of domestic market;

ii. qualified labor force;

iii. availability of natural resources;

iv. infrastructures

FDI attraction:

ranking of inward FDI

both in absolute terms and

relative to country size

Source: BBVA Research and UNCTAD


Four dimensions of attractiveness for FDI (ranking among 120 countries)

´ ´

0.00

0.20

0.40

0.60

Attractivemarket

Workforce

NaturalResources

Infrastructure

Mexico Chile Colombia Peru

Scale percentiles. 0 = best valued. 1 = Worst Rated

But there is still ample room to improve the attractiveness of Pacific Alliance for FDI flows

Source: BBVA Research and UNCTAD

Some areas with room to improve attractiveness

for FDI:

Labor force qualification

Labor costs

Quality and quantity of infrastructures

Key: education and labor market reform.

Infrastructure investment


2007 2012 2007 2012 2007 2012 2007 2012

Animal Products

Vegetable Products

Groceries

Mineral Products

Fuels

Chemicals

Plastics

Fur and leather

Wood Products

Textiles

Footwear and headgear

Stone and glass

Metals

Electrical machinery

Transport Equipment

Others

Primary products

Basic Manufacturing

Non Basic Manufacturing

Chile Colombia Mexico Peru

Index of Revealed Comparative Advantage (RCA) by

aggregate sector

Primary products

More complex

manufacturing

Stronger Lower

advantage advantage

Revealed Comparative Advantage of Andeans in primary products; manufactures in Mexico …

Source: WITS and BBVA Research


… and this pattern also shows up when thinking about most competitive sectors in each country

Chile

• Copper and articles

thereof

• Ores, slag and ash

• Edible fruit and nuts

• Pulp of wood

• Fish and

crustaceans

• Coffee, tea, mate

and spices

• Live trees, plants,

flowers

• Edible fruit and nuts

• Sugar and

confectionery

• Mineral fuels, oils

and bituminous

• Meat and Edible

meat offal

• Plaiting materials

(yarn)

• Furniture

• Motor Vehicles

• Alcoholic beverages

• Tin and articles

thereof

• Plaiting materials

(yarn)

• Ores, slag and ash

• Fishmeal

• Lead and articles

thereof

Colombia Mexico Peru


1 Pacific Alliance: aiming for integration into the global economy

2 Pacific Alliance: outlook and challenges

Outline


Latam: GDP growth forecasts

Pacific Alliance: MEX, COL, PER, CHI

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2012 2013 2014 2015 2016 2017 2018

Latam Pacific Alliance Brazil

Latam has decelerated, but less so in the Pacific Alliance

Growth forecasts for 2016 and 2017 are revised

down. due to weak domestic demand…

… and a challenging external environment.

including lower commodity prices and concerns

about growth in China

Pacific Alliance will grow around 2.5 in 2016-17,

still below its potential (closer to 4%)

Recovery of growth in 2017 driven by:

1. Stronger global growth;

2. Exchange rate depreciation and improved terms-

of-trade

3. Lower political uncertainty in Brazil

4. Surge of private investment in Argentina and

infrastructure investment in Peru and Colombia Source: BBVA Research


Potential GDP growth next 10 years (%)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

BRA MEX CHI COL PER US EU China

Average PA

Pacific Alliance: high potential growth

Source: BBVA Research

Besides a high contribution to global growth,

a high potential growth rate, although lower

commodity prices have dented it recently

Commitment to reform will contribute to increase

potential growth


Population growth rate (% annual, 2011-21)

Increase in middle class (million people, 2011-21)

Increase in middle class

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

BRA MEX Andeans

0

2

4

6

8

10

12

14

16

18

20

BRA Pacific Alliance

PER

COL

CHI

MEX

Dynamism due in part to favorable demography and the rise of the middle class

Source: BBVA Research Source: BBVA Research

Population growth,

demographic dividend

Increase in

per capita income

Progress in decreasing

inequality


Public debt (gross) %GDP, 2015 Inflation (%, 2015)

0

1

2

3

4

5

6

BRA MEX CHI COL PER

Index (0-7) of competition in the domestic market (7 = maximum competition)

0

10

20

30

40

50

60

BRA MEX CHI COL PER

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

BRA MEX CHI COL PER

... also (and more importantly) due to prudent policies, low interventionism and openness

Source: BBVA Research and FMI Source: BBVA Research and FMI Source: BBVA Research and World Economic Forum


Quality of infrastructure (Index: 0-7, 7 = maximum quality)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

BRA MEX CHI COL PER Emerging G7

But the Pacific Alliance also faces significant challenges

Source: BBVA Research and World Bank

High informal sector

(labor market, underground economy)

Human capital: quality of education

Physical capital: quantity and quality of

infrastructure (energy in Chile)

Tax revenues highly dependent on a small

number of exported commodities


Medium run: Populism

Long run: Inequality

Short run: lower global liquidity

Medium run: Chinese slowdown

Reforms that enhance productivity: Physical capital, human capital,

reduce informality

2%-3% growth may be ideal environment to push reforms

(not too high, not too low)

… key to deal with risks

Still on time

to implement Reforms 2.0

All in all: Pacific Alliance still controls its future …


The Pacific Alliance (PA) is the sixth biggest economy in the world

and will be the fifth in term of contribution to global growth in the next

10 years.

The PA is committed to trade and financial integration both within the

alliance as well as with the rest of the world. There is ample room to

develop further integration within the AP.

The PA’s potential growth is close to 4% during the next decade.

Growth will be based on continuing reforms and prudent economic

policies.

Growth could be even higher if there are further advances in

reducing the informal sector and increasing investment in

infrastructure and in human capital (education).

1

2

3

4

To summarize …

potential and outlook for the pacific alliance...outlook for the pacific alliance / march 2016 page...

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