presentation latin america outlook 4q17 · latin america outlook 4q17 main messages 1. global...

Latin America Outlook

4th QUARTER 2017

Latin America Outlook 4Q17

Main messages

1. Global growth continues increasing and becomes more

widespread. Financial markets still favor emerging

economies. Global risks still remain alive.

2. Growth recovers in Latin America, but will still be low in

2017-18. Growth is revised up 0.3pp in 2017 to 1.1% and

remains unchanged at 1.6% in 2018. Growth in 2018 will be

driven by the external sector and infrastructure investment in

Argentina, Colombia and Peru.

3. Inflation continues falling in South America and starts to

do so in Mexico, driven by stable exchange rates, weak

demand and, in some countries, lower food prices.

Consequently, central banks will cut interest rates in South

America in coming months and at end-2018 in Mexico

4. External risks for Latam decrease somewhat, apart from

the possible overvaluation in financial markets. On the

internal front, political noise and uncertainty also moderate,

but remain high.


GLOBAL Positive global momentum

gets reinforced, but still with

downside risks


Positive global momentum gets reinforced

4

2 Stable and strong

growth

But some decoupling

between optimists soft

data and not-so-strong

hard data

Central banks on

path to

normalization

High uncertainty and

different speed in

US and Europe

A more

synchronized

recovery

Improving in

emerging

economies

Low financial

volatility

Tailwinds to wane

gradually

Weak core

inflation

Some signs of

wage gains, but

doubts about its

sustainability

Downward

risks

Reduced in

China and

increased in

the US in the

short run


Global GDP growth Forecasts based on BBVA-GAIN model (%, qoq)

Confidence indicators improve

significantly, and point to a more

positive outlook than hard data

Trade grows strongly and

industrial production continues

recovering

Signs of stronger consumption

despite waning tailwinds

Source: BBVA Research

Global growth: strong and stable in 2H17

5

0,4

0,6

0,8

1,0

1,2

De

c-1

2

Jun-1

3

De

c-1

3

Jun-1

4

De

c-1

4

Jun-1

5

De

c-1

5

Jun-1

6

De

c-1

6

Jun-1

7

De

c-1

7

CI 20% CI 40% CI 60%

Point Estimates Period average


A more synchronized recovery of global growth across regions

6

Index of growth synchronization between developed and emerging economies

Developed markets:

- Strong US rebound.

- Positive surprises in Europe

Emerging:

• Slight deceleration in China,

though milder than expected. Still

supporting growth in rest of Asia.

• Russia and Brazil recover, and do

not drag global growth

• Growth improves in Latam

Growth gets more support from

economic policies

Synchronization index is the inverse of the standard deviation of quarterly growth across countries. Lower volatility is associated with higher

synchronization of global growth.

Source: National sources, Markit Economics and BBVA Research

0

10

20

30

40

50

60

70

2T

10

4T

10

2T

11

4T

11

2T

12

4T

12

2T

13

4T

13

2T

14

4T

14

2T

15

4T

15

2T

16

4T

16

2T

17

Stable growth in

EM, deceleration

in DM

Increased growth in DM

/ lower growth in EM

Increased

growth in DM

and EM


No warning signs regarding core inflation

7

US and Euro area: wages (%yoy)

Despite growth and tighter labor

market, core inflation remains low

Doubts whether recent wage gains

will persist. Inflationary pressures

remain low.

Uncertainty about drivers of inflation:

Permanent or temporary changes?

Caution at central banks, especially

in developed markets. Some more

policy space in emerging economies


US average 1993-2017

Euro area average1996-2017

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

2Q

16

4Q

16

2Q

17

Eurozone USA


Central banks on track for a gradual policy normalization

8

FED

ECB

Balance sheet

normalization starting in

October and next interest

rate hike in December,

followed by two more

hikes in 2018

Debt purchases to be

pared down in 2018, but

no interest rate hikes are

expected before mid-2019

• In US, due to subdued inflation and

expected changes to FOMC

composition in 2018

• In Euro area, bias toward more

gradual tapering (strong euro) and

delaying interest rate hikes (low

inflation)

High uncertainty


Financial markets still favor emerging economies

9 Source: BBVA Research y Bloomberg

Weak dollar and low interest rates

support search for yield and

emerging market assets

Global liquidity will remain high,

given gradual policy normalization

by Fed and ECB. But these tailwinds

will start to wane.

Pre

fere

nce f

or

dev

elo

ped

mark

ets

Pre

fere

nce f

or

em

erg

ing

mark

ets

em

erg

en

tes

Index of regional asset relocation (standardized deviation relative to historical mean)

-1.25

-1.00

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

Ma

r-1

5

Ju

n-1

5

Se

p-1

5

De

c-1

5

Ma

r-1

6

Jun-1

6

Se

p-1

6

De

c-1

6

Ma

r-1

7

Ju

n-1

7

Se

p-1

7


Growth in Europe and China revised up. Upward bias in Latin America

10 Source: BBVA Research. South America includes: Argentina, Brazil,

Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela

US

2017

2,1 2018

2,2

SOUTH AMERICA

2018

1,5

EUROZONE

CHINA 2017

2,2

2018

6,0

WORLD

2018

3,4 2017

3,4

Revised down

Revised up

Unchanged

2018

1,8

2017

0,6

2017

6,7 MEXICO 2018

2,0 2017

2,2


Hurricanes will have a limited

impact on activity and thus we

keep unchanged our growth

forecasts for 2017-18

Pending issues:

• Tax reform still to be fully spelled

out

• Uncertainty about economic policy

• Some signs of financial

vulnerability

• Increased geopolitical risk

Source: BBVA Research and BEA

US: GDP growth (%)

US: sustained growth despite political uncertainty and

hurricanes

11

2.6

2.9

1.52.1 2.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2014 2015 2016 2017 2018

Current Previous


China: GDP growth (%)

Slight upward revision of our 2017

growth forecast, due to better

incoming data on 1S17

Deceleration in 2018 due to lower

impulse from economic policies

and exchange rate appreciation

Uncertainty about the outcome of

the upcoming Communist Party

Congress

Long-run risks remain, even

though financial vulnerabilities

have improved given recent

regulatory measures.

Source: BBVA Research and CEIC

China: more favorable outlook in the short run

12

7.3

6.96.7 6.7

6.0

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

2014 2015 2016 2017 2018

Current Previous


Euro area: higher growth due to stronger domestic demand

13 Source: BBVA Research and Eurostat

Euro area: GDP growth (%)

Consumption and investment

strengthen, with limited fallout from

euro appreciation

Inflation increases slowly towards

ECB target

Monetary policy normalization will

allow it to continue supporting

growth

Political and banking risks remain

(Spain, Italy, support to European

project, brexit) but they become

more contained.

1.4

1.9

1.82.2

1.8

0.0

0.5

1.0

1.5

2.0

2.5

2014 2015 2016 2017 2018

Current Previous


Oil and soybean prices on track towards their long-run

equilibrium . Copper prices increase temporarily.

14

Source: BBVA Research and Bloomberg

BRENT OIL

(USD/B)

SOYBEANS

(USD/mT)

COPPER

(USD/lb)

Oil and soybean prices maintain our view of gradual

convergence towards long-run equilibrium prices. We still

expect Brent oil prices to converge towards 60USD/b.

Copper prices increased strongly in the last months driven by

financial flows, which should abate gradually going forward.

We keep unchanged our view for long-term prices.

0

20

40

60

80

100

120

1Q

20

14

3Q

20

14

1Q

20

15

3Q

2015

1Q

20

16

3Q

20

16

1Q

2017

3Q

20

17

1Q

20

18

3Q

20

18

1Q

2019

3Q

20

19

1Q

20

20

3Q

2020

Forecast in July 2017

Forecast in October 2017

1,5

1,7

1,9

2,1

2,3

2,5

2,7

2,9

3,1

3,3

1Q

20

14

3Q

20

14

1Q

2015

3Q

20

15

1Q

20

16

3Q

20

16

1Q

2017

3Q

20

17

1Q

20

18

3Q

20

18

1Q

2019

3Q

20

19

1Q

20

20

3Q

20

20



300

350

400

450

500

550

600

1Q

20

14

3Q

20

14

1Q

20

15

3Q

20

15

1Q

20

16

3Q

20

16

1Q

2017

3Q

20

17

1Q

20

18

3Q

20

18

1Q

20

19

3Q

2019

1Q

20

20

3Q

20

20




Global risks: rebalancing from China to US in the short run

15 **Other risks: Geopolitics (North Korea); Protectionism

- L

ike

lih

oo

d in

th

e s

ho

rt r

un

+

- Impact +

CHN

US

EZ

Jun Sep • Deleveraging risk: still high but more contained in the

short run (more gradual economic slowdown &

authorities strategy):

• Need to reform state-owned enterprises

• Managing a soft-landing

• Political controversy & risk of cyclical slowdown

• Financial instability risk: signs of overvaluation in some

assets.

• Fed’s exit risk: low but high uncertainty on interest rate

path

• Political and banking concerns: more contained except

Spain

• ECB’s exit risk: low; very gradual exit starting with

tapering in 2018

Upward bias Downward bias


LATAM Growth recovers, but it

is still low


Financial markets continued to show gains for Latam assets…

Asset prices continued to see

significant gains in the last

months, extending the trend

since the beginning of 2017,

driven mainly by global factors:

• Strong dollar

• Still ample global liquidity

• Increasing global growth

• Higher commodity prices

In addition, economic activity

starts to recover in Latam

Latam asset prices: percent change in the last 3 months to

October 16*

17 Source: BBVA Research and DataStream * Changes between October 16 and

July 17. 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


… in and environment of unusually low volatility, which could be

abruptly reversed

Volatility at historical lows despite

increasing economic, political and

geopolitical uncertainty

Risk of complacency by markets,

at a time of increasing rates by

the Fed.

Volatility in developed markets and country risk premium

in Latam

18 Source: BBVA Research, DataStream and Bloomberg

300

350

400

450

500

550

600

650

700

750

0

5

10

15

20

25

30

35

40

45

Feb

-15

Ap

r-1

5

Jun-1

5

Aug-1

5

Oct-

15

De

c-1

5

Feb

-16

Ap

r-1

6

Jun-1

6

Aug-1

6

Oct-

16

De

c-1

6

Feb

-17

Apr-

17

Jun-1

7

Aug-1

7

Oct-

17

VIX EMBI Latam (right)


Limited exchange rate depreciation in 2018

Stable or appreciating exchange

rates in the last 3 months. Real

exchange rate appreciation in all

countries.

We continue to expect a mild

depreciation of exchange rates

going forward, consistent with

diverging policy interest rates

between US and Latin America

Mexican peso could appreciate in

2018 if risks relative to renegotiation

of NAFTA and local elections

remain contained.

19 Source: BBVA Research and Haver

Exchange rates to the USD (Index Dec 2016=100)

depreciation with respect to USD

70

80

90

100

110

120

130

90

100

110

120

130

140

150

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

ARG(left)

BRA CHI COL MEX PAR PER

Observed Forecast


Confidence indicators remain pessimistic throughout the region,

but improved in the last months

20

Source: BBVA Research and Haver

Latam: Confidence indicators for households and firms (values above 50 pts indicate optimism)

Some recovery of producer confidence, supported by low

volatility in financial markets, higher commodity prices and

somewhat lower political noise and uncertainty in some

countries.

For households, lower inflation has improved sentiment

somewhat, which nonetheless remains in pessimistic ranges,

dragged by weak labor markets.

20

25

30

35

40

45

50

55

60

65

Ja

n-1

6

Ju

n-1

6

No

v-1

6

Apr-

17

Sep

-17

Ja

n-1

6

Ju

n-1

6

No

v-1

6

Apr-

17

Sep

-17

Ja

n-1

6

Ju

n-1

6

No

v-1

6

Apr-

17

Sep

-17

Ja

n-1

6

Ju

n-1

6

No

v-1

6

Apr-

17

Sep

-17

Ja

n-1

6

Ju

n-1

6

No

v-1

6

Apr-

17

Sep

-17

Ja

n-1

6

Ju

n-1

6

No

v-1

6

Apr-

17

Sep

-17

ARG BRA CHI COL MEX PER

Consumer Producer

optimism

pesimism


Growth recovers in Latam, but it will still be low in 2017-18

Recovery after a 5-year

deceleration and a GDP

contraction in 2015-16

Stronger growth in 2018

driven by: • External sector, supported by

more favorable terms of trade

and stronger global growth

• Investment, especially in places

like Argentina, Colombia and

Peru

Growth still low in 2017-18,

below potential, and below

developed economies

21


* Weighted average of Argentina, Brazil, Chile, Colombia, Mexico, Paraguay,

Peru, Mexico, Uruguay and Venezuela

Latam: GDP growth (%)

2,8 2,9

0,9

-0,4

-1,2

1,1

1,6

2,5

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

2012 2013 2014 2015 2016 2017* 2018* 2019*

Latam* Andeans Brazil Mexico


Latam growth revised up in 2017 (1,1%)

and unchanged in 2018 (1,6%)

22

Latam countries: GDP growth (%)


Recent data confirm recovery under way

in Argentina and also in Brazil, Chile and

Peru.

Economic activity in Mexico surprised to

the upside in 1H17, but there are early

signs of a deceleration in 2H17.

We revise up out growth forecasts for

Mexico and Peru in 2017, given the

strength of domestic demand in 1H17.

-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 Mercosul PacificAlliance

Oct-17 Jul-17


Inflation continues to diminish in South America

and starts to do so in Mexico

23

Latam: inflation and central bank target ranges (%, yoy)


Lower inflation in South America due to a stable exchange

rate, weak demand and lower food prices.

Inflation will stop falling in Brazil and Chile, but will remain

below their central bank target during some time. It will

continue to converge to target in Peru and Colombia.

Inflation will start to abate in Mexico and will continue to

fall in Argentina

0

2

4

6

8

10

12

14

16

18

0

5

10

15

20

25

30

35

40

45

50

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

De

c-1

6

De

c-1

7

De

c-1

8

Argentina (left) Brasil Chile Colombia Mexico Paraguay Peru Uruguay

ForecastInflation target


Additional interest rate cuts in South America in coming

months. Rate cuts in Mexico at end-2018.

24

Latam: official interest rates (%)

Source: BBVA Research and Haver

Interest rate cuts in South America will continue during the

rest of 2017 or at the beginning of 2018 (varying by country),

given low or declining inflation and weak domestic demand.

In Mexico, Banxico will keep interest rates unchanged until

3Q18, when it will start cutting rates, provided inflation

returns to the target range and volatility in financial markets

does not increase.

0

2

4

6

8

10

12

14

16

0

5

10

15

20

25

30

35

40

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8

Ju

n-1

6

De

c-1

6

Ju

n-1

7

De

c-1

7

Ju

n-1

8

De

c-1

8 .

ARG (lhs) BRA CHI COL MEX PAR PER

Observed Forecast


Fiscal deficits will continue to shrink, except (temporarily) in

Peru

Increase in our forecast for fiscal

deficits in Argentina, due to

interest payments and despite

the more positive performance of

primary deficit targets.

A slower fiscal consolidation path

in Brazil, due to less ambitious

primary deficit targets,

compensated with lower interest

rate payments.

Fiscal outlook improves in Peru

and Chile, given higher copper

prices.


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

oct-17 jul-17


Current account deficits improve in most countries. Better

outlook in Brazil, Chile and Peru

External deficits continue to

shrink in countries with the widest

gap, like Colombia, although at a

slower pace than anticipated in

some cases

On the contrary, Argentina’s

externa deficit worsens, given

strong increase of imports.

External outlook in Brazil, Peru

and Chile improves, given

increase of metal prices.


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

oct-17 jul-17


Main messages

1. Global growth continues increasing and becomes more

widespread. Financial markets still favor emerging

economies. Global risks still remain alive.

2. Growth recovers in Latin America, but will still be low in

2017-18. Growth is revised up 0.3pp in 2017 to 1.1% and

remains unchanged at 1.6% in 2018. Growth in 2018 will be

driven by the external sector and infrastructure investment in

Argentina, Colombia and Peru.

3. Inflation continues falling in South America and starts to

do so in Mexico, driven by stable exchange rates, weak

demand and, in some countries, lower food prices.

Consequently, central banks will cut interest rates in South

America in coming months and at end-2018 in Mexico

4. External risks for Latam decrease somewhat, apart from

the possible overvaluation in financial markets. On the

internal front, political noise and uncertainty also moderate,

but remain high.


ANNEX


Latin America GDP growth forecasts

29 f = forecast

GDP (%) 2014 2015 2016 2017f 2018f

Argentina -2.5 2.6 -2.2 2.8 3.0

Brasil 0.5 -3.8 -3.6 0.6 1.5

Chile 1.9 2.3 1.6 1.3 2.4

Colombia 4.4 3.1 2.0 1.5 2.0

Mexico 2.3 2.7 2.0 2.2 2.0

Paraguay 4.7 3.0 4.0 3.7 3.5

Peru 2.4 3.3 4.0 2.4 3.9

Uruguay 3.2 0.4 1.4 3.2 3.1

Mercosur -0.4 -2.8 -4.1 0.2 1.1

Pacific Alliance 2.6 2.7 2.2 2.0 2.3

Latin America 0.9 -0.4 -1.2 1.1 1.6

presentation latin america outlook 4q17 · latin america outlook 4q17 main messages 1. global...

Documents