Group Economics Emerging Markets
Latin America outlook What’s holding growth back?
Marijke Zewuster Tel: +31 20 3830518 marijke.zewuster@nl.abnamro.com
May 2015 The economic developments in the first months of the year were disappointing for most countries and the outlook for much of the continent remains sombre. Accordingly, we have revised our forecasts for 2015 further downwards in the past months. With three of the region’s seven largest economies in recession, regional growth is set to fall to a new low this year. Due to weak economic conditions, most countries have limited scope for budgetary and monetary stimulus measures. However, as the problems are more on the supply than the demand side, structural reforms appear to be a more important concern. Failing such measures, the region is heading for a prolonged period of moderate growth. Further downward revisions to our forecasts Internal circumstances remain an important factor in the growth deceleration. As a result, the negative impact of lower commodity prices and a diminishing risk aversion is having a stronger effect than the positive impact of improved growth prospects in the industrial countries. This most definitely applies to Argentina, Brazil and Venezuela. All these three countries not only face a further weakening of growth, but are also expected to undergo contraction in 2015.
in growth weakening from 4.6% in 2014 to 3.5% in 2015, a level that is likely to be maintained in 2016. Weak investments persist Low commodity prices are not only having a dampening effect on exports, but increasingly also on investments and consumer spending.
Falling investment ratio % GDP
27
Economic growth % y-o-y
24
Q2-14 Q3-14 Q4-14
2014
2015
2016
Brazil
-1.2
-0.6
-0.2
0.1
-1
2
Chile
2.1
1.0
1.8
1.9
3
3
Colombia
4.3
4.3
3.5
4.6
3.5
3.5
Mexico
1.6
2.2
2.6
2.1
3
3.5
Peru
1.8
1.8
1.0
2.4
4
5
Argentina
0.5
-0.5
1
Venezuela
-4.0
Average
0.9
-6 0.5
21 18 15 01 Brazil
03
05 Chile
07
09
Colombia
11 Mexico
13
15 Peru
-4 2.2
Source: EIU
Source: EIU, Bloomberg, ABN AMRO Group Economics
Another factor is that growth in the US is turning out to be less strong than we initially anticipated. Whereas we originally assumed 3.8% growth for 2015, we now expect 3.2%. Colombia and Mexico will suffer the most from the lower-thanexpected US growth. The US is still the most important trading partner of both countries, accounting for about 30% (Colombia) and almost 80% (Mexico) of their total exports. We still see Mexico as well as Chile and Peru staging a recovery after an extremely weak 2014, but the disappointing figures in the first quarter have prompted a slight downward adjustment to the forecasts. Colombia was the strongest grower in 2014, but the growth deceleration that started in the middle of last year looks set to persist this year. The country is contending with the low oil price and the resulting strong decline in investments in the country. We expect this to result
In its Regional Economic Outlook published in late April, the IMF devotes a separate chapter to the weak investments in Latin America and draws the not entirely surprising conclusion that, particularly in Brazil, Chile and Peru, the decline in the investment ratio since mid-2011 has a strong correlation with the fall in commodity prices since that time. Another contributing factor in Brazil and Chile is the political uncertainty, which caused investments to decrease even more strongly than was to be expected on the grounds of the development of commodity prices and other economic variables. External position remains strong Despite all sorts of structural shortcomings, the region’s external position remains a clear strong point. While the investment ratio in the region decreased, the inflow of foreign capital remained remarkably strong. This is not only evident from the fact that foreign direct investments (FDI) expressed
2
What’s holding growth back? – May 2015
as a percentage of GDP remained around 3% in the past years, but also from the fact that the share of foreign investments in total investments increased from a low of 10% in 2009 to approximately 15% in 2014. This suggests that the availability of foreign capital played little or no role in the decline in investments.
rising interest rates in the United States also constrain the possibilities for monetary relaxation. This, however, is not necessarily bad news. The problems in most countries are more on the supply than the demand side. This is also evident from the fact that, notwithstanding the slowdown in growth, unemployment remains low in most countries and inflation relatively high.
Direct foreign investments still holding up Potential growth also falls further Now that commodity prices are no longer giving the regional economy an upward push, old imbalances are reasserting themselves with a vengeance. To ward off a protracted period of low growth, Latin America urgently needs to implement reforms that address its structural weaknesses, most notably a low savings ratio, low productivity and a poor infrastructure.
% GDP
6 4 2 0 -2 -4 90
93
96
99
02
05
Current Account
08
11
14
FDI
Besides influencing short-term growth, these dampening factors will also keep the regional’s potential growth for the coming years closer to the long-term average of just 3% rather than the 4-5% that was considered possible in the initial years after the financial crisis of 2009.
Source: EIU, regiomal aggregate
Growth periods compared The FDI are also still sufficient to fully offset the current account deficits which have increased for the region as a whole from 1% in 2010 to just under 3% in 2014. The foreign debt has also risen further, but the debt structure of most countries has continued to improve, which has translated into favourable interest rates and repayment amounts. Due to the strong capital inflow, the level of the international reserves remains strong which, despite the weak growth rate, makes the region less vulnerable to an increased risk aversion due to, for instance, rising interest rates in the US.
% yoy
9
6
3
0 07
08
09
Brazil
10
11
Colombia
1981-2014
2004-08
2010-14
Brazil
2.5
4.8
3.2
Chile
5.0
5.5
4.6
Colombia
3.8
5.4
4.8
Mexico
2.5
3.3
3.3
Peru
3.2
7.3
5.8
Region
2.6
5.1
3.4
World
2.8
3.4
2.8
Source: EIU
The latter was mainly based on the robust growth achieved in the period between 2004 and 2009, when the commodities boom led to average growth of just over 5% in the region, and the initially rapid recovery after 2009. This strong rebound fed the belief that the region’s internal dynamics had significantly improved and that the region had also become much less sensitive to the peaks and troughs of the global economy. In its publication, the IMF also highlights the problems on the supply side and their negative impact on the region’s long-term growth path.
Inflation remains on the high side
06
%
12
13
14
15
Mexico
Source: Bloomberg
Problems mainly on the supply side The lower commodity prices are also feeding through in lower public revenues, thereby reducing the scope for budgetary stimulus measures in many countries, while the prospects of
Alongside the factors already mentioned, the IMF notes that decreasing diversification of and the simplification of production since 2000 are also playing a role. The production of a limited number of commodities increasingly gained the upper hand, to the detriment of, for instance, the processing industry. The same commodities boom that fuelled strong growth thus also sowed the seeds of the strong weakening we are witnessing today.
3
What’s holding growth back? – May 2015
Main economic indicators/forecasts GDP growth (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total
2013 6.4 1.8 2.4 1.6 4.6
2014e 6.4 1.3 0.9 2.8 4.4
2015e 6.4 -0.6 0.5 2.5 4.0
2016e 6.4 2.1 2.2 3.5 4.8
-0.4 2.2 3.2
0.9 2.4 3.2
1.8 3.1 3.3
2.3 3.1 3.9
2013 -2.5 -1.5 -3.0 0.5
2014e -2.5 -1.5 -4.5 -1.5
2015e -3.0 -3.0 -5.5 -6.5
2016e -3.0 -2.0 -3.5 -4.0
Eurozone -2.9 -2.4 US -4.1 -2.8 Source: EIU, ABN AMRO Group Economics
-2.3 -2.5
-2.0 -2.2
Eurozone US World Budget balance (%GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa
Inflation (%) Emerging Asia Emerging Europe Latin America Middle East/North Africa Emerging markets total Eurozone US World Current account (% GDP) Emerging Asia Emerging Europe Latin America Middle East/North Africa Eurozone US
2013 4.6 5.3 9.0 13.6 6.4
2014e 3.6 6.2 12.7 7.3 5.8
2015e 3.1 10.4 13.1 6.9 6.1
2016e 3.4 5.3 10.3 6.8 5.1
1.3 1.5 4.3
0.5 1.6 4.0
0.4 0.2 3.7
1.7 2.5 3.8
2013 1.0 -1.5 -2.5 8.5
2014e 2.0 0.0 -2.5 6.0
2015e 2.0 0.0 -3.5 -1.5
2016e 1.5 0.5 -3.0 1.5
2.6 2.9 3.2 3.1 -2.4 -2.3 -2.6 -2.7 * figures Emerging Markets regions are rounded
Find out more about Group Economics at: httips://insights.abnamro.nl/en This document has been prepared by ABN AMRO. It is solely intended to provide financial and general information on economics. The information in this document is strictly proprietary and is being supplied to you solely for your information. It may not (in whole or in part) be reproduced, distributed or passed to a third party or used for any other purposes than stated above. This document is informative in nature and does not constitute an offer of securities to the public, nor a solicitation to make such an offer. No reliance may be placed for any purposes whatsoever on the information, opinions, forecasts and assumptions contained in the document or on its completeness, accuracy or fairness. No representation or warranty, express or implied, is given by or on behalf of ABN AMRO, or any of its directors, officers, agents, affiliates, group companies, or employees as to the accuracy or completeness of the information contained in this document and no liability is accepted for any loss, arising, directly or indirectly, from any use of such n i formation. The views and opinions expressed herein may be subject to change at any given time and ABN AMRO is under no obligation to update the information contained in this document after the date thereof. Before investing in any product of ABN AMRO Bank N.V., you should obtain information on various financial and other risks and any possible restrictions that you and your investments activities may encounter under applicable laws and regulations. If, after reading this document, you consider investing in a product, you are advised to discuss such an investment with your relationship manager or personal advisor and check whether the relevant product –considering the risks involved- is appropriate within your investment activities. The value of your investments may fluctuate. Past performance is no guarantee for future returns. ABN AMRO reserves the right to make amendments to this material. © Copyright 2015 ABN AMRO Bank N.V. and affiliated companies ("ABN AMRO").