28
Global Ou utlook – 25 November 2015 2
Latin n Americ ca – The worst w se eems to b be over
Marijke Zewuster Head d Emerging Mark kets Research Tel. +31 20 383 0518
Eco onomic grow wth set to piick up slighttly in 2016 Exp ports are key y growth en ngine Dow wnward risk ks remain co onsiderable
marijjke.zewuster@nl.a abnamro.com
Large regional diffferences The ongoing slide in co ommodity price es, weaker glob bal growth andd internal proble ems are the ma ain reasons why 2015 hass turned out to be yet another disappointing year. After four years of slow wing y in negativve territory (-0.4 4%). But the growth, regional GDP iis even expected to end this year ces between in ndividual countrries are large and a the figures for, notably, Venezuela V and differenc Argentin na are not very reliable. We assume that the e worst is now oover for the reg gion and that reviving exports in the course of 2016 6 will kick-start a cautious ecoonomic revival. Regional grow wth cted to be 0.8% % in 2016 and 2.4% 2 in 2017. is expec s set to drive g growth in 2016 6 Exports Due to the t weak econ nomic conditions and heighte ened risk averrsion, Latin Am merican currencies were am mong the worrst performers in the world against the U USD this year. Though inittially aggravating the probllems (higher current c accoun nt deficit, inflaation, deteriora ating foreign debt d h interest rates), this cu urrency weakne ess is ultimateely the key to recovery. Besides ratios, higher dampening imports, it iis also helping exports to stag ge a cautious rrecovery. mmodity pricess expected to regain some upward u tractionn in 2016 amid dst reviving glo obal With com trade de emand, the exte ernal sector sh hould make a steadily s strongeer contribution to growth in 2016 2 - pulling investments ttentatively in its i wake. Desp pite this positivve growth imp pulse in 2016, the persistin ng structural p problems and the t impact of restrictive ecoonomic policie es will continue e to thwart an exuberant re ecovery for the time being.
Table % yoy
14Q4
15Q1 1
15Q2
20015
2016
2017 3.5 5
Argentina a
0.5
2.1
2.3
22.0
2..5
Brazil
-0.3
-1.6
-2.6 -
-33.0
-1.0
1.5 5
Chile
1.8
2.5
1.9
22.0
2..5
3.5 5
Columbia a
3.4
2.8
3.0
33.0
3..5
4.0 0
Mexico
2.6
2.6
2.2
22.5
3..0
3.0 0
Peru
1.0
1.8
3.0
22.5
4..0
4.5 5
--
--
--
-77.0
-6.0
0.0 0
-00.4
0..8
2.4 4
Venezuela Regional average
Source: ABN AMRO, EIU, T Thomson Reuters s Datastream
en largest countries, we see sharp contractioon in Brazil and d Venezuela, Homing in on the seve s the economie es in the other countries c are still s enjoying 2% % to 3% growth h. The strongesst whereas recovery y will be in the ccountries belon nging to the Pa acific Alliance: C Chile, Columbia, Mexico and d Peru. Brrazil, too, lookss set for an uptu urn in the cours se of 2016, butt not sufficiently to generate positive growth. Argenttina may be ab ble to produce a positive surpprise now that the election of on candidate M Macri has put an end to the Kirchner era. Thhis will give bus siness confiden nce oppositio a strong impulse, but th he structural problems will no ot be wiped awa way overnight. r has deteriorated, but… Shock resilience Thanks to t fiscal and m monetary expan nsion and, abov ve all, favourabble commodity prices, most Latin American countries ca me through the e 2009 financia al crisis in goodd shape. This gave g credence to the idea that the region n was more sho ock-resistant th han before. Eco conomic fundam mentals such as a
29
Global Ou utlook – 25 November 2015 2
public fin nances, inflatio on and the exte ernal financial position p were hhealthy and the ere was no reasson to assum me this would cchange any tim me soon. Five years on, the piicture is decide edly bleaker. Th he main objjective of the re ecent economic stimuli was to o encourage deemand, rather than resolve th he structura al supply-side p problems. Thou ugh effective when w confidencce was high, this policy ran ou ut of steam when w consumerr and producerr pessimism set in on the backk of sliding com mmodity pricess. Internal political unrestt in many countries compound ded the deepeening gloom. Ag gainst this he same time, backdrop, investmentss declined and, ultimately, so did consumer sspending. At th ommodity reve nues caused severe s budgeta ary deterioratio n and pushed up the public falling co debt. Du ue to this declin ne in the public c finances, therre is no longer aany fat for lean ner times, whicch makes th he region more e vulnerable to external shock ks than in 20099. As before, th he imbalances in Argentin na and Brazil, n not to mention those t in Venez zuela, cannot bbe compared with w those of the e Pacific Alliance A countriies.
Exports up, imports dow wn
Direct D foreign investmentss remain strong
% yoy 3mma (vo olumes)
% GDP
32
A Argentina
24
Brazil
16
Chile
8
C Colombia
0
Mexico
-8
Peru
-16
V Venezuela
-24 01
03 3
05
0 07
Import LA A
09
11
13
0
15
export LA
Source S CPB Nethe erlands Bureau forr Economic Policy y Analysis
2
4
current accou unt deficit
6
8
FDI
Sou urce: EIU
‌fortun nately the exte ernal position remains healthy Remarka ably, despite th he increased vulnerability, the e region contin ues to attract a vigorous inflo ow of foreign direct investm ment (FDI). Ac ccording to the latest World Innvestment Report (published by UNCTAD D in the middle e of this year), FDI decreased d by 14% in 20114. However, this t was largelyy due to a significant fall in investments s in Mexico, following an exceeptionally stron ng 2013. Despiite nflow into Braz zil dropped a mere 2%. With a total inflow off USD 63 billion n, all the prroblems, FDI in this coun ntry remained b by far the bigge est FDI recipient in the regionn and sixth worrldwide. In addition,, in an UNCTA AD survey, 10% % of the multina ationals mentio n Brazil as the most importan nt destinatiion for FDI in th he coming two years. This pu uts Brazil in fouurth place after China, the US S and India a. Another imp portant factor is s that in most countries FDI innflow almost en ntirely covers th he current account a deficit.. Together with h the high reserrves, this still foorms one of the e most importa ant buffers against a externa al shocks. m for accomm modative mone etary policy No room Currency y weakness ha as fanned inflattion in virtually all countries, bbut again there e are strong national differences. Th he regional ave erage (18.5% in 2105) is distoorted by towering inflation in na (about 50%)) and Venezuela (over 100%)). Excluding theese countries, the most strikin ng Argentin differenc ce is between B Brazil and the Pacific P Alliance e countries. Fo r years now, sttructural flaws have pre evented Brazil from approxim mating its inflatio on target of 4.55% for any leng gth of time. Alongsid de the currencyy depreciation, additional infla ationary pressuure came this year y from the increase e in utility pricess that was necessary to reduce the public ddeficit. Inflation stands close to o 10% and d the key policyy rate is now 14.25%. Should d inflation rise aabove 10%, furrther rate increase es cannot be ru uled out.
30
Global Ou utlook – 25 November 2015 2
Thanks to t their much lo ower inflation, the four Pacific c Alliance counntries were long g able to pursu ue a accomm modative monettary policy whe enever necessa ary. But this sco cope has contra acted considera ably due to th he depreciation n of their curren ncies. Particula arly Columbia aand, to a lesser extent, Chile and Peru hav ve seen inflatio on accelerate and a recently raiised their key ppolicy rates des spite the decelera ation in growth.. Further cautio ous rate increases look likely,, particularly in view of the imminen nt rate hike in th he US. The same applies to Mexico, M which has the lowestt inflation of the e four countries (2.5% in n October). Afte er the latest rate cut in June 22014, Mexico's key policy rate e is now 3%.
Difference in n inflation
Difference D in policy p rate
% yoy
%
15 5
9
12 2 6
9 6
3
3 0
0 06
07
08
09
Brazil
10 0
11
Colombia
12
13
14
15
08
09
B Brazil
Mexico
Source: S Bloomberg g
10
11
12 Co olombia
13
14
15
Mexico
Sou urce: Bloomberg
ard risks rema ain considerable Downwa The dow wnward risks arre significant, and a more so than for other reggions. Latin Am merica is and remains primarily a com mmodity-exporrting region whose fortunes bbob up and dow wn on the wave es obal economy.. In addition, major m structural problems conttinue to impede e growth, such as of the glo the low level of savingss and investme ents, the quality y of infrastructuure and educattion, income on. Alongside external e risks relating r to a ha rd landing in China C and inequalitty and corruptio increase ed risk aversion n due to the intterest rate incre eases in the US S, internal risks s hence continue to play an a important ro le. his could have a Another specific factor for Latin Amerrica is the El NiĂąo weather phhenomenon. Th detrimen ntal impact on g growth, notably y in Peru and possibly p also inn Argentina, but could actuallyy be beneficia al for Brazil. An nother concern n, despite the high internationaal reserves, is the deterioratio on of the ex xternal debt rattios. Particularly the ratio betw ween foreign trrade and exporrt revenues hass worsene ed in many cou untries over the e past years. Ye et another risk is that the currrent decline in prosperity may cause ccountries to shun austerity in favour of moree heterodox ec conomic policie es. sion between th he need for austerity and falling prosperity llevels could als so reignite sociial The tens unrest. Income distribu ution in Latin America is still among a the mosst unequal in th he world. All the ese c could d undermine co onsumer and producer p confiddence even furtther. factors combined
31
Global Ou utlook – 25 November 2015 2
Group Economic cs at: https://in nsights.abnam mro.nl/en/cate egory/econom my/ Find out more about G This docume ent has been prepared by ABN AMRO. It is solely intended to provid de financial and genera ral information on econ nomics. The information n in this documen nt is strictly proprietaryy and is being supplied to you solely for your information. i It may nott (in whole or in part) be reproduced, distributted or passed to a third t party or used for aany other purposes tha an stated above. This document d is informativve in nature and does not n constitute an offer of o securities to the public, nor a solicittation to make such an n offer. m be placed for any purposes whatsoever on the information, opinions, forecasts and aassumptions contained d in the document or on n its No reliance may completenes ss, accuracy or fairnesss. No representation orr warranty, express or implied, is given by orr on behalf of ABN AMR RO, or any of its directo ors, officers, agen nts, affiliates, group coompanies, or employee es as to the accuracy or o completeness of the information contained d in this document and no liability is acc cepted for any loss, ariising, directly or indirec ctly, from any use of su uch information. The vie iews and opinions exprressed herein may be subject to change at any given timee and ABN AMRO is under no obligation to update the information ccontained in this docum ment after the date the ereof. Before investing in any product of A ABN AMRO Bank N.V.., you should obtain infformation on various finnancial and other risks s and any possible restrictions th hat you and your invesstments activities may encounter e under applic cable laws and regulatitions. If, after reading th his document, you con nsider investing in a product, you are adviised to discuss such an n investment with yourr relationship managerr or personal advisor an nd check whether the relevant prod duct –considering the rrisks involved- is appro opriate within your investment activities. The vvalue of your investme ents may fluctuate. Passt performance is no guarantee for fuuture returns. ABN AMR RO reserves the right to make amendments tto this material. © Copyright 2015 ABN AMRO Bannk N.V. and affiliated co ompanies ("ABN AMRO O").