What Matters For Latam in 2020?: 6th BBVA Latin America Conference

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What matters for Latam in 2020?

6th BBVA Latin America Conference


London - January 20, 2020
Jorge Sicilia
01
Macroeconomic outlook
3

Modest recovery: Latin America will grow 1.4% in 2020 and 2.1%
in 2021, after having expanded 0.6% in 2019
GDP GROWTH IN LATIN AMERICA (*)
(YOY %) Actual Previous

2.9%
2.5% 2.1%
1.9%
1.4% 1.6%
1.4%

0.5%
0.6%
-0.2%
2012 2013 2014 2015 2016 2017 2018 2019 (f) 2020 (f) 2021 (f)

(*) (f) = forecast. Latam: weighted average of Argentina, Brazil, Chile, Colombia, México, Peru and
Uruguay. Source: BBVA Research
4

Growth will remain weak relative to both the global economy and the
“golden years” (2003-12), when expansion averaged 3.8%
GDP GROWTH: LATIN AMERICA AND WORLD (*)
(% A/A)

7
6
5
4
3
2
1
0
-1
-2
-3
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019(f)

2020(f)

2021(f)
Latam World Economy

(*) (f) = forecast. Latam: weighted average of Argentina, Brazil, Chile, Colombia, México, Peru and
Uruguay. Source: BBVA Research
5

The relatively low growth rates in the last few years are to some
extent related to the deceleration in China and commodity prices

GDP GROWTH IN LATIN AMERICA AND CHANGE IN AVERAGE COMMODITY PRICES (*)
(% A/A)

8 60
correlation: 0.82 50
6
40
4 30
20
2
10
0 0
-10
-2
-20
-4 -30
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019(f)

2020(f)

2021(f)
Latin America GDP Growth (left) % variation in the price of raw materials (right)

(*) Weighted average of Argentina, Brazil, Chile, Colombia, México, Peru and Uruguay.
Source: BBVA Research, IMF
6

Heterogeneity: growth to converge to more than 3% in COL and PER, to


around 2% in MEX, BRA, CHI and URU, while ARG will face a recession

GDP GROWTH
(% A/A)
4
3
2
1
0
-1
-2
-3
-4
2019

2020

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021
ARG BRA CHI COL MEX PER URU

(
Source: BBVA Research, IMF
7

Inflationary pressures will remain contained, mostly due to


the weakness of domestic demand and low global inflation

LATAM: ANNUAL INFLATION


(%, END OF PERIOD)
60 10
9
50 8
40 7
6
30 5
4
20 3
10 2
1
0 0

2020
2019

2020

2021

2019

2020

2021

2019

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021
ARG BRA CHI COL MEX PER URU

Inflation forecasts 2012-18 inflation average

Source: BBVA Research


8

Fed’s expansive tone and domestic inflation under control will


allow most central banks to keep monetary stimulus in place

LATAM: INTEREST RATES


(%, END OF PERIOD)
70 12

60 10
50
8
40
6
30
4
20
10 2

0 0
2019

2020

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021

2019

2020

2021
2018

2019

2020

ARG* BRA CHI COL MEX PER

Interest rate forecasts 2012-18 average

Source: BBVA Research


9

Fiscal policy will be more focused on keeping public accounts


under control than on supporting growth
LATAM: PUBLIC DEBT
(% OF GDP)
100
90
80
70
60
50
40
30
20
10
0
ARG BRA CHL COL MEX PER

2012 2015 2018 2021

(*) Forecasts for 2021.


Source: IMF
10

Weaker currencies will help the region to cope with lower


commodity prices
REAL EXCHANGE RATE: 2019-21 LEVELS COMPARED TO THE 2012-18 AVERAGE
(BILATERAL RATE AGAINST THE USD, %, ANNUAL AVERAGE)
10

-10

-20
More depreciated than in 2012-18
-30

-40

-50
ARG BRA CHL COL MEX PER

2019 2020 2021

(*) Forecasts for 2020 and 2021.


Source: BBVA Research
11

Challenges: driving growth up in a context of relatively low


commodity prices and global growth are among the main ones

ARGENTINA BRAZIL CHILE


• Debt restructuring • Public debt sustainability • Social unrest
• Sustainable reduction in inflation • Reforms to improve productivity • Institutional uncertainty created
• Growth recovery in a dollar by decision to elaborate a new
scarcity context constitution

COLOMBIA MEXICO PERU


• External vulnerability • Growth recovery • Boost public investment
• Fiscal consolidation and • Uncertainty about policy • Political uncertainty
fulfillment of fiscal targets decisions
• Populism threat • Take advantage of the USMCA
opportunities
02
Longer term outlook and structural
challenges
13

From a more long-term perspective, productivity growth is a problem


that prevents the closure of the income gap with respect to the US

GDP PER CAPITA: AS A SHARE OF US GDP PER CAPITA GDP PER CAPITA: AS A SHARE OF US GDP PER CAPITA
(%, PPP-ADJUSTED) (%, PPP-ADJUSTED)

50 50
45 45
40 40
35 35
30 30
25 25
20 20
15 15
10 10
5 5
0 0

1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
ARG BRA PAR URU CHI COL MEX PER

(*) Forecasts for 2019 and 2020.


Source: BBVA Research, IMF
Regional integration and trade opening could be further obstructed by
the “anti-trade” global environment and more “managed” trade
TARIFFS AND ECONOMIC UNCERTAINTY* TRADE AND INVESTMENT OPENESS
(%, INDEX: 0 TO 100) (2013-2017 AVERAGE; % OF GDP)
25 80 80 7.0

70 6.0
20 75
60
70 5.0
15 50
65 4.0
40
10
60 3.0
30
5 55 2.0
20

0 50 10 1.0
Apr-18

Oct-18

Apr-19

Oct-19
Jul-18

Jul-19
Jan-18

Jan-19

Jan-20
0 0.0
ARG BRA CHL COL MEX PER URY

Economic uncertainty (rhs) Exports and Imports as % of GDP


China's average tariffs on US exports (lhs) FDI as % of GDP (right axis)
US' average tariffs on China imports (lhs)

* Average tariffs at the beginning of each quarter. BBVA Research Index of Economic Uncertainty:
tone of the news about economic uncertainty; quarterly average (except 1Q20: average until January Exports and imports of goods and services, FDI Inflows.
9, 2020).
Source: BBVA Research, WB
Source: BBVA Research, PIIE
Expansion of middle classes is likely to continue, but at a much
softer pace than in the recent past…
TOTAL LATIN AMERICAN POPULATION BY INCOME GROUPS
(%)

Source: BBVA Research


… and, in spite of the improvements, poverty and inequality will
continue to be a concern in most countries
POPULATION BY INCOME GROUPS IN SELECTED COUNTRIES
(SHARE OF TOTAL POPULATION)
100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
2000

2015

2000

2030

2015

2030
2015

2030

2000

2030

2015

2000

2030

2000

2015
ARG BRA COL MEX URU

Poor and low income Low Middle Class Medium Middle Class High Middle Class Affluent

Source: BBVA Research


17

Inequality is still very high, despite having declined in most countries


during the last 15 years
As with inequality, intergenerational mobility in education (a proxy
for social mobility) has been improving, but it is still low in Latam
EDUCATION LEVEL COMPOSITION MATRIX(*) BOTTOM-UP MOBILITY (*)

(%, END OF PERIOD) (%, END OF PERIOD)

0% 5% 10% 15% 20% 25%


Parent's Education
Low Medium High Chile
Germany US
Bottom-up mobility Peru
Ecuador
High 13.9 27.9 58.2
Paraguay
Top persistence
Child's education

Colombia

Medium 29.7 38.7 31.6


Mexico
Brazil
Latam

Low 55.6 34 10.4 Bolivia


Argentina
Bottom Persistence
0% 20% 40% 60% 80% 100% Uruguay

% of individuals in children's generation Costa Rica

(*) Composition of educational classes by parental education background. Relative


educational position measured in standard deviation from own country’s average years of (*) Percentage of individuals with a high education coming from parents with low education
education and grouped in three quartiles (high/medium/low). People born 1940-1990. Source: BBVA Research based on Neidhofer, Serrano and Leonardo (2017)
Source: BBVA Research based on Neidhofer, Serrano and Leonardo (2017)
19

Social unrest and political tensions will continue to be a source of


concern over the next years
BBVA RESEARCH INDEX OF POLITICAL TENSIONS (*)
(ANNUAL AVERAGES)

0,7

0,6

0,5

0,4

0,3

0,2

0,1

0
LATAM ARG BOL BRA CHI COL ECU MEX PAR PER URU

2016 2017 2018 2019

(*) Tone of the news on politics in the local press, weighted by media coverage.
Source: BBVA Research, GDELT
0,0
0,5
1,0
1,5
2,0

-0,5
01-Jan-19

13-Jan-19

25-Jan-19
recently

Source: BBVA Research, IMF


06-Feb-19 (%, PPP-ADJUSTED)

18-Feb-19

02-Mar-19

14-Mar-19

26-Mar-19

07-Apr-19

19-Apr-19

01-May-19

13-May-19
BBVA Research index of political tensions

(*) Tone of the news on politics in the local press, weighted by media coverage.
25-May-19

Latam
06-Jun-19

18-Jun-19

CHI
30-Jun-19

12-Jul-19

24-Jul-19
MEX

05-Aug-19

17-Aug-19

29-Aug-19
COL

10-Sep-19

22-Sep-19

04-Oct-19

16-Oct-19

28-Oct-19

09-Nov-19

21-Nov-19

03-Dec-19

15-Dec-19

27-Dec-19

08-Jan-20
Protests have peaked in the October/November and eased more
20
21

Protests in Latin America

 Against leftist (BOL, VEN, BRA [Rousseff], NIC) and rightist (ECU, CHI, COL) governments
 Possible triggers?
- Growth deterioration
- High inequality
- Low social mobility
- Scarce and expansive public services (quantity / quality)
- (Frustrated) expectations of the middle classes
- Corruption scandals
- Disconnection between the political system and the population
- Reduction of political freedoms, attempts to hold on to power
- Demonstration effect?

 Greater interconnectivity: a catalyst?


 Channels of impact on activity: break up of productive chains (short term); uncertainty (short and
medium term); institutional changes (long term, potential growth)
22

In the past, insufficient and slow tech adoption was a problem; now the
region has a new opportunity to reap the gains of tech innovation…
DIGITALIZATION INDEX (DIGIX) (*)

1.20
USA
1.00
SPA
URU
0.80 ARG TUR
COL MEX
PER
0.60

0.40

0.20

0.00 Argentina

Mauritius
Turkey
Bangladesh

France

Norway

Israel
Bolivia

Kuwait
Ukraine
Macedonia, FYR

Korea, Rep.
Vietnam

Armenia

Lithuania

Luxembourg
Panama
Guatemala

Lebanon

Portugal
Azerbaijan

Australia
Italy

Oman

Qatar

Iceland
Sri Lanka

New Zealand
Cote dIvoire

Czech Republic

United States
Egypt

Belgium

Canada

Germany

Hong Kong
Indonesia

Hungary

Russian Federation
Slovak Republic
Mexico

Albania

Romania
India
Zambia

Pakistan
Cameroon

Switzerland
El Salvador

Montenegro

(*) DiGiX is a composite index that measures the degree of digitization in 99 countries around the world. It classifies information into three broad categories, supply conditions, demand conditions, and
institutional environment.
Source: BBVA Research
23

… even though job destruction could be a challenge: between 40% and


61% of the workforce is potentially at risk in Latin America

Spain
Mexico High Risk:
High Risk: 36% 36%
51% Colombia 33%
51%
High Risk: 31%
32%
44%
16% 44% Low Med High
38%

Low Med High 18%

Low Med High

Peru
High Risk:
61% Argentina Average
61%

High Risk: Latam


19% 21%
40% High Risk
40%

Low Med High


30% 30%
Latam 49%

Low Med High

Low probability of automation (<30%) Medium probability of automation (between 30% and 70%) High probability of automation (> 70%)
.
Source: BBVA Research
GDP forecast table
25

GDP forecast table

GDP (% Y/Y)

2017 2018 2019 2020 2021


Argentina 2.7 -2.5 -2.4 -3.0 0.5
Brazil 1.3 1.3 1.1 1.9 2.0
Chile 1.3 4.0 0.8 0.4 2.5
Colombia 1.4 2.6 3.2 3.2 3.5
Mexico 2.4 2.1 0.0 1.5 2.0
Peru 2.5 4.0 2.1 3.1 3.5
Uruguay 2.6 1.6 0.3 1.2 1.8

.
Source: BBVA Research
What matters for Latam in 2020?

6th BBVA Latin America Conference


London - January 20, 2020
Jorge Sicilia

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