Alejandro Werner - Monterrey 2016

Latin America and the Caribbean: Adjusting to a Harsher Reality Alejandro Werner Director, Western Hemisphere Department

Main Takeaways • Persistently low commodity prices. Impact differs across

countries; further adjustment is needed.

• Domestic fundamentals are key for growth outlook going forward; corporate vulnerabilities may increase downside risks to investment • Monetary policy is getting increasingly challenging for some countries (weak demand pressures vs rising inflation expectations).

• Policy priorities. Adjustment should be allowed to continue; buffers should be preserved; domestic fundamentals should be put in order.

2

Global Outlook Selected Projections for Real GDP Growth (Percent) Emerging market and developing

Advanced

China

economies

economies

Russia

India

Brazil

Africa

Mexico

0.6

6.9

4.0

1.9

-3.7

7.3

-3.8

1.3

2.5

1.7

1.0

6.3

4.3

2.1

-1.0

7.5

-3.5

0.7

2.6

1.8

0.3

6.0

4.7

2.1

1.0

7.5

0.0

1.8

2.9

United

Euro

World

States

Area

Japan

2015

3.1

2.5

1.6

2016

3.4

2.6

2017

3.6

2.6

South

Source: IMF, World Economic Outlook database.

3

Global Outlook (Commodities)

Selected Projections for Commodities Growth (Revisions in percent) Petroleum

Copper

Iron Ore

Soybeans

Gold

(US$/barrel)

(US$/metric ton)

(US$/metric ton)

(US$/metric ton)

(US$/troy ounce)

50.9

5,506.3

54.5

347.4

1,160.3

(October 2015)

-1.4

-1.0

-2.2

-1.2

-1.3

2016

42.0

4,587.7

34.9

327.1

1,067.8

(October 2015)

-16.7

-10.7

-22.0

-1.9

-7.8

2017

48.2

4,590.8

33.8

334.1

1,081.2

-13.0

-11.3

-21.1

0.2

-7.7

2015 Revision

Revision

Revision (October 2015)

Source: IMF, World Economic Outlook database.

4

Risks to Global Outlook  A sharper-than-expected slow down in China  Tighter global financial conditions as the United States exits from accommodative monetary policy.  A sudden rise in global risk aversion and market volatility  An escalation of ongoing geopolitical tensions

5

Latin America: An interplay between external shocks and domestic fundamentals

Regional recession and lower medium-term growth…

LAC: Estimates of Medium-Term Growth by Forecast Vintage¹ (Percent)

LAC: Real GDP Growth (Percent) 18

5th percentile Average¹ 95th percentile

15

4.9 4.5

12

4.5

4.2

4.1

9 6

3.7

3

3.3

0

3.4 2.9

2.9

2.8

-3

Source: IMF, World Economic Outlook database. ¹ Purchasing power parity-weighted average for the 32 Latin American countries.

2016 Jan.

2015 Fall

2014 Fall

2013 Fall

2012 Fall

2011 Fall

2010 Fall

2009 Fall

2008 Fall

2007 Fall

2006 Fall

2005 Fall

2004 Fall

2003 Fall

2002 Fall

2001 Fall

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-9

2000 Fall

2.5

-6

World Economic Outlook Vintage Source: IMF, World Economic Outlook database. ¹ Reflects projected real GDP growth for the last year (t+5) of the forecast horizon.

7

… with wide cross-country variation.

Latin America and the Caribbean: Real GDP Growth¹ (Percent) 2014

2015

2016

Latin America and the Caribbean

1.3

-0.3

-0.3

Central America

4.1

3.9

4.2

Caribbean

4.7

4.3

3.9

Argentina

0.5

1.5

-1.0

Brazil

0.1

-3.8

-3.5

Chile

1.9

2.1

2.1

Colombia

4.6

3.0

2.7

Mexico

2.3

2.5

2.6

Peru

2.4

2.7

3.3

Venezuela

-4.0

-10.0

-8.0

Latin America

Source: IMF, World Economic Outlook database. ¹ Regional aggregates are weighted by PPP-adjusted GDP.

8

… even at sub-regional level.

Latin America and the Caribbean: Real GDP Growth, 2016¹ (Percent) 5 4 3 2 1 0 -1 -2 -3 -4 Central America and Mexico

Caribbean

South America: Contracting economies²

South America: Others

Source: IMF, World Economic Outlook database. ¹ Regional groupings are based on WEO definition. ² Includes Argentina, Brazil, Ecuador, and Venezuela.

9

Why different growth outcomes?

Part I: External Conditions

10

Export prices declined substantially, but net impact differs across the region Primary Product Exports (Billions of U.S. dollars)

Net Commodity Exports

160 2013

140

-45 -40

120

-35

100

-30

2015

80

-25 -20

60

-15

40

-10

20

-5

Source: Gruss (2014).

Venezuela

Peru

Mexico

Colombia

Chile

Venezuela

Peru

Mexico

Colombia

Chile

Brazil

Argentina

0

0

Brazil

-50

Gross Commodity Exports

Argentina

Change in commodity terms of trade since 2011-2015 peak (%)

Change in Export Prices (From peak year to 2015)

Sources: National authorities; Haver Analytics; and IMF staff estimates and calculations

11

Current account adjustments are at different stages‌ Current Account (Percent of GDP)

Sources: Haver Analytics; Bloomberg, L.P.; and IMF staff calculations.

12

Sep-15

Mar-15

Sep-14

Mar-14

Brazil

Sep-13

2

Sep-15

-10 Mar-15

-10 Sep-14

-10

Mar-14

-8

Sep-13

-8

Mar-13

-8

Sep-12

-6

Mar-12

-6

Sep-11

-6

Mar-11

-4

Sep-15

-4

Mar-15

-4

Sep-14

-2

Mar-14

-2

Sep-13

-2

Mar-13

0

Sep-12

0

Mar-12

0

Sep-11

2

Mar-11

2

Argentina Uruguay

Mar-13

Peru

4

Ecuador Venezuela

Sep-12

Chile

Colombia Mexico

Sep-11

4

4

Food/Diverse Exporters

Mar-12

Energy Goods Exporters

Mar-11

Metals Exporters

But the region’s current account still needs to adjust Latin America and the Caribbean: Current Account Balance (Percent of GDP) 2 1 0 -1 -2 -3 -4 -5 2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

-6

Source: IMF, World Economic Outlook database.

13

Why different growth outcomes?

Part II: Domestic Fundamentals Matter

14

Private demand, particularly investment, has deteriorated, particularly in countries with higher degree of macroeconomic imbalances and microeconomic distortions LA5: Private Consumption and Gross Fixed Capital Formation (Year-over-year percent change) 18 13

Private consumption Gross fixed capital formation

Change in Private Investment from 2011 to 2015 (Percentage points of GDP) 3.0 2.0 1.0

8

0.0 3

-1.0 -2.0

-2

-3.0

-7

Sources: Haver Analytics; IMF, World Economic Outlook database; and IMF staff calculations.

Note: LA5 includes Brazil, Chile, Colombia, Mexico, and Peru.

Mexico

Colombia

Peru

Chile

Argentina

Ecuador

Brazil

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

-12

Venezuela

-4.0

Sources: IMF, World Economic Outlook database; and IMF staff calculations.

15

Corporate leverage has been increasing, particularly in some countries and in certain sectors,…

LA5: Leverage – Nonfinancial Corporates: Bond Debt 2010 US$ billion

Share

US$ billion

Share

291.3

100.0

504.9

100.0

Foreign currency

170.2

58.4

383.3

75.9

Local currency

121.1

41.6

121.7

24.1

Total

2010 US$ billion Share

2015

…of which Energy

…

…

168.7

33.4

Materials

…

…

103.7

20.5

Consumer

…

…

76.7

15.2

Utilities

…

…

42.8

8.5

Industrials

…

…

41.1

8.1

Other non-financial

…

…

71.9

14.2

Petrobras (BRA)

…

…

52.8

10.5

Eletrobras (BRA)

…

…

2.8

0.5

PEMEX (MEX)

…

…

70.3

13.9

Comision Fed Elec (MEX)

…

…

10.6

2.1

ECOPETROL (COL)

…

…

9.9

2.0

CODELCO (CHL)

…

…

11.3

2.2

Selected quasi-sovereigns

Sources: Dealogic; Bloomberg, L.P.; and IMF staff calculations.

Note: Sectoral shares and company-specific data from Bloomberg, L.P.

2015 US$ billion Share

Brazil Total Foreign currency Local currency

152.7 70.4 82.4

100.0 46.1 53.9

228.7 159.4 69.3

100.0 69.7 30.3

Chile Total Foreign currency Local currency

17.5 16.6 1.0

100.0 94.5 5.5

41.7 40.2 1.4

100.0 96.5 3.5

Colombia Total Foreign currency Local currency

9.3 5.0 4.3

100.0 54.0 46.0

23.4 17.7 5.7

100.0 75.5 24.5

Mexico Total Foreign currency Local currency

106.3 74.6 31.7

100.0 70.2 29.8

195.9 153.2 42.7

100.0 78.2 21.8

Peru Total Foreign currency Local currency

5.4 3.6 1.8

100.0 66.7 33.3

15.3 12.8 2.5

100.0 83.9 16.1

Sources: Dealogic; and IMF staff calculations.

16

…pushing up risk perceptions and downside risks to investment.

LA5: Leverage – Nonfinancial Corporates (Debt to equity; percent; median) 90 80

Brazil

Chile

Colombia

Mexico

LA5: Leverage - Sectoral Distribution, 2015Q3 (Debt to equity; percent)

450

250 Median

Peru

Top Quartile

60

350

50 100

30

1200 1000

300

150

40

1400

ENDESA (CHL) CODELCO (CHL) Comision Federal Elec (MEX) PEMEX (MEX) PETROBRAS (BRA)

400

200

70

CDS Spreads: Selected LAC Companies (Basis points; PETROBRAS in right scale)

250

800

200

600

150

50

20

400

100 0

Sources: Bloomberg; and IMF staff calculations.

Note: LA5=Brazil, Chile, Colombia, Mexico, and Peru.

Sources: Bloomberg; and IMF staff calculations.

Note: LA5=Brazil, Chile, Colombia, Mexico, and Peru.

Jan-16

Jul-15

Jan-15

Jul-14

0 Jan-14

0 Jul-13

Utilities

Materials

Industrials

Energy

Consumer Discretionary Consumer Staples

2015q3

2014q3

2013q3

2012q3

2011q3

2010q3

2009q3

2008q3

2007q3

2006q3

2005q3

0

200

50

Jan-13

10

Sources: Markit; and IMF staff calculations.

17

Domestic Demand Policy Space?

18

Fiscal space has shrunk significantly in most countries LA6: Primary Balance (Percent of GDP)

LA6: Government Gross Debt (Percent of GDP)

5

80

4

70

3

2008

2016

60

2

50

1

40

0

30

-1

20

-2

10

-3

2008

-4 Brazil

Chile

Colombia Mexico

Peru

2016 Uruguay

Sources: IMF, World Economic Outlook database; and IMF staff calculations and projections.

0 Brazil

Chile

Colombia Mexico

Peru

Uruguay

Sources: IMF, World Economic Outlook database; and IMF staff calculations and projections.

19

And monetary policy is getting more challenging with weak demand pressures and increasing inflation expectations LA6: Monetary Policy Rates (Percent) 9

120

Inflation target range Depreciation of exchange rate (right scale) Change in expected inflation for 2016 (since September 2015)

8

100

7 6

80

5

60

4 3

40

2

20

1 0

0 Brazil

Chile

Colombia

Mexico

Peru

Uruguay

(–)

(+50 bps)

(+100 bps)

(+25 bps)

(+50 bps)

(–)

Sources: Bloomberg, L.P.; Consensus Forecast; and national authorities.

Note: Numbers in parentheses refer to the change in policy rate between September 2015 and January 2016. ¹ National currency per U.S. dollar. Percentage change of the average of January 2013 to the average of January 2016.

20

Country Cases

21

Brazil: Recession with high inflation Brazil: Growth and Job Creation (Quarterly percent change, a.r., and thousands) 45

750

35

550

Brazil: Inflation and Market Expectations (Year-on-year percent change and expectations per survey vintage) 11 10

Y-o-y inflation

End-2016

End-2017

End-2018

9

5

150

7

-5

-50

6

Source: Central Bank of Brazil.

New economic team has reanchored mid-term expectations

Source: Central Bank of Brazil.

22

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

2 Jan-14

Mar-15

Mar-14

Mar-13

Mar-12

Mar-11

Mar-10

Mar-09

-650 Mar-08

-45

3

Target mid-point

Oct-13

-450

4

Jul-13

-35

5

Apr-13

-25

-250

Jan-13

Real GDP Private consumption Total investment Net job creation (right)

Oct-12

-15

Tolerance band

8

Jul-12

15

Apr-12

350

Jan-12

25

Brazil: Fiscal woes and market punishment Brazil: 5Y CDS and Gross Public Debt (Basis points and percent of GDP)

Brazil: Primary Balance (Percent of GDP)

80

600

4

CDS 3

Economic team non-binding target

2 1

Gross debt-to-GDP (right scale)

500

75 400 70

300

0

200 65

-1 100

Source: National authorities.

Jan-16

Oct-15

Jul-15

Apr-15

Jan-15

Oct-14

Jul-14

Apr-14

Jan-14

60 Oct-13

2009 2010 2011 2012 2013 2014 2015 2016 2017

0 Jul-13

-3

Apr-13

Budget Law Binding Targets

Jan-13

-2

Sources: Bloomberg, L.P.; Haver Analytics; and national authorities.

23

Argentina: Important transition is taking place, improving prospects in the long-term, despite mild recession in the short-term Central Bank Assistance to the Treasury (Percent of GDP)

-4

4

30

-5

3

20

-6 -7 -8

Overall balance net of transfers from central bank and social security Overall balance 2009

2011

2013

2 10

1 Proj.

2015

0

0 2009

2011

2013

Proj.

2015

30 20 Gross reserves

10

Gross reserves net of China swap, repos, and trade credits

0

Sources: Ministerio de Economía y Finanzas Públicas; Banco Central de la República Argentina; and IMF staff calculations and projections.

24

Dec-15

5

40

Jun-15

-3

40

Dec-14

6

50

Jun-14

-2

50

Dec-13

7

Jun-13

-1

Dec-12

0

60

Jun-12

FX loans (use of reserves) Advances Transfer of profits Monetary base growth (y/y %change, right)

Dec-11

1

International Reserves (Billions of U.S. dollars)

Jun-11

Federal Balance (Percent of GDP)

Ecuador: Sharp decline in oil prices+ Macroeconomic rigidities ďƒ¨ Sharp deceleration in economic activity 500

130 125

Commodity terms of trade

8

120

400

6

115

350

110

300

105

250

100

200

95

150 100

90

-4

50

Source: IMF, World Economic Outlook database.

2015Q4

2014Q3

2013Q2

2012Q1

2010Q4

2009Q3

2008Q2

2016

2014

2012

2010

2008

2006

2004

2002

2000

-6

2007Q1

85

Sources: IMF, Information Notice System database; and Gruss (2014).

0 2014

-2

2012

0

Chile Mexico Ecuador

2010

2

2000

4

Brazil Colombia Peru

450

2008

Current account (percent of GDP)

Real effective exchange rate

2006

Real GDP growth (percent)

10

Minimum Wage (U.S. dollars)

2004

12

REER and Terms of Trade (Index: 2007Q1=100)

2002

Real GDP Growth and Current Account Balance

Sources: Haver Analytics; IMF, World Economic Outlook database; and IMF staff calculations.

25

Venezuela: Falling oil prices , longstanding policy distortions, and fiscal imbalances Exports and Imports (Billions of U.S. dollars) Net-oil exports Non-oil imports Oil price (US$ per barrel, right scale)ยน 120 100 100

80 60 40

0 2010

2012

2014

30

20

60

15

5

0

0

Sources: National authorities; and IMF staff estimates and projections. ยน Venezuela basket.

8

Real GDP growth (percent) Inflation (right scale)

8

800

6

700

4

600

2 6 4

10

20

2016

CPS deficit Monetary financing Oil revenue (PDVSA surplus, right scale) 10

25

80

40

20

Real GDP Growth and Inflation (Percent)

Fiscal Balance and Monetary Financing (Percent of GDP)

0

500

-2

400

-4

300

-6 2 0 2010

2012

2014

2016

Sources: National authorities; and IMF staff estimates and projections.

200

-8 -10

100

-12

0 2010

2012

2014

2016

Source: IMF, World Economic Outlook database.

26

Latin America and the Caribbean: Adjusting to a Harsher Reality Alejandro Werner Director, Western Hemisphere Department