Latin America: Back to the Future II Manuel Balmaseda CEMEX Chief Economist
GIC London, May 2014
Latin America: moderate growth in 2013 GDP growth in 2013 (yoy)
MEX: 1.1% DR: 4.1% NIC: 2.8% GUA: 3.3% CR: 3.5% PAN: 8.4% COL: 4.3%
BRA: 2.3%
PER: 5.0%
ARG: 3.0%
Decline Stagnation Slight growth Strong growth Sources: IMF and CX-Economics
2
‌ and moderate growth in 2014 Expected GDP growth in 2014 (yoy)
MEX: 2.5% DR: 4.0% NIC: 4.0% GUA: 3.5% CR: 4.0% PAN: 7.0% COL: 4.3%
BRA: 1.8%
PER: 5.4%
ARG: -0.5%
Decline Stagnation Slight growth Strong growth Sources: IMF and CX-Economics
3
Tough environment for all EMs
Decreasing contribution of China
Global liquidity reversal
EMs
Structural problems
Political risk/geopolitics
4
External conditions are important determinants of Latin America’s economic performance Several studies find a strong role of external conditions in emerging economies growth and, particularly, in Latam economic growth
Historical decomposition of Real GDP growth into internal and external factors Source: IMF. WEO, April 2014, Chapter 4, On the receiving end ? External conditions and emerging market growth before, during and after the global financial crisis.
GDP growth in LAC-7: actual and predicted. Source: CERES. Latin America Macroeconomic Outlook. A global perspectives. Are the golden years for Latinamerica over? June 2013
Global output growth, commodity prices and international capital market conditions for emerging economies are key factors for Latin America growth 5
Less supportive external conditions?
Expected performance
Higher growth in advanced countries
Monetary policy normalization in high income countries
Decelerating growth in China
Impact on Latam countries growth
Most affected countries Mexico and Central America (trade ties)
Most financially open countries (Mexico, Brazil…) Metal commodity exporters (Brazil, Colombia, Peru, Chile…)
Key to distinguish which part of the financing conditions and commodity prices shock is transitory and which part is permanent 6
US monetary policy normalization: collateral damages in emerging countries Monetary policy normalization will have costs regardless the way it is implemented
1) Disorderly exit
2) Too late/too soon exit
Long term inflation expectations disanchoring
Permanent vs. transitory effect of financial crisis on potential growth
• Sunk costs: Fixed income bubble? Any other bubbles? 3) Right in time exit
• Coordinated or uncoordinated (first mover disadvantage) • Inefficient allocation of resources • Impact on EMs
7
US monetary policy normalization: collateral damage in emerging countries Lower flows to emerging markets led to a broad-based currencies depreciation (also in Latam) ARG INDO TUR BRA Depreciation until the official announcement (18 dec-2013)
CR INDIA PHI
Depreciation from the official announcement
THA MEX PERU COL CHINA EGY HUN
JAP CZE CRO POL EURO SWI
UK
-10%-8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% Apreciation
Depreciation
Exchange rate depreciation vs USD since the beginning of the “tapering talk� Source: Datastream
8
US monetary policy normalization: collateral damage in emerging countries Lower flows to emerging markets led to a broad-based currencies depreciation (also in Latam) 50%
ARG INDO TUR BRA Depreciation until the official announcement (18 dec-2013)
CR INDIA PHI
Depreciation from the official announcement
THA MEX PERU COL CHINA EGY HUN
JAP CZE CRO POL EURO SWI
UK
-10%-8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24% Apreciation
Depreciation
Exchange rate depreciation vs USD since the beginning of the “tapering talk� Source: Datastream
9
Collateral effects of QE exit strategy Emerging markets experienced capital flows reversal... Official tapering announcement
250
QE1
QE2
QE3
200
150
100
Bernanke announced before Congress that tapering would start
50
QE
0
“It is our currency but it is your problem�
-50
Dec-07 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
-100
Cumulative capital flows TO EM . USD Bill. Source: IIF
10
Lower external vulnerability, though domestic vulnerability is a risk Vulnerability chart External vulnerability Current account
Reserve coverage
External debt
Domestic vulnerability Debt in FX
Poland Czech Rep. Hungary Russia Argentina Brazil Chile Colombia Mexico Peru China India Indonesia Malaysia Philippines Thailand Turkey Red means higher vulnerability, yellow is medium and green low vulnerability
Source: CX Economics with IIF, IMF and BIS data
Credit growth
Fiscal position
Private debt growth
Political stability
Fundamentals improvement provides some optimism Macoeconomic policy credibility Exchange rate flexibility
Monetary policy independence
Inflation under control
Structural public balance
Total
Poland Czech Rep. Hungary Russia Argentina Brazil Chile Colombia Mexico Peru China India Indonesia Malaysia Philippines Thailand Turkey
Source: CX Economics with IIF, IMF and BIS data
???????
Internal conditions matters for growth and resilience
Internal factors: Macroeconomic management, policy room, how domestic stabilizers are allowed to work Structural reforms (increase productivity, deal with supply bottlenecks – physical and technological infrastructure, human capital) Elections
16
Internal conditions matters for growth and resilience
Internal factors: Structural reforms (increase productivity, deal with supply bottlenecks – physical and technological infrastructure, human capital ) Diagnosis of the structural reforms needed is well known, the problem is implementation A question of temporal consistency (positive effects mainly in the long-term, pragmatism)
18
The region still drags substantial deficit in the quality of its human capital… Not very good performance in traditional education indices… 600
550
500
450 CHL
Western Europe Latin America & the Caribbean Eastern Europe & Central Asia South Asia East Asia & Pacific Middle East & North Africa
MEX 400
BRA ARG COL PER
350 0
20
40
60
80
PISA score vs GDP per capita (PPP) in 2012. Source: OECD and IMF
20
…though in other measures of “human capital” the results in some countries are less disappointing In terms of “productive knowledge”, a proxy of value added in exports, some countries perform better 140 IRN
Economic Complexity Ranking (1=more complex, 128=least complex)
120
VEN BAN NIC ECU KAZ PAK PER CHL
100 80 60 40 20 0 -10
Western Europe Latin America & the Caribbean Eastern Europe & Central Asia South Asia East Asia & Pacific Middle East & North Africa
AUS
UAE EGY DR SAU IDN PHP ARG GRC COL BRA IND CR RUS CAN POR TUK THA MAL ESP CRO HKG CHN PAN IRL ISR ITA POL MEX US KOR FRA UK CZE FIN AUT SGP SWE JPN DEU 10 30 50
SWI 70
Income 2009 (per capita, thous. usd)
Distinguish between education and human capital 21
Mexico as example of reform impulse
Labor Local State’s Accountability Education Telecom Electoral-Politic
Financial-Banking
Higher flexibility in hiring and firing conditions Higher information availability and homogeneous formats Monitoring and teachers evaluation Wider access, lower costs and improved competitiveness Changes in the electoral law and political regime
Higher flexibility and more incentives to SMEs loans
Fiscal
Increase public revenues and ease dependency on oil revenues
Energy
Access to better quality inputs at lower cost
22
Mexico as example of reform impulse The energy reform will provide access to higher quality inputs at lower costs 200 180 160 140
120 100 80 60 40
20 NOR US SWE NZE EST FIN DEN ISR NTH LUX POL MEX FRA SLV BEL CHL SWI HUN GRE UK CZE POR TRK GER IRE SLO JP
0
Retail price in selected oecd countries. Electricity for industry (MHw), USD per unit. Source: IEA, 2013, Key World Energy Statistics
23
Elections and political instability in 2014
Governments will not push unpopular reforms in electoral year
Parliamentary and presidential elections Political risk
24
Potential growth increase by the reforms could be significant Any increase in potential growth in important 2500
2000
1500
Historical growth: 2.65%
1000
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
500
GDP in USD billion, constant prices. Source: CX Economics
25
Potential growth increase by the reforms could be significant Any increase in potential growth in important 2500
2000
3.5%
1500
Historical growth: 2.65%
1000
And additional percentage point of growth implies a GDP cumulative increase over the next 10 years equivalent of current Switzerland’s GDP
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
500
GDP in USD billion, constant prices. Source: CX Economics
26
Potential growth increase by the reforms could be significant Any increase in potential growth in important 2500
5% 2000
3.5%
1500
Historical growth: 2.65%
1000
GDP in USD billion, constant prices. Source: CX Economics
2023
2021
2019
2017
2015
2013
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
500
And additional percentage point of growth implies a GDP cumulative increase over the next 10 years equivalent of current Switzerland’s GDP A sustained 5% GDP growth will add over the next 10 years the equivalent to current Italian GDP
27
Thank you. Manuel Balmaseda CEMEX
EMNET dec-2009 Putting everything into perspective: fading boundary between emerging and “emerged�
Current
Fiscal
Account Balance
Public Debt
Doing CDS
S&P
Openness Business Sovereing Ranking
Rating
Italy
-2.5
-5.3
115
74
59
78
A+
Spain
-6.0
-11.2
54
73
59
62
AA+
Greece Portugal
-10.0
-12.7
113
141
56
109
A-
-9.9
-8.0
77
59
77
48
A+
-2.1
-6.6
37
76
150
74
A
Poland
-2.2
-6.4
52
116
84
72
A-
Chile Mexico
0.7
-4.2
26
76
86
49
A+
-1.2
-4.9
48
164
59
51
BBB+
Brazil
-1.3
-3.8
69
135
28
129
BBB-
Czech Republic
Note: All data refers to 2009 except for the Openness (2008) and Doing Business (2010) 16
29
What is the situation now?
Current Account
Fiscal Balance
Public Debt
CDS
Openess
Doing S&P Business Sovereign Ranking Rating
Italy
0.8
-3.0
133
117
59.2
65
BBB
Spain
0.7
-7.2
94
94
63.2
52
BBB-
Greece
0.7
-2.6
174
530
51.2
72
B-
Portugal
0.5
-4.9
129
75
78.2
31
BB
Czech Rep.
-1.0
-2.9
48
60
151.5
75
AA-
Poland
-1.8
-4.5
57
75
92.9
45
A-
Chile
-3.4
-0.7
12
83
68.0
34
AA-
Mexico
-1.8
-3.9
46
93
67.2
53
BBB+
Brazil
-3.6
-3.3
66
157
26.0
116
BBB30