Balmaseda

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