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Latin America: Beauty is in the Eye of the Beholder Manuel Balmaseda CEMEX Chief Economist

Arkansas State Chamber/AIA and GIC Little Rock, November 2017

Recovering from recession in 2017… 2017 GDP Growth Forecast

2.3%

2.0%

European Union

USA

2.1% CIS

6.5% 1.2%

Emerging Asia

Latin America & Caribbean

… but still a subdued economic performance Source: IMF and CX Economics

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Latin America or Latin Americas? Brazil and Mexico (2 of 32 countries) account for almost 60% of LatAm GDP, and the largest 7 countries account for 88%

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Improving outlook for the coming years 2017 GDP Growth

2018-2022 GDP Growth (average)

2.2%

2.4%

4.0% 4.7% 3.0%

4.1%

1.0% -3.0%

3.0% -1.3% 3.7%

3.8%

5.0% 3.6%

5.2% 3.7%

-12.0% 1.6%

-2.4% 3.6%

0.2%

1.2% 2.5%

0.7%

3.8%

4.2%

1.4%

2.4%

3.8%

2.9% 2.5%

2.9%

Recession Stagnation Mild growth Strong growth

Source IMF and CX.

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LatAm, beyond macroeconomic stability

Monetary Policy

 Central Banks addressing inflation, FX and relative stance with Fed  So far, Fed rate hikes not luring investors away from EM’s

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Monetary policy in easing mode, with the exception of Mexico

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LatAm, beyond macroeconomic stability

Monetary Policy

Fiscal Policy

 Central Banks addressing inflation, FX and relative stance with Fed

 Many countries highly indebted

 So far, Fed rate hikes not luring investors away from EM’s

Current Account Adjustment

 Global trade picking up

 Austerity  Commodity measures taking exporters vs. place importers

The Growth Challenge

 Physical and institutional barriers to development

 Diverging policy choices: “Latin  Protectionist risk Americas” prevails

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Significant differences among countries in the region Interventionist

Promarket

BOLIVIA

PERU

ECUADOR

Relevance of Commodity Exports

PARAGUAY

High CHILE

GUYANA JAMAICA

VENEZUELA SURINAME

URUGUAY

BRAZIL BELIZE ST. LUCIA

ARGENTINA

HONDURAS

T&T

COLOMBIA GUATEMALA

NICARAGUA

GRENADA ST. VINCENT DOMINICAN REPUBLIC BAHAMAS BARBADOS DOMINICA

PANAMA COSTA RICA

EL SALVADOR A&B HAITI

ST. KITTS

MEXICO

Low

Pro-market environment Source: CX Economics with IMF, UNCTAD and World Economic Forum data.

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Pro-market reforms will revitalize growth and investment MX Oil Production (million of daily barrels) 2.6

Expected investment 2017 2018- onwards

Projects

2.5 2.4 2.3

Oil round 1.4 8 cont. for explor. and explot.

$34400 mn USD Total investment over the next 35 years

Oil round 2.1 10 cont. for explor. and explot.

$8200 mn USD Total investment over the next 30-40 years

Oil round 2.2 and 2.3 21 cont. for explor. and explot.

$2064 mn USD Total investment over the next 30 years

2.2 2.1 2.0

Trion´s Farmout by PEMEX

PPEF18 Estimated 2017

1.9

1.93

Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17

1.8

Retail Gasoline Market

Shell BP Exxon

100 mn USD (1862) mn pesos

7391 mn USD (137620) mn pesos

1000 mn USD 1500 gas stations 300 mn USD

PEMEX’s financial health is improving. So far, PEMEX has signed three farmouts with foreign investors (deep water and two onshore fields)

Source: PEMEX, SENER, SHCP

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Higher and more sustainable growth requires tackling structural bottlenecks Overall infrastructure quality index relative to GDP per capita

Structural challenges

• Close the infrastructure gap

Infrastructure Quality Index

• Improve the business environment and governance

CHL

5 MEX

• Strengthen the institutional framework

4 COL BRA PER ARG

• Tackle corruption

VEN

• Further investment in human capital

• Increase domestic saving

0 500

5000

50000

GDP per capita

Source: IMF and World Economic Forum

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LatAm, beyond macroeconomic stability

Monetary Policy

Fiscal Policy

 Central Banks addressing inflation, FX and relative stance with Fed

 Many countries highly indebted

 So far, Fed rate hikes not luring investors away from EM’s

Current Account Adjustment

 Global trade picking up

 Austerity  Commodity measures taking exporters vs. place importers

The Growth Challenge

 Physical and institutional barriers to development

 Diverging policy choices: “Latin  Protectionist risk Americas” prevails

What comes next?

 Regional disparity to persist  Electoral Cycles  Risks ahead: NAFTA renegotiation

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Kickoff of LatAm’s electoral season, amidst heavy political noise High uncertainty, a common factor in several electoral processes of the region

2018 11 countries

• Legislative elections in Argentina reinforced Macri’s presidency • High social discontent & coalition’s infighting (Nueva Mayoria) driving Piñera’s come back

2017 11 countries

• Political crisis in Brazil, a neverending story

• 2018 elections in Venezuela? • Mexico is about to face its fiercest electoral race ever (change of the status quo?) Source: CELAG

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Political uncertainty will increase as the 2018 electoral process approaches Facing the biggest-ever election with a high level of complexity

•

An “exotic” cocktail (anti-PRI sentiment, unattractive political parties, uncertain political alliances) has fueled AMLO’s popularity.

•

AMLO is still leading the polls (only one clear runner) but it is too early to predict his victory (AMLO vs. himself)

•

Anti-AMLO vs anti-PRI election

Investors remain cautions about a potential victory of AMLO Uncertainty and FX volatility likely to resume as election nears Source: GEA, CX-Economics, Citibanamex, and, Parametria

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Mexico in the center of the US political agenda

High trade deficits

Outsourcing

US: trade balance in goods with China and Mexico

(Millions of persons)

China WTO Access

China WTO access

NAFTA

0.5

Immigration

Foreign-born population in the US, 1850 to 2015

US: employees in the manufacturing sector

(% of GDP) NAFTA

(manufacturing)

Millions

1924 National Origins Quota Act

% of total population

0.0

-0.5

Mexico

China

-1.5

13 12

-2.0

43.3 13.5

-1.0

1965 Immigration and Nationality Act

16 14 12 10

Total foreignborn population

2015

2012

2009

2006

2003

2000

1997

1994

1991

1988

10 1985

2015

2012

2009

2006

2003

2000

1997

1994

1991

1988

1985

-2.5

1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Source: US Census Bureau and BLS

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NAFTA: probably yes, but when? US- MX trade scenarios (from worst to best for Mexico)

The most controversial issues, finally on the table •

Trade deficit reduction

•

Regional rules of origin and national content (automotive sector)

•

“Sunset clause” (5-year validation)

•

Dispute resolution

• 3. NAFTA slow renegotiation (2019-2020)

Restrict access to government procurement in the US (“America First”)

4. NAFTA quick renegotiation (early 2018)

Mexico and Canada have no incentive to leave the negotiating table

1. US out of WTO

2. No NAFTA

All parts have incentives for a quick renegotiation of NAFTA, but nobody wants to waive their claims (and the clock is ticking) - 16 -

Latin America: Beauty is in the Eye of the Beholder Manuel Balmaseda CEMEX Chief Economist

Arkansas State Chamber/AIA and GIC Little Rock, November 2017