Madrid balmaseda

Emerging Markets; Wh the When th Going G i G Gets t T Tough h‌ Manuel Balmaseda CEMEX Chief Economist

GIC Conference Madrid, May 2015

2012: Growth everywhere, but Europe GDP growth in 2012

Lat: 3.3

Decline Stagnation Stag at o Slight growth

Note: CF was used in those countries where CX has no presence.

Source: CX and CF

Strong growth

2013: Winds of change begin to blow GDP growth in 2013

Isr: 2.5

Decline Stagnation Stag at o Slight growth

Note: CF was used in those countries where CX has no presence.

Source: CX and CF

Strong growth

2014: EM growth no longer the driver GDP growth in 2014

Decline Stagnation Stag at o Slight growth

Note: CF was used in those countries where CX has no presence.

Source: CX and CF

Strong growth

2015: the changing of the guard GDP growth in 2015

Decline Stagnation Stag at o Slight growth

Note: CF was used in those countries where CX has no presence.

Source: CX and CF

Strong growth

EM growth under scrutiny

6

A tough environment for emerging markets

Global growth/ liquidity reversall

Oil price adjustment

EMs

Stability/Structural reforms

Decreasing contribution of China

7

Global economy slowly adjusts to new environment IMF GDP Forecast

Still weak k gl global b l environment i t with low inflation Outlook for advanced economies has improved while for EMs it has deteriorated Reduced policy space in emerging markets, in general, than in 2008

Impact of Fed Fed’ss exit strategy

Difference from January IMF Report

2015

2016

2015

2016

US

3.1

3.1

‐0.5

‐0.2

UK

2.7

2.3

0.0

‐0.1

GER

1.6

1.7

0.3

0.2

FRA

1.2

1.5

0.3

0.2

SP

25 2.5

20 2.0

05 0.5

02 0.2

ITA

0.5

1.1

0.1

0.3

EURO ZONE

1.5

1.6

0.3

0.2

JAP

1.0

1.2

0.4

0.4

CHINA

6.8

6.3

0.0

0.0

INDIA

75 7.5

75 7.5

12 1.2

10 1.0

RUS

‐3.8

‐1.1

‐0.8

‐0.1

BR

‐1.0

1.0

‐1.3

‐0.5

MX

3.0

3.3

‐0.2

‐0.2

Source: IMF

8

Collateral effects of Fed exit Emerging markets experienced outflow of capital Official tapering announcement

200

150

100

50

0

‐50

Junn‐15

Decc‐14

Junn‐14

Decc‐13

Junn‐13

Decc‐12

Junn‐12

Decc‐11

Junn‐11

Decc‐10

Junn‐10

Decc‐09

Junn‐09

Decc‐08

Junn‐08

Decc‐07

Junn‐07

‐100

Cumulative capital flows TO EM . USD Bill.

Source: IIF

9

Uncertainty regarding oil prices

Moderate increase in oil price towards 70$/b is expected by consensus

• Supply factors are behind oil price moderation (a permanent change). What about b t demand? d d?

120 110 100 90

• Oil exporters should adapt to “estructurally lower oil prices”

Median of Bloomberg

80 70 60

Forwards

50 40 30

Source: $/b. Bloomberg

Jun‐16

Mar‐16

Dec‐15

Sep‐15

Jun‐15

Mar‐15

Dec‐14

Sep‐14

Jun‐14

20

• The positive effect on oil importing countries (US, China)) is being g lower than expected?

Other commodity prices suggests that demand issues also play a role Other commodity prices moderated before 160

140

Oil 120

100

80

Food

Metals 60

40

Commodity prices (CRB Metals, CRB foodstuff and Brent Oil). Jan-1-2011 =100 Source: Datastream

May‐15

Jan‐15

Sep‐14

May‐14

Jan‐14

Sep‐13

May‐13

Jan‐13

Sep‐12

May‐12

Jan‐12

Sep‐11

May‐11

Jan‐11

Sep‐10

May‐10

Jan‐10

Sep‐09

May‐09

Jan‐09

Sep‐08

May‐08

Jan‐08

Sep‐07

Jan‐07

May‐07

20

China: slowdown, but how low?

Electricity consumption data suggest rapid economic deceleration

• Disequilibria has clearly built in recent years: excess debt, local government financing, non-productive non productive investment,…

50 40 30

• Easing measures to underpin the economy y

20 10

• The PBOC is looking for ways to channel financing to preferred destinations while containing overall financing

0

1/1 /2015

7/1 /2014

10/1 /2014

4/1 /2014

1/1 /2014

10/1 /2013

7/1 /2013

4/1 /2013

1/1 /2013

10/1 /2012

7/1 /2012

4/1 /2012

1/1 /2012

10/1 /2011

7/1 /2011

4/1 /2011

1/1 /2011

10/1 /2010

7/1 /2010

4/1 /2010

‐20

1/1 /2010

‐10

• Risk of portfolio outflows

Electricity consumtpion. Year on year growth Source: National Energy Agency of China

Challenging scenario, in the best of cases

Combined impact of China’s slowdown and drop in commodity prices Cross-exposure to China and commodities

Exports to China. ((% total exp ports)

25

CL

20

Median

BR 15 PH

TH

ID

10 AR IN

5 HU CZ

0 0

Source: IMF,and UNCTAD

MY

TR

CO

MX PO

20 40 60 80 Export of commodities (% total exports)

100

Combined impact of China’s slowdown and drop in commodity prices China affects LatAm countries not only by the direct trade channel but also by their impact on commodity prices 30%

Exports to o China. (% ttotal exportts)

Median

CHILE

25%

20%

URU BRA PER

15% VEN

10% 0% ARG PAN

5%

COL

CR

BOL

HON RD

MEX

0% 0%

10%

ECU

20%

30%

40%

50%

60%

PAR

JAM

GUA

70%

80%

90%

100%

Export of commodities (% total exports) Source: IMF, UNTACD

14

A tough environment for emerging markets

Global growth/ liquidity reversall

Oil price adjustment

EMs

Stability/Structural reforms

Decreasing contribution of China

15

Long-term growth requires in depth reform, both economic …

Vulnerability chart External vulnerability Current account

Reserve coverage

External debt

Domestic vulnerability Debt in FX

Poland Czech Rep 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

Long-term growth requires in depth reform, both economic …

Macroeconomic policy credibility Exchange rate Exchange rate flexibility 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

Monetary policy Monetary policy Inflation under Inflation under Structural public Structural public independence control balance

Total

Long-term growth requires in depth reform, both economic and institutional World Bank Doing Business Index 2010

Long-term growth requires in depth reform, both economic and institutional World Bank Doing Business Index 2014

LatAm countries: our medium term assessment reaffirmed Venezuela

“Alternative “Alternati e routes” ro tes”

Worse MR Outlook

Argentina Brazil

The giant with feet of clay

Colombia

Growing up with criteria Peru Mexico Chile

The US anchor Well known quality

Better MR Outlook

20

The case of Mexico: the US anchor, ‌ and more

Labor Education Telecom Fiscal Electoral-Politic Financial-Banking Energy

Higher flexibility in hiring and firing conditions Monitoring and teachers evaluation Wider access,, lower costs and improved p competitiveness p Increase public revenues and reduce dependency on oil Changes in the electoral law and political regime Higher flexibility and more incentives to SMEs loans Access to better quality inputs at lower cost

Should have a significant impact on growth potential

Thank you Manuel Balmaseda CEMEX