Pilar l'hotellerie fallois for posting

LATIN AMERICA ECONOMIC OUTLOOK 2016-2017 Pilar L’Hotellerie-Fallois AG Director International Affairs

GIC Central Banking Series: “Life after Brexit” Fundación Rafael del Pino

Madrid, 3 October 2016

ASUNTOS INTERNACIONALES

Latin America Economic Outlook 2016-2017

• A turning point for economic growth in the region?

• A focus on Brazil • The long term: what explains TFP performance in Latin America?

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After a disappointing first half in 2016, will growth return to a positive rate in 2017?

• LA-6: large divergences by country

• Forecasts anticipate a turning point for the region that will depend heavily on Brazil • Improved growth projections rely in part on a favorable external context for EMEs GDP GROWTH % 12 10 8 6 4 2 0 -2 -4 -6 -8 -10 2011

2012 ARGENTINA

2013 BRAZIL

2014

2015

2016 (a)

2017 (a)

LATINAMERICA4 (MEX,CHI, COL, PER) ASUNTOS INTERNACIONALES

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External drivers: an improved global environment • In parallel to economic stabilization in China, commodity prices have levelled off • A general Improvement in EM external financial conditions, including a rebound in capital inflows (especially after Brexit), after a sharp fall in 2014-15, • Monetary policies in AEs remain key: risks of reversal if/when Fed rises oficial rates COMMODITY PRICES

CAPITAL FLOWS INTO BRAZIL, MEXICO AND CHILE

Jan 2014 = 100

$ Billions

140

100

120

80 60

100

40 80

20 60

0

40

-20

20 14-Jan

-40 14-Jul GLOBAL

15-Jan

15-Jul

METALS

16-Jan FOOD

16-Jul OIL

2005

2007

INWARDFDI

2009

2011

2013

INWARDPORTFOLIO

2015 INWARDTOTAL

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Sensitivity to US monetary policy and growth outlook • Divergence between market and FOMC expectations on policy rates generates potential risk-off episodes • LA economies are particularly sensitive to US MP: dollarization of assets and liabilities; financial and commercial links with the US; main exports (commodities) traded in dollars • Mexico is especially affected by the pace of economic recovery in the US M ARKET EXPECTATIONS (FUTURES) VS FOM C PROJECTIONS FOR THE FEDERAL FUNDS RATE

2,5

MODEL RESPONSE TO AN INCREASE IN US SOVEREIGN YIELD AND US HIGH YIELD SPREAD (DECEMBER 2014)

%

2,0

1,5

1,0

0,5

0,0 Dec-2016

Dec-2017

Dec-2018

MEDIAN DOT FOMC PROJECTION (JUN-16) MEDIAN DOT FOMC PROJECTION (SEP-16)

FUTURES(23/09/2016) SOURCE: FEDERALRESERVEAND DATASTREAM

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From external to domestic drivers: external balance • ER flexibility has provided a cushion. After strong depreciation ER are stabilizing • Current account adjustment has proceeded swiftly in some countries (Brazil), but external imbalances remain high

• FDI inflows and foreign currency reserves also provide some comfort CURRENT ACCOUNT BALANCE

NOMINAL EXCHANGE RATE AGAINST US DOLLAR Jan 2014 = 100

0

110

% of GDP

-1

100 -2

90 -3

80

-4

70

-5 -6

60 -7

50 Jan-14

12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 12 13 14 15 16 (a) (a) (a) (a) (a)

Jul-14 BRAZIL

Jan-15 MEXICO

Jul-15 CHILE

Jan-16 COLOMBIA

Jul-16

Brazil

Mexico

Chile

Colombia

Peru

a) Four quarters sum, latest data 1Q2016 ASUNTOS INTERNACIONALES

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Domestic drivers: inflation and monetary policy • After sharp inflationary processes (BR, ARG) consumer prices are converging to targets • This opens some space for monetary accomodation (but Fed tightening could be a constrain) • Mexico is a somewhat different case due to stronger links to US INFLATION RATE

OFFICIAL INTEREST RATES

% yoy

%

45

15

16 14

12

30

10

10 8

15

5

6 4 2

0

0 2011

2012

2013

2014

2015

2016

0 2011

2012

2013

2014

2015

2016

BRAZIL LATINAMERICA4 (MEX, CHI, COL, PER)

BRAZIL

MEXICO

CHILE

COLOMBIA

PERU

ARGENTINARHSscale ASUNTOS INTERNACIONALES

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Domestic drivers: fiscal policy • A general need to adjust fiscal accounts to a low-commodity price environment

• The private sector is deleveraging, with some exceptions

• Currency mismatches not worrisome BUDGET SURPLUS (+) OR DEFICIT (–) IN LATIN AMERICA 5 % GDP

REAL CHANGE IN CREDIT GROWTH TO THE PRIVATE SECTOR

2

30

1

25

0

20

-1

% yoy

15

-2 10 -3 5

-4 -5

0

-6

-5

-7 2011

2012

2013

TOTAL BALANCE

2014

2015

PRIMARYBALANCE

2016

-10 2011 BRAZIL

2012

2013

MEXICO

2014

2015

2016

LATINAMERICA5 (BRA, MEX, CHI, COL, PER)

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A focus on Brazil • Expectations have shifted as a result of improved policy credibility…

• …but economic policies still need to deliver: is a gradual fiscal adjustment enough?

BRAZIL: BUSINESS AND CONSUMER CONFIDENCE; EMBI 120

600

BRAZIL: PUBLIC BUDGET 6 4

100

500 2

80

400

0 -2

60

300

40

200

-4 -6 -8

20

100

-10 -12

0

0 2011

2012

2013

BUSINESSCONF.

2014

2015

CONSUMERCONF.

2000 2002 2004 2006 2008 2010 2012 2014 2016

2016 EMBI (RHSscale)

PRIMARYBALANCE

TOTAL BALANCE

INTEREST PAYMENTS

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The long term: what explains TFP performance in Latin America?

• It is well known that productivity growth has been historically low in Latin America

• However, TFP growth rose sharply during the commodity “supercycle”: plausible (not fully convincing) explanations range from lesser financial frictions to complementarity effects PRODUCTIVITY % 4

3

2

1

0

-1

-2 BOL BRA CHL COLECUMEXPERURY BOL BRA CHL COLECUMEXPERURY BOL BRA CHL COLECUMEXPERURY 1995-2002

2003-2008

2009-2014 ASUNTOS INTERNACIONALES

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The long term: what explains TFP performance in Latin America?

• According to model estimates including usual long-term TFP determinants along with shortterm determinants (commodity prices and output gap) the later explain over 50% of the TFP increase during the commodity boom • An improvement of structural determinants (i.e., bringing the levels of secondary education achievement and economic diversification closer to emerging peers) could contribute up to 0.7 pp in annual productivity growth LATIN AMERICA AND ASIA

TOTAL FACTOR PRODUCTIVITY % yoy

Institutions

2 Innovation

1.8

7

Infrastructure

6

Macroeconomic

5

1.6

Business sophistication

1.4

environment

4 3 2

1.2

Health and primary education

1

1

Market size

0

0.8 0.6

Higher education and training

Technological readiness

0.4 0.2

0 1995-2002 TFPGROWTH

2003-2008

2009-2014

Financial market development

Labor market efficiency

Good market efficiency

TFPGROWTHNET OFECONOMICCYCLECONTRIBUTION TFPGROWTHNET OFECONOMICCYCLEANDCOMMODITYPRICES CONTRIBUTION

LATINAMERICA

ASIA

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Concluding remarks •

Odds point in the direction of growth picking up in the region in 2017, with three big “ifs” (or three big risks):

• If Brazil manages to exit from a bad equilibrium to a good one • If Fed tightening is in fact as smooth as anticipated • If China continues the transition to lower growth while deleveraging orderly •

Fiscal consolidation in Brazil is challenging economically as well as politically (parliamentary support not granted) and socially (pensions)

•

Argentina provides an example of sharp policy adjustment with positive returns up to now

•

But, in general, important policy risks surround governments having to make substantive reforms without strong social support

•

Total factor productivity growth is back to standard (low) rates after an exceptional phase

• Few alternatives to usual recipees: diversifying the economy and increasing human capital takes time

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Thank you

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