CONFIDENTIAL
RESEARCH May 26 2016
LATAM
The sinking middle class
Many in Latin America are losing their hard-won middle-class status in the economic downturn, elevating political risk
TRADE PACT RIVALRY HIGHLIGHTS DANGER OF REGIONAL FAULTLINE
SPAIN’S RETAIL BANKS TO RAISE THEIR LATAM EXPOSURE
CHINA UPS ITS INVESTMENT IN INFRASTRUCTURE WITH SERVICES
Macro | LATAM
2 5 9
MAY 26 2016
MACRO The submerging middle classes
Latin America is not a landscape stalked only by bears. Its exuberance TRADE and capacity for creative improvisation Rival trade pacts could prolong will always attract its share of bulls historic divisions
13 FINANCE Spanish banks This edition brings to a close five-and-a-half years of emerging market research activity betting on Latin in Latin America, dating from the February 2011 launch of Brazil Confidential, which later America 16 INFRASTRUCTURE China takes the long view on infrastructure investment 21 METRICS
evolved into the LatAm-wide format you are reading today. Subscribers to our LatAm service should already have been contacted to advise them of the changes to our coverage and the planned integration of FT Confidential Research with FT.com, which should now be the destination for readers of the Financial Times’ Latin America coverage. If you have any queries, please address these to james.troy@ft.com. We would like to thank our subscribers for their interest in – and loyalty to – our LatAm research over the years.
Risks on the rise
We leave our coverage at a point in the economic cycle where risks for investors of all types are rising. The downturn in the value of both oil and commodity exports from the region is translating into rising deficits, reduced spending, falling bond ratings and weakening consumption. Political risk is mounting too. This month’s lead article highlights how the mounting frustrations of populations losing their only recently won status as members of the middle class are playing havoc with approval ratings for elected administrations across the region (see Macro: The submerging middle classes). And there are deep structural faults: in a trade environment characterised by rapid globalisation, Latin America’s chronic failure to integrate effectively counts against it. Centuries-old cultural and political divisions are finding new expression in the emergence of two rival regional trading blocs, Mercosur and the Pacific Alliance. While we think the long-term prospects of the Pacific Alliance are far brighter than those of its older, less dynamic rival (see chart 1), the growing split does not augur
GDP growth within Pacific Alliance and Mercosur 1. GDP growth within Pacific Alliance and Mercosur Average YoY GDP growth of member countries Pacific Alliance
Mercosur
LatAm
5 4 3 % 2 1 0
2011
Source: Observatory Latin America-Asia Pacific
2012
2013
2014
MAY 26 2016
3
Macro | CHINA well (see Trade). Latin American nations need to do more business with each other as well as with the wider world.
Both bulls and bears stalk the LatAm landscape
Portrait of a decline
Since October 2013 (when we inaugurated our region-wide coverage) our research-based analysis has charted the rapid decline of a region that we initially found in the throes of economic optimism. A fair proportion of the blame lies with China’s economic slowdown, which hit LatAm exports hard. This rise and fall was accurately tracked through FTCR’s quarterly survey of 6,500 Latin American consumers in six countries. The data provides a fascinating portrait of frustrated economic ambitions turning to rising discontent and – for governments of various stripes – missed opportunities to use the good times to save for a rainy day.
Economic failings spell political doom
In 3Q13, our Economic Confidence Index for LatAm touched 32.8. By 1Q16 (our final survey) it had dropped to 15.1. During this period our main indices plummeted – led by the Government Popularity Index. Although we only began to track the level of government popularity in 1Q15, the correlation between economic confidence and political support in each of the region’s markets was clear (see chart 3). The Government Popularity Index for Brazil – both the bellwether and enfant terrible of this dismal process of economic and political deterioration – fell from an already ominous 9.1 to 7.2 over the five quarters in our data: tracking the sustained collapse in political credibility
2. Chinese invesment to continue to grow in 2016 Chinese investment to continue grow inin2016 YoY change/expected change in Chineseto investment LatAm
YoY change/expected change in Chinese investment in LatAm 2015
2016E
8 7 No. of respondents
Spanish banks led by Santander view Latin America as a profit lifeline and are doubling their bets
Yet despite our own exit, this is a market where players will continue trading on perceptions of risk. Latin America is not a landscape stalked only by bears. Its exuberance and capacity for creative improvisation will always attract bulls and perennial optimists certain there are fortunes to be made. For example, bullish Spanish banks led by Santander (SAN:NYSE) view the region as a profit lifeline and are doubling their bets, even as Citigroup (C:NYSE) retreats (see Finance). Likewise China, undeterred by its own downturn, appears to remain convinced of the longterm rewards of infrastructure investment in Latin America. The experts we polled said that instead of withdrawing in the face of rising risk, China will expand and diversify its presence across the region (see chart 2) (see Infrastructure).
6 5 4 3
8 6
7
7 6
2
3
1 0
1 More than 20% increase
Less than 20% increase
Same
0
Less than 20% decrease
0
1
More than 20% decrease
1
0
Do not know
Q: In 2015, did the total value of Chinese investment in infrastructure projects in Latin America change from 2014? Q: How do you expect the total value of Chinese investment in infrastructure projects in Latin America to change in 2016 from 2015? Source: FT Confidential Research
MAY 26 2016
4
Macro | LATAM 3. Change FTCR governmentpopularity popularityand andeconomic economicconfidence confidencemetrics metrics Change in in FTCR government YoY YoY change, change, 1Q16 1Q16
The Government Popularity Index for Brazil fell from an already ominous 9.1 to 7.2 over the five quarters in our data
Index points
Government Popularity Index 25 20 15 10 5 0 -5 -10 -15 -20 -25
Argentina
Brazil
Chile
Economic Confidence Index
Colombia
Mexico
Peru
Source: FT Confidential Research
that so thoroughly undermined the mandate of President Dilma Rousseff. This made possible her suspension this May on impeachment charges for budgetary maladministration. Whether justified or not, the turbulent changes in Brazil’s fortunes over this period played a significant role in forging investor opinion about the whole continent.
Harvesting stability from turmoil
Despite all these caveats, we depart the region on a hopeful note. The “Pink Tide” of Bolivarian socialism originally conceived by Venezuela’s late strongman Hugo Chávez is at last ebbing rapidly, after sweeping the continent for over a decade. Argentina, for much of recent history completely off the investment radar, is now in the hands of the pragmatic Mauricio Macri. Colombia and Chile are soundly administered. Peru’s forthcoming presidential election run-off is between right-of-centre candidates. Even Caracas will soon be free of the toxic Chávez legacy. In place of the “Pink Tide” comes a new and more moderate political cycle. Those Latin American leaders able to build on the extraordinary progress made in terms of improving social inclusion to create durable and sustainable consumer societies will harvest stability in a continent whose past has been coloured by turmoil and unrest. We wish success to all the investors, politicians and policymakers who have peopled our past reports: it is now up to them to help write the future chapters of Latin America’s stillcompelling history. n
CONFIDENTIAL
RESEARCH
LatAm: Principal Richard House Senior Researcher Luke McLeod-Roberts Researchers Cecilia T. Lanata Briones, Lucinda Elliott
FT Confidential Research: Chairman James Kynge Managing Editor Jeremy Grant Head of Production Heidi Wilson Production Editor Caelin Robinson Sub Editor Richard Wells Senior Designer Paramjit Virdee Commercial Director James Mann Custom Research Nabeel Saeed Account Manager James Troy Marketing Manager Esther Lopez Product Managers David Griffith, Jenny Andrews Email: research.ftconfidentialresearch@ft.com Web: www.ftconfidentialresearch.com FT Confidential Research is published by The Financial Times Limited, Number One Southwark Bridge, London SE1 9HL © The Financial Times Limited 2016
The Client acknowledges that FT cannot provide the Client with any advice on dealing in specific investments and accordingly FT is not providing any such advice or making any recommendation to the Client on the merits of buying or selling or otherwise dealing in particular investments.
Macro | LATAM
5 SURVEY DETAILS •
Our income survey included 1,500 Brazilian respondents and 1,000 respondents from each of Argentina, Chile, Colombia, Mexico and Peru.
• Each of the samples was weighted to be representative of the specific country’s demographic and geographical distribution.
The submerging middle classes
MAY 26 2016
INCOME SURVEY
•
The economic downturn is causing millions of the recently minted middle-class population across Latin America to slip backwards towards poverty.
•
This backsliding is affecting both consumer markets and political stability. Our data has tracked the failing popularity of governments unable to satisfy raised expectations.
•
Brazil has the largest and fastest growing cohort of submerging middle-class consumers, but the trend is regional – and elevates political risk.
H
istory is rolling backwards for tens of millions of Latin Americans who had, over the past 15 years, emerged from poverty to join the ranks of the middle classes. Economic hardship induced by the end of the commodity supercycle and ballooning government deficits has started to unwind many of the advances achieved by those at the bottom of the social pyramid. The process is a toxic one not just for consumer markets, but for the region’s stillturbulent young democracies too, as hardship is visibly undermining the popularity of elected governments across the region. These submerging middle classes present a huge threat to political stability. Our consumer surveys across Latin America since 2013 provide detailed mapping of the way changes in economic and social expectations have translated into political instability. Our analysis is corroborated by senior political figures. “During the last decade, millions of people graduated from poverty into prosperity. Now these same people are at serious risk of relapsing into poverty again,” warned Enrique Garcia, a former planning minister from Bolivia who is now executive chairman of CAF, a Caracas-based regional development bank, “That isn’t just an economic risk – it’s a political one.”
Dilma’s reward for economic mismanagement
FIRST PUBLISHED ON MAY 19
The most dramatic recent manifestation of this dynamic is in Brazil, where the current impeachment process has triggered the suspension of President Dilma Rousseff. Although justified by a technical budgetary over-run issue, this is in truth a verdict on the stunning negative swing in economic growth of over 11pp in five years (from 7.5% in 2010 to a 3.8% contraction in 2015) with a further 3.6% GDP shrinkage forecast for 2016. Following a decade in which an estimated 40m Brazilians acquired the coveted “C” status that defined them as members of the middle class, in 2015 almost 10% fell back out of this category to join the new and politically volatile group known as the submerging middle class. According to national census data analysed by Bradesco (BBDC4:SAO) and the Getulio Vargas Foundation, in the 12 months to November 2015, the proportion of Brazilians defined as C-class fell 2pp, from 57% to 55%, equivalent to 3.7m fewer Brazilians meeting the required family income threshold of R$1,646-6,585 ($463-1,853) a month (see chart 1). The proportion of the population defined as C-class or above fell 3.5pp in the same period, with the percentage of citizens in the E-class category, which had fallen from 35% in 1993 to just 15% in 2009, once again on the rise. Ipea, a Brazilian government think-tank, confirmed this reversal of fortunes with a report showing that in 2013 the number of Brazilians in extreme poverty had risen for the first time since 2003. Brazil’s Gini Coefficient – a standard index of socioeconomic inequality – has been rising since a nadir in 2012.
MAY 26 2016
The submerging middle classes
A
5 B
6
C
50 D 24 E 15
4
C
A
5 B
38 D 27 E 28
7
C
57 D 16 E 16
20 07
31 D 28 E 35
4 B
A
5 B
5 47 25 E 18
C
D
015
C
A
A
No v2
3 3
20 0
3 B
014
A
No v2
20
09
199
3
1. Distribution Brazilian population socioeconomic class Distribution of of thethe Brazilian population byby socioeconomic class
5 B
6
C
55 16 E 19
D
Note: Official definition. A is highest class, E lowest. Based on income, education and occupation Sources: Banco Bradesco, IBGE, Fundação Getulio Vargas
So after a decade of steadily rising economic and social expectations, an emerging generation is having to put its hopes on hold.
Brazil’s slow-motion political car crash
Our Consumer Survey – which in the case of Brazil has been running since February 2012 – picked up very early on the plummeting economic confidence and sharply worsening household financial situations that later served to completely undermine Ms Rousseff’s presidency (see chart 2). When our Brazil data series began in February 2012, economic confidence was still robust, at 57.5 – with any reading above 50 indicating positive sentiment. By 3Q14 – when Ms Rousseff somehow managed to engineer her re-election – this index had plunged to 20.7. By 1Q16, when impeachment proceedings began, it had tumbled to just 9. Though economic confidence stumbled, it took a while for this to be reflected at the
2. Economic failures Dilma’s demise Economic failures keykey to to Dilma’s demise Household Financial Situation Index 70
Economic Confidence Index Re-election
50=no change
60 50
Impeachment preceedings begin
40 30 20 10 0 Fe b M -12 ar Ap -12 M r-12 ay Ju -12 nJu 12 Au l-12 g Se -12 pOc 12 No t-12 v De -12 c Ja -12 nFe 13 b M -13 ar Ap -13 M r-13 ay Ju -13 nJu 13 l-1 3Q 3 1 4Q 3 1 1Q 3 14 2Q 1 3Q 4 1 4Q 4 1 1Q 4 1 2Q 5 1 3Q 5 1 4Q 5 15 1Q 16
6
Macro | LATAM
Note: Any index reading above 50 indicates an increase; any reading below 50 indicates a decrease Source: FT Confidential Research
MAY 26 2016
7
Macro | LATAM
The submerging middle classes BLOOMBERG
10.9%
Unemployment figure for Brazil in 1Q16
Brazil’s 1Q15 Government Popularity Index reading of 9.1 was much lower than the LatAm average of 19.8 even before the impeachment proceedings
micro-level. The Household Financial Situation Index held up well until 4Q13, when Brazil’s previously low unemployment rate started to rise, and our Job Prospects Index started to slide. By 1Q16, with unemployment reaching 10.9%, our household finances measure had tumbled to just 26.2. Brazil’s Government Popularity Index had already fallen to 9.1 by 1Q15 – much lower than the LatAm average of 19.8 – but slipped even further to just 7.2 in 1Q16, leaving the nowdefunct Rousseff government as the region’s most unpopular by a huge margin (see chart 3). Analysing such data clearly shows why – within a rigid fixed-term presidential system with no mechanisms for recall or no-confidence votes – Brazil’s legislators selected an alternative means of ridding themselves of a government that had so comprehensively failed.
LatAm-wide popularity slide
Although the political malaise resulting from the submergence of the middle class is most extreme in Brazil, it is not unique in the region. In five of the six countries our Consumer Survey tracks, the trend is much the same, as profiled in our key indices. In Mexico, for example, President Enrique Peña Nieto’s approval rating now languishes at 30%, according to a poll by the Reforma newspaper. In Peru, outgoing president Humala Ollanta’s popularity fell to just 15% last year, contributing in part to a rightward political shift
3. Government Popularity Index Government Popularity Index LatAm
Argentina
Brazil
Chile
Colombia
Mexico
Peru
60
50=no change
50 40 30 20 10 0
1Q15
Source: FT Confidential Research
2Q15
3Q15
4Q15
1Q16
MAY 26 2016
8
Macro | LATAM
The submerging middle classes that is expected to sweep Kiko Fujimori into power after the June run-off in the presidential elections.
It’s the economy, stupid
Government Popularity Index reading for Argentina in 1Q16, the highest in the region
To stay rich is glorious
If China’s economic transformation kicked off in the 1980s with Deng Xiaoping’s famous dictum “to get rich is glorious,” then Latin America’s transformation began two decades later, when leaders began to create a whole new middle class of loyal voters. In 2003, Luis Inácio Lula da Silva – until then a perennial left-wing outsider candidate – promised Brazilians prosperity through income redistribution, and elevated 40m people to middle-class status. This translated into 13 years of hegemony for his Workers’ party. But there is no glory in getting rich only briefly. This political dominance is coming to a bitter end in Brazil with Ms Rousseff’s impeachment and – albeit more gently – ballot box defeats across the rest of Latin America for leftist administrations whose social policies became victims of the economic downturn. n
Change in in FTCR government 4. Change FTCR governmentpopularity popularityand andeconomic economicconfidence confidencemetrics metrics YoY change, 1Q16 1Q16 YoY change,
Government Popularity Index
Index points
57.6
Over the year to 1Q16, our data tracked the close correlation between economic slowdown and the slide in political support in five of the six countries for which we generate indices (see chart 4). Just one country bucked the downward trend: Argentina, where 3Q15 elections swept away the much-criticised Peronist Cristina Fernández de Kirchner (with popularity that quarter of 33.5) replacing her with right-of-centre Mauricio Macri, whose post-election bounce pushed up our index to 57.6. The collapse in political support in Colombia came despite the fact that from 2010-2015, 4.6m of its citizens left poverty behind them, with the extreme poverty rate falling from 15% to 7%. Memories can be short when wealth is under threat. Although President Juan Manuel Santos told UK investors on May 11 that Colombia has “a consolidated middle class with no risk of falling into poverty,” his deputy finance minister Andres Escobar told FTCR that his government was “very cautious” about its poverty reduction statistics, because “our social numbers aren’t going to do as well as they did in the past.” Meanwhile, Chile (whose purchasing-power-parity per-capita income of about $23,000 is the region’s highest) is acutely aware that a submerging middle class poses a danger to itself and the region. Like those of her regional peers, President Michelle Bachelet’s poll ratings in January 2016 reached an all-time low of 24%, according to pollster GfK Adimark. This is a 20% drop over 12 months. Ms Bachelet told a UK audience on May 12 that the 69m people still living in poverty across LatAm are an “urgent wake-up call” and that “reducing poverty and creating space for inclusion” was the path to stability.
25 20 15 10 5 0 -5 -10 -15 -20 -25
Argentina
Source: FT Confidential Research
Brazil
Chile
Economic Confidence Index
Colombia
Mexico
Peru
9 PACIFIC ALLIANCE: • Peru • Chile • Colombia • Mexico MERCOSUR: • Argentina • Brazil • Paraguay • Uruguay • Venezuela
Trade | LATAM
MAY 26 2016
Rival trade pacts could prolong historic divisions •
The newly created Pacific Alliance is already a more economically significant group than the much older Mercosur, in terms of both exports and economic growth.
•
We believe that the more pragmatic, business-friendly approach of Pacific Alliance nations makes them generally better investment destinations than the more bureaucratic, politically inspired grouping of Atlantic nations in Mercosur.
•
There is indeed a clear trade rift emerging between the two groups, though Chile is looking to bridge the gap by identifying areas of common interest. This is no easy task, however.
F
ive centuries after Pope Alexander VI ruled how Spain and Portugal should divide up the New World, a new split is emerging between trading nations facing the Pacific and Atlantic coasts of Latin America that could help define the coming decades. Newcomer the Pacific Alliance, comprising Peru, Chile, Colombia and Mexico, bills itself as a “twenty-first century trade pact” modelled along the lines of the EU, and is committed to free movement of people, goods and services. Meanwhile, the much older and larger (by number of members) Mercosur follows a more traditional model of state-negotiated trade based on customs union. Its full members are Brazil, Paraguay, Uruguay, Argentina and Venezuela (see chart). We believe that looming rivalry between the two trade bodies threatens to create a twospeed Latin America in which the region’s Atlantic powers – led by Brazil – trail the smaller yet far more vibrant economies facing the Pacific. If the rift is left to grow unchecked, the widely differing approaches to free trade will threaten still-fragile regional integration. For those with a short-to-medium investment horizon, we have no hesitation in recommending the Pacific Alliance as the more viable zone for growth.
Political dynamics thwarting trade agenda
FIRST PUBLISHED ON MAY 23
Mercosur has been struggling ever since it was established in 1991 – in part because of the traditional rivalry between founder members Brazil and Argentina. In fact Brazil, far from using its sheer economic scale to create momentum for Mercosur, has proved something of a dead weight. Differences of culture and language, together with Brazil’s decade-long but now-defunct strategy of creating a zone of influence among neighbouring countries with left-leaning governments, have undermined the morale of Mercosur. “The dynamics between the leaders of the Mercosur countries matters. It’s a political bloc,” explained a well placed diplomatic source. In contrast, added this observer: “the Pacific Alliance was invented with a different purpose and has been marketing itself as something very different to Mercosur.” There is also – and not coincidentally – significant divergence between the growth rates of the two groups. While in 2014 Pacific Alliance member nations enjoyed average GDP growth of 2.4%, their Mercosur counterparts recorded growth of just 0.3%. Equally, the Pacific Alliance already far outstrips its older rival in trade terms. Total exports from the Alliance totalled $570bn in 2014, compared with $321bn from Mercosur. Total Latin American exports were $1.07bn.
MAY 26 2016
10
Trade | LATAM
Rival trade pacts could prolong historic divisions
vs Mercosur members
Pacific Alliance members Argentina
Bolivia
Energy production, industrial machinery 4.2%
Brazil
Cereals, flour, starch, milk 4.4%
6.2% Vehicles (excl. trains)
Chile
Electrical machinery, equipment 5.0%
7.8% Ceramic products
Colombia
Mercosur associate members Ecuador
Paraguay
12.1%
34.7%
Copper, copper products
9.7%
5 4 3 % 2 1 0
2011
Mercosur
2012
LatAm
2013
2014
EXPORTS AS % OF LATAM TOTAL 17.5%
2011
Pacific Alliance 18.3%
2012
49.3%
33.3%
Source: Observatory Latin America-Asia Pacific
31.2%
6.9% Mineral fuels, oils
Ores, slag, ash
AVERAGE YOY GDP GROWTH OF MEMBER COUNTRIES Pacific Alliance
Vehicles Fish, (excl. trains) crustaceans 4.2% 2.9%
Mineral fuels, oils 16.3%
26.1%
Oil seeds, oil-producing fruits
Venezuela
Cereals
20.4%
26.9%
Uruguay
TOP EXPORTS TO LATAM IN 2014 (%)
20.1%
Energy production, industrial machinery Ores, slag, ash
Suriname
38.8%
9.7%
Raw hides, skins
Peru
Mineral fuels, oils
Plastics, plastic products
9.4%
TOP EXPORTS TO ASIA-PACIFIC IN 2014 (%)
Mexico
Pacific Alliance and Mercosur members
3.2%
Meat, edible Food industry waste meat offal
FDI AS % OF GDP IN MEMBER COUNTRIES Pacific Alliance
3.0 2.5 2.0 % 1.5 1.0 0.5 0.0
2011
Mercosur
2012
Mercosur
LatAm
2013
2014
Other 17.5%
2013
50.5% 31.6%
16.8%
2014
50.9% 30.0%
53.3%
MAY 26 2016
11
Trade | LATAM
Rival trade pacts could prolong historic divisions BLOOMBERG
Pacific Alliance member nations’ finance ministers at a recent news conference. From left, Mexico’s Luis Videgaray, Chile’s Rodrigo Valdes, Peru’s Alonso Segura and Colombia’s Mauricio Cardenas
Colombian president Juan Manuel Santos, recently briefing investors in London, called the Alliance “the most successful integration process in the whole history of Latin America”.
Chile seeks to build bridges
While the two groups may now be circling each other warily, there is as yet no open rivalry. Chile’s president Michelle Bachelet recently used the 2016 Canning Lecture to Londonbased diplomats and policymakers to position Chile as a “bridge for East-West integration”. She added that “people [in Mercosur] saw the Pacific Alliance as an elite group that would set other countries to one side – but we will not turn our backs on the Atlantic countries.” Chile certainly has the credentials to be a bridge-builder with Mercosur: since 1990 it has invested $25bn in Brazil and $17bn in Argentina. Ms Bachelet told the UK audience the two groups are following a path of “convergence with diversity” and that talks are ongoing between them. She said the Pacific Alliance had identified areas of common interest and proposed changes to Mercosur. “There are some things we agree on, others where we agree to disagree – and some where we just disagree,” she said. But this will not be easy. There are clearly questions of style and outlook separating the two. Argentina, which suffered many years of exclusion from international forums because of the former Peronist administration’s debt moratorium, is only now reaching out with a more business-friendly agenda. Meanwhile, Brazil’s diplomats and negotiators have tended to rely on the nation’s scale and sense of its own “manifest destiny” to be the region’s leader regardless of economic performance or cultural fit. In contrast, Pacific nations have worked hard to build reputations for competency and reliability, with macro-adjustment plans that are much more proactively addressing the impact of the commodities downturn. For example, Colombia’s “intelligent austerity” programme came almost two years ahead of the plan expected to be announced soon by Brazil’s interim president Michel Temer.
Mercosur’s political travails deter trade
$25bn $17bn
Brazil
Argentina
Chile’s investment in these countries since 1990
Mercosur has certainly not been making things easy for itself. The body has been dogged by bitter political disputes between politically moderate nations and those in the Bolivarian socialist group. First came the expulsion of associate member Paraguay after the 2012 impeachment of its president Fernando Lugo. Next followed disquiet within the organisation about Venezuelan president Nicolás Maduro’s 2015 decision to jail the opposition mayor of Caracas, Antonio Ledezma. Finally, the recent refusal of Mercosur members to intervene in the impeachment of Brazilian president Dilma Rousseff, laid bare deep divisions in the group. Mercosur refused Ms Rousseff’s request to suspend Brazil from the organisation as punishment for what she labelled anti-democratic behaviour. New Argentine president Mauricio Macri has also expressed impatience with Mercosur
MAY 26 2016
12
Trade | LATAM
Rival trade pacts could prolong historic divisions GETTY
2.2%
FDI’s share of GDP in the Pacific Alliance in 2014, up from 1.4% in 2011 Flags of the Mercosur trading bloc member states at Plaza de la Republica square in Buenos Aires
as he seeks to bring his country back into the international community. Foreign minister Susana Malcorra recently told the FT that the bloc had underdelivered and that “if it does not work, we will regroup and think again”. Clearly, Argentina sees the Pacific Alliance as a grouping with a better future than Mercosur. Certainly, activities as prosaic as managing trade quotas for cereals – which made up a fifth of Mercosur’s intra-regional exports in 2014 – vehicles, white goods or commodities between Brazil and Argentina seem almost anachronistic in the context of Mr Macri’s wider goals. From the perspective of foreign direct investment (FDI), the trends make it clear which bloc international partners are most positive about. While FDI in the Mercosur region as a percentage of GDP has remained largely flat since 2011, it rose from 1.4% of GDP in 2011 to 2.2% of GDP in 2014 in the Pacific Alliance. In addition, the $1.25tn market capitalisation of companies listed on MILA – the Alliance members’ integrated stock exchange – now exceeds the $1.22tn capitalisation of Brazil’s Bovespa, once by far the region’s largest bourse.
A southern pivot
True to its name, the Pacific Alliance is akin to a southern version of US president Barack Obama’s pivot toward Asia. Yet in terms of trade, the results have so far been modest, with 34.7% of export revenue still derived from low-value-added mineral ores, 20.4% from copper and 16.3% from oil. The promised trade with Asia in higher value intellectual property has yet to materialise. For Alliance nations, the Transpacific Partnership (counting Mexico, Chile and Peru among its 12 member nations) holds out benefits in terms of enhanced market access for goods and services. Chile’s Ms Bachelet said her country’s accession to TPP will follow approval by the congress in Santiago, now expected in 2H16. “There will be opposition, but we’re convinced the benefits outweigh the costs,” she told diplomats. However, we caution that as yet there is no clarity on how the Pacific Alliance will fit into the TPP. Nor indeed whether Latin America could eventually play a meaningful part in the Transatlantic Trade and Investment Partnership now being negotiated between the EU and US. The bigger picture remains, which is that even in an age of ever-larger global trading blocs it is still unlikely that any meaningful pan-regional economic integration will emerge for Latin America. As such, we expect the divisions that have prevented the region from achieving its undoubted promise to continue for the foreseeable future. n
Finance | LATAM
13 READ MORE ON LATAM BANKING ON OUR WEBSITE: FTCONFIDENTIALRESEARCH.COM
MAY 26 2016
Spanish banks betting on Latin America •
Spain’s big banks are raising their bets on Latin America as London’s HSBC and New York’s Citigroup exit the region. Santander is in the running for Citi’s Brazilian, Argentine and Colombian operations.
•
We believe the Spanish lenders are right to hold on to, and even expand, their regional assets, despite the LatAm downturn. Profits from the region helped sustain Santander and BBVA through the Euro crisis, while their cultural ties mean they are better placed to exploit the coming return to growth in Latin America.
•
There are, however, some signs of deteriorating asset quality in Brazil, and regional risks associated with economic turbulence.
I
n the turbulent years following 2008, shareholders of banks with operations in Latin America looked to the region as a profit lifeline. Today, with retail borrowers across Latin America facing an economic storm of rising risk and scarce cash, international bankers are responding in radically different ways. While sceptical Anglo-Saxons are getting out, hardier Spanish banks seem ready to double their bets on a continent where they have historic ties.
One man’s trash is another man’s treasure
HSBC (HSBC:NYSE) sold its Brazilian retail banking operations last August for $5.2bn to local bank Bradesco (BBDC4:SAO). Citigroup (C:NYSE), meanwhile, announced in February it will offload unwanted retail banking and credit card operations in South America’s three largest economies – Argentina, Brazil and Colombia. The assets are valued at about $6bn. The still-profitable commercial and investment banking operations in these countries will remain under Citigroup control. It has now either sold or is in the process of selling its entire Latin American retail network, including operations in Peru, Panama, Costa Rica, El Salvador, Guatemala and Nicaragua. Citi has said the exit from the region will allow it to put resources into areas of “greatest growth” and “to simplify the company, cut costs and boost returns”. But Spain’s two largest banks – Santander (SAN:NYSE) and Banco Bilbao Vizcaya and Argentaria (BBVA) (BBVA:MCE) – sense an opportunity, and they are eyeing up Citi’s retail assets across the region. So who is making the right move? We concede that Hispanic optimism could be based more on cultural proximity than on hard economic facts, yet Citi’s timing is puzzling, if not downright timid.
LatAm banking prospects looking up
FIRST PUBLISHED ON MAY 13
Today’s recessions are largely muted and the region is both vastly more wealthy and full of potential than it was back in 1983, when despite becoming embroiled in the first of a series of sovereign debt crises, Citi still hung in. Now, with global demand sluggish, Latin America constitutes one of the few fertile spots for profitable retail banking, which requires accelerated social and economic transformation. Most of the arguments for both going and staying understandably revolve around Brazil, the largest regional economy, which is suffering a deep downturn, with forecasts for a 3.8% GDP contraction in 2016, following on from a 3.6% fall in 2015.
MAY 26 2016
14
Finance | LATAM
Spanish banks betting on Latin America 1. Consistent investment LatAm Spanish firms Consistent investment in in LatAm byby Spanish firms Announcement date by year
Number of deals
40
20
30
15
20
40
43
Deal value
25
$bn
No. of deals
50
22.0
10
38
29 10
5 8
0
2012
2013
2014
2015
2016*
0
4.8
1.0
2012
2013
2014
2.6 2015
1.1 2016*
*Mar 2016 YTD Source: Dealogic
Citi has certainly had a torrid time in Brazil, a country in which it has been present since 1915 (the year after it started operations in Argentina) and from which it derives the majority of its retail banking revenue in a region that registered a 13% loss for the group in 2015. Yet after years of plenty, it is hard to believe the end of a banking profits supercycle may indeed have come. Since 2012 Santander and BBVA have made more money from their operations in Latin America than at home. And in 2014, Spanish corporates bought local assets worth $22bn (see chart 1).
Spanish see profit potential
Largest banks in Mexico by assets MXN (bn)
Bank Total assets BBVA Bancomer 1,889 Banamex 1,225 Santander Mexico 1,183 Banorte 1,171 HSBC Mexico 605 Inbursa 432 Scotiabank Mexico 341 Bancomext 286 Interacciones 191 Banco del Bajio 150 Note: As of Sep 2015 Source: Relbanks
Indeed, there are plenty of positives to be found. For example, Santander surprised analysts in 1Q16 by reporting a 5.3% YoY rise in operating profits in Brazil, its biggest retail and commercial banking market, where it has 12% market share and 3,443 branches. And the Spanish banks still see Brazil as having plenty of banking bounce. With official interest rates of 14% (inflation is 9%) it is helping pad margins for Santander, contributing 19% of group profits in 2015 – more than the 12% it derived from its home market (see chart 2). Mexico, Argentina and Chile combined contributed a further 16%, with Santander’s Mexican operations also performing well in 1Q16, rising 10% YoY. Rival BBVA derives a huge chunk of its profit from Mexico. The country generated some €2.1bn ($2.39bn) in net profit in 2015, 43% of its global profit. This is more than double the amount it brought in from all other South American markets (excluding Venezuela) combined. Santander Mexico and BBVA Bancomer together accounted for 14% and 23.4%, respectively, of lending in Mexico’s retail banking sector last year, with BBVA the biggest lender in the country. Moreover, there were few signs of credit stress among Mexican consumers. BBVA’s nonperforming loan ratio remained flat at 2.6%, while Santander recorded a ratio of 3.1%, down from 3.7% a year earlier. “The growth we’ve seen in Mexico has proven we were right in the first instance when we bet on the country,” said Ignacio Lacasta, head of business monitoring in Mexico & South America at BBVA. There are reasons for optimism elsewhere, too, with the ascendance of Mauricio Macri in Argentina. His business-friendly, right-of-centre administration should be positive for the economy and the banking system, and Santander – which enjoys a 10% market share – has high hopes. A spokesman for bank told FT Confidential Research that confidence in the banking system was “reaffirmed” and that Argentina will play a key part in the bank’s global investment strategy to 2018.
MAY 26 2016
15
Finance | LATAM
Spanish banks betting on Latin America 2. Spanish banks have significant exposure LatAm Spanish banks have significant exposure to to LatAm Underlying attributable profit profit in in 2015 Underlying attributable 2015
17%
11% 11%
4% 5% 6%
With fewer than 40% of Mexicans having access to financial services, the country still offers significant potential
3% 43%
19%
45%
12%
8% 4% 5%
7%
Brazil
Spain
US
Mexico
Chile
Argentina
Colombia
Peru
Other Source: Companies
Past performance is not an indicator of future returns
It is therefore easy to understand why Spanish banks cling to a “LatAm lifejacket” that helped them to weather the enduring Euro crisis, offering counter-cyclical support for Santander and BBVA at a time of increasing uncertainty at home. But just as dwindling flows of gold or silver left colonial Spain high and dry two centuries ago, there is no guarantee that Latin American banking profits will continue to bail out these banks. The IMF forecasts that Latin America and the Caribbean will record meagre economic growth of 0.3% in 2016, according to its biannual World Economic Outlook, and there are growing signs of financial stress in troubled Brazil. Santander’s provisions against bad loans in Brazil jumped more than 16% YoY to R$720m ($208) during the first quarter. And this pales in comparison to the adjustment to bad-loan provisions made by Bradesco, the new owners of HSBC’s Brazil operations. These rose a substantial 52% YoY to R$5.44bn. This does not portend well for asset quality in the country. Meanwhile, net profit from BBVA’s Mexican operations fell 6.5% YoY in 1Q16 as GDP growth continues to slow, according to the latest projections. But with less than 40% of Mexicans having access to financial services, the country still offers significant potential. And indeed, in the aggregate we believe that fortune will favour the brave in Latin America, with short-term turbulence likely to be outweighed by longer-term growth, in a region which continues to have great potential in the banking sector. n
16 SURVEY OF CHINESE INFRASTRUCTURE INVESTMENT
MAY 26 2016
Infrastructure | LATAM
China takes the long view on infrastructure investment •
Chinese investment in Latin American infrastructure is set to grow this year according to an FT Confidential Research survey, despite the economic slowdown in both China and the region itself.
•
China is shifting away from the more volatile and less transparent Bolivarian countries towards bigger and more stable markets like Argentina, Colombia and Mexico as it becomes more risk averse.
•
Chinese firms will need to master more transparent procurement processes in countries with more robust institutions and more open governance.
•
China’s long-term goal is not just to build infrastructure, but to operate it and provide support services.
C
hina is taking the long view on investing in Latin American infrastructure, confidently looking beyond today’s stormy economic horizon to a day when it will not just build transport, energy and mining projects, but also deploy the manpower to operate a range of related services right across the region. And it will continue spending and diversifying to achieve its goals. China is likely to shift its focus away from more statist, and in some cases unstable, markets, such as Venezuela, instead homing in on safer bets like Argentina, Mexico and Colombia, while consolidating its established position in Brazil. These are the conclusions of a special FTCR survey of 20 key executives from Chinese
1. Chinese invesment to continue to grow in 2016 Chinese investment to continue grow inin2016 YoY change/expected change in Chineseto investment LatAm
YoY change/expected change in Chinese investment in LatAm 2015
2016E
8
No. of respondents
7 6 5 4 3
8 6
7
7 6
2
3
1 0
FIRST PUBLISHED ON MAY 16
1 More than 20% increase
Less than 20% increase
Same
0
Less than 20% decrease
0
1
More than 20% decrease
1
0
Do not know
Q: In 2015, did the total value of Chinese investment in infrastructure projects in Latin America change from 2014? Q: How do you expect the total value of Chinese investment in infrastructure projects in Latin America to change in 2016 from 2015? Source: FT Confidential Research
MAY 26 2016
17
Infrastructure | LATAM
China takes the long view on infrastructure investment 2. Greater Chinese investment diversity Greater Chinese investment diversity
Sectors that received/will received/will receive in LatAm Sectors that receive most most Chinese Chinese investment investment in LatAm 2015
2016E
No. of respondents
20 15 10
17 14 10
5 0
Energy
8
Oil and gas
7
8
Transport
4
2
Mining
4
1 Other
Q: Which two infrastructure sectors received most Chinese investment in Latin America in 2015? Q: Which two infrastructure sectors do you expect to receive the most Chinese investment in Latin America in 2016? Source: FT Confidential Research
infrastructure firms and their Latin American counterparts, local governments responsible for awarding contracts, financiers and advisors.
Chinese investment to rise
A clear majority of respondents – 13 out of 20 – expected Chinese investment in Latin America to increase YoY in 2016, while only one believed it would shrink (see chart 1). Despite the tumbling prices of oil and gas, and mineral resources, 50% of respondents said these two sectors would still receive significant Chinese investment in 2016, though the energy sector (including hydroelectric dams and power transmission) was expected to be the top sector. But there was evidence of expectations of greater diversification into areas such as transport and other sectors like housing (see chart 2). Chinese firms have already established themselves in Latin America, investing a total of $41.8bn in infrastructure from 2013-2015, particularly in the extractive industries (see chart 3). While this investment total might be dwarfed by the scale of Chinese investments in Asia, our study suggests a hunger for new Latin American projects despite regional volatility and China’s own economic slowdown.
From Three Gorges to Belo Monte
Certainly Li Yinsheng, CEO of the Brazilian division of China Three Gorges (CTG), operator of the largest dam in the world and sole operator of over 5,300MW of capacity in Brazil, is unfazed by political risks in the region’s largest market. “Brazil is going through a very tough period,” he told FTCR. “But from a long-term perspective we have a positive view, there is stability and a well established legal framework.” CTG’s vote of confidence in Latin America’s biggest market is huge. Even after winning auctions as the sole bidder for two hydroelectric plants in November 2015, the company told FTCR it still plans to acquire sizeable greenfield assets. It agreed to pay R$13.8bn ($3.95bn) for the two contracts, bringing its total investment in Brazil to R$17bn. Elsewhere, China’s State Grid is developing two transmission lines delivering power from the recently inaugurated Belo Monte dam in the middle of the Amazon to south-east Brazil at a cost of R$12bn.
China’s opportunity 13 out of 20 respondents expected Chinese investment in Latin America to increase YoY in 2016
Investment appetite among major Chinese players remains undimmed, despite a rocky economic and political period for Brazil, given they are thinking in terms of longer-term strategic goals. First and foremost, China is keen to expand into services, and investing in build-own-
MAY 26 2016
18
Infrastructure | LATAM
China takes the long view on infrastructure investment 3. Extractive industry key target Chinese Extractive industry key target forfor Chinese Chinese investment in LatAm infrastructure, 2013-2015 ($bn) Chinese investment in LatAm infrastructure, 2013-2015 ($bn) BREAKDOWN BY SECTOR
Chinese banks find it easier to release funds for projects in Latin America
BREAKDOWN BY COUNTRY
0.6 Mexico
5.3
Agriculture 0.7
Venezuela 0.3
Real estate 0.6
Transport 2.4
6.3 Ecuador
Colombia
9.9 Peru
Mining 9.5
41.8
9.3
Bolivia 1.0
Brazil
9.1
Total
Argentina
Energy, oil and gas 28.6 Note: Includes construction contracts Sources: The American Enterprise Institute, The Heritage Foundation
operate infrastructure projects offers a logical route in. Schemes with an operational component support the goal of transitioning the Chinese economy away from manufacturing towards the service sector. “This allows Chinese firms to invest across the value chain,” Margaret Myers, director of the China and Latin America programme at the Inter-American Dialogue, a thinktank, told FTCR. “We have companies that are involved not just in construction but also in environmental impact studies. Loans are often related to the development of service provision.” The Chinese government has earmarked the region as an investment priority, seeing it as a growth market with high demand for new infrastructure, which helps Chinese firms offset spare capacity from waning demand at home. And certain markets match up well with China’s increasingly risk-averse international investment outlook. Given this preferred status, Chinese banks find it easier to release funds for projects in Latin America.
Cheap, readily available capital a key advantage
Indeed, our survey found that cheap, readily available capital is the major advantage Chinese companies have in Latin America (see chart 4). The low cost and availability of capital was seen as conferring an “extreme” advantage across all major LatAm markets. The quality of its technology and its speed of execution are not seen as advantages across most of the region, at least for now.
China searches for greater stability
Yet even though funding – often state-encouraged – is plentiful, China is becoming more selective with its investments. Time was, China was happy to take on projects in markets shunned by western investors, notably the so-called Alba countries – Venezuela, Bolivia, and Ecuador – and Argentina, long-ignored by investors given its
MAY 26 2016
19
Infrastructure | LATAM
China takes the long view on infrastructure investment
4. Chinese firms cost and capital availailityininLatAm LatAm Chinese firms winwin onon cost and capital availability Competitive markets Competitive advantages advantages of of Chinese Chinese firms firms in in LatAm LatAm markets Zero
Low
Low cost, availability of capital
Moderate
High quality of technology
High
Speed and efficiency
Extreme Strong bilateral government relationship
Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Note: Based on no. of respondents: 0 Zero; 1-4 Low; 5-8 Moderate; 9-12 High; 13+ Extreme. Q: What are the greatest competitive advantages of Chinese infrastructure firms operating in each of these countries? (Multiple-choice question with no limit on possible responses) Source: FT Confidential Research
China is now diversifying away from the seething cauldron of risk that Caracas has become
default and regulatory risk. Countries like Venezuela did not demand much transparency and provided an entry point to the continent less liable to generate confrontation with the US. During this period, Chinese investment was largely absent from the more transparent, free-market economies of Latin America, such as Colombia, Chile and Mexico. But the flaws in this approach became obvious by 2013, as the security and political situation deteriorated in Venezuela and allegations of corruption emerged (LatAm Mar 20 2014, Infrastructure). China is now diversifying away from the seething cauldron of risk that Caracas has become. “China is understanding that it did a poor job of assessing risk,” said Dr Evan Ellis of the US Army War College Strategic Studies Institute. “As the Maduro administration has fallen apart, China has only given the appearance of supplying loans, without actually providing new money. This is money to cover work done by Chinese companies and allows the country to maintain face while consolidating its position. China is playing a much tougher game with Venezuela.” From 2013 onwards, China went in search of greater stability, investing instead in Brazil and starting to build positions in other markets too.
Brazil and Argentina favoured markets
Our survey clearly shows this shift away from riskier markets to more stable, moderately institutionalised and transparent economies. Our respondents expected Chinese investment to shift rapidly away from Venezuela this year, with Brazil and Argentina predicted to be the two greatest recipients (see chart 5). Despite our survey results suggesting it is a higher-risk investment destination (see chart 6), Brazil still emerged as the nation expected to receive the greatest level of Chinese investment in 2016. As Mr Li explained, Brazil “has plenty of quality resources, potential for growth in energy demand and a legal framework that is transparent so that investors can [make] a reasonable return. You rarely find a country that possesses all three elements.” As for Argentina, it should be noted that its renewed favour among international investors means China will face stiffer competition from western nations than it would have done in the past.
MAY 26 2016
20
Infrastructure | LATAM
China takes the long view on infrastructure investment 5. Chinese desert Venezuelan infrastructure Chinese to to desert Venezuelan infrastructure
LatAm markets that received/will receive most Chinese investment 2015
2016E
No. of respondents
15 12 9 13
6 3
10
12
8
7 3
0
Argentina
Brazil
2
Ecuador
2
4
2
Mexico
Venezuela
0
4
Other
Q: Which two LatAm markets received most Chinese investment in infrastructure in 2015? Q: Which two LatAm markets do you expect to receive most Chinese investment in infrastructure in 2016? Source: FT Confidential Research
Colombia and Mexico more attractive destinations
Our survey also showed that Mexico and Colombia look set to benefit from China’s waning interest in Venezuela. Both are considered relatively low risk, with good-sized domestic markets. Furthermore, risk should fall further this year in Colombia following the imminent signing of a peace accord with the militant Farc group. Chinese investment in Colombia has already picked up. Together with local partners, China Harbour Engineering recently won the contract for Autopista Mar 2, a 245km motorway in north-west Colombia that is part of the so-called fourth generation of road concessions. This is a prime example of the sort of project sought by China, involving both construction and operation, and our survey suggests it is likely to be just one of the first of many in Latin America in the coming years. n
6. Domestic risk Chinese investment Chile, Colombia, Mexico Domestic risk to to Chinese investment lowlow in in Chile, Colombia, Mexico Level Level of of risk risk to to growth growth of of Chinese Chinese infrastructure infrastructure investment investment Zero
Low
Local slowdown
Moderate
Local regulatory risk
High
Local political risk
Extreme
Lack of well structured projects
Argentina Brazil Chile Colombia Ecuador Mexico Peru Venezuela Note: Based on no. of respondents: 0 Zero; 1-4 Low; 5-8 Moderate; 9-12 High; 13+ Extreme. Q: What do you consider to be the greatest risks to the growth of Chinese investment in infrastructure in 2016 for each country? (Multiple-choice question with no limit on possible responses) Source: FT Confidential Research
21
MAY 26 2016
Metrics | LATAM
LATAM CONSUMER INDICES
GOING UP
LatAm Argentina
Brazil
Chile Colombia
Mexico
Peru
FTCR LatAm Economic Confidence Index
32.6%
YoY rise in Argentine car sales in Apr-16
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
22.5 15.7 17.7 23.8 41.6 17.9 50.5 18.3 24.4 6.0 30.5 36.9 20.7 45.5 16.5 22.8 5.7 25.6 33.5 18.5 38.8 12.9 20.1 5.1 17.2 27.5 11.6 34.9 16.0 24.9 4.0 19.8 31.8 20.9 36.7 15.1 26.0 9.0 22.8 14.3 16.4 32.0
FTCR LatAm Household Financial Situation Index
6.4%
10.1%
YoY rise in Mexican retail sales in Mar-16
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
42.7 29.5 44.1 39.0 54.6 37.1 57.4 37.6 33.7 30.6 45.1 52.3 39.3 54.4 35.5 34.2 29.2 40.7 51.8 35.2 51.4 32.7 34.2 25.7 37.3 48.9 32.6 49.9 34.1 35.2 24.3 36.4 52.1 38.7 49.2 32.4 30.2 26.2 38.5 39.5 36.1 47.0
FTCR LatAm Spending Index
Colombian unemployment in Mar-16, up from 8.6% in Mar-15
GOING DOWN
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
63.9 46.7 72.8 50.0 64.3 56.3 66.7 63.5 52.1 71.6 58.8 62.7 54.7 63.8 61.1 50.1 67.9 53.6 60.1 54.8 61.1 58.1 52.0 61.7 52.2 58.2 53.9 62.3 61.6 53.4 65.3 51.2 62.7 59.6 60.1 59.2 55.0 61.4 56.8 55.8 58.1 61.1
FTCR LatAm Job Prospects Index 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
49.8 34.7 52.9 40.4 55.1 45.8 63.2 45.3 36.7 38.9 46.7 55.2 50.3 63.5 40.7 36.4 33.1 39.9 52.1 45.8 58.6 39.4 35.1 30.8 37.3 47.2 48.7 55.4 42.3 37.4 33.7 41.8 53.0 50.5 57.4 41.7 40.2 31.2 43.9 48.3 52.8 58.6
FTCR LatAm Inflation Perception Index
5.7%
YoY decline in Brazilian retail sales in Mar-16
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
64.1 74.0 63.6 66.6 62.8 63.0 58.9 64.5 72.6 65.3 65.9 63.6 62.1 57.2 64.6 68.5 64.8 65.8 65.4 64.2 57.2 63.2 70.7 61.8 69.5 66.5 62.4 56.6 63.8 68.9 62.5 68.3 66.1 64.0 59.0 62.8 68.1 59.3 65.1 71.1 64.4 58.6
FTCR LatAm Inflation Expectations Index
4.6%
3.9%
YoY decline in Peruvian industrial production in Mar-16
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16
56.8 64.8 53.5 60.5 56.3 59.8 54.7 54.6 61.4 53.0 59.8 52.5 55.5 52.9 54.0 58.5 51.0 58.7 54.5 57.1 52.4 54.5 60.1 50.7 60.9 56.8 57.4 52.7 55.7 59.0 52.2 62.1 59.4 58.2 55.5 53.6 58.4 49.1 59.4 58.8 56.1 56.5
FTCR LatAm Government Popularity Index 1Q15 2Q15 3Q15 4Q15 1Q16
19.8 35.3 17.7 37.5 15.7 33.5 17.1 35.4 16.7 57.6
9.1 31.6 42.9 18.9 30.0 9.4 25.9 35.3 15.8 20.8 8.3 20.6 32.1 13.7 20.3 6.9 21.0 40.5 18.3 16.0 7.2 19.7 23.1 15.1 17.6
FTCR LatAm Discretionary Spending Index
YoY Peruvian inflation in Apr-16
2Q15 3Q15 4Q15 1Q16 Source: FT Confidential Research
17.7 37.5 9.4 25.9 35.3 15.8 20.8 15.7 33.5 8.3 20.6 32.1 13.7 20.3 17.1 35.4 6.9 21.0 40.5 18.3 16.0 34.1 38.1 45.8 44.7 40.6 40.9 48.5
MAY 26 2016
22
Metrics | LATAM MACRO
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
GDP (YoY change %) 2Q15 3Q15 4Q15 2015 2016E 2017E
1.9 – – – -1.1 3.2
-2.6 -4.5 -5.9 -3.8 -3.8 0.6
1.9 2.2 1.3 2.1 1.8 2.5
3.0 3.3 3.2 3.1 2.4 3.0
2.2 2.6 2.5 2.5 2.4 2.9
3.0 2.9 4.7 3.3 3.6 4.0
-4.7 -7.1 – – -7.8 -0.1
4.7 3.8 0.7 3.9 3.1 4.5
-9.7 -4.2 -1.0 -4.9 1.8 4.0
-13.7 -26.0 – – -13.7 0.9
Gross fixed investment (YoY change %) 2Q15 3Q15 4Q15 2015 2016E 2017E
4.6 – – – 1.7 7.5
-11.9 -15.0 -18.5 -13.9 -12.3 0.4
-3.0 4.3 -1.3 -1.5 1.0 2.0
1.9 0.5 0 2.8 2.0 3.4
Sources: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast
GOVERNMENT
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
General government revenue (GDP %) 2012 2013 2014E 2015E 2016E
31.5 35.4 24.4 28.3 23.8 22.2 23.5 33.4 35.6 23.3 28.3 24.2 22.3 23.4 35.5 34.0 23.4 27.7 23.5 22.3 28.4 35.5 33.5 22.9 26.8 24.1 20.7 18.1 35.1 35.0 24.8 26.7 23.6 20.6 16.2
General government expenditure (GDP %) 2012 2013 2014E 2015E 2016E
33.9 38.0 23.7 28.3 27.5 20.3 40.0 35.4 38.6 23.7 29.2 28.1 21.5 38.0 38.1 40.2 24.9 29.5 28.1 22.5 43.4 40.3 41.2 26.2 29.9 28.1 22.6 42.5 40.0 42.1 27.1 29.7 27.1 22.8 41.2
General government overall balance (GDP %) 2012 2013 2014E 2015E 2016E
-2.4 -2.0 -2.6 -4.8 -4.9
-2.6 0.7 -3.0 -0.4 -6.2 -1.5 -7.7 -3.3 -7.1 -2.3
0.0 -3.7 1.9 -16.5 -0.9 -3.9 0.8 -14.6 -1.8 -4.6 -0.2 -15.0 -3.1 -4.0 -1.9 -24.4 -3.0 -3.5 -2.2 -25.0
Sources: IMF
JP MORGAN EMBI+ BONDS
Argentina
Brazil Colombia
Mexico Panama
Peru Venezuela
Stripped spread values May 24 2 wk prev Change (%) Change YTD (%)
538.0 565.0 -4.8 22.8
395.0 387.0 2.1 -24.5
305.0 293.0 4.1 -5.0
230.0 219.0 5.0 -0.9
221.0 212.0 4.2 1.4
223.0 210.0 6.2 -9.3
2,823.0 2,842.0 -0.7 6.2
1,271.6 1,289.0 -1.3 4.9
1,137.1 1,159.6 -1.9 8.9
801.4 791.9 1.2 7.8
Total return values May 24 2 wk prev Change (%) Change YTD (%) Source: Thomson Reuters Datastream
280.7 274.6 2.2 9.9
991.4 1,003.6 -1.2 16.5
535.3 543.7 -1.5 7.4
639.7 651.7 -1.8 6.5
MAY 26 2016
23
Metrics | LATAM CONSUMER
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
Consumer price index (YoY change %) Feb-16 Mar-16 Apr-16 2015 2016E 2017E
– – – – 33.4 19.9
10.4 9.4 9.3 10.7 7.1 5.6
4.7 4.5 4.2 4.4 3.5 3
7.6 8.0 7.9 6.8 5.4 3.6
2.9 2.6 2.5 2.1 3.3 3.4
4.5 – 4.3 – 3.9 – 4.4 159.7 3.3 355.5 2.9 158.5
3.4 3.0 2.9 1.4
2.8 1.8 1.2 2.6
– –
4.3 4.3 4.2 4.4
7.4 7.2 – 6.5
– – – 6.8
Wholesale price index (YoY change %) Feb-16 Mar-16 Apr-16 2015
– – – –
13.4 12.4 11.5 11.3
n/a n/a n/a n/a
9.3 5.7 6.7 5.5
–
Unemployment (%) Jan-16 Feb-16 Mar-16 2015
– – – –
7.6 8.2 – 6.8
5.8 5.9 6.3 6.3
11.9 10.0 10.1 8.9
Industrial production (YoY change %) Jan-16 Feb-16 Mar-16 2015 2016E 2017E
– -13.9 -7.6 7.6 0.8 -3.5 – – -9.8 1.8 8.2 2.6 -0.8 – – – 3.9 – -2.0 -4.6 – -0.3 -8.2 -0.3 0.9 1 -1.7 -9.7 0.1 -5.7 1.1 3.6 2.5 1.4 -8.9 4.2 1.2 1.9 3.5 3.1 2.5 -1.5
Retail sales (YoY change %) Jan-16 Feb-16 Mar-16 2015
– – – –
-10.6 -4.2 -5.7 -4.2
2.2 6.5 1.1 3.0
5.5 6.9 -1.0 6.5
5.2 9.6 6.4 5.0
n/a n/a n/a n/a
– –
72 76.4 – 892
n/a n/a n/a n/a
0.3 0.2 0.3 18
–
Car sales (000s units) Feb-16 Mar-16 Apr-16 2015
53 61 61 612
142 173.3 157.6 2,478
n/a n/a n/a n/a
n/a n/a n/a n/a
Note: Inflation in Argentina is MoM % change. Inflation in Peru is only for Lima city. Inflation for Venezuela is only for Caracas city. Unemployment in Argentina is a quarterly figure. Retail sales in Argentina and Chile are only supermarket sales Sources: Thomson Reuters Datastream, Latin American Consensus Forecast, central banks, FT Confidential Research
DOLLAR VS CURRENCIES
Argentina Brazil Chile Colombia Mexico Peru Venezuela (peso) (real) (peso) (peso) (peso) (nuevo sol) (bolívar)
May 24 2 wk prev Change (%) Change YTD (%)
14.67 3.55 693.89 3,055.06 18.42 3.34 10.00 14.54 3.48 670.97 2,981.17 17.98 3.33 10.00 0.9 2.0 3.4 2.5 2.5 0.3 0.0 1.8 -10.3 -1.9 -3.8 7.1 -2.1 58.7
Source: Thomson Reuters Datastream
EQUITY INDICES
Argentina (Merval) Brazil (Bovespa)
May 24 2 wk prev Change (%) Change YTD (%)
Chile (IGPA) Colombia (IGBC)
Mexico (IPC)
Peru (IGBL)
Venezuela
12,381.5 49,345.2 19,511.9 9,780.4 45,497.5 13,439.2 15,236.2 13,456.5 53,070.9 19,699.5 9,859.8 45,676.4 13,451.8 15,355.9 -8.0 -7.0 -1.0 -0.8 -0.4 -0.1 -0.8 6.0 13.8 7.5 14.4 5.9 36.5 4.4
Source: Thomson Reuters Datastream
MAY 26 2016
24
Metrics | LATAM EXTERNAL ACCOUNTS
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
Exports ($bn) Jan-16 Feb-16 Mar-16 2015 2016E 2017E
3.9 4.1 4.4 56.8 59.7 64.8
11.1 13.3 15.9 190.1 188.0 196.6
5.1 4.8 5.3 63.4 60.0 63.4
1.8 2.3 2.3 35.7 37.2 41.9
30.4 30.1 29.3 381.2 384.3 407.3
2.4 2.4 2.8 34.2 35.1 38.4
– – – 41.8 26.8 36.3
Imports ($bn) Jan-16 Feb-16 Mar-16 2015 2016E 2017E
4.0 10.5 4.0 10.4 4.7 11.7 59.8 172.4 58.5 145.4 64.2 151
4.4 3.5 32.2 4.2 3.5 31.8 4.7 3.6 31.3 59.2 54.1 395.6 57.4 48.8 398.5 60.9 50.8 421.2
2.9 – 2.6 – 2.8 – 37.4 34.1 37.2 28.3 39.2 31.2
Trade balance ($bn) Jan-16 Feb-16 Mar-16 2015 2016E 2017E
-0.1 0.6 0.1 2.9 -0.3 4.2 -3.0 17.7 1.2 42.6 0.6 45.6
0.7 -1.7 -1.8 -0.5 – 0.6 -1.2 -1.7 -0.2 – 0.6 -1.3 -2.0 -0.0 – 4.2 -18.4 -14.4 -3.2 7.7 2.6 -11.6 -14.2 -2.1 -1.5 2.5 -8.9 -13.9 -0.8 5.1
Current account ($bn) 2Q15 3Q15 4Q15 2015 2016E
-2.1 -4.0 4.8 -15.9 -9.7
-12.8 -11.4 -9.7 -58.9 -34.1
0 -2.6 2.1 -4.8 -3.6
-4.3 -5.3 4.3 -18.9 -16.1
-8.0 -8.9 7.7 -32.4 -32.2
-1.6 -2.4 1.5 -8.4 -7.7
-1.9 -5.1 – – -11.8
2.8 3.9 -5.3 2.8 16.3
7.6 5.6 7.1 4.9 22.8
2.2 1.5 1.5 1.5 7.9
0.4 -0.8 -0.8
FDI ($bn) 1Q15 2Q15 3Q15 4Q15 2014
n/a n/a n/a n/a 6.6
– – – – 62.5
n/a n/a n/a n/a 22
4.0
Sources: Thomson Reuters Datastream, Latin American Consensus Forecast
FRONTIER COUNTRIES 2011 2012 2013 2014 2015E 2016E Bolivia GDP (YoY% change) 5.2 5.2 6.8 5.5 4.1 3.7 Consumer price index (YoY% change) 6.1 5.3 6.5 5.2 3.0 4.1 Current account ($bn) 0.5 2.0 1.0 0.6 -1.1 -1.4
Costa Rica GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
4.4 4.8 -2.2
5.1 4.5 -2.3
3.6 3.7 -2.5
3.5 5.1 -2.4
3.0 -0.8 -2.2
3.5 2.9 -2.0
3.9 3.9 -4.0
4.1 3.9 -2.5
7.3 1.6 -2.0
6.5 2.3 -1.4
5.0 2.4 -1.3
5.0 4.2 -0.2
4.6 2.7 -1.2
3.7 3.7 -0.6
0.3 3.4 -2.4
-1.0 3.0 -2.1
1.7 0.7 -1.6
2.0 0.5 -1.2
2.5 1.0 -0.8
2.3 1.4 -0.8
Dominican Republic GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
4.5 7.8 -4.4
Ecuador GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
7.4 5.4 -0.2
El Salvador GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
2.2 5.1 -1.1
1.9 0.8 -1.3
MAY 26 2016
25
Metrics | LATAM FRONTIER COUNTRIES (cont.) 2011 2012 2013 2014 2015E 2016E
Guatemala GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
4.2 6.2 -1.6
3.0 3.4 -1.4
3.7 4.4 -1.5
4.2 2.9 -1.4
4.1 3.1 -0.6
3.6 3.7 -0.6
3.3 5.4 -1.7
2.6 4.9 -1.8
3.1 5.8 -1.4
3.6 2.4 -1.3
3.5 4.6 -1.3
5.2 6.7 -1.4
4.6 5.7 -1.3
4.7 6.5 -0.8
4.9 3.1 -1.0
4.5 6.0 -1.1
10.7 4.5 -3.3
8.4 3.7 -4.8
6.2 2.6 -5.3
5.8 0.3 -3.8
5.9 2.2 -3.7
-1.2 3.9 0.1
14.2 3.7 0.6
4.4 4.2 -0.1
3.0 3.1 -0.4
3.4 4.4 -0.3
3.9 7.5 -2.7
4.4 8.5 -3.0
3.5 8.3 -2.5
1.0 9.4 -2.1
1.5 8.5 -2.0
Honduras GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
3.7 5.6 -1.5
Nicaragua GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
5.4 8.0 -1.3
Panama GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
10.8 6.4 -3.8
Paraguay GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
4.3 4.9 -0.3
Uruguay GDP (YoY% change) Consumer price index (YoY% change) Current account ($bn)
6.5 8.6 -1.4
Sources: Latin American Consensus Forecasts, FT Confidential Research
MONEY AND BANKING
Argentina
Brazil
Chile Colombia
Mexico
Peru Venezuela
3,303.0 3,275.1 3,304.4 3,351.2
71.1 70.6 68.7 73.4
4,087.3 4,206.7 4,358.9 3,932.1
11,455.7 11,444.1 11,501.8 11,311.4
146.4 145.7 144.2 148.0
4,175.6 4,299.2 4,449.1 4,015.7
13,909.6 13,865.5 13,909.2 13,735.1
n/a n/a n/a n/a
4,175.6 4,299.2 4,449.1 4,015.7
3.75 3.75 3.75 3.00
4.25 4.25 4.25 3.50
n/a n/a n/a n/a
175.2 170.3 175.8 184.5
60.2 61.3 61.3 61.5
– – – –
M1 (local currency bn) Jan-16 Feb-16 Mar-16 2015
763.5 742.6 722.5 799.4
308.0 305.2 299.2 333.7
29,116.7 28,647.0 27,808.7 28,383.5
95,752.9 96,837.8 96,155.9 103,369.5
M2 (local currency bn) Jan-16 Feb-16 Mar-16 2015
1,016.6 986.3 960.0 1,052.9
2,252.5 2,245.9 2,249.3 2,271.5
101,514.8 101,463.8 101,518.2 99,773.0
376,203.8 386,634.0 389,517.4 381,851.0
M3 (local currency bn) Jan-16 Feb-16 Mar-16 2015
1,597.2 1,578.7 1,567.6 1,604.2
4,755.4 4,803.2 4,867.9 4,745.4
174,018.3 174,975.9 174,403.2 172,701.4
410,039.1 418,090.9 420,781.2 414,746.2
Benchmark interest rate (%)* Mar-16 Apr-16 May-16 2015
n/a n/a n/a n/a
14.25 14.25 14.25 14.25
3.50 3.50 3.50 3.25
6.50 6.50 7.00 5.50
Foreign reserves ($bn) Feb-16 Mar-16 Apr-16 2015
28.4 24.6 29.4 25.6
*End of period figure Sources: Thomson Reuters Datastream, central banks
359.4 357.7 362.2 356.5
38.3 39.6 39.9 38.6
46.8 47.2 47.3 46.7