Alejandro Werner - Monterrey 2016

Latin America and the Caribbean:

Adjusting to a Harsher Reality

Alejandro Werner Director, Western Hemisphere Department

Main Takeaways

2

• Persistently low commodity prices. Impact differs across countries; further adjustment is needed.

• Domestic fundamentals are key for growth outlook going forward; corporate vulnerabilities may increase downside risks to investment

• Monetary policy is getting increasingly challenging for some countries (weak demand pressures vs rising inflation expectations).

• Policy priorities. Adjustment should be allowed to continue; buffers should be preserved; domestic fundamentals should be put in order.

Global Outlook

3

Selected Projections for Real GDP Growth (Percent)

Source: IMF, World Economic Outlook database.

WorldUnited States

Euro Area Japan China

Emerging market and developing economies

Advanced economies Russia India Brazil

South Africa Mexico

2015 3.1 2.5 1.6 0.6 6.9 4.0 1.9 -3.7 7.3 -3.8 1.3 2.5

2016 3.4 2.6 1.7 1.0 6.3 4.3 2.1 -1.0 7.5 -3.5 0.7 2.6

2017 3.6 2.6 1.8 0.3 6.0 4.7 2.1 1.0 7.5 0.0 1.8 2.9

Global Outlook (Commodities)

4

Selected Projections for Commodities Growth (Revisions in percent)


Petroleum (US$/barrel)

Copper (US$/metric ton)

Iron Ore (US$/metric ton)

Soybeans (US$/metric ton)

Gold (US$/troy ounce)

2015 50.9 5,506.3 54.5 347.4 1,160.3

Revision(October 2015) -1.4 -1.0 -2.2 -1.2 -1.3

2016 42.0 4,587.7 34.9 327.1 1,067.8

Revision(October 2015) -16.7 -10.7 -22.0 -1.9 -7.8

2017 48.2 4,590.8 33.8 334.1 1,081.2

Revision(October 2015) -13.0 -11.3 -21.1 0.2 -7.7

Risks to Global Outlook

5

A sharper-than-expected slow down in China

Tighter global financial conditions as the United States exits from accommodative monetary policy.

A sudden rise in global risk aversion and market volatility

An escalation of ongoing geopolitical tensions

Latin America: An interplay between external shocks and

domestic fundamentals

Regional recession and lower medium-term growth…

7

Source: IMF, World Economic Outlook database. ¹ Purchasing power parity-weighted average for the 32 Latin American countries.

LAC: Estimates of Medium-Term Growth by Forecast Vintage¹

(Percent)

4.5

3.4

4.2

2.8

2.9

2.5

2.9

3.3

3.7

4.1

4.5

4.9

2000

Fal

l 20

01 F

all

2002

Fal

l 20

03 F

all

2004

Fal

l 20

05 F

all

2006

Fal

l 20

07 F

all

2008

Fal

l 20

09 F

all

2010

Fal

l 20

11 F

all

2012

Fal

l 20

13 F

all

2014

Fal

l 20

15 F

all

2016

Jan.

World Economic Outlook Vintage

Source: IMF, World Economic Outlook database. ¹ Reflects projected real GDP growth for the last year (t+5) of the forecast horizon.

LAC: Real GDP Growth (Percent)

-9

-6

-3

0

3

6

9

12

15

18

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

20

13

2014

20

15

2016

5th percentile Average¹ 95th percentile

… with wide cross-country variation.

8

Latin America and the Caribbean: Real GDP Growth¹ (Percent)

2014 2015 2016

Latin America and the Caribbean 1.3 -0.3 -0.3

Central America 4.1 3.9 4.2Caribbean 4.7 4.3 3.9

Latin AmericaArgentina 0.5 1.5 -1.0Brazil 0.1 -3.8 -3.5Chile 1.9 2.1 2.1Colombia 4.6 3.0 2.7Mexico 2.3 2.5 2.6Peru 2.4 2.7 3.3Venezuela -4.0 -10.0 -8.0

Source: IMF, World Economic Outlook database. ¹ Regional aggregates are weighted by PPP-adjusted GDP.

… even at sub-regional level.

9

Latin America and the Caribbean: Real GDP Growth, 2016¹ (Percent)

Source: IMF, World Economic Outlook database. ¹ Regional groupings are based on WEO definition. ² Includes Argentina, Brazil, Ecuador, and Venezuela.

-4

-3

-2

-1

0

1

2

3

4

5

Central America and Mexico

Caribbean South America: Contracting economies²

South America: Others

Why different growth outcomes?

Part I: External Conditions

10

Export prices declined substantially, but net impact differs across the region

11

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

Arge

ntin

a

Braz

il

Chile

Colo

mbi

a

Mex

ico

Peru

Vene

zuel

a Chan

ge in

com

mod

ity te

rms

of tr

ade

sinc

e 20

11-2

015

peak

(%)

Gross Commodity Exports Net Commodity Exports

Change in Export Prices (From peak year to 2015)

Source: Gruss (2014).

0

20

40

60

80

100

120

140

160

Arge

ntin

a

Braz

il

Chile

Colo

mbi

a

Mex

ico

Peru

Vene

zuel

a

2013 2015

Primary Product Exports (Billions of U.S. dollars)

Sources: National authorities; Haver Analytics; and IMF staff estimates and calculations

Current account adjustments are at different stages…

12

-10

-8

-6

-4

-2

0

2

4

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Chile Peru

-10

-8

-6

-4

-2

0

2

4

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Colombia Ecuador Mexico Venezuela

Current Account (Percent of GDP)

-10

-8

-6

-4

-2

0

2

4

Mar

-11

Sep-

11

Mar

-12

Sep-

12

Mar

-13

Sep-

13

Mar

-14

Sep-

14

Mar

-15

Sep-

15

Argentina Brazil Uruguay

Sources: Haver Analytics; Bloomberg, L.P.; and IMF staff calculations.

Metals Exporters Energy Goods Exporters Food/Diverse Exporters

But the region’s current account still needs to adjust

13

-6

-5

-4

-3

-2

-1

0

1

2

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Latin America and the Caribbean: Current Account Balance (Percent of GDP)


Why different growth outcomes?

Part II: Domestic Fundamentals Matter

14

Private demand, particularly investment, has deteriorated, particularly in countries with higher degree of macroeconomic

imbalances and microeconomic distortions

15

Change in Private Investment from 2011 to 2015

(Percentage points of GDP)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Vene

zuel

a

Braz

il

Ecua

dor

Arge

ntin

a

Chile

Peru

Colo

mbi

a

Mex

ico

Sources: IMF, World Economic Outlook database; and IMF staff calculations.

-12

-7

-2

3

8

13

18

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

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Private consumption Gross fixed capital formation

LA5: Private Consumption and Gross Fixed Capital Formation (Year-over-year percent change)

Sources: Haver Analytics; IMF, World Economic Outlook database; and IMF staff calculations. Note: LA5 includes Brazil, Chile, Colombia, Mexico, and Peru.

16

Corporate leverage has been increasing, particularly in some countries and in certain sectors,…

LA5: Leverage – Nonfinancial Corporates: Bond Debt

2010 2015

US$ billion Share US$ billion Share

Total 291.3 100.0 504.9 100.0

Foreign currency 170.2 58.4 383.3 75.9

Local currency 121.1 41.6 121.7 24.1

…of which

Energy … … 168.7 33.4

Materials … … 103.7 20.5

Consumer … … 76.7 15.2

Utilities … … 42.8 8.5

Industrials … … 41.1 8.1

Other non-financial … … 71.9 14.2

Selected quasi-sovereigns

Petrobras (BRA) … … 52.8 10.5

Eletrobras (BRA) … … 2.8 0.5

PEMEX (MEX) … … 70.3 13.9

Comision Fed Elec (MEX) … … 10.6 2.1

ECOPETROL (COL) … … 9.9 2.0

CODELCO (CHL) … … 11.3 2.2

2010 2015 US$ billion Share US$ billion Share

Brazil Total 152.7 100.0 228.7 100.0

Foreign currency 70.4 46.1 159.4 69.7 Local currency 82.4 53.9 69.3 30.3

Chile Total 17.5 100.0 41.7 100.0


Colombia Total 9.3 100.0 23.4 100.0


Mexico Total 106.3 100.0 195.9 100.0


Peru Total 5.4 100.0 15.3 100.0


Sources: Dealogic; and IMF staff calculations.

Sources: Dealogic; Bloomberg, L.P.; and IMF staff calculations. Note: Sectoral shares and company-specific data from Bloomberg, L.P.

17

…pushing up risk perceptions and downside risks to investment.

0

200

400

600

800

1000

1200

1400

0

50

100

150

200

250

300

350

400

450

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

ENDESA (CHL) CODELCO (CHL) Comision Federal Elec (MEX) PEMEX (MEX) PETROBRAS (BRA)

CDS Spreads: Selected LAC Companies (Basis points; PETROBRAS in right scale)

0

10

20

30

40

50

60

70

80

90

2005

q3

2006

q3

2007

q3

2008

q3

2009

q3

2010

q3

2011

q3

2012

q3

2013

q3

2014

q3

2015

q3

Brazil Chile Colombia Mexico Peru

LA5: Leverage – Nonfinancial Corporates

(Debt to equity; percent; median)

Sources: Markit; and IMF staff calculations. Sources: Bloomberg; and IMF staff calculations. Note: LA5=Brazil, Chile, Colombia, Mexico, and Peru.

0

50

100

150

200

250

Cons

umer

D

iscr

etio

nary

Co

nsum

er

Stap

les

Ener

gy

Indu

stria

ls

Mat

eria

ls

Util

ities

Median Top Quartile

LA5: Leverage - Sectoral Distribution, 2015Q3

(Debt to equity; percent)

Sources: Bloomberg; and IMF staff calculations. Note: LA5=Brazil, Chile, Colombia, Mexico, and Peru.

Domestic Demand Policy Space?

18

Fiscal space has shrunk significantly in most countries

19

LA6: Primary Balance (Percent of GDP)

Sources: IMF, World Economic Outlook database; and IMF staff calculations and projections.

LA6: Government Gross Debt (Percent of GDP)

Sources: IMF, World Economic Outlook database; and IMF staff calculations and projections.

-4

-3

-2

-1

0

1

2

3

4

5

Brazil Chile Colombia Mexico Peru Uruguay

2008 2016 0

10

20

30

40

50

60

70

80


2008 2016

Presenter

Presentation Notes

The primary balance gap is defined as the gap between the actual and the debt-stabilizing primary balance, and it is one of the ways to assess fiscal space. Other assessments, including vulnerability to shocks, adjustment flexibility (i.e. the possibility and desirability to increase taxes and the extent of budgetary rigidities), future spending pressures and contingent liabilities, all also suggest less fiscal space. Overall, the policy relaxation in response to the crisis have eroded also fiscal institutions. The graph on the right shows, as percent of GDP, how far countries deviated from their fiscal rules.

And monetary policy is getting more challenging with weak demand pressures and increasing inflation expectations

20

LA6: Monetary Policy Rates (Percent)

0

20

40

60

80

100

120

0

1

2

3

4

5

6

7

8

9


(–) (+50 bps) (+100 bps) (+25 bps) (+50 bps) (–)

Inflation target range Depreciation of exchange rate (right scale) Change in expected inflation for 2016 (since September 2015)

Sources: Bloomberg, L.P.; Consensus Forecast; and national authorities. Note: Numbers in parentheses refer to the change in policy rate between September 2015 and January 2016. ¹ National currency per U.S. dollar. Percentage change of the average of January 2013 to the average of January 2016.

Country Cases

21

Brazil: Recession with high inflation

22

Brazil: Growth and Job Creation (Quarterly percent change, a.r., and thousands)

Source: Central Bank of Brazil.

Brazil: Inflation and Market Expectations (Year-on-year percent change and expectations per survey vintage)

Source: Central Bank of Brazil.

2

3

4

5

6

7

8

9

10

11

Jan-

12

Apr-

12

Jul-1

2

Oct

-12

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

Apr-

14

Jul-1

4

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

Y-o-y inflation End-2016 End-2017 End-2018

Tolerance band

Target mid-point

New economic team has reanchored mid-term expectations

-650

-450

-250

-50

150

350

550

750

-45

-35

-25

-15

-5

5

15

25

35

45

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

Mar

-14

Mar

-15

Real GDP Private consumption Total investment Net job creation (right)

Brazil: Fiscal woes and market punishment

23

-3

-2

-1

0

1

2

3

4

2009 2010 2011 2012 2013 2014 2015 2016 2017

Budget Law Binding Targets

Economic team non-binding target

Brazil: Primary Balance (Percent of GDP)

Source: National authorities.

60

65

70

75

80

0

100

200

300

400

500

600

Jan-

13

Apr-

13

Jul-1

3

Oct

-13

Jan-

14

Apr-

14

Jul-1

4

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

CDS Gross debt-to-GDP (right scale)

Brazil: 5Y CDS and Gross Public Debt (Basis points and percent of GDP)

Sources: Bloomberg, L.P.; Haver Analytics; and national authorities.

Argentina: Important transition is taking place, improving prospects in the long-term, despite mild recession in the

short-term

24 Sources: Ministerio de Economía y Finanzas Públicas; Banco Central de la República Argentina; and IMF staff calculations and projections.

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2009 2011 2013 Proj. 2015

Overall balance net of transfers from central bank and social security Overall balance

Federal Balance (Percent of GDP)

0

10

20

30

40

50

60

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

Dec

-15

Gross reserves

Gross reserves net of China swap, repos, and trade credits

International Reserves (Billions of U.S. dollars)

Central Bank Assistance to the Treasury

(Percent of GDP)

0

10

20

30

40

50

0

1

2

3

4

5

6

7

2009 2011 2013 Proj. 2015

FX loans (use of reserves) Advances Transfer of profits Monetary base growth (y/y %change, right)

Ecuador: Sharp decline in oil prices+ Macroeconomic rigidities Sharp deceleration in

economic activity

25

-6

-4

-2

0

2

4

6

8

10

12

2000

2002

2004

2006

2008

2010

2012

2014

2016

Real GDP growth (percent) Current account (percent of GDP)

Real GDP Growth and Current Account Balance


85

90

95

100

105

110

115

120

125

130

2007

Q1

2008

Q2

2009

Q3

2010

Q4

2012

Q1

2013

Q2

2014

Q3

2015

Q4

Real effective exchange rate Commodity terms of trade

REER and Terms of Trade (Index: 2007Q1=100)

Sources: IMF, Information Notice System database; and Gruss (2014).

0

50

100

150

200

250

300

350

400

450

500

2000

2002

2004

2006

2008

2010

2012

2014

Brazil Chile Colombia Mexico Peru Ecuador

Minimum Wage (U.S. dollars)

Sources: Haver Analytics; IMF, World Economic Outlook database; and IMF staff calculations.

Venezuela: Falling oil prices , longstanding policy distortions, and fiscal imbalances

26

Exports and Imports (Billions of U.S. dollars)

Fiscal Balance and Monetary Financing

(Percent of GDP)

0

20

40

60

80

100

120

0

20

40

60

80

100

2010 2012 2014 2016

Net-oil exports Non-oil imports Oil price (US$ per barrel, right scale)¹

Sources: National authorities; and IMF staff estimates and projections. ¹ Venezuela basket.

0

2

4

6

8

10

0

5

10

15

20

25

30

2010 2012 2014 2016

CPS deficit Monetary financing Oil revenue (PDVSA surplus, right scale)

Sources: National authorities; and IMF staff estimates and projections.

0

100

200

300

400

500

600

700

800

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2010 2012 2014 2016

Real GDP growth (percent) Inflation (right scale)


Real GDP Growth and Inflation (Percent)

Latin America and the Caribbean:

Adjusting to a Harsher Reality

Alejandro Werner Director, Western Hemisphere Department

Documents

Alejandro Werner - Monterrey 2016