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INTERNATIONAL AFFAIRS
SHORT AND MEDIUM-TERM PROSPECTS FOR LATIN AMERICA
Ignacio Hernando
Meeting of International Relations Managers
Banco de España, 9 July 2015
ASUNTOS INTERNACIONALES
CONTENT
2
1. The Latin America economy at the current juncture
2. Medium-term prospects and the road ahead
ASUNTOS INTERNACIONALES
1. LATIN AMERICA AT THE CURRENT JUNCTURE. Adjusting to three external shocks
3
• The slowdown (and rebalancing) in the Chinese economy • The decline in commodity prices • The tightening of external financial conditions (as a result of the expected normalization in US monetary policy)
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70
80
90
100
110
120
130
140
150
160
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
OVERALL FOOD ENERGY METALS
COMMODITIES PRICES
Jan 2010 =100
60
65
70
75
80
85
90
95
100
105
110
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15
BRAZIL MEXICO CHILE COLOMBIA PERU
NOMINAL EXCHANGE RATE AGAINST THE DOLLAR
Jan 2013= 100
ASUNTOS INTERNACIONALES
1. LATIN AMERICA AT THE CURRENT JUNCTURE. The reaction of macroeconomic policies
4
• Monetary policy trade-offs but, in general, stability of policy rates • Fiscal space has significantly shrunk in most countries • Prudent management of fiscal policy: spending cuts even in those countries with fiscal space • Pro-cyclical adjustment to regain credibility
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012 2013 2014 2015
BRAZIL MEXICO CHILE COLOMBIA PERU
OFFICIAL INTEREST RATES
-3
-2
-1
0
1
2
3
4
BRAZIL CHILE COLOMBIA MEXICO PERU LATIN AMERICA
2008 2015
LATIN AMERICA PRIMARY BALANCE
% GDP
ASUNTOS INTERNACIONALES
1. LATIN AMERICA AT THE CURRENT JUNCTURE. Lower growth and higher inflation
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Regional growth is expected to decline for a fifth consecutive year in 2015, whereas inflation is on the rise (by contrast with other EME)
0
2
4
6
8
10
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2010 2011 2012 2013 2014 2015 2016EMERGING ECONOMIES EMERGING EUROPE
EMERGING ASIA (EXCLUDING CHINA) CHINA
LATIN AMERICA WEO ABRIL FORECASTS
GDP GROWTH: EMERGING MARKET ECONOMIES
% yoy
0
2
4
6
8
10
12
14
1
2
3
4
5
6
7
8
2010 2011 2012 2013 2014 2015 2016EMERGING ECONOMIES EMERGING EUROPE
EMERGING ASIA (EXCLUDING CHINA) CHINA
WEO ABRIL FORECASTS LATIN AMERICA (right axis)
INFLATION GROWTH: EMERGING MARKET ECONOMIES
% yoy
ASUNTOS INTERNACIONALES
1. LATIN AMERICA AT THE CURRENT JUNCTURE. Assessment
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1. The Latin America economy has significantly changed with respect to the 20th century. Lower vulnerability to external shocks, largely due to more resilient macroeconomic framework
2. However, as tailwinds are gradually vanishing, the risk of mediocre growth is reviving
3. A number of challenges remain; the most relevant one being ending up with the lackluster productivity growth of the region
ASUNTOS INTERNACIONALES
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Productivity
Latin America displays a permanent growth gap in relation to Asia, the reason being productivity performance and capital accumulation. The boom in commodity prices allowed for a higher GDP growth but not for a higher productivity growth nor potential growth.
ASUNTOS INTERNACIONALES
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Investment
Average investment to GDP ratios in Latin America are more similar to advanced country ratios than to other emerging economies.
Low level of infrastructure limits growth and exports potential and might be a deterrent for FDI. Lack of regional interconnections
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20
25
30
35
40
45
50
81 84 87 90 93 96 99 02 05 08 11 14ARGENTINA BRAZILCHILE MEXICOEMERGING ASIA CHINAADVANCED ECONOMIES
INVESTMENT/GDP RATIOS
88
87
84
76
65
49
46
39
12
9
7
6
0 1 2 3 4 5 6 7
PERU
INDIA
COLOMBIA
BRAZIL
MEXICO
CHILE
CHINA
RUSSIAN F.
UNITED STATES
SPAIN
GERMANY
JAPAN
GLOBAL COMPETITIVENESS INDEX:INFRASTRUCTURE(0-7 Scale; ranking)
source: World Economic Forum. Global Competitiveness Report
ASUNTOS INTERNACIONALES
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Informality and human capital
Substantial reduction in extreme poverty, but labor informality, still very high
Inequality remains very high, in part as a result of low intergenerational mobility Remarkable increase in access to education but still margin to improve in quality of education
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0
10
20
30
40
50
60
0.0 0.2 0.4 0.6 0.8
Latin America
INTERGENERATIONAL MOBILITY AND INEQUALITY
Gini Index
Intergenerational income persistence
0
10
20
30
40
50
60
70
PERU BRAZIL MEXICO VENEZUELA ARGENTINA CHILE
90'S AVERAGE 00'S AVERAGE LAST YEAR AVAILABLE
LATIN AMERICA INFORMALITY
ASUNTOS INTERNACIONALES
2. MEDIUM-TERM PROSPECTS FOR LATIN AMERICA. Low level of regional integration
Latin America is a region with a long history of initiatives of political and economic integration but … with limited success
The level of intra-regional trade is low and decreasing
0
5
10
15
20
25
30
35
40
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
LATIN AMERICA EMERGING ASIA EMERGING EUROPE AFRICA MIDDLE EAST
INTRA REGIONAL TRADE
% export and import within the area
ASUNTOS INTERNACIONALES
2. MEDIUM-TERM PROSPECTS AND THE ROAD AHEAD. Diagnosis
• Short term:
• Latin America needs to adjust to a lower growth phase as a result of
• the end of the commodity super-cycle,
• the slowdown and rebalancing in China
• the end of QE
• Medium term:
• How to raise potential growth?
• Productivity and diversification
• Infrastructure spending
• Informality and the job market
• Education
• How to ensure more inclusive growth?
• Extreme poverty less of an issue, but redistribution still needed
• The role of the State: fiscal reforms
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ASUNTOS INTERNACIONALES
THANK YOU
AUTOR