the pacific alliance: integration and growth

The Pacific Alliance: integration and growth

Juan Ruiz

BBVA Research │ Chief economist for South America

DE / BBVA Conferences – Pacific Alliance│ Lisbon, 1 October 2013

Pacific Alliance/ October 2013

1 A rising group of countries among emerging economies

2 Committed to integration, without forgetting about the global economy

3 Stability and growth, but some challenges as well

Outline


Emerging markets: the most dynamic

GDP growth, adjusted by PPP (%)Source: BBVA Research

0000

1111

2222

3333

4444

5555

6666

7777

1980s1980s1980s1980s 1990s1990s1990s1990s 2000s2000s2000s2000s 2011201120112011----2021202120212021

45 EMEs ex China45 EMEs ex China45 EMEs ex China45 EMEs ex China 45 EMEs45 EMEs45 EMEs45 EMEs G7G7G7G7

Share of global GDP: emerging vs. developed (%)Source: BBVA Research

30

35

40

45

50

55

60

65

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

Advanced Economies

Emerging Economies


BBVA EAGLEs: Emerging And Growth Leading Economies

45 candidate 45 candidate 45 candidate 45 candidate emerging emerging emerging emerging

economieseconomieseconomieseconomies

G6 countriesG6 countriesG6 countriesG6 countries

Current GDPCurrent GDPCurrent GDPCurrent GDPGDP in 10 GDP in 10 GDP in 10 GDP in 10

yearsyearsyearsyears

BBVA Research / IMF forecastsBBVA Research / IMF forecastsBBVA Research / IMF forecastsBBVA Research / IMF forecastsStep 1Step 1Step 1Step 1

Step 2Step 2Step 2Step 2Incremental Incremental Incremental Incremental

GDPGDPGDPGDPGDP in 10 GDP in 10 GDP in 10 GDP in 10

yearsyearsyearsyearsCurrent GDPCurrent GDPCurrent GDPCurrent GDP---- ====

BBVA EAGLEs: emerging economies that will be the biggest contributors to global growth


BBVA EAGLEs: combining size and growth rates

Ranking and selection according to incremental GDP

Step 3Step 3Step 3Step 3

G6 average (446bn$)

Minimum from G6 (Italy, 194bn$)

NEST

EAGLEs

Rest of candidate emerging economies

Biggest

incremental GDP

Smallest

incremental GDP


EAGLEs versus G7: A new G?• EAGLEs will contribute 60% of global GDP growth in the next 10 years. EAGLEs will contribute 60% of global GDP growth in the next 10 years. EAGLEs will contribute 60% of global GDP growth in the next 10 years. EAGLEs will contribute 60% of global GDP growth in the next 10 years.

• NEST countries will contribute an extra 10% (G7: 16%)NEST countries will contribute an extra 10% (G7: 16%)NEST countries will contribute an extra 10% (G7: 16%)NEST countries will contribute an extra 10% (G7: 16%)

GDP (PPP adjusted): current and in the next 10 years (2012-2022). Bn dollarsSource: BBVA Research

Contribution to global GDP growth 2012-2022 (%)Source: BBVA Research

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

55000

EAGLEs

G7

Nest

Other

Advanced

Rest of World

Other EMEs

2012 2012-2022

EAGLEs57%

Nest10%

Other EMEs3%

G717%

Other Adv.5%

Rest of World8%


Indonesia1219

Brazil2363

Russia2520

Korea1618

Japan4623

Turkey1126

Germany3207

Mexico1768

UK2335 Taiwan

905

G6 avg.2620

300

400

500

600

700

800

900

1000

1100

1200

1300

EAGLEs: global players• BBVA EAGLEs: China, India, Brazil, Indonesia, Korea, Russia, Mexico, Turkey and TaiwanBBVA EAGLEs: China, India, Brazil, Indonesia, Korea, Russia, Mexico, Turkey and TaiwanBBVA EAGLEs: China, India, Brazil, Indonesia, Korea, Russia, Mexico, Turkey and TaiwanBBVA EAGLEs: China, India, Brazil, Indonesia, Korea, Russia, Mexico, Turkey and Taiwan

EAGLEs (ex China and India) vs. G6:

Current GDP size (2012, size of circles) and contribution to global GDP growth 2012- 2022 (bn dollars)Source: BBVA Research and IMF

Billion USD


G6 avg.2620

Egypt540

Nigeria453

Thail.655

Australia967

S.Arabia744

France2260

Canada1451

Colombia500

Vietnam322

Malaysia498

Poland806

Spain1415

Bang.307

S.Africa580

Philip.425

Iraq156

Peru328

Argentina745

Pakistan517

Iran1002

Chile322

G6 min.(Italy)1808

100

150

200

250

300

350

400

450

500

Waiting list of potential EAGLEs: The NESTNEST vs. G6:

Current GDP size (2012, size of circles) and contribution to global GDP growth 2012- 2022 (bn dollars)Source: BBVA Research and IMF

Billion USD


The Pacific Alliance in the global sceneBiggest economies in 2012(bn. USD, PPP adjusted)Source: BBVA Research and IMF

Biggest contributions to GDP growth in the next 10 years (m USD, PPP adjusted)Source: BBVA Research and IMF

0

200

400

600

800

1000

1200

1400

1600

1800

2000

China

India

US

PA

Indo

nesia

Brazil

Rus

sia

Korea

Japa

n

Turke

y

German

y

UK

PER

COL

CHI

MEX

13k 5k 4k

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

US

China

India

Japa

n

German

y

PA

Rus

sia

Brazil

UK

Franc

e

Italy

Korea

PER

COL

CHI

MEX

16k 12k





Outline


Committed to integration in the global economy

Number of trade agreements signedSource: BBVA Research and WTO


... especially with the main economic regions

Trade agreements signedTrade agreements signedTrade agreements signedTrade agreements signed

with

US

with

EU

with

Japan

with

China

Total

number of

agreem’ts

Chile 21

Colombia 11

Mexico 18

Peru 16

Brazil 5


Trade between PA countries is just4% of their total foreign trade

Trade between PA countries is just4% of their total foreign trade

Nevertheless, cooperation within PA can extend beyond trade flows:

know-how , investment and labor market

Nevertheless, cooperation within PA can extend beyond trade flows:

know-how , investment and labor market

There is scope to increase trade within PA but, potential is highest in the case of Mexico

There is scope to increase trade within PA but, potential is highest in the case of Mexico

Also committed to trade integration within the PA. But trade opportunities are asymmetric for nowExport potential (origin-destination)(index: 0= very high; 200 = very low)Source: BBVA Research and COMTRADE

0

20

40

60

80

100

120

140

160

180

COL MEX PER CHI MEX PER CHI COL PER CHI COL MEX

Origin: CHI Origin: COL Origin: MEX Origin: PER


High

Primer cuartil Mozambique Uruguay

Chile,

Colombia,

Peru

Segundo cuartil Nicaragua Costa Rica Portugal

Mexico,

Spain, US

Tercer cuartil São Tome

Low

Cuarto cuartil

Paraguay, Angola Ecuador

Cuarto cuartil Tercer cuartil Segundo cuartil Primer cuartil

Low High

Belos expectations

FDI Attraction index (2009-2011)

FDI potential index (2011)

Above expectationsIn line with expectations

PA countries among those with highest potential to attract FDIPA countries among those with highest potential to attract FDI

FDI attraction: ranking of inward FDI

both in absolute terms and relative to country size

FDI attraction: ranking of inward FDI

both in absolute terms and relative to country size

FDI potential index:

(i) attractiveness of domestic market;

(ii) productivity of labor force; (iii) availability of natural resources;

(iv) infrastructures

FDI potential index:

(i) attractiveness of domestic market;

(ii) productivity of labor force; (iii) availability of natural resources;

(iv) infrastructures

Pacific Alliance attracts FDI in line with its high potential....FDI: attraction and potential to attractSource: BBVA Research and UNCTAD


... especially from US and Europe, with growing interest from Asia

PA: Source of FDI (% del total 2002-2012)Source: BBVA Research, ECLAC and national sources

0

5

10

15

20

25

30

Chile Colombia Peru Mexico

2009 2012

FDI from Asia to PA (% of total FDI to PA)Source: BBVA Research, ECLAC and national sources.

0%

20%

40%

60%

80%

100%

CHI COL MEX PER

US Europe Latam Asia-PacificOrigin:


There is scope and potential for bigger bilateral FDI flows within the PA

There is scope and potential for bigger bilateral FDI flows within the PA

Mexico and Colombia: focus on financial sector, telecoms and retail

Mexico and Colombia: focus on financial sector, telecoms and retail

Chile has led the process in Peru and Colombia: geographical proximity; search of economies of

scale; similar characteristics

Chile has led the process in Peru and Colombia: geographical proximity; search of economies of

scale; similar characteristics

... but there is still a sizable asymmetry in FDI flows within the Pacific AllianceCumulated FDI to PA countries 2009-2012 (home-host country, m USD)Source: BBVA Research and Banco Central de Chile

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

CO

L

PE

R

ME

X

CH

I

PE

R

ME

X

CH

I

PE

R

CO

L

CH

I

CO

L

ME

X

Home:

Chile

Home:

Colombia

Home:

México

Home:

Peru

Host


Integration in portfolio investment is lagging behind in the Pacific Alliance

Stock market capitalization (m USD, Dec 2012)Source: BBVA Research and Bloomberg

Volume of transactions (2012, m USD)Source: BBVA Research and Bloomberg

1227

678

525

313262

103

0

200

400

600

800

1,000

1,200

1,400

Brazil MILA Mexico Chile Colombia Peru

3,487.0

502.0182.0 157.0 25.0 0.4

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Brazil Mexico Chile Colombia Peru MILA


MILA: a great opportunity to develop the regional stock marketVolume and number of transactions in MILA(m USD, number)Source: BBVA Research and MILA

There are already mutual funds operating in MILA, hedging risk between markets

There are already mutual funds operating in MILA, hedging risk between markets

Need to keep working on having similar tax burdens in different countries, simultaneous

IPOs and more financial instruments

Need to keep working on having similar tax burdens in different countries, simultaneous

IPOs and more financial instruments

MILA will be further developed when Mexico joins in

MILA will be further developed when Mexico joins in

0

10

20

30

40

50

60

0

100

200

300

400

500

600

700

800

900

1000

May

-11

Aug

-11

Nov

-11

Feb

-12

May

-12

Aug

-12

Nov

-12

Feb

-13

May

-13

Volume (RHS) Number of transactions





Outline


Besides a high contribution to global growth,a high potential growth rate

Besides a high contribution to global growth,a high potential growth rate

Commitment to reform will contribute to increasing potential growth

Commitment to reform will contribute to increasing potential growth

Pacific Alliance: high potential growthPotential GDP growth next 10 years (%)Source: BBVA Research

0

1

2

3

4

5

6

7

8

BRA MEX CHI COL PER US EU China OtherEAGLEs

with reforms

Average PA


Dynamism due in part to favorable demography and the rise of the middle class

Population growth rate(% annual, 2011-21)Source: BBVA Research

Increase in middle class(million people, 2011-21)Source: BBVA Research

Population growth, demographic dividend

Population growth, demographic dividend

Progress in decreasing inequality

Progress in decreasing inequality

Increase in per capita income

Increase in per capita income

Increase in

middle class

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

BRA MEX Andeans0

2

4

6

8

10

12

14

16

18

20

BRA Pacific Alliance

PER

COL

CHI

MEX


... also (and more importantly) due to prudent policies, low interventionism and openness

Public debt (gross)%GDP, 2012

Source: BBVA Research and FMI

0

10

20

30

40

50

60

70

BRA MEX CHI COL PER

Inflation (%, 2012)Source: BBVA Research and FMI

0

1

2

3

4

5

6

BRA MEX CHI COL PER

Index (0-7) of competition in the domestic market(7 = maximum competition)Source: BBVA Research and World Economic Forum

0

1

2

3

4

5

6

7

BRA MEX CHI COL PER


Human capital: quality of educationHuman capital: quality of education

Tax revenues highly dependent on a small number of exported commodities

Tax revenues highly dependent on a small number of exported commodities

Physical capital: quantity and quality of infrastructure (except Chile)

Physical capital: quantity and quality of infrastructure (except Chile)

But the PA also faces big challengesQuality of infrastructure(Index: 0-7, 7 = maximum quality)Source: BBVA Research and World Bank

0

1

2

3

4

5

6

BRA MEX CHI COL PEREAGLEs

NEST G7

High informal sector (labor market, underground economy)

High informal sector (labor market, underground economy)


The Pacific Alliance (PA) is the sixth biggest economy in the world

and will be the fourth in term of contribution to global growth in the

next 10 years.

The PA is committed to trade and financial integration both within

the alliance as well as with the rest of the world. There is ample room

to develop further integration within the AP.

The PA’s potential growth is close to 4,5% during the next decade.

Growth will be based on continuing reforms and prudent economic

policies.

Growth could be even higher if there are further advances in

reducing the informal sector and increasing investment in

infrastructure and in human capital (education).

To summarize …1

2

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The Pacific Alliance: integration and growth

Juan Ruiz

BBVA Research │ Chief economist for South America

DE / BBVA Conferences – Pacific Alliance│ Lisbon, 1 October 2013

the pacific alliance: integration and growth

Economy & Finance