Transcript Bringing Americas Markets into View

Citi Research
February 2016
Global & Latam Outlook: Painful adjustment
Guillermo Mondino
Head Emerging Markets Economics and Strategy Research
[email protected]
+1 212-816-6499
See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures
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Global and Latam Outlook: Painful adjustment
 Major macro themes remain
 Sluggish global growth: Risk of global recession; China; broken EM growth model
 Low AE inflation
 Lower for longer’ monetary policy (BoJ, ECB, Fed)
 Low commodity prices
 Political risks: Bexit; Catalexit; Refugees; Shia-Sunni conflict; Russia;…
 Latam themes
a)Adjustment is difficult – lower growth, declining investment, fiscal deficits…Pro-cyclical fiscal
adjustment is needed as balance sheets have weakened. Fiscal multipliers may be relatively high and
thus tighter fiscal likely to be contractionary.
b)Incomplete adjustment, in part because of politics. But also, politics are bad because of adjustment.
c) Winds of change in politics? A move towards less populist policies may be under way
d)Two interesting stories: Brazil & Argentina
Global Backdrop: growth remains challenging
We expect global growth of 2.7% in 2016. EM growth is no longer a muscular engine of global growth.
Global growth remains moderate, forecasted at 2.7% for 2016
Sources: Citi Research, IMF, Haver Analytics.
Back to the old days? EM vs AE growth differential have narrowed
Global Backdrop: oil (commodities really) and capital flows
A world with low oil prices implies a redistribution towards consumers and, remarkably, coincides with
slower flows towards EM.
The collapse in oil prices reflect changing supply conditions
(and some demand factors)
Sources: Citi Research, IMF, Haver Analytics.
Petrodollar recycling seems to be correlated with K-flows to EM
Is China facing the hardest of the soft landings?
China is rebalancing but also slowing. The economy faces great challenges including excess capacity,
over-leverage and capital outflows.
Activity measures
TWI RMB and FX reserves
Source: Bloomberg, NBS, Markit and Citi Research.
Source: PBoC, CFETS, Bloomberg and Citi Research.
How much is China ‘really’ growing at?
Rebalancing towards services.
Secondary vs Tertiary Industry
Contribution to Nominal GDP growth
(% YoY)
(%)
25
%YoY, 2010 Yuan
Secondary Industry
Tertiary Industry
20
15
Manufacturing tends to explain services
High beta (below) and Granger-causality (fairly weak) suggests so
10
Dependent Variable: TERTIARY_INDUSTRY
Method: Least Squares
Date: 11/17/15 Time: 04:17
Sample: 2006Q1 2015Q3
Included observations: 39
5
2000 2002 2004 2006 2008 2010 2012 2014
Source: NBS and Citi Research.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
SECONDARY_INDUSTR...
3.537622
0.920008
1.171773
0.088559
3.019033
10.38869
0.0046
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.744695
0.737795
2.378384
209.2982
-88.10248
107.9249
0.000000
Source: NBS and Citi Research.
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
15.04991
4.644743
4.620640
4.705951
4.651249
0.418472
How much is China ‘really’ growing at?
Rebalancing towards services.
Secondary vs Tertiary Industry
Contribution to Nominal GDP growth
(% YoY)
(%)
25
%YoY, 2010 Yuan
Secondary Industry
Tertiary Industry
20
15
Manufacturing tends to explain services
High beta (below) and Granger-causality (fairly weak) suggests so
10
Dependent Variable: TERTIARY_INDUSTRY
Method: Least Squares
Date: 11/17/15 Time: 04:17
Sample: 2006Q1 2015Q3
Included observations: 39
5
2000 2002 2004 2006 2008 2010 2012 2014
Source: NBS and Citi Research.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
SECONDARY_INDUSTR...
3.537622
0.920008
1.171773
0.088559
3.019033
10.38869
0.0046
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.744695
0.737795
2.378384
209.2982
-88.10248
107.9249
0.000000
Source: NBS and Citi Research.
Mean dependent var
S.D. dependent var
Akaike info criterion
Schwarz criterion
Hannan-Quinn criter.
Durbin-Watson stat
15.04991
4.644743
4.620640
4.705951
4.651249
0.418472
China: rebalancing or sharp slowdown?
The combination of cyclical and structural forces weighing on the Chinese outlook makes a sustainable
rebound in Chinese growth unlikely.
Investment slowdown is in construction, manufacturing (SOEs) and resources
Credit Growth and Credit to Non-financial Sector
Source: CEIC and Citi Research.
Source: PBoC, BIS and Citi Research.
EM: broken growth in search for stabilisation
EM growth faces many headwinds: China, global trade, commodity prices, excessive debt, financial
conditions, reform fatigue, dysfunctional politics etc.
EM Exports Volume and AE Growth
Private Debt
Oil price
Source: Netherlands Bureau of Economic
Policy Analysis and Citi Research.
Source: BIS and Citi Research.
Source: Macrobond and Citi Research.
Two parallel discussions for the US
Could the Fed hike faster than expected? Or is the US heading for recession? We still expect a very slow
and gradual Fed hiking process but no reversal yet.
Employment Growth
PMIs and REER:
Manufacturing is a concern, yet it is 12% of GDP
Source: BLS and Citi Research.
Source: ISM, BIS and Citi Research.
The US economy is probably slower
Investment has slowed, though almost exclusively in oil and gas. Financial conditions have tightened,
suggesting growth won’t be strong.
The slowdown in US-CAPEX
FCI and Domestic Demand
Source: BEA and Citi Research.
Source: BEA and Citi Research.
when the US sneezes…
A material slowdown in the US would be a major headwind for the world economy, and could easily push
global growth below 2%.
Cumulative Impulse Response of Global Real GDP To A 1sd shock to US FCI
Cumulative Impulse Response of Global Real GDP To A 1sd shock to US Growth
Note: The VAR consists of QQ% growth in global real GDP-ex-US, US real GDP growth and the Bloomberg financial conditions index (in std calculated from 1994 to
July 1, 2008), using one lag of each variable and estimated from 1990Q2-2015Q4. The impulse responses were identified using a Cholesky decomposition which
ordered US FCI first, US growth second and global growth last. Source: National Statistical Agencies, IMF, BEA, Bloomberg and Citi Research.
See: Global Economics View - Rising Risk Of A Global Recession
US rate hiking cycle to be very gradual
Low inflationary pressure & strong $ argue against hiking fast. We expect 2-3x 25bp hikes in ‘16 even
though dots perhaps suggest 4.
4.5 %
% 4.5
4.0
4.0
FOMC Rate Median Projections
(The Dots)
3.5
3.0
3.5
3.0
Rate hike path at
historical pace
2.5
2.0
2.5
2.0
Citi Forecast
1.5
1.5
1.0
1.0
January 8
Fed Funds Futures
0.5
0.0
0.5
0.0
Fed Funds Target Range and Effective
-0.5
2012
-0.5
2013
2014
2015
2016
2017
2018
Notes: Diamonds represent median FOMC participants’ judgment of appropriate level of the target federal funds rate.
Sources: Federal Reserve Board and Citi Research.
We expect negative interest rates to become
more common
The experience with negative interest rates has so far has been mostly encouraging – pass-through has
been ok, risks have not materialized.
Expected Policy Rate Movements
Source: National Central Banks and Citi Research (as of 24 February 2016).
See: Global Economics View: Negative Policy Rates – What’s Next? Who’s Next?
Faced with China, commodities and Fed risk, EMFX
has repriced
We expect continued weakness in EMFX. The external shock and lack of domestic policy tools suggest
EMFX will remain under pressure.
Trade Weighted Real Exchange Rates –weak, but not weakest
Brazil’s Real Exchange Rate and Terms of Trade
140
120
100
80
60
40
20
Sources: BIS and Citi Research.
Apr-13
Jan-13
TRY
THB
ZAR
RUB
PLN
MXL
MYR
IDR
INR
CZK
HUF
Max
KRW
Min
COP
CNY
CLP
BRL
0
LatAm: External conditions impact growth
One of the reasons why we expect growth to remain low is that we expect external conditions to remain
depressed, particularly for South America.
South America
Mexico-CCA
%
12
4
F
10
3
8
2
6
1
4
0
2
-1
0
-2
-2
-3
-4
-4
-6
-5
1998
2000 2002 2004 2006
Average GDP YoY
2008 2010 2012 2014 2016
External Conditions Index (RHA)
%
6
3
F
4
2
1
2
0
-1
0
-2
-2
-3
-4
-4
-5
-6
-6
1998
2000 2002 2004
Average GDP YoY
2006
2008 2010 2012 2014 2016
External Conditions Index (RHA)
 Our External Conditions Index for South America and Central America & the Caribbean (CCA) and Mexico yields two interesting results. First,
given Citi forecasts for growth in G7 countries and China, and for commodity prices, external conditions will likely remain very weak for South
America in 2017. In the case of Mexico and CCA, external conditions are likely to be relatively stable, though far from peak levels
 Second, we find that the deceleration in South America has been more abrupt than that in external conditions, suggesting idiosyncratic forces are
at play. In the case of CCA and Mexico, the region has outperformed
Source: National Sources and Citi Research
LatAm: Growth will still be below average
We expect growth to remain low, though in several countries it may improve a bit relative to 2015.
%
 In some cases, as in Brazil or Chile, low growth is
mostly the result of domestic factors. In other cases, as
Colombia or Ecuador, it is mostly the consequence of
the negative ToT shock (amplified by the weak preexistent conditions, though)
 A combination of structural and cyclical factors is
behind the slow growth. Our improved forecasts for
2016 are mostly due to base effects and cyclical forces
8
3
-2
-7
-12
DO AR SV MX CR CO CL PE
2012-2014
2015F
UY
PA
EC BR
2016F
VE
Citi’s Growth Forecasts
2014
2015F
2016F
AR
-3.0
1.2
-1.7
BR
0.1
-3.8
-3.7
CL
1.9
2.2
1.5
Source: National Sources and Citi Research.
CO
4.6
3.0
2.4
CR
3.5
2.7
3.0
DO
7.3
7.0
5.5
EC
3.7
0.6
-1.2
MX
2.3
2.5
2.3
PA
6.2
5.5
6.0
PE
2.4
2.8
3.5
SV
2.0
2.2
2.5
UY
3.5
1.0
1.0
VE
-4.0
-9.5
-5.6
Recession in EMs: Nonlinearities vs mean-reversion
Our research shows that mean-reversion does not necessary hold during deep recessions.
1
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
Probability Output Drops by (at least) an Additional:
Prob
Percentage Points
6.5
6
5.5
5
4.5
4
3.5
3
2.5
Cumulative Drop, %
0
1
2
3
4
2 Percentage Point
5
6
7
8
9
4 Percentage Point
Accumulated Drop, %
2
10
0
1
2
3
4
5
6
7
8
9
10
Expected Additional Contraction
 Our analysis on recessions is relevant for LatAm as four countries are expected to post negative growth this year:
Argentina, Brazil, Ecuador and Venezuela
 In the case of Brazil, our analysis shows that the recession is at a stage in which the likelihood of self-stabilization is
questionable. But encouragingly, our analysis suggests that Brazil is still not yet near the highly “dangerous” thresholds
Source: National Sources and Citi Research.
Fiscal adjustment is needed at a difficult time
The region’s growth outlook has weakened as a result of low commodity prices and the lack of structural
reforms. Fiscal adjustment is needed, though it could further worsen the growth outlook.
Fiscal Profiles have Deteriorated
% of GDP
GDP Growth (%)
17
45º
90
12
80
Good
BR
Bad
-17
-12
AR
EC
60
50
2
40
-3
30
-8
VE
-7
-13
-2
F
70
7
CR
Public Debt
20
10
3
Fiscal Balance (% of GDP)
2008
2015
8
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
BR
EC
MX
CR
SV
 The need for some fiscal consolidation will likely hurt the growth outlook in some of the region’s countries. Argentina,
Brazil and Venezuela are the most clear examples.
 We see a vicious circle: the lower growth rates generate the need to tighten fiscal policy (in order to prevent the debt to
GDP ratio from increasing), while the fiscal adjustment puts additional pressure on growth.
Source: National Statistics Sources and Citi Research
Fiscal Multipliers suggest the adjustment will be painful
The region’s growth outlook has weakened as a result of low commodity prices and the lack of structural
reforms. Fiscal adjustment is needed, though it could further worsen the growth outlook.
value
Fiscal Balance (% of GDP)
0
Per
Col
Ecu
Vzl
Arg
Bra
Mex
Chl
Uru
Els
Pan
Dom
Cri
-2
Average
PA
-4
DO
-6
CO
CL
UY
ES
PE
AR
EC
CR
-8
"Bad Cuadrant"
VE
-10
BR
Multiplier
-12
0.0
0.5
1.0
Fiscal multiplier
1.5
Source: Batini, Eyraud and Webed (2014), National Statistics Sources and Citi Research
Average
0.0
0.5
1.0
1.5
2.0
CAs have not improved, despite the lower investment
The fall in investment (only Mexico shows a higher investment rate than two years ago) is not linked to an
improvement in current account balances.
% of GDP
Gross Investment
32
30
28
26
24
22
20
18
16
14
12
% of GDP
Current Account Balance
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
Panama
Ecuador
2013
Chile
DomRep Uruguay Venezuela El Salv
2014
2015
VE
PA CO PE BR UY SV CR EC MX AR DO CL
2013
2014
2015
 Wider current account deficits, combined with lower investment rates, reflect that national savings have decreased.
Gross investment has fallen 2.4pp of GDP on average during the last two years in South America, while the adjustment
in Mexico-CCA has been smaller with a decline in investment of 1% of GDP on average
 In South America, the current account deficit widened by 1.7% of GDP on average between 2013 and 2015, compared to
an improvement of 2% of GDP for CCA and Mexico
Source: National Statistics Sources and Citi Research.
Assessing which countries are better positioned to
restore growth
We believe that many of the countries within the region have not yet adjusted to the new economic
conditions. There probably are a few exceptions, though.
Current Account Balance (% of GDP)
0
CL
Better -1
AR
DO
-2
MX
EC
-3
CR
UY
BR
SV
-4
PE
Average
-5
-6
CO
-7
-8
PA
VE
-9
Worse
Average
-10
-12
-10
-8
-6
-4
-2
0
Government Balance (% of GDP)
 Most of the countries within the “Mexico cluster” do not show sizeable fiscal or external deficits. The exception is Costa
Rica, where the fiscal deficit is quite large
 Most of South American countries exhibit either a high current account or fiscal deficit, or both, as Venezuela and to a
lesser extent Brazil do. The notable exception, at least from this point of view, is Chile
Source: Citi Research based on Batini, Eyraud and Webed (2014).
Time to rethink monetary policy?
We believe that, moving forward, the interaction between monetary policy and the needed macroeconomic
adjustment in many countries within the region will become a relevant theme of discussion.
% of GDP
Change CA (% of GDP) 2011/13 - 2015
5
DO
CR
-400
-300
4
3
2
1
0
-1
-2
-3
-4
%
4
y = -0.0083x + 0.4547
R² = 0.3875
0
BR
-200
-100
0
100
Change in Policy Rate (Bps) 2014 - 2016
-12
-8
Mx
-14
-10
-12
-16
2012
200
300
-6
-10
-6
CO
-4
-8
-2
-4
CL
PE
F
2
2013
Primary Balance
Overall Balance
2014
2015
2016
Interest Bill
Selic Rate - Inverted (RHA)
 Despite the lower growth, the current accounts need to adjust in some of the countries within the region. Therefore, the
right path for monetary policy could be contractionary, in order to facilitate the necessary adjustment in
domestic absorption
 In Brazil, monetary policy also plays a role assisting (or hindering) the fiscal adjustment. The country appears to be
trapped in a “vicious circle”. Conventional inflation targeting and fiscal stability, once the fiscal anchor has been lost,
appear to be increasingly conflicting objectives
Source: Citi Research based on Batini, Eyraud and Webed (2014)
A changing political landscape
Against a growth and adjustment crisis, it is not surprising that Latin America is experiencing a shift in its
political landscape and in economic policies.
%
65
60
55
50
45
40
35
30
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2015
Government's approval rate
 The challenge across the region is to implement policies that facilitate a return of growth. This is no easy task, as
populism leaves behind economies with great challenges. Equally important is that external conditions have changed
quite dramatically, making economic adjustment inevitable and painful
Source: Latinbarómetro and Citi Research).
Brazil: Activity Outlook
We expect GDP to contract -3.8% in 2015 and -3.7% in 2016. Risks are skewed downwards. Brazil will
face the longest recession ever (6 quarters of contraction). Potential growth below 2.0%.
GDP Growth
Domestic Demand
Source: IBGE and Citi Research.
 There are several fundamentals constraining economic activity in
2015 and 2016.
 Due to monetary and fiscal tightening, labor and credit markets should
continue decelerating steadily amid depressed levels of confidence.
 Political negotiations may extend the recession period
throughout 2016.
Source: IBGE and Citi Research.
Brazil: Activity, Confidence and Domestic Demand
Confidence indicators continue around their record lowest levels. Credit growth slowdown will keep in place
in coming quarters.
Confidence Indicators
Credit Growth
120
45
110
40
% YoY
35
100
30
25
90
20
80
15
10
70
5
60
Sep-15
Apr-15
Nov-14
Jun-14
Jan-14
Aug-13
Mar-13
Oct-12
Earmarked
May-12
Dec-11
Jul-11
Total
Feb-11
Sep-10
Apr-10
Nov-09
Jun-09
Jan-09
Aug-08
Service Sector
Mar-08
Jan-16
Sep-15
May-15
Jan-15
Sep-14
May-14
Jan-14
Sep-13
Consumer
May-13
Jan-13
Sep-12
May-12
Jan-12
Sep-11
May-11
Jan-11
Sep-10
May-10
Jan-10
Sep-09
May-09
Jan-09
Industrial Sector
0
Non-Earmarked
Source: FGV and Citi Research.
Source: Brazilian Central Bank and Citi Research.
 All confidence indicators have been plummeting, breaching lowest
levels ever every month
 Service and consumer confidence indicators are also moving south.
 Lower confidence reduces the willingness to increase debts
 Credit market is decelerating steadily, especially in non-earmarked
credit which is expanding below 5% (contracting in real terms)
 Credit expansion will probably weaken further, given labor market
deceleration and higher loan interest rates
Brazil: Taming Fiscal Accounts – An impossible job?
Rousseff‘s 2nd term adopted opposite fiscal policy stance. Mr Levy, an MoF with austere reputation, disclosed several fiscal
consolidation measures. But harsh 1H15 meltdown hurt tax revenues and expenditures are sticky.
Primary Surplus
Gross Public Debt Dynamic
100
95
Gross Debt /
GDP (%)
90
85
80
75
70
65
60
51.3
55
50
2009 2010 2011 2012
Pessimistic
Sources: BCB and Citi Research.
 From 2012 to 2014, she decided to loose fiscal policy: tax breaks,
quasi-fiscal subsidies sectors, and boost social transfers
 2015 primary balance-to-GDP sat at -1.9% of GDP. The unwinding
of the “pedaladas” caused a lump-sum of BRL55.8bn
 We expect a deficit of 1% in 2016, the third deficit in a row
 The structural primary balance in 2015 shows that the fiscal stance
vis-à-vis 4Q14 was neutral up to 3Q15
94.9
87.5
78.5
80.7
75.9
71.0
72.3
82.8
72.5
58.9
2013 2014
Optimistic
2015
2016 2017
Benchmark
2018
Source: Brazilian Central Bank and Citi Research
 Positive scenario assumes primary surplus of 2.5% of GDP and
-2.0% in negative scenario
 Gross public debt/GDP rose to 58.9% in Dec14, coming from the
trough of 51.8% in December 2010
 Gross public debt should surpass the 70% threshold in 2016 and will
likely cross the 80% level in 2017
 With lax fiscal anchors for years to come, and GDP growth still in
negative camp in 2016 as well, the debt-to-GDP ratio is set to grow
over the next years
Brazil: Fiscal Accounts – It is not just the primary that matters
Brazil’s deficit, including interest costs, is exploding. An important part is that the cost of debt is linked to short term interest
rates. Not all the “nominal” deficit matters, but Brazil’s super high real interest rates make it bad.
% of GDP
%
6
4
2
16
F
0
-2
-4
-6
-8
-10
-12
1Q2007 3Q2008 1Q2010 3Q2011 1Q2013 3Q2014 1Q2016
Primary Balance
Interest Bill
Overall Balance
Sources: BCB and Citi Research.
14
F
12
10
8
6
4
1Q2007 3Q2008 1Q2010 3Q2011 1Q2013 3Q2014 1Q2016
Selic Rate
Public Debt Average Interest Rate
Brazil: Inflation – Above Upper Limit of the Target in 2016
We forecast CPI inflation at 7.2% in 2016, above the target’s upper-band (6.5%). CPI inflation above the
mid-point target despite weak growth, thanks to FX pass-through and negative expectations.
CPI Inflation and Targets
CPI Breakdown
(YoY)
(YoY)
20.0
20%
in %
18%
18.0
16%
16.0
14.0
forecast
14%
12%
10.0
10%
8.0
8%
6.0
6%
4.0
4%
2.0
2%
0.0
0%
Average of Core Measures
Jan-17
Jan-16
Jan-15
Jan-14
Jan-13
Jan-12
Sources: IBGE, BCB and Citi Research.
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Headline CPI Inflation
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
12.0
CPI
Food
Monitored Prices
Sources: IBGE and Citi Research.
Services
Mexico: Divergence Across Sectors
Service sector still drives the local economy.
GDP growth by sectors
(% annual)
4
3
2016
Possible
Scenarios
2
1
0
1Q14
2Q
GDP
Source: INEGI.
3Q
4Q
1Q15
Industry
2Q
3Q
Services
4Q
Mexico: Limited Terms of Trade Impact
FX Income coming from oil has declined significantly. Remittances are now the second source of
USD flows.
FX Income by source (current account)
(USD Mn)
14
100
90
12
Manufacturing
10
70
Oil
8
60
50
Remittances
6
40
30
4
20
Turism
2
10
0
0
Q1
'13
Source: Banxico.
80
Q2
Q3
Q4
Q1
'14
Q2
Q3
Q4
Q1
'15
Q2
Q3
Mexico: MXN, Weak Beyond Fundamentals…
Regardless of the metric, MXN looks cheap.
Real Exchange Rate
(Deviation from its 20yr average, %)
10
Overvaluation
Forecast
0
-10
-20
Undervaluation
-30
13
14
Bilateral
Source: BIS, Bloomberg, Banamex.
15
Multilateral
16
… which could pass-through to inflation
The correction could be done by either higher inflation or a reversion on the nominal rate.
Exchange rate and Inflation
(Index, January 2014 = 100)
140
Exchange Rate
130
Currency
depreciation
Possible
scenarios
120
110
100
Inflation
90
J '14
Source: INEGI, Thomson Reuters.
M
S
J '15
M
S
J' 16
Mexico: Fiscal tightening, Banxico to the rescue…
Banxico’s profits will be transfered to Hacienda. Pemex will have to farm out investment projects to
complete the required fiscal adjustment.
Banxico’s Operational result
Debt-to-GDP
(MXN millions at constant prices)
(% of PIB)
400
55
300
50
200
45
100
40
0
35
-100
30
Historic PSBR
PSBR using
Banxico's
surplus
25
-200
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Balance Sheet
FX Revenue/Loss taking Foreign Reserves
Source: Banxico, Banamex.
20
2006 2008 2010 2012 2014 2016 2018 2020
Source: Banxico, Banamex.
Argentina: A Consolidated Fiscal Deficit of 7.6% of GDP in 2015
The consolidated fiscal deficit is likely to stand at 7.6% of GDP this year, up from 5.2% of GDP last year
and 3.2% of GDP in 2013.
% of GDP
Federal Gov - Consolidated Balance
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
2007 2008 2009 2010 2011 2012 2013
Federal Government
BCRA (Cash Basis)
Source: BCRA, MECON and Citi Research.
2014 2015F
Consolidated
Argentina: and a Quasi-Fiscal problem
When appropriately measured, Argentina has a quasi-fiscal deficit.
USD Bn
Total Assets
International Reserves
Public Debt
Non-Negotiable Treasury Notes
Transitory Loans to the Treasury
Other Assets
31-Dec-10
110.2
52.2
5.1
16.1
11.6
25.3
31-Dec-11
100.6
46.4
3.8
25.7
15.6
9.1
31-Dec-12
116.0
43.3
5.3
33.5
26.0
8.0
31-Dec-13
110.9
30.6
3.4
42.9
28.0
6.0
31-Dec-14
129.9
31.4
2.5
53.8
29.4
12.8
31-Dec-15
139.0
25.6
18.3
48.4
25.5
21.2
Total Liabilities
Monetary Base
Lebacs and Nobacs
Current Accounts In Foreign Currency
Other Labilities
84.4
40.3
22.3
9.8
12.0
92.0
51.8
19.6
5.7
14.9
103.6
62.5
20.3
8.5
12.3
94.4
57.9
17.0
10.7
9.0
117.2
54.1
33.0
8.1
22.1
125.4
48.0
32.1
10.7
34.6
Net Worth
Net Worth Exc Non-Negotiable Debt and Transitory Loans
25.8
-1.9
8.7
-32.6
12.5
-47.0
16.5
-54.5
12.7
-70.6
13.6
-60.3
% of GDP
4
BCRA's Balance
3
2
1
0
-1
-2
-3
2007
2008 2009
Cash
2010 2011
Accrued
2012
2013 2014 2015F
Total Balance
 The BCRA’s balance sheet has been deteriorating, as the BCRA has
an increasing amount of non-interest bearing Treasury debt on its
asset side
 The BCRA reports its balance on an accrued basis. As a result, the
ARS depreciation leads to paper profits, as it has a large amount of
USD public debt on its liability side.
 On the liability side, the Lebacs continue increasing. The
higher stock of Lebacs leads to a higer interest bill, leading to a
quasi-fiscal deficit
 However, on a cash basis (the way fiscal accounts are reported), the
BCRA’s deficit has increased significantly
Source: BCRA and Citi Research.
Argentina: and monetary policy is fiscally dominated
The evolution of the FX market, together with the one of monetary aggregates, makes evident that the
pressure on the FX market has fundamental roots. Thus, a change in the financing strategy is needed.
% of GDP
% of GDP
3.3
2.8
3
2
1.1
1.4
1.7
1
12
-0.6
2007
2008
60
40
6
20
0
2009
2010
2011
2012
BCRA ARS Transfers to the Treasury
2013
2014
2015
M0 (RHA)
 The main imbalance in the monetary front arises from the fact that
the ARS financing the Treasury needs from the BCRA is higher than
the “inflation tax” at an inflation rate of 25%, as shown below
 With the M0 at around 9% of GDP, the seigniorage for an annual
inflation of around 25% is 2.3% of GDP
Source: BCRA and Citi Research.
80
8
2
-0.5
100
10
4
0.0
0
-1
% of M0
3.7
4
0
-20
-40
-60
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Domestic Credit
BCRA's FX Interventions
 The pressure on the FX had a fundamental rout: excessive
“domestic credit” growth
 Argentina was suffering a text-book 1st generation BoP crisis
Argentina: An Approximation to the 2016 Financing Program
We believe that the government’s fiscal and inflation targets imply a challenging financing program
for 2016.
2016 Target Deficit
ARS Bn
396.4
BCRA Transfers
25% Increse M0
Sterilization
(Stock of Lebacs)
259.1
156.0
103.2
585.2
Deficit Financing
Amortizations
Financing Needs
137.3
Source: BCRA, MECON and Citi Research.
USD Bn
% of GDP
5.8
3.8
2.3
1.5
8.6
9.0
3.0
12.0
2.0
0.7
2.7
Argentina: What is the Country’s Real Indebtedness?
Argentina´s public debt is usually underestimated, as a result of creative accounting and the effect of the
real overvaluation of the ARS.
4%
USD
16%
EUR
3%
FX Other
18%
59%
ARS
ARS + CER
 According to the last official public debt report, 80.6% of it was
denominated in foreign currency. Thus, the debt to GDP ratio is
sensitive to the real ARS
 According our estimates, with an official USDARS of 13.88, the
public sector excluding public holdings stands at 21.7% of GPD. In
other words, the real overvaluation of the ARS implied an
underestimation of the public debt to GDP ratio of around 4.6pp
Source: MECON and Citi Research.
Public Debt - Official Estimates*
USD Bn
% of GDP**
88.3
21.7
GDP Warrants
6.1
-
21.8
1.5
-
5.4
Stil in Default (Notional + PDI)
11.5
-
20
2.8
-
4.9
Total
105.9
130.1 26.1
32.0
 The Treasury’s debt increases significantly (up to 10% of GDP) if we
include the debt in default plus the GDP kickers
 What would happen if we include the BCRA (consolidated picture)?
Argentina: Where should the ARS go?
We believe the ARS remains somewhat overvalued – though much less than in 2015.
RER USD
2011=100
220
120
200
110
180
100
90
160
80
140
70
120
60
100
50
80
40
60
2011
ARS
2012
BRL
2013
CLP
2014
COP
MXN
2015
PEN
2016
UYU
 the USDARS stands 6% higher in real terms than in early 2011.
Meanwhile, other LatAm currencies have depreciated, on average,
41% vis-à-vis the greenback
 Peru and Uruguay, where the depreciation has also been more
limited than in the rest of the region, have witnessed a real increase
of 11% in their currencies relative to the USD
Source: Bloomberg, Haver and Citi Research.
30
2011
2012
REER
2013
2014
RER BRL
2015
2016
RER EUR
 As the ARS has remained roughly flat vis-à-vis the USD in real
terms, it has appreciated significantly relative to other currencies.
According to our estimates, the real effective exchange rate has
dropped (appreciated) 26% since early 2011
 If we look at the relationship with Brazil, Argentina’s main trading
partner, the real BRLARS dropped 43% since 2011
Colombia: Terms of Trade Nosedived
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15
Source: Citi Research & Banrep.
Colombia: The External Accounts Deteriorated
Exports stood at USD2.36bn in November decreasing 37.8% YoY. Imports stood at USD4.2bn in November
(a 20.8% YoY drop).
Current Account Balance (% of GDP)
2.0
0.7
1.0
1.1
0.0
-1.0
-1.2
-2.0
-0.9
-1.4
-0.7
-1.3
-3.0
-1.8
-4.1
-2.7
-2.9
-3.0
-3.1
-3.3
-4.2
-4.6
-5.2
-6.0
-7.0
1996
1997
1998
1999
2000
2001
Balance, USD Mn
10.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
-6.6
2015
-6.3
2016
X and M, USD Mn
65
Twelve-Month Accumulated Trade Balance
5.0
60
0.0
55
-5.0
50
-10.0
45
-15.0
40
-20.0
Dec-12
Mar-13
Jun-13
Sep-13
Trade Balance (LHA)
Source: DANE & Citi Research.
2002
Dec-13
Mar-14
Jun-14
Sep-14
Exports (RHA)
Dec-14
Mar-15
Jun-15
Imports (RHA)
Sep-15
35
Dec-15
Thousands
-5.0
-2.0
-2.9
-4.0
Colombia: Growth has slowed, though not enough…
The National Statistics Department announced that GDP grew at a yearly 3.2% rate in 3Q15, above
our forecast.
GDP Growth
%, YoY
10.0
9.0
8.0
8.0
7.0
6.4
6.3
6.0
5.3
5.7
6.1 6.1
5.9
5
5.0
6.4
4.7
4.3 4.2
3.5 3.5 3.5
4.0
3.5
3.0
2.5
2.9 2.8
2.8
3
3.2
2.0
1.0
0.0
Mar-10
Source: Citi Research & DANE.
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Sep-15
Colombia: Inflation is way above target
Headline inflation stood at 7.45% in January, above the 4.0% upper bound of the CB’s target range for the
twelfth consecutive month.
%, YoY
14.0
Recent Inflation Dynamics and Forecast
12.0
10.0
8.0
6.0
4.0
2.0
0.0
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Headline
Source: DANE & Citi Research.
Dec-13
Food
Jun-14
Dec-14
Non-Food
Jun-15
Dec-15
Jun-16
Dec-16
Colombia: Banrep has reacted hiking rates
In its December meeting, the CB’s Board decided to increase its Repo rate to 5.75%.
CB Policy Rate
%
10.0
F
9.0
8.0
7.0
6.50
6.0
6.00
5.0
4.0
3.0
Source: Citi Research & Central Bank.
Dec-16
Dec-15
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
2.0
Source: Citi Research & BCRP.
90
Nov-15
Nov-14
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-08
Nov-07
Nov-06
Nov-05
Nov-04
Nov-03
Nov-02
Nov-01
Nov-00
Nov-99
Nov-98
Nov-97
Nov-96
Peru: worse terms of trade
120
110
100
89.56
80
70
60
50
Peru: and the Current Account Deficit Widens
Current Account Balance (%GDP)
3.3
4.0
1.6
2.0
0.1
0.0
-0.5
-2.0
-2.8 -3.0
-4.0
-2.3 -2.0
-1.6
-2.4
-4.4
-6.0
-8.0
1.5
-6.7
-1.9
-2.7
-4.2 -4.0 -4.5 -4.2
-5.9 -6.2
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Peru: growth, a step lower, but still strong
15%
10%
5%
4.0%
0%
Source: Bloomberg & Citi Research.
Nov-15
Nov-14
Nov-13
Nov-12
Nov-11
Nov-10
Nov-09
Nov-08
Nov-07
Nov-06
Nov-05
-5%
Peru: Inflation
Inflation peaked at 4.4% in December 2015, above market consensus and the central bank target.
Lima Inflation
7.0
6.0
5.0
4.40
4.0
3.0
2.0
1.0
Source: Bloomberg & Citi Research.
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
0.0
Peru: Monetary Policy
In its January meeting, the BCRP decided to increase its policy rate to 4.0%. We think they will do more to
facilitate the otherwise minimal external adjustment.
Policy Rate
%
7.00
F
6.00
5.00
4.5
4.00
3.75
3.00
2.00
Source: BCRP and Citi Research.
Dec-16
Jun-16
Dec-15
Jun-15
Dec-14
Jun-14
Dec-13
Jun-13
Dec-12
Jun-12
Dec-11
Jun-11
Dec-10
Jun-10
Dec-09
Jun-09
Dec-08
1.00
In short: headwinds likely will continue in 2016

It is unlikely the global environment will improve a lot.
a) AE growth, China and commodities are all expected to have similar levels of growth and prices (if
not weaker) as 2015
 For Latam external conditions are at the weakest non-crisis level since 2001-02
b) Monetary policy divergence: Could the Fed tighten more aggressively than markets expect? Could
ECB and BoJ ease more than expected? Might China weaken the CNY or introduce greater
FX flexibility?
c) Capital flows to EM likely to be very subdued or even flow out
d) In Latam, pro-cyclical fiscal adjustment is unfortunately needed. Fiscal multipliers may be relatively
high and thus tighter fiscal likely to be contractionary
e) Monetary policy under many constraints reduce margins for pure inflation targeting: central banks
must facilitate CA adjustment, tame inflation and mind fiscal solvency
f) Winds of change in politics? US elections, thawing of relation with Russia? Merkel, Brexit, Latam
departure from populism?
g) In short, a 2016 that promises to be not too dissimilar to 2015
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Appendix A-1
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