BBVA EAGLEs Emerging And Growth Leading Economies Economic Outlook

Annual Report 2014 Cross-Country Emerging Markets, BBVA Research March 2014

Index

Key takeaways in 2013

Rethinking EAGLEs for the next decade

Special Topics

EM markets portfolio flows: changing underlying forces

The EM Middle-Class revolution will accelerate

Are EAGLEs & Nest ready for income transition

EM credit deepening: In the search for a healthy path

Trends in South-South trade and global value chains

45

46

47

48

49

50

51

52

53

54

55

01/1

2

02/1

2

03/1

2

04/1

2

05/1

2

06/1

2

07/1

2

08/1

2

09

/12

10/1

2

11/1

2

12/1

2

01/1

3

02/1

3

03/1

3

04/1

3

05/1

3

06/1

3

07/1

3

08/1

3

09/1

3

10/1

3

11/1

3

12/1

3

01/1

4

Global EAGLEs G7

Expansion / contraction threshold

After a long period of time, the external environment is finally gaining momentum…

Manufacturing PMIs (2012-14) (simple average for EAGLEs* and G7 groups) Source: Haver

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

Chin

aPhili

ppin

es

Nig

eri

aIn

donesi

aBangla

desh

Vie

tnam

Qata

rK

aza

khst

an

Peru

India

Mala

ysi

aC

olo

mbia

Chile

Turk

ey

Sin

gapore

Iraq

Pakis

tan

S.A

rabia

Hong K

ong

Aust

ralia

Thaila

nd

Kore

aBra

zil

Taiw

an

Arg

entina

US

UK

Egypt

S.A

fric

aC

anada

Japan

Russ

iaPola

nd

Mexic

oG

erm

any

Fra

nce

Spain

Neth

erl

ands

Iran

Italy

Estimation / data

Forecasts (March 2013)

+

- - - - - - - - - - - - - - - -

+

-

Significant Upward Revision

Significant Downward Revision

+ +

…but local EM drivers disappointed

Real GDP growth in 2013 (in %) Source: IMF and BBVA research

Index

Key takeaways in 2013

Rethinking EAGLEs for the next decade

Special Topics

EM markets portfolio flows: changing underlying forces

The EM Middle-Class revolution will accelerate

Are EAGLEs & Nest ready for income transition

EM credit deepening: In the search for a healthy path

Trends in South-South trade and global value chains

6

Rethinking BBVA EAGLEs

All emerging economies

IMF criteria and groupings

Avg contribution of non-G7 developed

economies (with GDP > USD 100bn)

45 countries; discretionary

exclusion

Consensus from different sources

Lowest contribution of a G6 economy

(one country)

Now Before

Candidates

Definition of EM

Nest threshold

More candidates to be considered

Stable and clear criteria

A mix of macro and institutions

Extension and stability of the threshold

Implications

7

Maintaining our robust methodology…

Emerging Economies

Developed Economies Current GDP

Level

GDP Level in 10 years

BBVA Research & IMF forecasts

Step 2: Calculating Incremental GDP

Labor

-

Growth rate

(10 yrs) =

Current Size (“Initial size matters”)

Potential Growth (“long run dynamics”)

Final Size

X

Capital Technology

Step 1: Estimating GDP level in the next decade

GDP Level in 10 years

Current GDP Level =

Incremental GDP

Institutions

8

…but new thresholds broaden the scope in 2014 members

G6 economies average

Non-G7 developed economies (with GDP > USD 100bn average)

NEST countries

EAGLEs

Rest of emerging economies

USD 490bn

USD 157bn

China, India, Indonesia Russia, Brazil Turkey & México

Saudi Arabia, Nigeria, Thailand, Colombia, Phillippines Malaysia, Irak, Vietnam, Bangladesh, Poland, Iran, Peru

South Africa, Chile, Kazkhsthan, Qatar & Argentina

Rest of Emerging Markets

BBVA World Economic Groups and Incremental GDP thresholds: 2013-2023 Source: BBVA Research,

9

A bird’s eye to EAGLEs contribution… Contribution to world growth in the next ten years and current GDP size (2013) (PPP-adj. 2013 USD) Source: BBVA Research, IMF

USD

tn

USD

bn

18

15

12

9

6

3

0

3

6

9

12

15

Chin

a

Nest

US

India

EA

GLEs-

5*

Oth

er

EM

s

Non-G

7 D

Ms

G6

2013-2023

2013

30.3% of world growth

13.5% 11.6% 11.4% 9.7% 8.3% 8.0% 7.1%

Current Size (2013)

Increase (2013-23)

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

0

500

1000

1500

Indonesi

a

Russ

ia

Bra

zil

Kore

a

Japan

Turk

ey

Germ

any

Mexic

o

UK

G6 a

vera

ge

2013-2023

2013

Current Size (2013)

Increase (2013-23)

China and India play in another league

The rest of the EAGLE`s are consolidating over time

10

… and the new list of Nest members Contribution to world growth 2013-2023 and current GDP size (2013 USD bn and 2013 USD PPP adjusted) Source: BBVA Research, IMF

2400

2100

1800

1500

1200

900

600

300

0

300

600

S.A

rabia

Nig

eri

a

Taiw

an

Thaila

nd

Fra

nce

Aust

ralia

Colo

mbia

Spain

Canada

Phili

ppin

es

Mala

ysi

a

Iraq

Vie

tnam

Pakis

tan

Bangla

desh

Pola

nd

Italy

Egypt

Iran

Peru

S.A

fric

a

Chile

Kaza

khst

an

Qata

r

Arg

entina

Non-G

7 D

Ms

2013

2013-2023

Current Size (2013)

Increase (2013-23)

11

EAGLE’s contribution growth map… Regional contribution to world growth in the next ten years (%) Source: BBVA Research, IMF

The EAGLE´s & Nest are geographicaly

balanced

Eastern Europe

Western Europe 7.2%

Africa 5.7%

6.2%

America

Middle

East

4.1%

Japan

1.7%

Latin America

6.9%

North

12.5%

Oceania

1.1%

Asia exJapan

54.7%

G7

Non-G7 Developed

Eagles

Nest

Other Emerging

12

…with a bias to the Asia-Pacific region Regional contribution to world growth in the next ten years (%) Source: BBVA Research, IMF

-

Western Europe 7.2%

Africa 5.7%

Eastern Europe 6.2%

Latin America

6.9%

North America

12.5%

Middle East 4.1%

Japan 1.7%

Oceania 1.1%

Asia exJapan 54.7%

The center of gravity is moving to the

Asia Pacific Region (77%)

Index

Key takeaways in 2013

Rethinking EAGLEs for the next decade

Special Topics

EM markets portfolio flows: changing underlying forces

The EM Middle-Class revolution will accelerate

Are EAGLEs & Nest ready for income transition

EM credit deepening: In the search for a healthy path

Trends in South-South trade and global value chains

-4

-3

-2

-1

0

1

2

3

4

2012 2013 2014

Local Global/Regional

40%

40% 60%

40% 60%

40% 60%

Portfolio Flows to Emerging Markets (2012-2014) (median flows and contributions, flows to total assets) Source: BBVA Research and EPFR and IMF

Risk On (Draghi + QE3)

Risk Off Tapering Adjustment Geopolitics

40%

40% 60%

40%

40% 60%

Global “push” factors

Local “pull” factors

Global “push” factors have been the dominant force

driving portfolio flows to EM…

… but Local and Regional “pull” factors are becoming

more relevant

EM Portfolio Flows: changing underlying forces…

-200

-100

0

100

200

300

400

500

600

700

800

900

2005 2006 2007 2008 2009 2010 2011 2012 2013

Portfolio Flows to Emerging Markets (2012-2014) (cumulative from 2005) Source: BBVA Research, EPFR and IMF Ultra loose Monetary Policy in western

countries (“push”) and EM atractiveness (“pull”) prompted “excess” flows

into Emerging Markets …

… which sharply corrected with the FED announcement of the Tapering… We

have already corrected previous excesses entering into the

“Under-shooting” area

Dra

ghi &

QE3

FED

Taperi

ng

EM Portfolio Flows: … with limited room to the downside

16

The EM Middle class revolution will accelerate and poverty will drop significantly

Population by GDP pc in EM (1980-2025) (Eagles and Nest countries) Source: BBVA Research

Millions of people

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

Affluent High Middle ClassMedium Middle Class Low Middle ClassPoor and Low Income

Slow Motion Fast Track

Middle Classes will continue in Fast Track…

…overcoming Poverty, Poor and Low income Classes!!!

The Revolution of EM “Middle Class” is accelerating reaching

near 3bn people. Some of them will jump faster

joining the affluent classes

For the first time Poverty drop below Middle Classes

17

Change of population by GDP pc: 2013 to 2025 (millions of people by countries and Groups) Source: BBVA Research

*EAGLE’s 5: Indonesia, Russia, Brazil, Turkey and Mexico

63

167 68 219

37

-600

-400

-200

0

200

400

600

800

China India EAGLEs-5* Nest G7

Affluent High Middle-ClassMedium Middle-Class Low Middle-ClassPoor&Low Income TOTAL

New 1100 mln Middle Class living in

EAGLE’s countries

Nest will add 255 mln new Middle Class

Eagles & Nest reducing poverty

by 1000 mln

New 195 mln Rich People in

Eagles & Nest countries

The EM Middle class revolution will accelerate and poverty will drop significantly…

18

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

G7

avera

ge

Kore

a

Russ

ia

Turk

ey

Mexic

o

Bra

zil

Chin

a

Indonesi

a

India

Qata

r

Pola

nd

Arg

entina

Mala

ysi

a

Chile

Kaza

khst

an

Iran

Peru

Thaila

nd

Colo

mbia

South

Afr

ica

Iraq

Egypt

Phili

ppin

es

Vie

tnam

Nig

eri

a

Pakis

tan

Bangla

desh

DMs EAGLEs Nest

Affluent High Middle-Class Medium Middle-Class Low Middle-Class Poor&Low Income

… in some places more than in others (EM Middle Class heterogeneity)

Population by GDP pc: 2013 (millions of people by countries and Groups) Source: BBVA Research

19

Are EAGLE’s and Nest ready for income transition?: different positions, different challenges…

Demographics, urbanization, high

investment returns, Basic Manufacturing low wages

Middle income

Tertiarisation, Manufacturing diversification &

sophistication, increasing middle classes, financial

deepening

Factor accumulation moderation, wages rise,

need of higher education, technological skills and

infrastructure

High income

Diversification, sophistication, complexity, innovation, welfare systems

Population aging, fiscal sustainability, increasing

inequality, excessive leverage

2,000-8,000 PPP-adj. USD

India, Indonesia, Bangladesh, Egypt, Iraq, Nigeria, Pakistan, Philippines,

Vietnam

10,000-21,000 PPP-adj. USD

Malaysia, Russia, Argentina, Chile, Poland, Brazil, Iran, Kazakhstan, Mexico, Turkey,

China, Thailand, Colombia, S. Africa, Peru

>22,000 PPP-adj. USD

Qatar, Saudi Arabia Developed Economies

Drivers

Risks Macro and institutional,

social unrest, poverty, basic services, increasing

inequality

Low income

20

Economic development and population dynamics Source: BBVA Research, UN, World Bank, UNU-WIDER

*Low Income = India, Indonesia, Bangladesh, Egypt, Iraq, Nigeria, Pakistan, Philippines and Vietnam; Middle Income 1 = China, Thailand, Colombia, South Africa and Peru; Middle Income 2 = Brazil, Iran, Kazakhstan, Mexico and Turkey; Middle Income 3 = Malaysia, Russia, Argentina, Chie and Poland

Share of population with 15-64 (%) GINI inequality index (latest)

50

55

60

65

70

75

2010

2025

2010

2025

2010

2025

2010

2025

2010

2025

LowIncome

Mid.Inc.1

Mid.Inc.2

Mid.Inc.3

G7

0,0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

LowIncome

Mid.Inc.1

Mid.Inc.2

Mid.Inc.3

G7

Are EAGLE’s and Nest ready for income transition?: different positions, different challenges…

21

GDP per capita and Global Competitiveness Index (GCI) in selected economies Source: BBVA Research, WEF

6

7

8

9

10

11

12

3.0 3.5 4.0 4.5 5.0 5.5 6.0

GD

P p

er

cap

ita (

201

3)

(natu

ral lo

gs

of

PPP-a

dj. U

SD

)

Global Competitiveness Index (2013-2014) (from 1 to 7)

EAGLEs

Nest

G7

Other DMs

Korea

China

Italy

Poland

Bangladesh

Pakistan Nigeria

India

Philipp.

Vietnam Indonesia

Egypt

Mexico Brazil

Chile Argentina

Peru Colombia

Malaysia

Canada

Thailand

UK

Japan US

Germany

France

Turkey Russia

Qatar

Spain

Australia

S.Arabia

Netherlands

Iran

Kazakhstan S.Africa

Are EAGLE’s and Nest ready for income transition?: policy room to change development paths…

22

Quality of overall infrastructure (1-7) in EAGLEs, Nest and G7 countries (2013-2014) Source: BBVA Research, WEF

H-I = High income countries; no data available for Iraq; discontinuous lines represent group averages

Are EAGLE’s and Nest ready for income transition?: infrastructure will play a crucial role…

1

2

3

4

5

6

7

Bangla

desh

Nig

eri

a

Pakis

tan

Vie

tnam

India

Phili

ppin

es

Indonesi

a

Egypt

Chin

a

Thaila

nd

Colo

mbia

S.A

fric

a

Peru

Bra

zil

Iran

Kaza

khst

an

Mexic

o

Turk

ey

Mala

ysi

a

Russ

ia

Arg

entina

Chile

Pola

nd

S.A

rabia

Qata

r

Italy

Fra

nce

Japan

UK

Germ

any

Canada

US

Low-income Middle-income H-I G7

23

… and Credit Deepening will help to finance development as long as it follows a healthy path

Credit to the private sector and GDP per capita (2013) (credit to GDP and GDP per capita PPP adjusted) Source: BBVA Research and IMF

Note: the trend represents long-term relation between GDP per capita and the ratio of credit regardless of other variables which play a relevant in our model; the size of the bubbles are proportional to the absolute value of GDP

0

25

50

75

100

125

150

175

200

225

7,5 8,0 8,5 9,0 9,5 10,0 10,5 11,0 11,5

Cre

dit

to

pri

vate

secto

r (%

GD

P)

GDP per capita (natural logs)

EmergingDeveloped

24

Trends in South-South trade and Global Value Chains (GVCs): South-South trade on the rise…

Distribution of world exports according to origin and destination (% of total) Source: BBVA Research, IMF/DOTS

1980s-90s Present

Note: 1980s-90s corresponds to the 1980-1999 average and Present to the 2010-2012 average

North - North 61%

South - South

6%

South - North 16%

North - North 40%

South - South 15%

South - North 24%

North

-South

1

7%

North

-South

20

%

25

South-South trade flows by regions (USD bn) (2012) Source: BBVA Research, IMF/DOTS

573

217

354

120

52

Intra Trade

Exports

Imports

37

28

69

24

111

99

12

35

60

44

Total South-South

Trade:

2.92 tn

EM Asia Africa M.East EM Europe Latam

Trends in South-South trade and GVCs: …gravitating around the Asian Factory

Further progress in trade liberalization

Rapid economic growth of Southern countries

Development of global value chains

Exports by regional trade network : 2000 & 2009 (gross value and value added basis, tn USD) Source: BBVA Research, OECD

0.4 1.6 1.2

0.3 0.9 0.7

1.2

2.5

1.2

0.9

1.9

0.9

1.1

2.2

1.1

0.8

1.6

0.8

3.6

5.2

1,6

2.6

3.8

1.1

0

1

2

3

4

5

6

7

8

9

10

11

12

2000 2009 Change 2000 2009 Change

Gross value Value added

South -> South South -> North North -> South North -> North

Trends in South-South trade and GVCs: countries should pursuit VA gains…

Increase value retention drain through foreign inputs or imports of final products

Increase domestic connectivity with other

activities

Increase diversification in commodities and

manufacturers

Upgrade technological content most of them merely “assemblers”

27

Current GDP size and expected change in the next decade (PPP-adj. 2013 USD) Source: BBVA Research, IMF

0

3

6

9

12

15

18

21

24

27

Chin

a

US

EU

-28

India

ASEA

N

Merc

osu

r

Paci

fic

Alli

ance

G6 a

vera

ge

GC

C*

2013-2023

2013

Trends in South-South trade and GVCs: strategic alliances can help

Thank you!

DISCLAIMER This document has been prepared by BBVA Research Department, it is provided for information purposes only and expresses data, opinions or estimations regarding the date of issue of the report, prepared by BBVA or obtained from or based on sources we consider to be reliable, and have not been independently verified by BBVA. Therefore, BBVA offers no warranty, either express or implicit, regarding its accuracy, integrity or correctness. Estimations this document may contain have been undertaken according to generally accepted methodologies and should be considered as forecasts or projections. Results obtained in the past, either positive or negative, are no guarantee of future performance. This document and its contents are subject to changes without prior notice depending on variables such as the economic context or market fluctuations. BBVA is not responsible for updating these contents or for giving notice of such changes. BBVA accepts no liability for any loss, direct or indirect, that may result from the use of this document or its contents. This document and its contents do not constitute an offer, invitation or solicitation to purchase, divest or enter into any interest in financial assets or instruments. Neither shall this document nor its contents form the basis of any contract, commitment or decision of any kind. In regard to investment in financial assets related to economic variables this document may cover, readers should be aware that under no circumstances should they base their investment decisions in the information contained in this document. Those persons or entities offering investment products to these potential investors are legally required to provide the information needed for them to take an appropriate investment decision. The content of this document is protected by intellectual property laws. It is forbidden its reproduction, transformation, distribution, public communication, making available, extraction, reuse, forwarding or use of any nature by any means or process, except in cases where it is legally permitted or expressly authorized by BBVA.