Region Macroeconomics Perspective and Challenges - Banking … · 2015-10-14 · Region...

Region Macroeconomics Perspective and Challenges

Presented by

Ricardo Dessy - Director

[email protected]

+54-11-4329-1471

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Yie

ld t

o W

ors

t (%

)Current Interest Rate Environment

Source: Citi Yieldbook.

Note: Dotted lines represent 20 yr. Average

Credit Rallies as

Recession Ends

Mexican Financial Crisis

Orange County Bankruptcy

CMO Market Collapse

Asian Financial Crisis

Russian Default

LTCM Bailout

Corporate Governance

September 11th

Dot-Com Collapse

Subprime Meltdow n

LBO Overhang

Financial Sector Crisis

Economic Recovery /

Historic High Yield Rally

B Index

20-Yr. Avg: 9.78%

Current: 5.00%

High: 20.93%

Low: 4.90%

Avg Spread: 618 bps

Current: 412 bps

CCC Index

20-Yr. Avg: 14.38%

Current: 7.87%

High: 29.49%

Low: 7.65%

Avg Spread: 1,086 bps

Current: 674 bps

BB Index

20-Yr. Avg: 7.88%

Current: 4.27%

High: 14.61%

Low: 3.86%

Avg Spread: 429 bps

Current: 285 bps

10 Year Treasury

20-Yr. Avg: 4.53%

Current: 2.53%

High: 8.03%

Low: 1.39%

HY CCC Index

HY B Index

HY BB Index

10-yr Treasury

4

0.70%

0.80%

0.90%

1.00%

1.10%

1.20%

1.30%

1.40%

1.50%

Nov-13 Dec-13 Feb-14 Mar-14 May-14

5s-10s

10s-30s

1.6

2.0

2.4

2.8

3.2

3.6

4.0

Apr-13 Oct-13 May-14 Nov-14 Jun-15 Dec-15

10-Year UST UST Citi Forecast

UST Street Consensus

5-year Treasury Current 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Citi’s January Forecast

1.52%

1.80% 2.00% 2.23% 2.45% -- --

Citi’s May Forecast 2.00% 2.30% 2.50% 2.65% 2.75% 2.85%

Change +20 bp +30 bp +27 bp +20 bp -- --

10-year Treasury 3Q14 4Q14 1Q15 2Q15 3Q15 4Q 15


2.53%

3.13% 3.25% 3.38% 3.50% -- --


Change -18 bp -5 bp +2 bp -5 bp -- --

30-year Treasury 3Q14 4Q14 1Q15 2Q15 3Q15 4Q 15


3.40%

4.25% 4.35% 4.48% 4.60% -- --


Change -65 bp -55 bp -63 bp -70 bp -- --

Fed Funds 3Q14 4Q14 1Q15 2Q15 3Q15 4Q 15

Citi’s January Forecast 0.00-

0.25%

0.25% 0.25% 0.25% 0.25% -- --


Change +0 bp +0 bp +0 bp +0 bp -- --

LIBOR 3Q14 4Q14 1Q15 2Q15 3Q15 4Q 15


0.23%

0.24% 0.24% 0.32% 0.45% -- --


Change -2 bp -2 bp +3 bp +20 bp -- --

Rate Forecasts

Changing Interest Rate Forecasts

Citi period average forecasts as of May 21, 2014 and Jan 22, 2014

Source: Bloomberg; Citi. Bloomberg forecast as of 05/08/14

A Flattening Yield Curve

10-Year Treasury Yield Forecast Citi expects a significant rise in 10-year rates over the next several quarters

Yie

ld (

%)

Current: 2.53%

3.80%

3.55%

Current and Historic Yield Curves Despite expectations of rising rates in 2014, 5-, 10-, and 30-year Treasury yields

are all significantly below where they started the year

1

After declining significantly from November highs, the 5s10s and 10s30s yield

curves posted their first weekly gains in a month during the week ending May

9th

-70

-60

-50

-40

-30

-20

-10

0

10

01/01 02/05 03/13 04/17 05/23

5-Year UST 10-Year UST 30-Year UST

Latin America

4

Latam: Global environment and domestic policies

y = 0.1684x - 11.23

R2 = 0.9159

0

2

4

6

8

10

12

14

16

80

90

10

0

11

0

12

0

13

0

14

0

15

0

16

0

Argentina's Terms of Trade

Ch

ina

's S

ha

re o

f th

e W

orl

d's

GD

P

China's Share of World GDP Linear (China's Share of World GDP)

%

1

10

100

1000

10000

-30

36

9

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014(F)

Real GDP Growth CPI Inflation (RHA)

% %

Latin America Inflation and GDP growth

5

Fuente: BCRA, Bloomberg, INDEC, MECON, OJF y Citi Research

6 6

Real GDP Growth

Source: Citi Research.

0.0

2.5

5.0

7.5

10.0

-2.0

0.0

2.0

4.0

6.011

:Q1

11

:Q2

11

:Q3

11

:Q4

12

:Q1

12

:Q2

12

:Q3

12

:Q4

13

:Q1

13

:Q2

13

:Q3

13

:Q4

14

:Q1

14

:Q2

14

:Q3

14

:Q4

Perc

en

t, Y

oY

Perc

en

t, Y

oY

China

United States

Euro Area

7 7

China — A conditioning factor…. Rising risks from financial imbalances/credit misallocation on the back of its credit boom. There is no obvious

“trigger” for financial crisis given unique domestic funding nature. But almost all episodes of deleveraging result

in slower growth. It is difficult to see China growing more than 7.5%.

China’s pace of credit expansion augurs a period of

deleveraging…

Source: BIS, Haver, Citi Research

Note: *East Asia 4 includes ID, KR, MY and TH

…but unlike others at their credit boom peak, CN’s external

& bank funding vulnerability looks different

Source: Haver, CEIC, Citi Research

8 8

Source: Citi Research.

Export prices have stagnated

Exports seem to have slowed only recently

Global trade no longer a driver ?

9 9

The drag from abroad is compensated at home: policies are expansionary

Source: Citi Research

LatAm: Some (Unpleasant) Growth Accounting

10

More sustained growth coupled with improved macroeconomic frameworks drove many to wonder if, finally, the

region was ready to escape from the so-called "middle income trap".

11

While growth accelerated in the 2000s in LatAm, growth in output per-worker did so only marginally. Figure 4

shows that the region's past average growth in per worker terms is comparable to other historical periods.


12

In other words, the acceleration in growth was not the consequence of higher capital accumulation or

productivity gains, but of stronger labor accumulation, casting some doubts on its sustainability.


13

In other words, the acceleration in growth was not the consequence of higher capital accumulation or

productivity gains, but of stronger labor accumulation, casting some doubts on its sustainability.


14

The significant increase in the employed population during the 2000s is puzzling as population growth has been

declining steadily in most of the region.


LatAm: Low Saving Rates may Limit Investment Saving rates have decreased. As a result, higher investment needs to be financed by external savings,

increasing the countries’ external vulnerability and their dependence on global financial conditions.

15

When we look at LatAm as a whole, the current account deficit stands at 2.3%, more than twice the deficit from

emerging Europe (1% of GDP) and compared to a 2% of GDP surplus in developing Asia.

16

LatAm: Low Saving Rates may Limit Investment

17 17

High inflows resulted in greater foreign ownership

17

Foreign ownership of local currency bonds in selected countries (% total)

Source: Citi Research based on National Central Banks.

0

10

20

30

40

50

60

70

Jul-0

7

May-0

8

Mar-0

9

Ene-1

0

Nov-1

0

Sep-1

1

Jul-1

2

May-1

3

Mexico Indonesia Hungary Malaysia Turkey

Brazil Poland Peru Czech Rep

Mexico

Brazil

Peru

18 18

Much weaker FX could trigger balance sheet effects…

Weaker currencies and lower collateral values in USD terms could become a problem for those who borrowed in

foreign currency.

Source: BIS and Citi Research

Note: Excludes Venezuela


LatAm: External debt (Public+Private)

has been on the rise

LatAm corporate indebtedness (Net

Debt/EBITDA) has grown faster than for all

EM issuers (publicly listed companies)

0

200

400

600

800

1,000

1,200

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Short Term External Debt Long Term External Debt

US$ Bn

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

20122011201020092008200720062005

Largest non-quasi corporate issuers

Total of EM publicly listed companies

19 19

… while smaller K-flows could hurt leveraged countries

LatAm’s bank credit has grown consistently reaching somewhat worrisome levels in Brazil.

Latam Average – Bank Credit to GDP Ratio

Source: World Bank, Citi Research

Bank Credit to GDP Ratios, individual LATAM countries

Source: WB Citi Research

LatAm: The reform agenda is stalling

Unfortunately, with the only exception of Mexico, initiatives to boost the region’s productivity seem scarce at this

juncture.

20

Latin America — Selected Economic Indicators

Most economies are expected to slow down in 2014.

21


Latin America — FX Outlook

We are concerned with the levels of FX in much of Latin America.

22

Brazil

23

24

Source: Datafoha and Citi Research

D. Rousseff Again: Maybe, But We Can Not Be Sure Anymore D. Rousseff’s popularity level does not assure her reelection anymore. World Cup, power rationing and the

economy are the major liabilities.

We still have D.Rousseff ’s reelection as our base case scenario

During the demonstrations last year, D.Rousseff ’s popularity

plummeted to 30% from 51%.

D.Rousseff ’s approval rate has been falling lately, hovering around

35%

Below 35%, her reelection is under severe risk.

Source: Datafolha and Citi Research

Before TV campaign starts in August, the opposition candidates are

not well known

For the first time this year, polls are showing 2nd round

A. Neves has been seeing as D. Rousseff´s opponent in the first

round, but Campos might be better for the second run.

President Popularity (Good and Excellent Assessment) Election Race

0

10

20

30

40

50

60

70

0 12 24 36 48

months after inauguration

FHC 1 FHC 2 Lula 1 Dilma

Jun/13

Mar/01

25

Source: ONS and Citi Research

Key Risks for Dilma: World Cup and Power Rationing The impact of World Cup on the economy has disappointed so far. A 6 p.p. Reduction in Energy Supply is

already a technical recommendation, but Federal Government is taking the risk.

Previous analysis was very optimistic about the impact on the World

Cup. Now, we think the net effect in growth would be modest.

From 2007, when the World Cup was announced, to 2012, the

infrastructure investments in GDP terms rose from 1.8% to 2.3%.

The World Cup will likely produce more downside than upside effects

to the incumbent federal government

Levels of reservoirs kept roughly flat so far in 2014, mainly reflecting

the disappointing precipitation season. (April 38.8%)

According to National System Operator (ONS), level of reservoirs will

drop slightly in May.

Power rationing would imply lower growth, high inflation, worse fiscal

fundamentals, larger current account deficit, all of them likely hurting

D. Rousseff´s popularity.

Infra Structure Investments

Figure 1. Infrastructure Investments in Brazil (Percentage of GDP)

Sector 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Electricity 0.61 0.52 0.59 0.68 0.54 0.59 0.58 0.60 0.54 0.64

Telecom 0.47 0.69 0.66 0.52 0.47 0.80 0.56 0.42 0.50 0.56

Transportation 0.32 0.37 0.50 0.53 0.55 0.76 0.94 0.93 0.76 0.70

Airports 0.04 0.03 0.03 0.04 0.02 0.01 0.01 0.02 0.03 0.06

Ports 0.01 0.03 0.02 0.03 0.09 0.08 0.06 0.12 0.11 0.16

Waterways 0.01 0.01 0.01 0.01 0.01 0.01 0.02 0.01 0.00 0.00

Water and Sewage 0.03 0.25 0.23 0.24 0.13 0.21 0.23 0.21 0.17 0.20

Total 1.48 1.89 2.04 2.05 1.81 2.47 2.40 2.31 2.11 2.32

Private 0.86 1.08 1.13 0.98 1.01 1.43 1.05 1.01 1.06 1.25

Public 0.62 0.81 0.92 1.06 0.80 1.05 1.36 1.29 1.04 1.07

Source: C. Frischtak “Infraestrutura e desenvolvimento no Brasil”, in F. Veloso, P. Cavalcanti, F. Giambiagi e S. Pessoa, “Desenvolvimento econômico: Uma perspectiva brasileira”, Ed.Campus, 2012.

26

Activity – Real GDP Growth, Retail Sales& Industrial Production

Source: IBGE and Citi Research Source: IBGE and Citi Research

We expect 2014 GDP growth to be about 1.3% and 1.8% in 2015. Potential output is slightly below 3.0%,

according to our models.

4Q13 GDP expanded 0.7% QoQ, above expectations.

Our BLI model was estimating 1Q14 GDP growth to reach 0.3%

QoQ.

Looking ahead, our structural models estimate GDP growth to hover

around 0.3% QoQ.

.

Widening gap between retail sales and industrial production

represents the evidence of strong demand amid disappointing

industrial performance.

In principle, stronger global growth and weaker domestic currency

suggests improvement of industrial sector.

But high level of real unit labor cost in industry constrains this good

perspective.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009.I

2009.II

2009.III

2009.IV

2010.I

2010.II

2010.III

2010.IV

2011.I

2011.II

2011.III

2011.IV

2012.I

2012.II

2012.III

2012.IV

2013.I

2013.II

2013.III

2013.IV

2014.I

2014.II

2014.III

2014.IV

QoQ GDP Growth

80

85

90

95

100

105

110

40

50

60

70

80

90

100

110

120

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Index number

Retail Sales Industrial Production

27

Activity –Private Consumption & Investment and Confidence

Source: IBGE and Citi Research Source: FGV and Citi Research

Consumption was growing close to 6% in 2010, but 2013 result is the worst performance since 2003. Confidence

indices are sideways or dropping lately.

Consumption grew 2.3% in 2013, the lowest growth since 2003.

We do not expect consumption to recover in the years ahead.

Investment shows a recovery mode, but it is difficult to continue

growing.

.

Confidence is not in a upward trend in netther of the series.

Industrial confidence is as low as in 2009.

Industrial confidence granger causes industrial production and

investment.

2.3

6.3

-10

-5

0

5

10

15

20

25

2001.I

2001.IV

2002.III

2003.II

2004.I

2004.IV

2005.III

2006.II

2007.I

2007.IV

2008.III

2009.II

2010.I

2010.IV

2011.III

2012.II

2013.I

2013.IV

q/q

Private Consumption Investment

70

80

90

100

110

120

130

140

150

Jun-08

Oct-08

Feb-09

Jun-09

Oct-09

Feb-10

Jun-10

Oct-10

Feb-11

Jun-11

Oct-11

Feb-12

Jun-12

Oct-12

Feb-13

Jun-13

Oct-13

Feb-14

Industrial Sector Consumer Service Sector

28

Monetary Policy – We Are Not in Kansas Anymore

Sources: Brazilian Central Bank and Citi Research Source: Brazilian Central Bank, Bloomberg and Citi Research

We expect Selic at 11% in 2014 year-end. We also assume a resumption of tightening cycle in 2015.

Interest Rate Long-term Interest Rates

Real interest rate has declined from 7.5% in 2011 to 1.5% in 2012,

but since April/13 Central Bank has started a tightening cycle.

The deteriorating inflation outlook motivated Copom to hike Selic rate

by 350bp so far, bringing real interest rate back to levels above 4%.

We expect Copom to keep Selic rate at 11% until year end.

Long end of the Brazilian curve looks to peg US10 year rate.

If US10Y rate goes to 4%, Selic might return to 13%.

Correlation between the two series is 88%.

To arbitrage US x Brazil long-term interest rate BRL needs to

depreciate.

0

5

10

15

20

25

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

in %

Real Interest rate Selic rate

1

1.5

2

2.5

3

3.5

4

4.5

8

9

10

11

12

13

14

15

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

%%

DI Jan 17 Treasury 10Y

29

Inflation – At the Upper Bound of Inflation Target 2014 and 2015

We forecast CPI inflation at 6.6% in 2014, above the mid-point of the target (4.5%). CPI inflation keeps above

the mid-point target despite the weak GDP growth.

Services inflation (amounts 20% of CPI basket) continues to surpass

CPI inflation markedly.

Tight labor market is strongly linked to service inflation that has been

sticky above 8.5%.

Food inflation had reached its peak in April (14%) and reverted after

that. Recent dry weather is pressuring food prices again.

Monitored prices have been exerting a downward pressure through

energy tax cuts, revoke of public transportation fares hikes and

freeze of gasoline prices.

Sources: Brazilian Central Bank and Citi Research Sources: Bloomberg and Citi Research

We forecast IPCA inflation at 6.6% in 2014, above the target band

(2.5% - 6.5%).

We expect hikes in gasoline prices this year to reduce the large gap

to international prices.

BRL depreciation will increase inflation pressures ahead and is the

main risk to our forecasts.

CPI Inflation and Targets (YoY) CPI Breakdown (YoY)

30

Sources: Brazilian Central Bank and Citi Research

Fiscal Accounts – Social Unrest Worsens Fiscal Trade Off

We expect primary surplus of 1.5% of GDP in 2014, while Government is aiming 1.9% in 2014. The fiscal room

to further tax rebates is limited. So interest rate should return as the main tool to fight inflation.

Even with one-off revenues, the primary surplus fell to 1.9% of GDP

in 2013 (from 2.4% in 2012).

In January/February, central government surplus disappointed but

regional one surprised in the upside.

Primary Surplus

0

1

2

3

4

2006 2007 2008 2009 2010 2011 2012 2013 2014

% of GDP

Consolidated Central Government Regional Government

29.5

40.8

33.8

36.0

25

30

35

40

45

50

2004 2006 2008 2010 2012 2014 2016 2018

Net Debt / GDP (%)

Positive Negative Base

Positive scenario admits primary surplus of 3.0% of GDP (1.0% in

negative). GDP growth was set at 2.5% for all scenarios.

Mexico

31

Mexico — The Link with the United States

Exports going to the United States have picked up recently. Growth in U.S. imports coming from Mexico has

outperformed those from the rest of the world.

32

Non-Oil Exports by Destination (YoY %)

US Imports (YoY, %)

Source: INEGI and Citi Research Source: U.S. Census Bureau and Citi Research

-10

-5

0

5

10

15

20

25

Jan-11 Oct-11 Jul-12 Apr-13 Jan-14

Mexico World

-10

-5

0

5

10

15

20

J 13

F M A M J J A S O N D J 14

F

To the US To the ROW Total

Mexico — Reforms

• Peña Nieto leads the pack amongst reform oriented Mexican Presidents.

• The energy reform is the potentially most impactful reform of the last 15 years.

33

Main Legislation Approvals


Zedillo

1997-2000

Fox

2000-2003Fox

2003-2006

Calderón

2006-2009

Calderón

2009-2012

Peña

2012-2013

*Government

Accounting

*General

Victims Law

*Education

*Telecomms

and

Competition

*Secondary

laws on

Education

*Sole Penal

Code

*Land

registry and

public records

*Fiscal

*Transparency

*Fiscal

Responsibility

Law

*Social Security

System

*Political- Electoral

*Energy

*IPAB

*Youth

Institute

*Fiscal

Coordination

Law

*ISSSTE

*Popular

Credit and

Savings Law

*Closure of

Ferronales

*Indigenous

People Law

*Social

Security Law

*IFAI

*Women

Institute

*Federal

Superior

Audit Office

*Electoral

*Energy

*Fiscal

*Fobaproa *Oral

Judgements

*Fiscal

*COFETEL

Granted autonomy

*Senior

Citizens Law

*Disabled

Persons Law

*Equity

Markets Law

*Gender

Equality Law

*Space

Agency Law

*Reading

Encouragement

Law

*Human

Traffic

Law

*Tobacco Law

*INEGI

*Hydrocarbons

National

Comission

*Renewable

Energies Law

*Federal Police

Law

*Fiscal

*Law against

Organized Crime

*Political

Reform

*Anticorruption

Law

*Climate

Change Law

*Labor

*Prevention

against

resources of

ilicit procedure

*IFETEL

*INEE

Note: Items in red are relevant legislative changes, in our view.

Mexico — Energy Reform

The secondary laws will define the depth of inflows into the energy sector.

34

Dec 2014 Dec 2013

Constitutional Reform

Senate Approval

Chamber of Deputies approval

Local Congresses Approval (16/31)

Signing by the President

Lawmakers to:

• Define the details of the contracts that can be rendered with private companies

• Define the new attributes of the Energy Sector authorities: SENER, CNH and CRE

• Produce new legal framework for Productive State Enterprises

• Create the National Agency for Industrial Safety and Environment Protection

120 days

365 days

• Legal framework for environmental protection and efficient energy use. As

well as that for reducing gas emissions and green house effects.

90 days

• Pemex presents to SENER a list of

fields that it can productively continue to

operate.

180 days

Round Zero

• SENER decides which fields will

continue to be operated by PEMEX

Mexico — Inflows from the Energy Reform

High dispersion in estimates about inflows, but the consensus is that the flows will be gradual.

35


Projected Investment Flows According to Different

‘Top-Down’ approaches (USD million)

Materialization of investment flows will be gradual: these flows

will probably peak around 2018.

Estimates vary, but investment flows will likely be relevant.

In conventional E&P we estimate USD 15-20 billion

per year

Investment in downstream activities could materialize

faster, and will help to boost manufacturing

competitiveness

The reform also includes the electricity sector: its

appeal as investment destination is quite substantial

as well

All in all, Gross Fixed Investment could increase by 2% of

GDP, with demand-driven growth impacts easily implying

additional GDP growth by at least 1%.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2015 2016 2017 2018 2019 PMX Citi CCE PEMEX GFDI / WGDP FDI trends

Argentina

36

Argentina — The BRCA is financing the fiscal deficit

The Peso transfers from the BCRA to the Treasury have been increasing in the last five years, reaching 3.5% of

GDP or more than 30% of the M0 in 2013

37

Federal government deficit Transfers to the Treasury

Source: MECON and Citi Research Source: BCRA and Citi Research

-5

-4

-3

-2

-1

0

1

2

3

4

5

Primary Surplus Interests Overall Surplus

% of GDP

-2

-1

0

1

2

3

4

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

BCRA Transfers to the Treasury

% of GDP

Argentina — The result? Stagflation gets worse

We expect growth to be negative (-1.5%) in 2014, and we see real GDP flat in 2015. Despite the lack of activity

growth, inflation is on the rise

38

“Official” real GDP growth and Citi’s estimates “Official” and non-official inflation

Source: INDEC and Citi Research Source: INDEC, MyS and Citi Research

-20

-15

-10

-5

0

5

10

15

20

Official Annual Activity Growth Citi's Activity Indicator Annual Growth

%

-5

0

5

10

15

20

25

30

35

40

45

Official Annual Inflation Non-Official Annual Inflation

%

Argentina — Keep a close eye on Argentina in 2H

Agricultural exports pickup in 2Q and start decreasing forward, leading to higher pressure on the FX front. Also,

the bulk of the ARS transfers from the BCRA to the Treasury take please in the second semester.

39

BCRA FX interventions turn negative in 2H Transfers from the BCRA to the Treasury rise in 2H

Source: BCRA and Citi Research

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 2012 2013 2014

USD Mn

-20,000

0

20,000

40,000

60,000

80,000

100,000

2011 2012 2013 2014

ARS Mn, YTD

Source: BCRA and Citi Research

Venezuela

40

Venezuela — High inflation and Scarcity of Goods

Scarcity of goods has increased substantially, as price controls and inflation remain unabated.

41

Inflation and Scarcity

Source: BCV and Citi Research

Venezuela — Slowdown in growth

We expect a overall deceleration in economic activity .

42

Source: BCV and Citi Research

Oil and Non-oil GDP ( YoY growth)

Venezuela — SICAD II In our view, some of the supply that will be given in SICAD 2 will come from USD-denominated bonds in hands

of the government and public. We continue to believe the only mechanism to “normalize” the USD supply in the

country is by issuing additional debt.

43

Parallel exchange rate

Source: Dolar-paralelo info Citi Research Source: Citi Research

SICAD II Exchange Rate

84.6

56.98

62.08

-5

10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85

Apr

-09

Oct

-09

Apr

-10

Oct

-10

Apr

-11

Oct

-11

Apr

-12

Oct

-12

Apr

-13

Oct

-13

Apr

-14

USD/VEF (Parallel exchange rate)

47.5

48.0

48.5

49.0

49.5

50.0

50.5

51.0

51.5

52.0

52.5

24/0

3/2

014

29/0

3/2

014

03/0

4/2

014

08/0

4/2

014

13/0

4/2

014

18/0

4/2

014

23/0

4/2

014

28/0

4/2

014

USD/VEF

Colombia

44

45

Colombia — GDP breakdown

Growth is expected to be broad-based.

Sector 2011 2012 2013 (F) 2014 (F)

Agriculture 2.4% 2.5% 5.2% 2.6%

Mining 14.4% 5.6% 4.9% 5.0%

Manufacturing 5.0% -1.1% -1.2% 3.4%

Utilities 2.9% 2.1% 4.9% 4.1%

Construction 10.0% 6.0% 9.8% 8.5%

Retail, Restaurants and Hotels 6.0% 4.3% 4.3% 5.2%

Transportation 6.2% 4.9% 3.1% 4.9%

Financial and Real State Services 7.0% 5.0% 4.6% 5.3%

Social Service Activities 2.9% 5.0% 5.3% 4.3%

GDP 6.6% 4.0% 4.3% 4.6%

Source: Dane and Citi Research

Colombia: Our supply side GDP growth forecast

46

Source: DANE & Citi Research

-5.0

-4.5

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Central Gov. Budget Balance (% of GDP)

-1.3

-0.8

-0.3

0.2

0.7

1.22003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Central Gov. Primary Budget Balance (% of GDP)

Colombia — Fiscal accounts

Colombia is in a continuous process of fiscal reform.

47

Colombia — FDI and Portfolio Inflows

Foreign direct investment continues to be at high levels. Portfolio inflows are on the rise.

0

2

4

6

8

10

12

14

16

18

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

FDI

FDI (12-month inflow) Trend

USD Bill.Monthly inflow

Source: Banrep and Citi Research

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Mar

11

Sep

11

Mar

12

Sep

12

Mar

13

Sep

13

Mar

14

Portfolio investment (12-month inflow) Trend

USD Bill.Monthly inflow.

Portfolio inflows Foreign Direct Investment

Source: Banrep and Citi Research

48

Colombia — Intervention… Reactive rather than Proactive

Source: Bloomberg and Citi Research

We do not expect the Central Bank to take any additional measure in the FX front for the time being. Daily

interventions could increase somewhat but they will remain inside the quarterly target.

COP and Intervention

1500

1700

1900

2100

2300

2500

2700

2900

3100

3300

3500A

pr-0

4

Oct

-04

Apr

-05

Oct

-05

Apr

-06

Oct

-06

Apr

-07

Oct

-07

Apr

-08

Oct

-08

Apr

-09

Oct

-09

Apr

-10

Oct

-10

Apr

-11

Oct

-11

Apr

-12

Oct

-12

Apr

-13

Oct

-13

Apr

-14

Discretional Intervention by the CB Intervention using Daily Auctions by the CB

Verbal Intervention by the CB USD/COP (Monthly Average - LHA)

1750 Level

USD/COP

Capital

Controls

Eliminated

Capital Controls

Imposed

Verbal and

discrecional FX

intervention by

the MoF

Sells USD via

Options

Buys USD via

Options

Buys USD via

OptionsBuys USD

via Options

Buys USD

via Options

Peru

49

Peru — Terms of Trade

Copper and metal prices have contributed significantly to the recent fall in Terms of Trade (ToT).

50

Terms of Trade

Source: BCRP and Citi Research Source: BCRP and Citi Research

122.7

80

90

100

110

120

130

140

150

160

Feb

-91

Feb

-92

Feb

-93

Feb

-94

Feb

-95

Feb

-96

Feb

-97

Feb

-98

Feb

-99

Feb

-00

Feb

-01

Feb

-02

Feb

-03

Feb

-04

Feb

-05

Feb

-06

Feb

-07

Feb

-08

Feb

-09

Feb

-10

Feb

-11

Feb

-12

Feb

-13

Feb

-14

55%

12%

4%

2%

27%

Mining

Oil and Derivatives

Fishing

Agriculture

Other Exports

Main exports

Peru — Effects from Copper

Copper is the main driver not only in exports but also in investment.

51

Copper price and exports

Source: BCRP, Bloomberg and Citi Research Source: BCRP, Bloomberg and Citi Research

Copper price and investment

-60%

-10%

40%

90%

140%

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-11

De

c-1

2

De

c-1

3

Copper Exports

-20%

-10%

0%

10%

20%

30%

40%

-100%

-50%

0%

50%

100%

150%

De

c-9

8

De

c-9

9

De

c-0

0

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

De

c-11

De

c-1

2

De

c-1

3

Copper Investment (RHA)

Peru — External Debt

FX volatility could cause some balance sheet imbalances in the private sector, as private external debt has

increased. In our view, levels beyond the USDPEN2.85 would lead to aggressive interventions by the BCRP.

52

External Debt (% of GDP)

Source: Bloomberg and Citi Research

0%

5%

10%

15%

20%

25%

30%

35%

40%

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Jan

-12

Public Private

10%

16%

Chile

53

Chile — Copper Prices

Weak copper prices are expected to work against the CLP. Lower copper prices have widened the current

account deficit.

54

USDCLP and Copper Prices FDI and Current Account

Source: Bloomberg and Citi Research Source: BCCh, Haver and Citi Research

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

350

400

450

500

550

600

650

700

2006 2007 2008 2009 2010 2011 2012 2013 2014

USDCLP (lhs) Copper Prices (rhs)

USDCLP USD/MT

-15

-10

-5

0

5

10

15

20

25

30

Current Account FDI CC + FDI

USD Bn, 4Q

Chile — Assets • The country has roughly USD40 billion in international reserves and USD23 billion in its sovereign wealth

funds (FEES and FRP).

• Chile has one of the lowest fear-of-floating factors in EM.

55

International Reserves Sovereign Wealth Funds

Source: BCCh, Haver and Citi Research Source: Hacienda and Citi Research

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

International Reserves

USD billion

0

5

10

15

20

25

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13

FEES FRP

USD billion

Chile — Effects over Investment and Monetary Policy

Lower copper prices and the fiscal reform bill are working against investment in the country. This has led the

BCCh to cut rates and to keep an easing bias.

56

GDP, Consumption and Investment Policy rate

Source: BCCh, Haver and Citi Research Source: BCCh, Haver and Citi Research

-15

-10

-5

0

5

10

15

20

25

2010 II III IV 2011 II III IV 2012 II III IV 2013 II III IV

Real GDP Private Consumption Gross fixed capital formation

YoY, %

0

1

2

3

4

5

6

7

8

9

May-06 May-07 May-08 May-09 May-10 May-11 May-12 May-13 May-14

Monetary Policy Rate

%

ANNEX

57

Global Environment

y = 0.1684x - 11.23

R2 = 0.9159

0

2

4

6

8

10

12

14

16

80 90 100

110

120

130

140

150

160

Argentina's Terms of Trade

Ch

ina'

s S

har

e o

f th

e W

orl

d's

GD

P

China's Share of World GDP Linear (China's Share of World GDP)

%

1

10

100

1000

10000

-30

36

9

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014(F)

Real GDP Growth CPI Inflation (RHA)

% %

Latin America Inflation and GDP growth

58

Fuente: BCRA, Bloomberg, INDEC, MECON, OJF y Citi Research

LatAm FI Deal Volume by Year

Latin American Financial Institutions

LatAm FI Volume as Share of Total LatAm Volume

Financial Issuer Tenor Preference Financial Issuance vs. Non-FI Issuance

2013 2014 YTD

Source: Dealogic as of May 23, 2014

Although total 2014YTD LatAm issuance is greater than 2013YTD, so far this year, FI issuance is lagging

behind that of 2013. There has also been a greater amount of subordinated debt issuances in 2013YTD

than we have seen in 2014YTD.

2013 2014 YTD

26%

60%

7%

3%

2% 1%

3-7 yrs >7-10 yrs Perp >10-20 yrs < 3 yrs >20 yrs

56%25%

8%

7%3%

76%

5%3%

7%8%

16 EM & Latin America Markets

FI17%

Non FI83%

FI19%

Non FI81%

6169 71

84

102

47 57

8

2725

3524

13

13

100

177

145

193

207

105

86

0

40

80

120

160

200

240

0

20

40

60

80

100

120

2009

2010

2011

2012

2013

2013

YT

D

2014

YT

D

Nu

mb

er

of D

ea

ls in

La

tAm

Vo

lum

e (

US

$ B

N)

Non-FI FI Total Deals

6.2

18.619.7 20.3 19.4

9.712.72.0

8.9 4.9

14.9

4.3

3.0

0.524

69

54

77

70

3934

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

35

40

2009

2010

2011

2012

2013

2013

YT

D

2014

YT

D

Nu

mb

er

of D

ea

ls

Vo

lum

e (

US

$ B

N)

Subordinated Senior FI Deals

31%

20%14%

13%

10%

6%6%

General CorporatePurposes

Project Financing

Acquisitions

Repay Debt

Refinancing

Trade Flow

Other

LatAm Loan Market Review

LatAm Issuance by Loan Type Volume in 1Q 2014 was lower than the last two quarters of 2013 with term loans

becoming the dominant loan type.

LatAm Loan Issuance by Purpose 1Q 2014 During the 1Q 2014, General Corporate Purposes overtook Refinancing as the main

purpose of loan issuance. Project Financing remains as a strong use of loan funds,

while Refinancing has taken a back seat.

Other denotes: Refinancing, Commodity Finance, Shipping, Working Capital, Property,

Aircraft, Offshore Services and Capital Expenditures Other denotes: Bridge Facilities, Export Credit, Mezzanine Loans, Buyer Credit and L/C Facilities

LatAm Loan Share by Tenor Shorter tenor loans have become the dominant tenor as the Basel III rules put

pressure on banks

Source all graphs: Dealogic as of 1Q 2014

0

12

24

36

48

60

0

5

10

15

20

25

30

1Q'112Q'113Q'114Q'111Q'122Q'123Q'124Q'121Q'132Q'133Q'134Q'131Q'14

3M

LIB

OR

(bps)

Issuance (

US

$ B

n)

Term Loan Revolving Credit Other 3M LIBOR

0%

20%

40%

60%

80%

100%

2Q'11 3Q'11 4Q'11 1Q'12 2Q'12 3Q'12 4Q'12 1Q'13 2Q'13 3Q'13 4Q'13 1Q'14

< 1 yr

1 - 3 yrs

>3 - 5 yrs

> 5 yrs


Other includes Oil & Gas, Telecommunications, Consumer Products, Professional

Services, Chemicals, Auto/Truck, and Government

LatAm Loan Market Snapshot Historical LatAm Volumes

Q1 2014 Industry Breakdown Global Volume Overview – Q1 2014 (%s represent Change vs. Q1 2013)

Bond Issuance vs. Loans for LatAm in 2013 and 2014YTD

Source: Dealogic Quarterly Loan Review and Dealogic as of May 23, 2014

2013

YTD

19%

19%

15%12%

9%

6%

5%

5%4%

6%

Mining

Finance

Utility & Energy

Food & Beverage

Construction/Building

Metal & Steel

Dining & Lodging

Transportation

Agribusiness

Other


125.3

70.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Cum

ula

tive V

olu

me (

US

$ b

n)

Int. Bonds 2013

Loans 2013

Loans 2014

Int. Bonds 2014

17.5

82.9

51.3 46.5 43.2

63.454.9

54.5

18.3

0

20

40

60

80

100

2007 2008 2009 2010 2011 2012 2013 2014

US

$ in

bill

ions

Region Macroeconomics Perspective and Challenges - Banking … · 2015-10-14 · Region...

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