The New Global Order is Asian: Opportunities and risks for Latin America

Alicia García-Herrero

Chief

Economist

of

Emerging

Markets

BBVA Research

Oxford, February

17, 2012

Key Messages

2

•

Opportunities are concentrated within emerging Asian economies

•

Latin American economies also have world class players

•

However, Latin America’s bright future much less dependent on traditional partners and much more on Asia, specially China

•

China’s sweet commodity demand has stopped the process of export diversification

•

However, opportunities go beyond that China can also become a larger provider of FDI for Latam

to produce manufacturing as well as importer of Latin American goods

The new global order will be Asian

The future for Latin America

Partnership with Asian economies

Risks and opportunities

The new global economic order will be Asian

• Emerging Asian economies to contribute close to 58% to global growth in next 10 years

• Traditional Latin American partners (US and EU) to contribute less than 20%

Contribution to World economic growth by region between 2011-2021 (%)

Source: BBVA Research and IMF WEO

10.5

Latin America

Africa Australia + New Zealand

North America

Asia (ex.Japan)

Japan

7.8

6.0

4.1

Eastern Europe

57.91.8

1.0

5.8

Western Europe

Middle East

5.0

The Asian order will be Chinese … followed by India in the distance

• China’s incremental GDP will triple that of India.

• India, itself, will have a larger contribution to growth than the USCurrent economic size* and incremental GDP** 2011 –

2021(billion USD, adjusted by PPP)

13,718

4,8203,881

India4,314

China11,067

United States

14,806

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

0

Incr

emen

tal G

DP

PP

P 2

011

-20

21 (b

illio

n U

SD)

Asian Emerging EconomiesG7 economy

*Current size is indicated by the size of the circle as well as the number below the country’s name ** Incremental GDP is found in the number inside the circleSource: BBVA Research and IMF WEO

Other Asian countries will also be key players• Indonesia will contribute much more than Japan to global growth.

• Korea as much as Japan and much more than Germany

• Taiwan slighlty

more than the UK

Current economic size* and incremental GDP** 2011 –

2021(billion USD, adjusted by PPP) *

983

741 725

456419 415

373 358 345 343 341294

262236 229

134

Taiwan863

Italy1,791

South Africa543

Malaysia436

Hong Kong344

Singapore308

Philippines382

Spain1,385

Bangladesh277

Pakistan480

France2,173

Vietnam295

Canada1,367

Australia899

Korea1,523

Japan4,311

Germany3,039

United Kingdom2,213

Thailand601

Saudi Arabia665

Indonesia1,100

165176225

268300

0

200

400

600

800

1,000

1,200

Incr

emen

tal G

DP

PP

P 2

011

-20

21 (b

illio

n U

SD)

Asian Emerging EconomiesG6 EconomiesOther Economies

Current size is indicated by the size of the circle as well as the number below the country’s name ** Incremental GDP is found in the number inside the circleSource: BBVA Research and IMF WEO

What about Latin America?• Brazil and Mexico also world class players

• Brazil will contribute to global growth nearly double Japan. Mexico more than Germany.

• Argentina more than Canada, Colombia close to France. Peru and Chile more than ItalyCurrent economic size* and incremental GDP** 2011 –

2021(billion USD, adjusted by PPP)*

198 176 165

Italy1,791

Chile275

Peru296

South Africa543

Colombia461

Spain1,385

France2,173

Saudi Arabia665

Mexico1,628

Japan4,311

Germany3,039

Australia899

Argentina700

Canada1,367

Singapore308

Hong Kong344

United Kingdom2,213

Brazil1,100

165229

419

236322

341343345347358415

456514

741

1,137

0

200

400

600

800

1,000

1,200

1,400

Incr

emen

tal G

DP

PP

P 2

011

-20

21 (b

illio

n U

SD)

LATAM Emerging EconomiesG6 EconomiesOther Economies

Current size is indicated by the size of the circle as well as the number below the country’s name ** Incremental GDP is found in the number inside the circleSource: BBVA Research and IMF WEO

However, Latin American relevance in the global arena is more and more dependent

on Asia, particularly China

Page

8

Trade between Asia and Latin America has grown nine times in last 20 years

0

20

40

60

80

100

120

140

160

1990 2000 2010

LATAM to Asia Asia to LATAM

Trade flows between Asia and LATAM 7(billion USD) Source: BBVA Research and COMTRADE

Page

9

In 2010 the three countries accounted for 84% of total exports to LATAM (114 billion USD)

Brazil and Chile

accounted for 66% of total exports to Asia which added up to 84

billion USD. Argentina, Mexico and Peru played a minor role

China is the key trading partner but also Korea and Japan are relevant

Trade flows Asia to LATAM: the big players2010

China50%

Korea18%

Japan16%

Rest of Asia16%

Trade flows LATAM to Asia: the big players2010

Brazil41%

Chile25%

Mexico14%

Rest of LATAM20%

Page

10

China top trading partner… but not only for exports, also for imports!

China’s ranking as trade partner in Latin AmericaSource: BBVA Research and COMTRADE

Country

Export to China Import from China

2000 2010 2000 2010

Argentina 6 2 4 2

Brazil 12 1 11 2

Chile 4 1 4 1

Colombia 36 2 9 2

Mexico 19 3 6 2

Peru 2 1 9 2

Venezuela 35 7 18 2

LATAM exports concentrated on commodities: iron ore, soybean, copper, paper and food for animalsAsian exports are manufactured goods, also medium and high value added ones like motor vehicles, communication devices and electronic devices.

Page

11

Comparative advantage ruling trade patterns

Trade flows Asia to LATAM: commodities2010

Machinery, other than

electric17%

others47%

Electrical machinery,

apparatus and appliances

21%

Transport equipment

15%

Trade flows LATAM to Asia: commodities2010

Metalliferous ores and metal

scrap35%

Non ferrous metals13%

other commodities

42%

Oil seeds, oil nuts and oil kernels

10%

Risks and opportunities

Key risk

• Reverting the

slow

process

of

export

diversification in the

Latin

American region

– Maybe true

but

also

happening elsewhere

The process of diversification away from commodities seems to have stalled in the last few years due to China’s dominance

Latin America continues to rely on commodity exports

Commodity

Exports(% of

total exports)Source: COMTRADE

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

World LATAM LATAM 7 ex Mexico Australia

The rise of China has concentrated further the demand for commodities (imports)

However supply is also highly concentrated (exports)

Commodity markets increasingly concentrated

Commodity markets concentration(Gini

coefficient)Source: BBVA Research and COMTRADE

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 20100.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

Copper Iron Ores Soybean0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 20100.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

Copper Iron Ores Soybean

Imports Exports

Exports have a significant share of GDP only in the case of Chile

Despite its explosive growth, exports to China are still small relative to GDP

However Latin America still relatively closed. Exports to China are important but not essential

Exports(as % of GDP)

Source: BBVA Research and Haver

Total exports Exports to China

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0Argentina Brazil Chile Peru

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0Argentina Brazil Chile Peru

Page

17

Concentration of exports to China into commodities not only happening in Latam

Trade relations with China are concentrated in three commodities

but vulnerability is not the higher when compared to other countries

Relative export dependency on Chinese demand(0 = no dependence, 100 = total dependence)

0

5

10

15

20

25

30

35

40

45

50

USA

-soy

GER

-cop

per

IND

O-r

ubbe

r

IND

O-c

oal

AUS-

coal

BRA-

soy

PER

-Cop

per

ARG

-soy

BRA-

iron

AUS-

iron

CH

I-cop

per

PER

-Non

F

NIG

-oil 0

5

10

15

20

25

30

35

40

45

502002 2009

Source: Ferchen and García-Herrero. China Economic Quarterly

Key opportunity

Rather than

confronting

–

or

ignoring

China -

engage

with it

before

everybody

else

does!

Page

19

China is huge and already here. No single country can change that reality

China is already the largest export power but not yet a global growth engine except for commodities. This should change over time as China increases the share of consumption in GDP. Furthermore, export structure will change

Share in World manufactured exports(percentage) Source: BBVA Research and WDI

0

2

4

6

8

10

12

14

16

18

Ch

ina

Ger

man

y

US

Jap

an

Ko

rea

Fra

nce

Ital

y

UK

Mex

ico

Can

ada

Ind

ia

Tu

rkey

Bra

zil

Ind

on

esia

Ru

ssia

Eg

ypt

2000 2010

Page

20

China’s five year plan will transform the economy towards a high value added goods producer

China will

follow

the

same

process

as Japan

and

Korea

did

many

years

ago: Low value added production will be reallocated to South East Asian economiesCompetition

to

low

value

good

producers

will

remain; blame

is

going

to

turn

to

others…

Export market share of R&D intensity Industries (aerospace, electronics, instruments, office machines and pharmaceutical)Source:

Fu et al. (2010)

and BBVA Research

%

0

5

10

15

20

25

30

35

Kore

a

US

Chi

na

Japa

n

EU27

Ger

man

y

Braz

il

Indi

a

Rus

sia

1997-2000

2001-2005

2006-2009

Export market share of high-tech industries(aerospace, office & computing equipment, communications equipment, drugs & medicines, scientific instruments, and electrical machinery)Source: OECD and BBVA Research

%

0

5

10

15

20

25

EU15 US

Chi

na

Japa

n

Kore

a

Mex

ico

2000 2008

Page

21

China to become a key FDI providerChina needs to diversify its hugely positive international investment position away from reserve assets to FDI and away from the developed world to the emerging world. This is a huge opportunity for Latin American economies. Furthermore, investment will also be gear to manufacture outside China and not only to extract commodities. Increasing cost of transportation also behind this.

-25

-15

-5

5

15

25

35

45

55

65

China Japan Germany-25

-15

-5

5

15

25

35

45

55

65

FDI Portfolio Derivatives Other Reserves Total

International Investment Position 2010(% of GDP) Source: BBVA Research and IMF

Opportunities for

LATAM:

beyond commodity

exports

• Huge increase

in middle

cass

in China and

higher

consumption to

GDP will

bring

about

huge

demand

for

consumer products

(and

not

only

commodities)

• China will use FDI to

cover

some

of

the

demand

of

the

rest of

the

world

in a decentralized

way

as Japan

and

Korea did. Huge

opportunitiy

for

countries

with

large

demand or

access

to

large

markets: Mexico

–

much

less

engaged with

China so far -

should

not

miss this

opportunity!• Finally

China also

has the

financing

muscle

to

help

Latam

finance its

huge

infrastructure

needs.

The New Global Order is Asian: Opportunities and risks for Latin America

Alicia García-Herrero

Chief

Economist

of

Emerging

Markets

BBVA Research

Oxford, February

17, 2012