79341079 hsbc tailwinds still stronger
TRANSCRIPT
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Macro
Global Economics
Q1 2012
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
ECONOMICS
Latin American
Tailwinds still stronger
than headwindsWe expect global headwinds to hit Latin America less severely than in 2008-2009;
growth in 2012 is forecast at 3.7%, below 2011s 4.2%
Stable commodity prices and strong domestic consumption mitigate potential damage
to growth prospects
Policy firepower across the region offers an important tailwind and Brazil, in
particular, is already moving aggressively to boost growth
By Andr Loes and the Latin America Economics Research team
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Key forecasts 2
Tailwinds still stronger thanheadwinds 3
Latin America at a glance 17GDP 18
Inflation 19
Exchange rates 20
Monetary policy rates 21
Industrial production & unemployment 22
Consumption & investment 23
Trade balance & current account 24
FDI & international reserves 25
External debt & remittances 26
Primary surplus & fiscal balance 27
Country profiles 29
Argentina 30
Brazil 33
Chile 36
Colombia 39
Mexico 41
Panama 44
Peru 46
Uruguay 48
Venezuela 50
Disclosure appendix 56
Disclaimer 57
Contents
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Key forecasts
Latin America: HSBC key forecasts
(%, y-o-y) LatAm Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela
Real GDP2010 6.3 9.2 7.5 5.2 4.3 5.4 7.6 8.8 8.4 -1.52011f 4.2 8.5 3.0 6.4 5.7 3.7 9.7 6.6 6.3 3.72012f 3.7 3.0 3.7 4.5 4.3 3.4 7.0 4.8 5.0 4.02013f 4.1 5.0 4.5 4.8 4.5 3.0 6.5 5.7 4.0 1.9
CPI (year-end)*2010 8.1 24.8 5.9 3.0 3.2 4.4 4.9 2.1 6.9 27.42011f 8.2 23.0 6.5 3.6 3.5 3.5 6.4 4.5 8.3 29.92012f 7.2 18.0 5.4 3.0 2.7 3.9 4.8 2.5 7.0 30.42013f 7.2 16.0 5.9 3.0 3.0 3.4 4.2 2.6 6.2 32.1Industrial production2010 7.8 10.3 10.4 0.5 5.0 6.0 3.7 14.1 3.5 -2.52011f 2.9 9.7 0.0 6.0 4.5 3.9 5.0 8.6 3.2 5.62012f 3.9 3.1 3.6 3.0 5.5 3.6 5.8 6.0 6.2 5.82013f 3.7 5.4 3.0 6.0 6.1 3.3 5.0 6.8 5.0 1.7Unemployment rate (year-end)2010 6.2 7.3 5.3 7.1 11.8 4.9 6.5 8.2 6.7 8.62011f 5.5 6.9 4.6 6.9 9.3 4.5 5.0 7.9 6.6 8.42012f 5.6 7.7 4.8 6.8 9.0 4.2 4.7 8.0 6.4 8.12013f 5.6 7.4 4.7 7.0 10.0 4.2 4.5 7.5 6.6 8.7Private consumption
2010 6.3 9.0 7.0 10.4 5.0 5.0 24.4 6.0 11.5 -1.92011f 5.4 8.9 4.4 10.2 6.2 5.0 16.5 6.2 9.1 3.12012f 4.7 3.6 4.3 6.0 3.6 5.1 11.3 5.2 5.7 7.52013f 4.5 4.8 5.5 5.0 4.0 2.7 8.5 5.8 4.3 1.8Current account balance (% of GDP)2010 -1.0 0.8 -2.2 1.9 -3.1 -0.5 -11.1 -1.5 -1.1 5.22011f -1.0 0.3 -2.2 -0.6 -3.6 -0.9 -14.0 -1.6 -0.2 9.82012f -1.4 0.0 -2.1 -1.2 -3.8 -0.9 -11.5 -3.3 -0.4 5.62013f -1.4 -0.3 -2.1 -0.8 -3.4 -1.0 -9.5 -3.6 -0.7 5.1International reserves (USDbn)2010 595.2 52.1 288.6 27.9 28.5 113.6 2.5 44.2 7.7 30.32011f 705.3 45.5 355.0 39.5 32.5 142.5 2.6 49.5 10.7 27.52012f 738.3 43.0 370.0 41.5 35.1 157.6 2.7 49.2 11.0 28.22013f 776.2 41.0 380.0 42.7 33.5 181.4 2.9 53.2 11.3 30.2Total fiscal balance (% of GDP)2010 -2.6 -0.8 -2.5 -0.3 -3.0 -2.8 -1.9 -0.6 -0.4 -7.6
2011f -2.2 -2.3 -2.2 1.2 -2.8 -2.5 -3.0 2.0 -0.3 -6.22012f -2.5 -1.8 -2.4 -0.5 -2.4 -2.4 -1.9 0.8 -0.2 -9.52013f -2.1 -0.9 -2.5 -0.8 -2.6 -2.0 -1.5 0.2 0.0 -2.5Exchange rate (vs USD, year-end)2010 n.a. 3.98 1.67 468 1920 12.37 1.0 2.82 19.90 2.6/4.32011 n.a. 4.30 1.88 520 1939 13.93 1.0 2.70 20.00 4.32012f n.a. 5.00 1.80 530 1800 13.20 1.0 2.68 19.50 4.32013f n.a. 5.65 1.90 530 1750 13.50 1.0 2.70 21.00 6.5Monetary policy rates (%, year-end)**2010 8.4 9.0 10.75 3.25 3.00 4.5 3.1 3.00 6.50 17.92011 8.8 9.0 11.00 5.25 4.75 4.5 2.0 4.25 8.75 17.02012f 7.7 9.0 9.00 4.50 5.00 4.5 2.6 3.75 8.00 16.52013f 8.0 9.0 9.00 4.50 5.25 5.0 3.1 3.75 7.00 18.5
* Average of consumer price indices from provincial statistical institutes used since 2007** For Panama, the values denote the deposit rate; for Argentina, the 1-day reverse repo rate, and for Venezuela, t he average lending rate informed by the Central Bank (BCV)Source: Central banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC
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2012 than in 2011, reflecting the fact that theeconomy had already slowed down significantly
in 2011 unlike other Latam countries and that
Brazilian policymakers have already responded to
the slowdown by cutting interest rates, reverting
part of macro-prudential tightening and
introducing tax rebates.
Venezuela is also likely to show slightly higher
growth in 2012 than in 2011 due to the stimulus
associated with the electoral year (presidential
elections will take place on 7 October 2012).
2012 vs 2008: a less sharpbut more protracted slowdown
Even as echoes of the 2008-2009 downturn are
heard, we do not expect most Latin American
countries to be hit as hard this time around as they
were during the 2008 crisis.
There are, of course, significant tail risks to our
scenario. Our growth forecasts for the region
would have to be lowered sharply if the
difficulties in sovereign bond markets in Europe
culminate in a rupture. But, in the absence of such
a tail scenario, we believe that the outlook for the
economy in Latin America is better than in 2008,
and we are confident that this is not another
example of economists being over-cautious in
incorporating tail risks into their scenarios.
Table 2 compares the loss of growth in the region
in the 2008-2009 financial crisis with what we
think will be the loss of growth during the currentglobal slowdown.
As usual, the peaks and troughs may be different
for each country. We limited the time span for the
peaks to the year 2008 in the case of the first
period considered, and to the year 2011 for the
current deceleration of growth. Peaks and troughs
are dated, for each country, in the table.
We conclude from the comparative analysis
that the average difference from peak to
trough is likely to reach 4.3% this year, much
less intense than the 10.5% decline during the
2008-2009 period.There are three reasons for
this, in our view.
First, we do not expect an event as disruptive as
the bankruptcy of Lehman Brothers that occurred
during the 2008 crisis. The shock event, and the
disorderly de-leveraging, wild reduction of
inventories, the large depreciations which
followed, all resulted in a sharp adjustment in
2008; most of these are either absent or much less
pronounced now. We also highlight that bothBrazil and Mexico experienced an aggravating
factor of the credit crunch back in 2008 namely,
excessive leveraging of companies on FX
derivatives which seems absent now.
Second, the pace of growth before the outbreak of
the 2008 financial crisis in some countries was
above potential GDP growth. When we look at the
current state of affairs, however, we see that most
Latin American economies are growing closer to
capacity, which means any decline would likelybe less severe.
Table 2. Loss of GDP growth in Latin America: During the current global slowdown, loss of growth maybe less intense than in 2008-2009
______________________ 2008-09 crisis_______________________ ______________Expected current financial crisis_____________________Peak _______ _____Trough______ ____Difference ____ ______Peak _______ _____Trough______ ____Difference ____
(%) Growth Quarter Growth Quarter In growth In quarters Growth Quarter Growth Quarter In growth In quarters
Argentina 8.5 2008-Q1 -0.8 2009-Q2 9.3 5 9.9 2011-Q1 1.5 2012-Q2 8.4 5Brazil 7.1 2008-Q3 -2.7 2009-Q1 9.8 2 4.2 2011-Q1 2.1 2011-Q4 2.1 3Chile 5.2 2008-Q3 -4.8 2009-Q2 9.9 3 9.9 2011-Q1 3.3 2012-Q2 6.5 5Colombia 5.5 2008-Q2 0.1 2008-Q4 5.4 2 7.7 2011-Q3 3.6 2012-Q1 4.1 2Mexico 2.5 2008-Q2 -9.6 2009-Q2 12.1 4 4.5 2011-Q1 2.8 2011-Q4 1.7 3
Panama 13.1 2008-Q2 1.9 2009-Q3 11.1 5 11.4 2011-Q2 6.7 2012-Q3 4.7 5Peru 11.7 2008-Q2 -1.2 2009-Q2 12.9 4 8.9 2011-Q1 3.5 2012-Q1 5.4 4Uruguay 10.2 2008-Q2 -0.1 2009-Q2 10.3 4 7.5 2011-Q3 3.7 2012-Q3 3.8 4Venezuela 7.8 2008-Q2 -5.8 2009-Q4 13.6 6 4.8 2011-Q1 2.5 2012-Q4 2.2 7
Source: HSBC and Datastream
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In some cases, natural disasters resulted in a 2011
peak that was higher than in 2008. In Chile, the
strong growth peak in 1Q 2011 reflected the low
base in 1Q 2010, when the country experienced a
severe earthquake. In Colombia, the higher-than-
expected pace of 3Q 2011 GDP growth partially
reflected a shift in production that had been
expected to take place during 1H, due to floods
the country endured in the beginning of 2011.
Third, Latin Americas pace of growth at the start
of 2011 was strong and, in many countries,
inflation was the most pressing problem (seeLatin
America Economics Quarterly Q2 2011: An
inflation heat map). As a result, many counties
tightened policy during 1H 2011.
This was the case in Brazil, where monetary
policy was tightened through a total 175bp hike in
the policy rate from January to July, and macro-
prudential measures were implemented, intended
to curb the growth of consumer credit. Fiscalpolicy was also tightened, and to a larger extent
than we had expected. In Chile, tightening was
also impressive. While there was no
unconventional tightening, the policy rate was
hiked 475bp from June 2010 to June 2011, with a
total 2011 fiscal tightening of 1.5% vis--vis the
2010 fiscal stance.
In this sense, while the external backdrop played a
part in the slowdown observed in 2011, we
believe it is fair to say that policy tightening,implemented to curb inflationary momentum, also
played a role.
The comparative analysis also suggests that the
length of the slowdown that began in 2011
could be more protracted than that of 2008.
This appears to be a logical consequence of the
low growth that is expected for a considerable
period of time in developed economies. Indeed,
even though domestic consumption in many Latin
American countries remains fairly robust,
exposure to the rest of the world presents varying
degrees of risks for the region. The figures in
Table 2 are useful to assess the risks to our
country-by-country 2012 growth forecasts.
The global slowdown transmits to local
economies through concrete channels such as
lower export growth and reduced external
financing, as well as more subjective ones, like
consumer and business confidence.
We analyzed the impact of the following factors
on Latin American economies:
Trade links: the degree of exposure to the
global economy, through trade links and
openness.
Financial links: the extent of financial ties to
European banks and reliance on external
financing.
Policy firepower: the capacity and
willingness of governments to cushion the
slowdown with the use of economic policies.We analyzed monetary, fiscal, and currency
policy aspects.
Trade links
Softer growth abroad means lower export growth
for Latin American countries, and a negative
impact on output of the export chain.
In 2012, this may be more worrisome for the
countries of the southern cone of South
America. Europe is an important destination for
their exports, consistently accounting for around
20% of total exports over time, as shown in Table
3. However, as most of this regions exports to
Europe are commodities, slowing European
demand could translate into a commodity price
problem, which may be partially cushioned by the
solid growth HSBC still forecasts for China.
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z90VaNSRq7&n=295535.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z90VaNSRq7&n=295535.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z90VaNSRq7&n=295535.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z90VaNSRq7&n=295535.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z90VaNSRq7&n=295535.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z90VaNSRq7&n=295535.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=z90VaNSRq7&n=295535.PDF -
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In a scenario of a prolonged cooling of average
global growth, an analysis considering more
permanent negative effects is required.
Accordingly, the relative impact of reduced growth
in exports for each country of the region should
reflect the degree of openness measured by the
sum of exports and imports as a percentage of GDP
as well as the share of primary goods of GDP,
given the greater sensitivity of commodity prices to
the global cycle.
Chart 1 shows the degree of openness and the
share of the primary sector of GDP for each
country of the region.
Chart 1. Openness and primary sector*/GDP, by country
Venezuela
UruguayPeru
Mexico
Colombia
Chile
Brazil
Argentina
10%
30%
50%
70%
5% 10% 15% 20% 25% 30% 35% 40%
Primary sector/GDP (2009)
Openness(2011f)
30%
60%
90%
120%Panama (RHS)
Venezuela
UruguayPeru
Mexico
Colombia
Chile
Brazil
Argentina
10%
30%
50%
70%
5% 10% 15% 20% 25% 30% 35% 40%
Primary sector/GDP (2009)
Openness(2011f)
30%
60%
90%
120%Panama (RHS)
* Primary activities plus utilities
Source: UNCTAD, Foreign trade departments and HSBC
As expected, the four Andean countries (we
include Chile in this category) are quite exposed
to the production of commodities, and three of
them Chile, Venezuela, and Peru could be
considered open economies. These three countries
would fit the textbook definition of small, open,
commodity-exporting economies. In this sense,
from a trade perspective, their growth is likely
more vulnerable to a further worsening of the
international situation, especially if it translates
into lower commodity prices.
Looking at Chart 1, we see that Colombia is a
more closed economy than we would have
expected. Furthermore, domestic consumption
households plus government accounts for a
more important part of the countrys GDP than itdoes in the above-mentioned countries, as shown
in Chart 2. This suggests that from a trade
perspective, Colombia is relatively more shielded
from the external crisis.
Heading south, both Brazil and Argentina are not
particularly open economies Brazil is a pretty
closed one. Brazil also shows a low share of the
primary goods segment of GDP, with its
important industrial base and a large services
sector diluting the weight of the commodities
segment. Despite the strong correlation between
commodity prices and the BRL, the country is far
from a commodity-dependent economy, and the
impact of foreign trade-related developments on
growth likely should be mild.
Table 3. Exports for the European Union are important for the South American southern cone countries (% of total)
to: _____________ China________________ _________________US__________________ ______________EU _______________Exports from: 1995 2000 2005 2010 1995 2000 2005 2010 1995 2000 2005 2010
Argentina 1.4 3.1 8.0 10.2 8.6 12.1 11.6 5.6 21.9 18.2 17.4 17.4Brazil 2.6 2.0 5.9 15.5 19.0 24.7 19.6 9.8 29.0 28.4 23.3 21.8Chile 1.8 5.1 12.0 25.8 13.6 16.7 16.6 10.8 27.6 25.7 24.0 18.6Colombia 0.4 0.2 1.1 4.9 35.6 50.4 41.8 43.1 25.0 13.9 13.4 12.6Mexico 0.0 0.2 0.5 1.4 83.5 88.2 85.8 80.1 3.9 3.5 4.3 4.9Peru 6.4 6.4 10.9 15.5 17.2 28.0 30.7 16.4 30.7 22.0 17.3 17.8Uruguay 5.9 4.0 3.5 15.5 6.0 8.3 23.2 3.2 21.2 16.3 17.6 22.1
Venezuela 0.1 0.2 1.4 9.5 53.5 57.5 59.9 50.2 10.1 6.5 8.6 7.2Latin America 1.1 1.1 3.6 9.0 46.7 59.7 51.8 40.8 16.7 11.8 12.7 12.7Latam (ex-Mexico) 1.7 2.0 5.5 13.0 25.3 32.8 29.9 19.8 24.1 19.6 18.2 16.9
Source: UNCTAD 2010.Calculations: HSBC
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Chart 2. Consumption expenditure (households andgovernment) is high in Latin America (% of GDP, as of 2009)
84%81%
79% 78% 77%75%
73% 73%
59%
50%
60%
70%
80%
90%
BRA URU COL MEX VEN PER ARG CHI PAN
Source: UNCTAD and HSBC
In Argentina, the relatively low share of primary
activities in its GDP seems to belie the importance
of the commodities segment. A significant part of
the industry is related to agribusiness, and the
wealth effect of commodity prices is significant.
Thus, though less exposed to a deterioration of
trade dynamics than the Andean countries, we
may expect more than just a mild impact in the
case of further deterioration.
Mexico is not particularly dependent on primary
activities although its fiscal revenues could
suffer from any reduction of oil prices. This
characteristic is also seen in the breakdown of its
exports, which are mainly comprised of
manufactured goods. Mexico is a very open
country, but its trade is directed to a single export
destination, the US, which absorbs close to 80%of its total exports. In this sense, any negative
impact from international trade would only be
material if it affects US GDP growth.
Panama possesses the characteristics one would
expect in a small country that is a financial and
transportation hub: a very open economy with low
participation of primary activities in its GDP. Its
growth may suffer from a reduction in trade
volumes, as this would affect the revenues of the
Panama Canal.
Uruguay surprises with a low primary sector-to-
GDP ratio, as the economy is not as open as one
would expect of such a small country. The
country seems more shielded from external trade
than expected, but the dynamics of growth on
neighboring Brazil and Argentina which
together account for almost 30% of Uruguayan
total exports could transmit to its own growth.
Financial ties: bank funding
and FDILatin America has a current account deficit, so
potential damages to external financing have to be
closely monitored, as they may translate into
limitations on growth.
The most pressing financial implication from the
cooling down of the world economy for Latin
America relates to the importance of European
banks as a source of international credit lines for
the region.
According to estimates detailed in our report
published on 12 December 2011 (Andre Loes, et
al.,Latin America Economics: European banks
funding: Don't panic, but keep a watchful eye),
external funding originating from European banks
accounted for more than 40% of total bank
funding for the region as of June 2011, the most
recent available data from the BIS.
Chart 3 shows the amount of external fundingfrom European banks for different countries of the
region, as a percentage of both their exports and
reserves. While the exposure overall looks
manageable, it is worth highlighting that Chile
and Uruguay look more exposed to a non-renewal
of these external lines than the other countries.
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=JTtCC7RjRD&n=316130.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=JTtCC7RjRD&n=316130.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=JTtCC7RjRD&n=316130.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=JTtCC7RjRD&n=316130.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=JTtCC7RjRD&n=316130.PDF -
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Chart 3. Exposure to European funding is significant butlooks manageable (June 2011)
0%
20%
40%
60%
80%
ARG BRA CHI COL MEX PER URU VEN
European international claims/ex ports
European international claims/Reserv es
Source: UNCTAD, BIS, Central banks and HSBC
In 2008, total external funding for the countries of
the region fell 10-20%, from peak to trough. When
the contraction of lines was more pronounced, most
lines coming due were not renewed, implying a
significant rise in the cost of trade finance. Market
participants suggest that this has already been
occurring over the past couple of months, with the
cost of lines rising up 50-60bp over this period.
Alternative sources of USD-denominated funding
are already coming into play, such as an expanded
supply of lines from banks of other regions, as
well as regional development banks. Yet, we
believe that the cost of USD external funding may
remain higher than typical for several quarters to
come, with adverse effects for the exports of the
region. The possibility of a sale of local
subsidiaries of European banks with the
corresponding repatriation flows may also be a
threat to the stability of the currencies in less liquid
FX markets.
Other than the more immediate risk of a prolonged
period of de-leveraging from European banks,
other types of capital flows may also be affected, as
the risk-on, risk-off scenario remains. We have
already seen a significant reduction in Latin
America corporate bond issuance in international
markets, as well as the postponement of IPOs.
Foreign direct investment has so far, however,
been resilient. This is important for the external
financing of the region, as FDI has been more
than enough to compensate for the regional
current account deficit, and we forecast it will
continue to cover the external deficit of the region
over the next several years.
This resilience of FDI inflows, even during a
period of low growth in developed markets, is
partially due to the existence of long-term projects
that demand significant equity participation in the
region some already underway such as mining
projects in the Andean countries, oil in Brazil and
Colombia, and infrastructure in Brazil and
Panama. While some of these projects are
vulnerable to weakness in commodity prices, the
nature of the investments is long term, and their
economics are very attractive even at somehow
lower commodity prices. Chart 4 shows the
regions current account deficit, net FDI, and the
ratio of net FDI to current account deficit.
Chart 4. Net FDI (USDbn) has been more than enough tofinance the current account deficit (USDbn)
-50
0
50
100
150
2006 2007 2008 2009 2010 2011f 2012f 2013f
-5
-2
1
4
7
FDI (USDbn) Cur. a/c def (USDbn)
FDI/Cur. a/c def (RHS)
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Officeof the Republic of Panama, National Statistics Institutes, HSBC estimates
It is also important to highlight the absence of any
relevant currency mismatch in the region
currently. This is a key difference vis--vis the
2008 crisis, when, in Brazil and Mexico,
companies were highly leveraged in FX
derivatives, typically with large, net-long local
currency positions. This positioning magnified the
currency depreciation beyond the levels which
would be justified by the mere negative impulse
coming from the external crisis which was
already significant.
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Policy firepower, andgovernments eager to use it
Developed economies may have entered an
economic permafrost that could easily last a
decade. Yet, Latin America should be able to
mitigate the effects of this more prolonged period
of economic slowdown.
Our emerging markets strategy team has calculated
a useful policy flexibility index (Pablo Goldberg,
What if 2008 happens again?12 October 2011),
reproduced in Table 4. It combines different
indicators denoting the capacity of policy response
of the most important emerging markets, as
detailed in the note to the table.
Among the six Latam countries included in the
comparison, Brazil, Chile, and Colombia rank
well, while Argentina, Mexico, and Venezuela
rank less favorably. Regarding the less favored
countries, it is worth adding some comments andcaveats for Argentina and Mexico.
In Argentina, while the capacity of the country to
respond to external shocks with policy action has
been declining over the past couple of years, we
believe it should have declined even more,
considering the current situation vis--vis the time
when the index in the table had been estimated
September 2011.
The strong capital flight and the lacklustre growthin ARS-denominated deposits related to it during
most of 2H 2011, have led to a rise in the interest
rate on deposits, whereas the governments fiscal
action has been limited by the move to reduce
energy and transportation subsidies. As a result,
we believe that Argentina should rank worse in
terms of policy flexibility than what it is
suggested by the index in Table 4.
In the case ofMexico, it is the other way around.
If we consider the USD72bn flexible credit line
the country has with the IMF immediately
available and recently renewed Mexico should
rank way better than it does in Table 4. The policy
flexibility index provides the highest weight in its
composition (25%) to the import coverage ratio.
Reserves reduce potential
overshooting
On the strengths of the region, we start by noting
that international reserves are at robust levels. In
some countries, reserves are far above their levels
of September 2008, the outbreak of the globalfinancial crisis.
While we expect the majority of Latin American
central banks to let currencies float in the event of
more pronounced global risk aversion, having
high levels of international reserves is a positive,
in our view. When markets seize up, overshooting
may occur, and the ability to intervene in the
currency markets may alleviate the potential for
an economic slowdown beyond the intensity
explained by the initial external shock.
Good enough fiscal accounts
Regarding fiscal policy firepower, on an
aggregate level, government finances in Latin
American countries are good in absolute terms,
despite an unambiguous deterioration when
compared to the pre-2008 period. Chart 5 shows
the primary and total fiscal balance for the region.
The usual national discrepancies apply here.While most of the countries in the region kept
their fiscal deficits low enough to allow the
necessary capacity of response despite the
above-mentioned worsening some underwent a
more pronounced deterioration. This is the case in
Venezuela, where the fiscal deficit climbed to
relatively high levels; we expect it to reach 9.5%
of GDP in the 2012 electoral year, compared to an
average below 3% of GDP up until 2008.
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=xqIWSlyvqf&n=310201.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=xqIWSlyvqf&n=310201.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=xqIWSlyvqf&n=310201.PDF -
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Chart 5. Primary and total fiscal balance (both as % of GDP)for Latin America
-4
-2
0
2
4
2006 2007 2008 2009 2010 2011f 2012f 2013f
Primary fiscal balance Total fiscal balance
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office
of the Republic of Panama, National Statistics Institutes, HSBC estimates
In Argentina, we also see a more pronounced
fiscal deterioration. The mild worsening of the
overall fiscal balance masks a more marked
deterioration of the quality of the result with a
growing reliance on non-traditional sources of
revenue, such as the reserves of the BCRA and
the gains of the nationalized pension system.
With inflation finally slowing downThe capacity for policy response in the region
seems more significant at the monetary, rather
than fiscal, policy level. While policy interest
rates are lower than at the end of 2008 when the
region began its last monetary easing cycle
inflation is also lower in most parts of the region,
and it clearly lost momentum vis--vis the
strength shown in the beginning of 2011.
Brazil, Chile, Colombia, Mexico, Peru, andUruguay currently follow an inflation-targeting
regime (Argentina, Panama, and Venezuela do
not). Most of these inflation-targeting countries
currently have inflation either close or converging
to their midpoint target, and HSBCs 2012
inflation forecasts project the continuation of this
trend. Peru and Uruguay are exceptions.
Table 4. Policy flexibility index by component most Latin American countries rank reasonably well
_ Stock of FX reserves_ _ Fiscal balance __ Public debt/GDP _ __Nominal rates __ Residual inflation concerns Ability Policy FlexibilityMonths of
import cover z-score % of GDP z-score % z-score % z-score %
z-scoreto floatz-score
Index, latest
China 23.3 2.3 -1.6 0.3 26.9 0.9 6.6 0.0 -0.3 0.7 0.6 1.00Russia 22.0 2.1 -1.1 0.4 11.7 1.6 8.3 0.5 0.5 0.3 -0.2 0.78Taiwan 20.2 1.7 -3.2 -0.2 35.4 0.5 1.9 -1.2 1.0 0.0 1.1 0.60Brazil 20.0 1.7 -2.5 0.0 65.0 -1.0 12.0 1.4 1.1 0.0 0.6 0.50Kazakhstan 14.2 0.7 1.8 1.3 12.9 1.6 7.0 0.1 0.3 0.4 -0.6 0.50Ukraine 6.2 -0.7 -2.8 -0.1 39.3 0.3 7.7 0.3 -5.3 3.3 -1.3 0.42Korea 7.9 -0.4 2.1 1.4 32.0 0.6 3.3 -0.8 0.4 0.3 0.5 0.30Colombia 9.3 -0.2 -3.0 -0.2 35.9 0.4 4.5 -0.5 -1.3 1.2 0.2 0.29Chile 4.1 -1.1 1.4 1.2 10.5 1.7 5.3 -0.3 0.0 0.5 0.3 0.25
Israel 15.1 0.8 -2.8 -0.1 71.1 -1.3 3.3 -0.8 0.4 0.3 0.6 0.23Singapore 8.6 -0.3 3.2 1.8 93.5 -2.4 0.5 -1.5 0.2 0.4 0.8 0.15Thailand 11.6 0.2 -2.6 0.0 43.0 0.1 3.5 -0.8 1.5 -0.2 0.6 0.09Philippines 12.9 0.4 -2.9 -0.1 44.4 0.0 4.5 -0.5 0.8 0.1 -0.1 0.08Indonesia 8.0 -0.4 -1.8 0.2 25.2 1.0 6.8 0.1 1.5 -0.3 0.2 0.00Malaysia 9.1 -0.2 -5.1 -0.8 55.1 -0.5 3.0 -0.9 -0.2 0.6 0.2 -0.07South Africa 7.4 -0.5 -4.3 -0.6 36.9 0.4 5.5 -0.2 0.8 0.1 0.4 -0.08Argentina 11.6 0.2 -2.0 0.1 43.3 0.1 10.6 1.1 2.2 -0.6 -0.4 -0.09Mexico 5.0 -1.0 -3.2 -0.2 42.9 0.1 4.5 -0.5 0.9 0.1 0.5 -0.18Venezuela 11.5 0.2 -3.5 -0.3 30.5 0.7 14.5 2.1 4.2 -1.7 0.3 -0.18Hong Kong 7.7 -0.5 2.5 1.5 31.6 0.6 0.5 -1.5 4.4 -1.8 0.6 -0.23Hungary 6.9 -0.6 2.0 1.4 76.1 -1.5 6.0 -0.1 0.9 0.1 -0.8 -0.26Turkey 4.4 -1.1 -0.9 0.5 40.3 0.2 5.8 -0.2 2.6 -0.8 -0.4 -0.47India 12.0 0.3 -8.0 -1.7 64.9 -1.0 8.3 0.5 2.8 -0.9 -0.3 -0.55Poland 6.0 -0.8 -5.5 -0.9 56.0 -0.6 3.5 -0.8 1.3 -0.1 -0.6 -0.59Egypt 7.7 -0.5 -9.0 -2.0 73.3 -1.4 9.8 0.8 0.5 0.3 -0.8 -0.61
Vietnam 2.2 -1.4 -7.0 -1.4 51.5 -0.3 14.0 1.9 1.9 -0.5 -1.2 -0.86Pakistan 5.2 -0.9 -6.5 -1.3 57.6 -0.6 13.5 1.8 4.5 -1.8 -0.9 -1.02
Note: Policy flexibility index ranks countries on six c ategories (weights between parenthesis): 1. reserves import coverage (25%); 2. fiscal balance (15%); 3. debt-to-GDP ratio (10%); 4. nominal interest rates (5%); 5. forecast inflationminus inflation target (25%); 6. abilit y to float the currency (20%) (net public external debt, hard currency loans as % of total bank loans; food and energy share in CPI).Source: HSBC, IMF, Bloomberg
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While in Peru the trend seems less concerning, as
it is mainly explained by food inflation, in
Uruguay, resilient demand-driven inflation does
not seem to allow for convergence to the target, so
far. Chart 6 shows the gap between inflation and
the midpoint of the national targets.
Yet, inflationary momentum has clearly lost steam
across the region when compared to the beginning
of 2011. As depicted by our inflation heat map,
shown in Chart 7 an exercise intended to gaugethe momentum of inflation most Latin American
countries are currently witnessing either stable or
decelerating inflation momentum.
Chart 6. Inflation looks manageable relative to targets
-7
-3
1
5
2007 2008 2009 2010 2011
BRA CHI COL
MEX PER URU
Source: Central Banks, Datastream, HSBC
This is understandable, as this period has
witnessed soft economic activity numbers,
particularly in the bigger economies, curbing
demand-pull inflationary pressures.
One possible limitation to monetary policy action
could arise from the recent depreciation of most
of the Latin American currencies. As shown in
Chart 8, depreciation has been particularly strong
in Brazil (BRL), Mexico (MXN), and Chile
(CLP). While the maturity of the monetary policy
regimes and lower FX volatility have led to
reduced pass-through from depreciation to
inflation in Latin America over time, countries
where inflation expectations are less anchored at
this time may experience more pass-through than
others this is the case in Brazil and Argentina.
Latam countries seem ready to pull
the policy trigger
Despite residual inflation concerns in some of the
countries of the region, the international backdrop
has resulted in governments worrying more aboutgrowth than inflation. Thus, barring Argentina,
Chart 7. Inflation heat map showing weaker inflationary momentum than in 1H 2011
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Uruguay
Venezuela
Deceleration Strong acceleration Stable inflationModerate deceleration Moderate acceleration
2008 (from April) 2009 2010 2011 (till November)
Methodology: We analyze the development of five different monthly inflation measures: Headline CPI, C ore CPI, PPI, international food inflation ( measured by CRB food) and international oil inflation (measured by the simple
average of Brent, WTI and Dubai). The inflation indices are seasonally adjusted and t he 3m/3m growth rates are calculated. For oil and food prices we convert the values in local currencies. Z-score for each inflati on indicator is
calculated using the formula: Z = (x - ) /; where x is the current value, is the 24-month moving average and is the 24-month moving standard deviation. Source: HSBC estimates
Chart 8. Strong FX movements in 2H11 (%)
-5
05
10
15
20
25
ARS BRL CLP COP MXN PEN URU
Depreciation btw 30th June & December 28, 2011
Source: Datastream, HSBC estimates
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for which some of the limitations to
countercyclical policy action have already been
discussed, and Uruguay, where a stubborn
inflationary problem has led the BCU to tighten
monetary policy at the very end of 2011 and keep
a cautious stance on fiscal policy, the other
governments in the region seem more keen to pull
the trigger on their policy tools should they need
to. In fact, some have already done so.
Brazil was the early mover, and is proving themost keen to ease. The BCB began alleviating
monetary policy during 3Q 2011 through a
traditional rates mechanism and macro-prudential
measures. We expect the monetary policy
committee to apply a further 200bp cut, bringing
the rate to 9% by May 2012.
On the fiscal side, despite the announced intention
of the government to blend policy action in a way
that tight fiscal policy provides room for increased
monetary easing and the impressive fiscal
tightening of 2011 we believe the need to re-
accelerate the growth of infrastructure investment
will lead to some relaxation of fiscal policy in
2012. We may then see Brazil showing a
combination of significant easing in monetary
policy with a slight easing of fiscal policy.
Other countries have not yet started to ease, but
we may see it happening soon. We expect Chile
to follow in Brazils footsteps and begin to cutrates in the very beginning of 2012, for a total
movement of 75bp in 1Q 2012. While fiscal
accounts may deteriorate a little in 2012, we
would expect this to be more the result of political
pressure for more education-related spending and
some weakness on the revenue side. In the case of
additional worsening of the global economy, the
lions share of the countercyclical burden may fall
on the shoulders of the BCCh.
Peru may cut rates 50bp in 2012, but we also think
it is likely that the fiscal surplus eases to 0.8% of
GDP (from 2.0% in 2011), as revenues soften on
the back of a less-upbeat commodity cycle and
expenses increase with the introduction of more
social programs.
In Venezuela, the equation is simple. President
Chavez is expected to seek re-election next October,
and this time he or his party candidate, if he
decides not to run may face a more split electorate.
In a country where institutional limitations are
almost nonexistent, we may expect aggressiveeasing measures provided that oil prices are
supportive, which is HSBCs base-case scenario.
Monetary easing has been applied in 2H 2011
with the lowering of the reserve requirement
ratios, and fiscal spending should accelerate in
2012, reinforcing the push provided in 2011 by
the massive governmental housing program.
While we expect this to translate into higher
inflation and the need for a managed devaluation
of the VEF, we do not expect this to be addressed
before 2013, after the elections.
We expect Colombia, Mexico, and Panama to be
in less of an easing mood, even if they are not
restricted in their policy actions.
Colombia is still struggling to contain strong
domestic demand, and had surprised with a 25bp
hike of its policy rate at its last meeting in
November. The current monetary policy stance is
stimulative, as the real interest rate remains below
what is considered the neutral level.
This, coupled with a pace of GDP growth which
we believe will only gradually converge down to
potential GDP growth during 2012, may lead to
stability in the rate, as well as a fiscal stance that
should be even tighter in 2012 than in 2011,
boosted by the financial results of national oil
company Ecopetrol.
In Mexico, growth forecast at 3.4% for 2012 also
means activity slightly above potential GDP
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growth. While the strength of domestic demand is
less pronounced than in Colombia, increased
exporting capacity has been supported by
increasingly competitive USD-denominated unity
labor costs, as shown in Chart 9.
As the recent depreciation of the MXN may
translate into some additional inflation, we see
Banco de Mexico staying on hold, as well as a
neutral fiscal impulse in 2012 we forecast a
2012 fiscal deficit practically at the same level asin 2011. Given its strong correlation with the US
economy, the Mexican policy approach is
naturally less domestic-driven than in Colombia,
for instance. In this sense, a more marked
deterioration of US economic activity could
prompt some policy easing in Mexico, mostly
through monetary easing.
Chart 9. Mexican labor costs matching Chinas (USD/hour)
0
1
2
3
4
2002 2003 2004 2005 2006 2007 2008 2009 2010
China (a) Mexico (b) (b)/(a) in %
Source: Banco de Mexico
Being a dollarized economy, Panama has limited
firepower in monetary policy, though some
remains, as it can manage reserve requirements,
for example. Fiscal policy, the countrys main
policy tool, is expected to contribute negatively to
growth in 2012. Fiscal policy will need to be
tightened, first, due to the 2011 peak in inflation,
and, second, due to compliance with the fiscal
responsibility law, which imposes a 2.0% limit on
the fiscal deficit in 2012.
Putting our 2012 GDP growthcalls in perspective
As we noted in the beginning of this report, the loss
of growth we expect to see in Latin America during
the current global slowdown is likely to be less
intense than that experienced in 2008-2009.
Having already discussed the trade and financial
links of the region to the global economy, as well
as the capacity and willingness of the countries to
use their policy firepower to respond to the
current slowdown, it is worth assessing our 2012
GDP growth calls in light of these aspects.
Chart 10 presents an extract of Table 2, depicting
the differences, from peak to trough, of the pace
of GDP growth for each country in 2008-2009, as
well as the difference we forecast for the current
slowdown. The timing of the peaks and the
troughs may differ from country to country for
both periods examined.
Chart 10. GDP loss in Latam: better now than in 2008-2009
0
3
6
9
12
15
VEN MEX BRA PER URU PAN CHI COL ARG
Loss of growth in 2008-09 Expected loss of growth in 2011-12
Source: HSBC and Datastream
The intensity of the loss of growth forecast for
Chile, Colombia, Panama, Peru, and Uruguay
looks easy to understand. The forecasts
generally represent a reasonable fraction of what
occurred during the 2008 financial crisis
roughly between one-third and two-thirds of the
growth loss of 2008-2009. Some of thesecountries have economies that are strongly
correlated with primary activities, which means
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they are more exposed to the global cycle.
However, HSBCs house view is that commodity
prices should hold up well even if our forecasts
are less upbeat than in the recent past as China,
the commodity buyer of last resort, should keep
growing at a healthy 8.5% pace in 2012.
The other four countries Argentina, Brazil,
Mexico, and Venezuela which are at the
extremes in Chart 10, merit some explanation.
The loss of growth we expect during the currentslowdown is either more or less of the same
magnitude as that experienced in 2008
(Argentina), or else a very small fraction of it
(Brazil, Mexico, and Venezuela).
In Argentina, the country is in worse shape
entering the current slowdown than it was during
the 2008 crisis. We are already seeing a
significant deterioration of the fiscal result and an
intensification of capital flight, which is implying
a deceleration of growth and, at the same time, is
severely reducing the policy firepower of the
country. The situation in 2008 was better.
In the case ofVenezuela, the main difference
between the two periods is the price of oil. As we
do not expect the price of oil to collapse this time
as it did in 2008 the capacity to use policy
tools to respond counter-cyclically is present.
And, in our view, the government will not shy
away from using these tools during the electoralcampaign in 2012.
Brazil and Mexico, the power houses of the
region, deserve a more detailed explanation.
Brazil
Brazil has been an early mover into slowdown
mode. Facing very strong inflationary momentum
at the onset of 2011, the new Dilma Rousseff
administration adopted a strong tightening bias to
policy. Monetary policy was tightened via a
175bp hike in the policy rate from January to July
2011, while macro-prudential measures, intended
to curb the growth of consumer credit and
implemented by the previous administration in
December 2010, continued to be applied
throughout the year, and have only recently
started to be reverted.
Fiscal policy has also been tightened, and to a
larger extent than we expected. The year 2011
may have closed with a tightening of around 1.3%
of GDP in fiscal accounts, a result of tighter
controls on current spending, the postponement ofinfrastructure spending originally budgeted for
2011, and higher-than-expected fiscal revenues.
This strong combination of tightening has been
reinforced since the end of 2Q 2011 by an
industrial recession. The industrial sector, already
suffering from a combination of an appreciated
currency and rising labor costs, has received an
additional hit from the exports side, with the more
marked slowdown of developed economies. The
result has been a contraction of industrial activity
which apparently only started to revert at the end
of the year. Looking at Chart 11, which shows
Brazil HSBC PMI, one sees how significant the
split between manufacturing and services sector
dynamics in Brazil has been recently.
In this sense, while the external backdrop played a
part in the slowdown observed in 2011, it is fair to
say that the deceleration of the Brazilian economy
a very closed one, as shown in Chart 1 hasbeen partly self-inflicted, as a result of a necessary
cooling of the economy induced by policy to tame
a dangerous inflationary push. Going forward, we
expect policy easing to be significant, and we
believe this stimulus may be effective in
countering the headwinds coming from the
external conditions.
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Chart 11. Brazil HSBC PMI shows poor industry dynamics
35
40
45
50
55
60
Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11
PM I Manufacturing PM I Serv ic es
Source: HSBC and Markit
Last but not least, the leveraged conditions that
prevailed in the Brazilian corporate sector in 2008
and which amplified the credit crunch coming
from abroad are absent today.
All these points combined explain why we expect
Brazil to lose only 2.1% in its pace of growth,
from peak to trough, during the current global
slowdown, vs the deceleration observed in the
2008-2009 crisis, which was been much more
pronounced, at 9.8%.
Mexico
We expect Mexico to maintain its economic
resilience and expand 3.4% in 2012, a good
defensive position to face the current slowdown.
It is worth noting that this projection, although
lower than the expected 3.7% economic activity
rate in 2011, is above the potential GDP growthrate, which we estimate at 3.0%.
We project this above-potential economic growth,
even in the face of a moderate US economy growth
rate, for four main reasons. First, we cite
strengthening domestic demand, which has been
presenting good results for retail sales, and strong
3Q11 consumption growth of 5.2%. We expect
these dynamics to continue with the injection of
election-related spending in 2012 and better
consumer confidence levels.
Second, Mexican exports have beengaining
market share in US imports, as well as
diversifying exports to other countries. We are
optimistic that this trend will prevail given the
competitiveness of Mexican manufacturing labor
costs. In particular, Mexico currently enjoys a 5th
place ranking among auto exporters in the world,
and prospects are promising with estimates of
production increasing as much as 50% in the
coming years.
Third, the automatic stabilizers, the real interest
rates and the real exchange rate, have been
moving in the right direction to support the
economy in the face of the slowdown. In effect,
real interest rates have remained low, between 0%
and 1%, and the real exchange ratehas
depreciated above 20% over the past few months,
although we expect some appreciation in 2012.
Fourth, Mexico enjoys a sound macroeconomic
framework with strong international reserves,
including resources from the IMF flexible credit
line, close to 20% of GDP; a low fiscal deficit at
2.4% of GDP; and a low public sector debt-to-GDP
ratio of 36%, of which only one-fourth is external.
In sum, during 2011, favorable conditions
prevailed such as economic growth above
potential GDP growth, loose monetary conditions
because of low interest rates and a depreciated
real exchange rate and the US economys beingresilient and avoiding recession. In 2012, we
expect less favorable conditions such as slightly
weaker though still above potential GDP growth;
some real exchange rate appreciation, although
still-loose monetary conditions with low interest
rates; and some deceleration in US GDP growth.
Under these growth conditions in 2011 and the
prospects for 2012, we do not see the need for the
central bank to stimulate further the economy by
loosening its monetary policy stance. Our view is
that monetary policy will remain on hold for an
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extended period of time, and that the bank will be
vigilant in curbing inflationary pressures coming
from the pass-through to inflation fromexchange
rate moves and the closing of the output gap.
These conditions of healthy economic growth,
even in the absence of monetary policy stimulus,
provide support to our view that Mexico will lose
only 1.7% of its pace of growth, from peak to
trough, during the current global slowdown, vs a
loss of 12.1% in 2008-2009.
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Latin Americaat a glance
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Real GDP (annual)(%, y-o-y) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 5.4 5.7 4.3 -1.7 6.3 4.2 3.7 4.1Argentina 8.5 8.7 6.8 0.9 9.2 8.5 3.0 5.0Brazil 4.0 6.1 5.2 -0.3 7.5 3.0 3.7 4.5Chile 4.6 4.6 3.7 -1.7 5.2 6.4 4.5 4.8Colombia 6.7 6.9 3.5 1.5 4.3 5.7 4.3 4.5Mexico 5.2 3.3 1.2 -6.1 5.4 3.7 3.4 3.0Panama 8.5 12.1 10.1 3.2 7.6 9.7 7.0 6.5Peru 7.7 8.9 9.8 0.9 8.8 6.6 4.8 5.7Uruguay 4.7 7.2 8.7 2.0 8.4 6.3 5.0 4.0Venezuela 9.9 8.8 5.3 -3.2 -1.5 3.7 4.0 1.9
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
GDP growth forecasts by country (%, y-o-y) Latin America GDP growth data and forecasts (%, y-o-y)
-2
3
8
13
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
-2
0
2
4
6
8
2006 2007 2008 2009 2010 2011f 2012f 2013f
LatAm
Source: HSBC estimates Source: HSBC estimates
Real GDP (quarterly)
_______________2010 _______________ _______________2011 ________________ ______________ 2012________________(%, y-o-y) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Qf 1Qf 2Qf 3Qf 4Qf
Latin America 6.3 7.7 6.1 5.3 5.3 4.2 4.1 3.2 3.1 3.4 3.9 3.9Argentina 6.8 11.8 8.6 9.2 9.9 9.1 9.3 6.0 3.6 1.5 2.9 4.1Brazil 9.3 8.8 6.9 5.3 4.2 3.3 2.1 2.2 2.4 3.4 4.2 3.5Chile 1.7 6.4 6.9 5.8 9.9 6.6 4.8 4.5 4.2 3.3 4.3 6.2Colombia 4.0 4.7 3.3 5.1 4.7 5.1 7.7 5.3 3.6 4.0 3.6 5.9Mexico 4.5 7.6 5.1 4.4 4.5 3.2 4.5 2.8 3.4 3.4 3.2 3.5Panama 7.9 6.6 8.0 7.9 9.3 11.4 10.4 8.0 7.5 7.0 6.7 6.8Peru 6.2 10.0 9.6 9.2 8.9 6.8 6.6 4.5 3.5 3.9 5.6 6.2Uruguay 9.2 10.3 7.7 6.5 6.7 4.7 7.5 6.5 5.7 6.0 3.7 4.6Venezuela -4.8 -1.7 -0.2 0.5 4.8 2.5 4.2 3.5 3.9 4.7 4.0 3.4
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
GDP
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Inflation (annual, end-period)(%, y-o-y) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 4.8 7.3 9.5 6.6 8.1 8.2 7.2 7.2Argentina* 9.8 25.6 20.0 16.1 24.8 23.0 18.0 16.0Brazil 3.1 4.5 5.9 4.3 5.9 6.5 5.4 5.9Chile 2.6 7.8 7.1 -2.6 3.0 3.6 3.0 3.0Colombia 4.5 5.7 7.7 2.0 3.2 3.5 2.7 3.0Mexico 4.1 3.8 6.5 3.6 4.4 3.5 3.9 3.4Panama 2.2 6.4 6.8 1.9 4.9 6.4 4.8 4.2Peru 1.1 3.9 6.7 2.9 2.1 4.5 2.5 2.6Uruguay 6.4 8.5 9.2 5.9 6.9 8.3 7.0 6.2Venezuela 17.0 22.5 31.9 26.9 27.4 29.9 30.4 32.1
* Average of consumer price indices from provincial statistical institutes used since 2007Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Inflation forecasts by country (%, y-o-y) Latin America inflation data and forecasts (%, y-o-y)
0
5
10
15
20
25
30
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
2
4
6
8
10
2006 2007 2008 2009 2010 2011f 2012f 2013f
LatAm LatAm ex Arg & Ven
Source: HSBC estimates Source: HSBC estimates
Inflation (quarterly, end-period)
_______________2010 _______________ _______________2011 ________________ ______________ 2012________________(%, y-o-y) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Qf 1Qf 2Qf 3Qf 4Qf
Latin America 7.4 7.2 7.2 8.1 7.8 7.9 8.4 8.2 7.6 7.5 7.3 7.2Argentina* 21.3 23.1 23.5 24.8 22.6 23.4 24.9 23.0 21.7 21.0 19.2 18.0Brazil 5.2 4.8 4.7 5.9 6.3 6.7 7.3 6.5 5.7 5.6 5.3 5.4Chile 0.3 1.2 1.9 3.0 3.4 3.4 3.3 3.6 2.9 2.7 2.7 3.0Colombia 1.8 2.3 2.3 3.2 3.2 3.4 3.7 3.5 2.4 2.3 2.6 2.7Mexico 5.0 3.7 3.7 4.4 3.0 3.3 3.1 3.5 3.7 4.2 4.4 3.9Panama 2.7 2.8 4.2 4.9 5.5 6.5 6.1 6.4 5.6 5.4 5.3 4.8Peru 0.8 1.6 2.4 2.1 2.7 2.9 3.7 4.5 3.6 3.5 2.7 2.5Uruguay 7.1 6.2 6.3 6.9 8.2 8.6 7.8 8.3 7.1 7.5 7.5 7.0Venezuela 28.2 28.2 28.5 27.4 28.7 25.1 26.7 29.9 30.5 28.3 29.5 30.4
* Average of consumer price indices from provincial statistical institutes used since 2007Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Inflation
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Latin America
Q1 2012
abc
Exchange rates vs USD (annual)(end-period) 2006 2007 2008 2009 2010 2011 2012f 2013f
Latin America n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Argentina 3.06 3.15 3.45 3.80 3.98 4.30 5.00 5.65Brazil 2.14 1.77 2.34 1.74 1.67 1.88 1.80 1.90Chile 547 498 629 506 468 520 530 530Colombia 2240 2014 2223 2043 1920 1939 1800 1750Mexico 10.81 10.92 13.82 13.08 12.37 13.93 13.20 13.50Panama 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0Peru 3.21 3.00 3.14 2.89 2.82 2.70 2.68 2.70Uruguay 24.42 21.53 24.40 19.50 19.90 20.00 19.50 21.00Venezuela 2.2 2.2 2.2 2.2 2.6/4.3 4.3 4.3 6.5
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC
Exchange rate forecasts by country (per USD, end-period) Exchange rate forecasts by country (per USD, end-period)
0
5
10
15
20
ARG BRA MEX PAN PER URU
2012f 2013f
0
500
1000
1500
CLP COP
2012f 2013f
Source: HSBC estimates Source: HSBC estimates
Exchange rates vs USD (quarterly)
_______________2010 _______________ _______________2011 ________________ ______________ 2012________________(end-period) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Qf 2Qf 3Qf 4Qf
Latin America n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.Argentina 3.88 3.93 3.96 3.98 4.05 4.11 4.20 4.30 4.46 4.58 4.77 5.00Brazil 1.78 1.80 1.69 1.67 1.63 1.56 1.85 1.88 1.90 1.90 1.85 1.80Chile 526 543 485 468 482 467 461 520 525 530 530 530Colombia 1920 1916 1799 1920 1871 1770 1750 1939 1875 1875 1850 1800Mexico 12.36 12.89 12.63 12.37 11.89 11.71 13.88 13.93 13.60 13.50 13.40 13.20
Panama 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0Peru 2.84 2.83 2.80 2.75 2.75 2.75 2.70 2.70 2.71 2.70 2.69 2.68Uruguay 19.45 21.12 20.30 19.90 19.25 18.40 20.30 20.00 20.50 20.50 20.00 19.50Venezuela 2.6/4.3 2.6/4.3 2.6/4.3 2.6/4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC
Exchange rates
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Policy rates (annual, %)(end-period) 2006 2007 2008 2009 2010 2011 2012f 2013f
Latin America 9.6 9.9 11.8 7.7 8.4 8.8 7.7 8.0Argentina* 6.2 8.0 10.5 9.0 9.0 9.0 9.0 9.0Brazil 13.25 11.25 13.75 8.75 10.75 11.00 9.00 9.00Chile 5.25 6.00 8.25 0.50 3.25 5.25 4.50 4.50Colombia 7.50 9.50 9.50 3.50 3.00 4.75 5.00 5.25Mexico 7.02 7.50 8.25 4.50 4.50 4.50 4.50 5.00Panama* 5.1 4.6 3.5 3.5 3.1 2.0 2.6 3.1Peru 4.50 5.00 6.50 1.25 3.00 4.25 3.75 3.75Uruguay n.a. 7.25 7.75 6.25 6.50 8.75 8.00 7.00Venezuela* 15.2 21.7 21.7 18.9 17.9 17.0 16.5 18.5
* For Panama the values denote the deposit rate; for Argentina the 1-day reverse repo rate & for Venezuela the average lending rate informed by the Central Bank (BCV)Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Policy/interest rate forecasts by country (%) Latin America policy/interest rate data and forecasts (%)
0
5
10
15
20
ARG BRA CHI COL MEX PAN PER URU VEN
2012f 2013f
6
7
8
9
10
11
12
2006 2007 2008 2009 2010 2011f 2012f 2013f
LatAm LatAm ex Ven
Source: HSBC estimates Source: HSBC estimates
Policy rates (quarterly, %)
_______________2010 _______________ _______________2011 ________________ ______________ 2012________________(end-period) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Qf 2Qf 3Qf 4Qf
Latin America 7.4 8.1 8.4 8.4 9.0 9.3 9.2 8.8 8.3 7.7 7.7 7.7Argentina* 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0 9.0Brazil 8.75 10.25 10.75 10.75 11.75 12.25 12.00 11.00 10.00 9.00 9.00 9.00Chile 0.50 1.00 2.50 3.25 4.00 5.25 5.25 5.25 4.50 4.50 4.50 4.50Colombia 3.00 3.00 3.00 3.00 3.50 3.50 4.00 4.75 4.75 4.75 4.75 5.00Mexico 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5Panama* 3.3 3.2 3.0 2.7 2.5 2.3 2.1 2.0 2.3 2.4 2.5 2.6Peru 1.25 1.75 3.00 3.00 3.75 4.25 4.25 4.25 3.75 3.75 3.75 3.75Uruguay 6.25 6.25 6.50 6.50 7.50 8.00 8.00 8.75 8.75 8.50 8.50 8.00Venezuela* 18.4 17.7 17.4 17.9 17.1 17.4 17.5 17.0 17.5 15.5 16.0 16.5
* For Panama the values denote the deposit rate; for Argentina the 1-day reverse repo rate & for Venezuela the average lending rate informed by the Central Bank (BCV)Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Monetary policy rates
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Latin America
Q1 2012
abc
Industrial production
(%, y-o-y) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 5.3 5.4 1.8 -7.3 7.8 2.9 3.9 3.7Argentina 8.4 7.5 1.1 -4.9 10.3 9.7 3.1 5.4Brazil 2.8 6.0 3.1 -7.4 10.4 0.0 3.6 3.0Chile 3.2 4.1 0.2 -6.7 0.5 6.0 3.0 6.0Colombia 11.2 10.9 -3.0 -5.2 5.0 4.5 5.5 6.1Mexico 5.7 2.0 -0.1 -7.6 6.0 3.9 3.6 3.3Panama 7.0 11.7 14.2 3.7 3.7 5.0 5.8 5.0Peru 7.5 11.1 9.1 -6.3 14.1 8.6 6.0 6.8Uruguay 5.3 5.9 12.1 -4.0 3.5 3.2 6.2 5.0Venezuela 10.1 6.9 1.4 -11.7 -2.5 5.6 5.8 1.7
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Industrial production (%, y-o-y) Unemployment rate (%, end-period)
0
2
4
6
8
10
12
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
0
3
6
9
12
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
Source: HSBC estimates Source: HSBC estimates
Unemployment rate (end-period)
(%) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 7.0 6.5 6.6 7.1 6.2 5.5 5.6 5.6Argentina 9.3 7.8 7.4 8.4 7.3 6.9 7.7 7.4Brazil 8.4 7.4 6.8 6.8 5.3 4.6 4.8 4.7Chile 6.0 7.2 8.5 10.0 7.1 6.9 6.8 7.0Colombia 12.0 11.2 11.3 12.0 11.8 9.3 9.0 10.0Mexico 3.5 3.4 4.3 4.8 4.9 4.5 4.2 4.2Panama 9.1 7.3 6.4 6.9 6.5 5.0 4.7 4.5Peru 7.5 8.4 8.4 8.4 8.2 7.9 8.0 7.5
Uruguay 10.9 9.2 7.6 7.3 6.7 6.6 6.4 6.6Venezuela 10.1 8.2 7.5 7.9 8.6 8.4 8.1 8.7
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Industrial production &unemployment
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Private consumption expenditure
(%, y-o-y) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 6.4 6.5 4.6 0.1 6.3 5.4 4.7 4.5Argentina 7.8 9.0 6.5 0.5 9.0 8.9 3.6 4.8Brazil 5.2 6.1 5.7 4.2 7.0 4.4 4.3 5.5Chile 7.1 7.0 4.5 0.9 10.4 10.2 6.0 5.0Colombia 6.4 7.3 3.5 0.9 5.0 6.2 3.6 4.0Mexico 5.7 4.0 1.8 -7.1 5.0 5.0 5.1 2.7Panama 4.4 0.9 -2.1 -2.8 24.4 16.5 11.3 8.5Peru 6.4 8.3 8.7 2.4 6.0 6.2 5.2 5.8Uruguay 6.1 7.0 8.5 0.9 11.5 9.1 5.7 4.3Venezuela 15.5 16.9 6.3 -2.9 -1.9 3.1 7.5 1.8
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Private consumption expenditure (%, y-o-y) Investment (%, y-o-y)
-4
0
4
8
12
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
0
5
10
15
20
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
Source: HSBC estimates Source: HSBC estimates
Investment
(%, y-o-y) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 12.6 13.0 10.8 -10.8 14.9 8.3 6.1 6.6Argentina 18.2 13.6 9.1 -10.2 21.2 15.1 0.9 5.5Brazil 9.8 13.9 13.6 -10.3 21.9 5.5 5.4 7.1Chile 2.3 11.2 19.4 -15.9 18.8 14.4 9.7 12.0Colombia 18.1 14.4 9.9 -0.8 8.3 13.6 8.9 9.9Mexico 9.9 6.9 5.9 -11.3 2.3 8.1 6.3 3.0Panama 16.6 41.0 25.3 -6.2 11.6 14.5 12.1 11.3Peru 18.9 22.6 28.3 -8.6 23.0 6.1 9.5 13.4
Uruguay 18.5 7.9 19.0 -6.0 13.8 9.3 6.7 5.8Venezuela 36.3 28.2 2.2 -19.1 1.0 12.4 10.1 6.5
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Consumption & investment
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Latin America
Q1 2012
abc
Trade balance
(USDbn) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 101.0 78.6 83.2 84.2 67.0 93.3 76.7 65.3Argentina 12.3 11.2 12.6 16.9 11.6 9.9 8.8 8.0Brazil 46.5 40.0 24.7 25.3 20.3 26.5 23.4 20.1Chile 9.6 10.8 22.8 23.9 8.5 14.1 15.9 9.6Colombia 0.3 -0.6 1.0 2.5 2.1 1.0 -2.1 -0.6Mexico -6.1 -10.1 -17.3 -4.7 -3.0 -5.3 -7.7 -9.9Panama -1.7 -3.2 -4.5 -2.1 -4.6 -5.6 -5.5 -5.7Peru 9.0 8.3 3.1 5.9 6.7 8.5 5.1 4.6Uruguay -0.8 -1.1 -3.1 -1.5 -1.9 -2.4 -2.6 -2.8Venezuela 32.0 23.3 44.1 18.0 27.1 46.7 41.4 41.9
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Trade balance (USDbn) Current account balance (% of GDP)
-10
0
10
20
30
40
50
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
-12
-8
-4
0
4
8
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
Source: HSBC estimates Source: HSBC estimates
Current account balance
(% of GDP) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 1.7 0.5 -0.4 -0.3 -1.0 -1.0 -1.4 -1.4Argentina 3.8 2.8 2.2 3.6 0.8 0.3 0.0 -0.3Brazil 1.3 0.1 -1.7 -1.5 -2.2 -2.2 -2.1 -2.1Chile 4.9 4.5 -1.9 1.6 1.9 -0.6 -1.2 -0.8Colombia -1.8 -2.9 -2.8 -2.1 -3.1 -3.6 -3.8 -3.4Mexico -0.5 -0.9 -1.5 -0.7 -0.5 -0.9 -0.9 -1.0Panama -3.1 -7.1 -11.8 -0.2 -11.1 -14.0 -11.5 -9.5Peru 3.0 1.3 -3.7 0.2 -1.5 -1.6 -3.3 -3.6
Uruguay -2.0 -0.9 -6.4 -0.3 -1.1 -0.2 -0.4 -0.7Venezuela 14.4 7.7 13.4 3.2 5.2 9.8 5.6 5.1
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Trade balance & currentaccount
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Latin America
Q1 2012
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Net FDI
(USDbn) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 32.5 91.3 88.8 71.8 87.9 134.6 100.1 115.9Argentina 3.1 5.0 8.3 3.3 6.0 5.0 5.0 10.0Brazil -9.4 27.5 24.6 36.0 36.9 70.3 36.0 43.0Chile 5.1 10.0 7.1 4.8 6.4 14.3 12.5 14.1Colombia 6.7 9.0 10.6 7.1 6.9 13.7 11.0 13.5Mexico 20.1 29.7 26.3 15.3 18.7 20.5 20.3 25.0Panama 2.5 1.8 2.4 1.8 2.4 2.8 3.1 3.3Peru 3.5 5.4 6.2 4.4 7.1 6.7 5.8 7.5Uruguay 1.5 1.2 2.1 1.6 2.4 2.9 3.2 3.0Venezuela -0.5 1.6 1.2 -2.5 1.2 2.0 2.0 2.0
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Net FDI (USDbn) International FX reserves (ex-gold, USDbn)
0
20
40
60
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
0
100
200
300
400
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
Source: HSBC estimates Source: HSBC estimates
International FX reserves (ex-gold)
(USDbn) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 279.9 410.3 468.3 508.0 595.2 705.3 738.3 776.2Argentina 32.0 46.2 46.4 48.0 52.1 45.5 43.0 41.0Brazil 85.8 180.3 206.8 239.1 288.6 355.0 370.0 380.0Chile 19.4 16.9 23.2 25.4 27.9 39.5 41.5 42.7Colombia 15.4 21.0 24.0 25.4 28.5 32.5 35.1 33.5Mexico 67.7 78.0 85.4 90.8 113.6 142.5 157.6 181.4Panama 1.8 1.8 1.7 2.3 2.5 2.6 2.7 2.9Peru 17.2 27.7 31.2 33.2 44.2 49.5 49.2 53.2
Uruguay 3.1 4.1 6.4 8.0 7.7 10.7 11.0 11.3Venezuela 37.4 34.3 43.1 35.8 30.3 27.5 28.2 30.2
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
FDI & international reserves
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Q1 2012
abc
External debt
(USDbn) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 566.5 649.7 677.4 736.0 875.2 967.8 1026.4 1077.5Argentina 108.8 124.5 124.9 116.4 128.6 132.3 140.6 147.6Brazil 172.6 193.2 198.3 198.2 256.8 307.0 336.4 360.7Chile 49.8 55.9 63.5 73.7 87.3 91.4 92.3 94.3Colombia 40.1 44.7 46.4 53.7 64.8 65.6 67.2 69.0Mexico 107.6 123.1 129.9 163.8 190.1 198.8 198.6 207.7Panama* 7.8 8.2 8.5 10.2 10.4 11.5 12.8 14.0Peru 28.7 33.1 34.6 34.1 40.1 43.4 45.2 45.2Uruguay 9.3 11.0 10.6 12.2 12.1 13.5 14.0 14.5Venezuela 41.8 55.9 60.7 73.8 84.9 104.4 119.4 124.5
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights* For Panama the values represent the Public external debt
External debt (USDbn) Remittances (% of GDP)
0
100
200
300
400
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
0.0
0.5
1.0
1.5
2.0
2.5
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
Source: HSBC estimates Source: HSBC estimates
Remittances
(% of GDP) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 1.5 1.3 1.1 1.0 0.9 0.8 0.9 0.9Argentina 0.5 0.4 0.2 1.2 0.1 0.2 0.2 0.2Brazil 0.4 0.3 0.3 0.2 0.1 0.1 0.1 0.1Chile 2.3 1.9 1.7 1.0 2.2 1.2 2.3 2.2Colombia 2.4 2.2 2.0 1.8 1.4 1.5 1.6 1.5Mexico 2.7 2.5 2.3 2.4 2.1 2.0 2.1 2.1Panama 1.5 1.3 1.0 0.9 0.7 0.7 0.8 0.8
Peru 2.4 2.0 1.9 1.5 1.4 1.5 1.4 2.4Uruguay 0.6 0.5 0.6 0.4 0.3 0.3 0.4 0.4Venezuela 1.3 1.3 1.2 0.5 1.0 1.2 1.0 0.8
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
External debt & remittances
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Primary fiscal surplus
(% of GDP) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America 3.0 2.8 2.5 0.2 0.8 1.3 0.9 1.0Argentina 3.5 3.2 3.1 1.5 1.7 0.5 1.0 1.5Brazil 3.2 3.3 3.4 2.0 2.8 3.1 2.6 2.5Chile 8.4 8.8 4.8 -4.0 0.1 1.7 0.0 -0.3Colombia 0.2 1.0 0.9 -1.1 -1.1 -1.0 -0.9 -0.4Mexico 2.5 2.2 1.8 -0.1 -0.9 -0.4 -0.3 -0.2Panama 4.9 6.9 4.6 1.9 2.3 -0.3 0.6 0.5Peru 4.0 4.9 3.7 -0.6 0.6 3.2 2.0 -9.0Uruguay 3.2 2.2 1.7 1.2 1.2 1.2 1.4 1.6Venezuela 0.5 -1.2 -1.2 -6.7 -6.6 -4.6 -6.5 0.2
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Primary fiscal surplus (% of GDP) Fiscal balance (% of GDP)
-7
-5
-3
-1
1
3
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
-10
-5
0
5
ARG BRA CHI COL MEX PAN PER URU VEN
2011f 2012f 2013f
Source: HSBC estimates Source: HSBC estimates
Fiscal balance
(% of GDP) 2006 2007 2008 2009 2010 2011f 2012f 2013f
Latin America -0.9 -0.8 -0.7 -3.3 -2.6 -2.2 -2.5 -2.1Argentina 1.9 1.1 1.2 -1.7 -0.8 -2.3 -1.8 -0.9Brazil -3.6 -2.8 -2.0 -3.3 -2.5 -2.2 -2.4 -2.5Chile 7.9 8.4 4.3 -4.4 -0.3 1.2 -0.5 -0.8Colombia -0.5 -1.2 0.3 -2.3 -3.0 -2.8 -2.4 -2.6Mexico 0.1 0.0 -0.1 -2.3 -2.8 -2.5 -2.4 -2.0Panama 0.5 3.5 1.5 -1.0 -1.9 -3.0 -1.9 -1.5Peru 2.1 3.1 2.1 -1.9 -0.6 2.0 0.8 0.2
Uruguay -0.5 -0.1 -1.4 -1.5 -0.4 -0.3 -0.2 0.0Venezuela -1.6 -2.9 -2.7 -8.2 -7.6 -6.2 -9.5 -2.5
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of t he Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Primary surplus & fiscalbalance
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Q1 2012
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Country profiles
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Reality check
We expect economic growth in Argentina to slow
in 2012, driven by a slowdown in its biggest
trading partner, Brazil, and continued capital
outflows into USDs. Dealing with dollarization is
the main policy challenge in the short term.
Argentine savers and investors have been
increasing purchases of dollars since April 2011,
putting pressure both on central bank reserves,
which are used to repay debt, and on the peso.
President Christina Fernandezs government has
continued to fight depreciation, however, and has
responded to the pressure from dollarization by
imposing currency controls. Financial repression
is working for now, aided by higher interest rates.
The thirst for dollars has pushed funding costs and
rates upwards, and higher rates, in turn, will likely
slow growth further. This could create conditions
for the authorities to allow the currency to
depreciate more quickly. Nevertheless, the timing
of any such change is uncertain.
That said, dollarization has receded recently, and
the central bank is back to purchasing reserves in
net terms. There are several reasons behind this.
First, the government enacted several regulations
to increase the supply and reduce the demand for
dollars (seeEM FX Roadmap: The newest new
normal,page 11). Second, interest rates paid to
institutional depositors increased 650bp in the
most recent quarter, rising to an average 18.8% in
Q4 from an average 12.3% in Q3. Third, some
investors may have over-dollarized, anticipating a
level of depreciation that has not materialized thus
far, and, accordingly, are now rebalancing their
portfolios. Fourth, economic activity is
decelerating, leading to lower imports. Fifth, ARS
peso demand tends to increase for seasonal
reasons in December. The key issue is that the
fundamental reason behind dollarization a
stronger ARS in real terms remains in place fornow, suggesting that dollar demand could regain
strength in the future.
Another key policy challenge is to keep wage
rises below the current inflation rate during the
bargaining process that will start early in 2012.
Real-term increases in labor costs could make
faster depreciation less effective in real terms.
As the economy slows, so, too, will the
deterioration in the external accounts, as bothindustrial and energy imports will be reduced.
On the fiscal side, the government appears
committed to reducing the burden of energy and
transportation subsidies, which approached 4% of
GDP in 2011. This is a significant political
challenge, as some residential consumers will be
affected. It is not clear whether the money saved
by eliminating subsidies will be spent elsewhere.
In 2008, an expansionary fiscal policy was funded
through the primary surplus and the nationalization
of pension funds. Now, such a policy would be
difficult to finance, and monetizing a deficit could
feed dollar demand or inflation.
Recovering the twin surpluses which appears
to be the objective requires lower growth, and
this is the key political challenge for an economy
that is used to living with growth running well
above potential.
Argentina
Javier FinkmanEconomistHSBC Bank Argentina S.A.+54 11 4344 8144
http://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=FLAFL50Enn&n=313778.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=FLAFL50Enn&n=313778.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=FLAFL50Enn&n=313778.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=FLAFL50Enn&n=313778.PDFhttp://www.research.hsbc.com/midas/Res/RDV?p=pdf&key=FLAFL50Enn&n=313778.PDF -
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Inflation is set to moderate in 2012 though Q1 wage negotiations will be key to achieve that
0
10
20
30
40
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
y-o-y%
12m ex pectations Priv ate sector w ages
Consumer prices
We believe that in order for our forecast of inflations dropping
5pp to 18% to materialize, wage inflation and expectations mustdecline significantly and relatively early in 2012.
Consumer prices and wage inflation peaked at the end of Q3.Benchmark annual wage negotiations are set to take place inFebruary-March. While the government is attempting tocoordinate wage agreements at around 18%, we believe the low20s range is more plausible.
For that outcome to emerge, though, inflation expectations willhave moderate throughout Q1.
We expect authorities to target a slow pace of ARS depreciation,delaying major adjustments for later in the year.
Perhaps more important, a significant slowdown of economicactivity in the near term will be key to cooling expectations andallow wage deceleration to take place.
Source: INDEC, provincial statistics institutes, UTDT
With higher interest rates, deposit and credit growth ratesare converging
as deposit growth accelerates while loan growth slows
0
1
2
3
4
5
6
Aug-10 Dec-10 Apr-11 Aug-11 Dec-11
m-o-m%
10
12
14
16
18
20
22
ann
ual%
Peso deposits Peso loans
Wholesale rate (RHS)
Interest rates paid to institutional depositors increased 650bp inthe most recent quarter, rising to an average 18.8% in Q4 froman average 12.3% in Q3, in order to gain deposits in the midstof strong dollarization.
Commercial loan growth is slowing while term deposits aregrowing faster as a result of higher rates, marginally easing the
funding pressure on banks.In addition, rates are beginning to come down following an
almost ARS20bn central bank liquidity injection in the last 30days (data as of 16 December).
A key challenge is to sustain current dynamics after Decemberwhen the seasonal increase in peso demand begins to fade.
Source: BCRA. December is average through the 16th. The interest rate is the
wholesale CDs interest rate (BADLAR) paid by private banks
Dollar outflows have subsided due to several factors
-1,000-800-600-400-200
0200400600800
1,000
05-Jan 30-Mar 22-Jun 14-Sep 07-Dec
USDm
-8
-6
-4
-2
0
2
4
6
8
w-o-w%
CB purchase s Do llar deposits (RHS)
-1,000-800-600-400-200
0200400600800
1,000
05-Jan 30-Mar 22-Jun 14-Sep 07-Dec
USDm
-8
-6
-4
-2
0
2
4
6
8
w-o-w%
CB purchase s Do llar deposits (RHS)
New regulations targeting both supply and demand of FX havecreated some relief in the market: (1) oil, gas, and miningcompanies have to settle all their export proceeds in the localFX market; (2) insurance companies had to repatriate theirforeign investments; and (3) dollar purchases require an exante authorization from tax authorities.
Higher interest rates have helped to slow down the dollarizationprocess.
Lower economic growth implies lower imports, actually fuelingthe trade surplus.
Probably some families and companies over-dollarized inanticipation of a level of depreciation that has not taken place,so they are now rebalancing their portfolios or selling dollars topay for current expenses.
Peso demand tends to increase for seasonal reasons in December.
Source: BCRA
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Argentina: Macro frameworkArgentina: HSBC forecasts
2006 2007 2008 2009 2010 2011f 2012f 2013f
Production, demand and employmentGDP growth (% y-o-y) 8.5 8.7 6.8 0.9 9.2 8.5 3.0 5.0Nominal GDP (USDbn) 212.7 260.5 323.4 302.5 368.7 468.6 515.8 538.9GDP per capita (USD) 5399 6534 8017 7409 8925 11208 12191 12585Private consumption (% y-o-y) 7.8 9.0 6.5 0.5 9.0 8.9 3.6 4.8Government consumption (% y-o-y) 5.2 7.6 6.9 7.2 9.4 11.8 4.6 7.1Investment (% y-o-y) 18.2 13.6 9.1 -10.2 21.2 15.1 0.9 5.5Industrial production (% y-o-y) 8.4 7.5 1.1 -4.9 10.3 9.7 3.1 5.4Gross domestic saving (% GDP) 34.6 34.4 34.5 34.8 34.9 34.7 34.3 34.4Unemployment rate end-year (%) 9.3 7.8 7.4 8.4 7.3 6.9 7.7 7.4
Prices & wagesCPI, average (% y-o-y)* 10.9 12.7 24.8 14.5 23.2 23.5 20.0 16.7CPI, end-year (% y-o-y)* 9.8 25.6 20.0 16.1 24.8 23.0 18.0 16.0WPI, end-year (% y-o-y) 8.0 17.5 5.9 4.3 6.3 9.2 13.5 19.8Manufacturing wages, nominal (% y-o-y) 19.4 20.0 23.4 17.3 29.3 33.1 23.0 17.0
Money, FX & interest ratesBroad money supply M3 (% y-o-y) 23.4 20.2 11.3 12.8 36.9 30.0 23.0 20.0Real private sector credit growth (% y-o-y) 25.8 11.7 2.0 -5.2 8.7 23.7 5.1 5.0Policy rate, end-year (%) ** 6.2 8.0 10.5 9.0 9.0 9.0 9.0 9.05-yr yield, end-year (%) 15.2 12.9 16.8 16.0 14.0 12.0 10.0 10.0ARS/USD, end-year 3.06 3.15 3.45 3.80 3.98 4.30 5.00 5.65ARS /USD, average 3.08 3.12 3.19 3.79 3.91 4.13 4.62 5.32ARS /EUR, end-year 3.83 4.25 4.84 5.43 5.32 5.81 7.20 8.19ARS /EUR, average 3.69 4.05 4.77 5.34 5.19 5.57 6.42 7.69
External sectorMerchandise exports (USDbn) 46.5 55.8 70.0 55.7 68.1 81.5 77.4 83.7Merchandise imports (USDbn) 34.2 44.6 57.4 38.8 56.5 71.5 68.6 75.7Trade balance (USDbn) 12.3 11.2 12.6 16.9 11.6 9.9 8.8 8.0Current account balance (USDbn) 8.0 7.4 7.0 10.9 3.0 1.3 0.0 -1.5Current account balance (% GDP) 3.8 2.8 2.2 3.6 0.8 0.3 0.0 -0.3Net FDI (USDbn) 3.1 5.0 8.3 3.3 6.0 5.0 5.0 10.0Net FDI (% GDP) 1.5 1.9 2.6 1.1 1.6 1.1 1.0 1.9Current account balance plus FDI (% GDP) 5.2 4.7 4.8 4.7 2.4 1.3 1.0 1.6Exports (% y-o-y) 16.1 20.1 25.5 -20.5 22.4 19.5 -5.0 8.2Imports (% y-o-y) 19.0 30.6 28.7 -32.5 45.7 26.6 -4.2 10.4International FX reserves (ex gold) (USDbn) 32.0 46.2 46.4 48.0 52.1 45.5 43.0 41.0Import cover (months) 11.3 12.4 9.7 14.8 11.1 7.6 7.5 6.5
Public and external solvency indicatorsCommercial banks FX assets (USDbn) 4.2 5.5 5.3 3.8 3.4 3.4 3.4 3.4Gross external debt (USDbn) 108.8 124.5 124.9 116.4 128.6 132.3 140.6 147.6
Short term external debt (% of int'l reserves) 47.8 40.5 38.2 35.9 35.9 42.5 42.9 47.3Private sector external debt (USDbn) 47.8 53.7 60.5 54.6 59.2 57.9 61.2 63.2Consolidated government balance (% GDP) 1.9 1.1 1.2 -1.7 -0.8 -2.3 -1.8 -0.9Central government balance (% GDP) 1.8 1.1 1.4 -0.6 0.2 -1.4 -0.9 0.0Primary balance (% GDP) 3.5 3.2 3.1 1.5 1.7 0.5 1.0 1.5Gross public domestic debt (ARSbn) 246.3 260.2 311.7 349.7 410.2 491.6 626.8 770.7Gross public domestic debt (% GDP) 37.6 32.0 30.2 30.5 28.4 25.4 26.3 26.9Gross public external debt (USDbn) 61.1 70.8 64.4 61.8 69.4 74.4 79.4 84.4Gross public external debt (% GDP) 28.7 27.2 19.9 20.4 18.8 15.9 15.4 15.7Gross public sector debt (% GDP) 66.6 58.9 47.8 50.9 46.8 40.3 39.7 41.0
* Average of consumer price indices from provincial statistical institutes used since 2007. ** 1-day reverse repo rate.Source: Central Bank, Ministry of Finance, INDEC, provincial statistical institutes, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts.
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Some recovery in 2012
The Brazilian economy lost momentum in the
second half of 2011, reflecting slower growth in
the US and Europe, volatility in the international
market and the impact this had on expectations,
and the fiscal and monetary tightening in Brazil
undertaken during 2010 and the early part of 2011
to curb inflation. We believe that part of the
explanation for weak