LATIN AMERICA

Quarterly Economics Update – Q3 2015Argentina, Bolivia, Chile, Ecuador, Peru, Paraguay and Uruguay

Christian von Canstein, MSc

ARGENTIN

A – QUARTERLY ECO

NO

MICS U

PDATE – Q3 2015

Argentina has a GDP of $964 Billion (adjusted for PPP) and a population of 43 million, hence a GDP of around $22,400 per capita. This amounts to 0.85% of world GDP and 5.6% of US GDP.

With a new leadership in place that is expected to be more market-friendly, Argentina might finally start to deal with its many economic problems that have been created by its previous administration. The biggest issue is its pariah status in financial market after its government chose to default for political reasons in 2014. A settlement with holdout creditors could help the country to return to global debt markets and would also help its companies to borrow in order to grow; after years of economic turmoil, corporate leverage in Argentina is far below the Latin American average which means there is scope for many companies to issue debt to fund their expansion in a recovering economy.

Another important issue is the liberalization of the Argentinian Peso. As the currency has been artificially maintained at overvalued levels, Argentinian business and consumers have been living with Dollar shortages. This has made it difficult to import inputs from abroad while at the same time, exporters could not benefit from a weaker currency in times when most regional currencies depreciated sharply. Even though exchange rate liberalization is necessary, it comes with risk: using black market rates as estimates, where the Peso is traded at ARP14.5/USD compared to the official rate of ARP9.6/USD, Argentina could face all of a sudden a 50% devaluation which is likely to cause economic turmoil and lead inflation to rise sharply in the short term, from already high levels.

Given the economic problems as well as the slowdown in the whole region and low commodity prices, it is questionable whether Argentina will go straight away through a massive rebound, even with a highly capable leadership team due to take office soon. 2

Argentina

*GDP Growth is based on quarterly figures and CPI Inflation is based on monthly figures. Both have been annualized.**2016 Forecasts are based on the IMF October 2015 World Economic OutlookData for real GDP growth, CPI inflation and unemployment are provided by the Instituto Nacional de Estadistica y Censos; the consumer confidence index is provided by the Universidad Torcuato de Tella; the exchange rate basket is provided by the Bank of International Settlements; the rest of the data is provided by Bloomberg.

30/09/10 30/09/14 30/06/15 30/09/15 1 Year Change Forecast for 2016

Real GDP Growth 10.90% -0.20% 2.30% 2.30% 2.50% -0.70%

CPI Inflation N/A 18.16% 12.68% 15.39% -2.77% 26.40%

3 Month Bank Deposit Rate 12.13% 27.20% 16.48% 18.58% -8.63% N/A

Unemployment 7.50% 7.50% 6.60% 6.60% -0.90% 8.40%

Consumer Confidence 48.83 41.50 54.88 54.62 0.13 N/A

Equity Index (MERVAL Index) 2643.42 12548.99 11656.81 9814.62 -2734.37 N/A

Exchange Rate (Broad Basket) 98.08 51.73 55.76 57.74 6.01 N/A

BOLIVIA – Q

UARTERLY ECON

OM

ICS UPDATE – Q

3 2015

Bolivia has a GDP of $73.9 Billion (adjusted for PPP) and a population of 11.5 million, hence a GDP of around $6,400 per capita. This amounts to 0.065% of world GDP and 0.43% of US GDP.

Like most of the region, Bolivia has been growing strongly amid the commodity boom but is going through more challenging times, now that raw material prices are expected to stay low. Nevertheless, current estimates still suggest that Bolivia will grow comfortably above 3% over the coming year. This also means that the central bank should be able to concentrate on curbing inflation which has been picking up recently.

In spite of hardline rhetoric and occasional expropriations, President Evo Morales has stayed clear of Venezuelan style socialism and left large parts of the economy market-based. State companies are inefficient in many cases as they often serve to dole out patronage in form of public sector jobs. With commodity prices not expected to recover any time soon and its donor Venezuela facing a severe economic and political crisis, Bolivia is learning to live within its means. Evo Morales recently visited New York to pitch the country to foreign investors and polish its negative image that his rhetoric created. This is because many state-owned companies in the natural resources sector need foreign capital and technical knowledge in order expand.

As Latin America’s second smallest economy, frontier market status and a high reliance on the commodity sector, Bolivia does not seem like overly attractive to invest in. While there is probably a point in this argument, it should not be forgotten that Bolivians’ real incomes have tripled over the last decade which has led to a significant pick-up in consumer spending and services. Tourism has also become a growing sector. With macroeconomic variables at healthy levels, Bolivia should therefore be kept on the radar. 3

Bolivia

*GDP Growth is based on quarterly figures and has been annualized.**2016 Forecasts are based on the IMF October 2015 World Economic OutlookData for real GDP growth and CPI inflation are provided by the Instituto Nacional de Estadistica Bolivia; data for the budget balance, the exchange rate, the current account are provided by the Bolivia Central Bank.

30/09/10 30/09/14 30/06/15 30/09/15 1 Year Change Forecast for 2016

Real GDP Growth 3.71% 6.09% 5.01% 5.01% -1.08% 3.50%

CPI Inflation N/A N/A N/A 4.08% 43.77% 5.00%

Budget Balance (BOB Millions) 266.20 -1683.60 -1197.40 -1197.40 486.2 N/A

Exchange Rate (BOB/Basket) 6.97 6.86 6.86 6.86 0.00 N/A

Foreign Reserves (USD Millions) 9058.47 15239.23 14676.04 14500.70 -738.53 N/A

CHILE – QUARTERLY ECO

NO

MICS U

PDATE – Q3 2015

Chile has a GDP of $424.3 Billion (adjusted for PPP) and a population of 18 million, hence a GDP of around $23,500 per capita. This amounts to 0.38% of world GDP and 2.5% of US GDP.

Chile has been one of Latin America’s best managed economies for a long time and is currently the only OECD member on the continent. It is, however, also affected by the commodity downturn as almost 75% of its exports are raw materials, led by copper, and around 25% of exports go to China.

What helps is the fact that Chile is among the few countries that have managed the commodity boom responsibly via a sovereign wealth fund and following countercyclical fiscal policies. Since the return to democracy, Chile has been led by centrist and technocratic governments that avoided the populist excesses that have led to the perpetual boom and bust cycles from which many countries in the region suffer. As a consequence, all macroeconomic indicators look fairly healthy and have not deteriorated dramatically during the downturn. The country is currently running a small budget deficit with overall public debt of less than 20% of GDP.

Due to the country’s openness for trade and membership of several high profile global free trade agreements, the sharp depreciation of its currencies could offers opportunities to the country’s exporters.

The only dark cloud on the horizon could be the current administration’s leftwards shift with tax increases and legislation that is unfavorable to business and threatens Chile’s successful economic model. This has led to a sharp fall in business sentiment, especially as it is happening while the economy is already facing many headwinds. However, it seems that the government has recognized the negative impact such policies are having on economic growth and might still move back to the center. 4

Chile

*GDP Growth is based on quarterly figures and has been annualized.**2016 Forecasts are based on the IMF October 2015 World Economic OutlookData for real GDP growth, core inflation and policy rate are provided by the Banco Central de Chile; data for unemployment is provided by the Instituto Nacional de Estadistica, data for business confidence is provided by the Instituto Chileno de Administracion Racional de Empresas; data for business and consumer rates is provided by the Superintendencia de Bancos e Instituciones; the rest is provided by Bloomberg.

30/09/10 30/09/14 30/06/15 30/09/15 1 Year Change Forecast for 2016Real GDP Growth 7.40% 0.95% 2.24% 2.24% 1.29% 2.50%Core Inflation N/A 4.50% 5.40% 5.40% 0.90% 3.50%Policy Rate 2.50% 3.25% 3.00% 3.00% -0.25% N/AUnemployment 8.00% 6.60% 6.50% 6.50% -0.10% 7.00%Business Confidence 60.6 43.16 47.14 45.28 2.12 N/A10 Year Yield 4.79% 4.80% 4.59% 4.54% -0.26% N/ABusiness and Consumer Rate 8.08% 14.56% 14.56% 14.56% 0.00% N/AEquity Index (IPSA Index) 4795.38 3943.56 3897.10 3685.18 -258.38 N/AExchange Rate (CLP/USD) 483.55 598.31 639.12 696.38 98.07 N/A

ECUADOR – Q

UARTERLY ECON

OM

ICS UPDATE – Q

3 2015

Ecuador has a GDP of $182 Billion (adjusted for PPP) and a population of 16 million, hence a GDP of around $11,200 per capita. This amounts to 0.16% of world GDP and 1.06% of US GDP.

Ecuador is a similar case as Bolivia with a firebrand leader who did not make the same mistake as Venezuela’s administration by putting all his words into action. Instead, like Morales, Correa accepted the primary role of markets in the economy and even invested some of the windfalls from oil production in infrastructure. Still, Ecuador was not fully spared of less productive populist spending and its economy was largely driven by high commodity prices. Therefore, it is also going through a slowdown.

Feeling cornered, Correa has turned increasingly authoritarian and has started to to offset lost oil revenues with take hikes. This has come at an inopportune moment for the already battled economy and both business and consumer confidence have fallen as a consequence.

Another big problem for Ecuador is dollarization. The introduction of the US Dollar as legal tender initially helped its economy to stabilize and confidence to return, as previous administrations had proven to be unable to accept an independent and technocratic central bank, using it instead to finance chronic government deficits, which lead to bouts of high and unpredictable inflation. Unfortunately, the strong US Dollar has now become a liability in a region where pretty much all currencies have seen double digit declines. This means that Ecuador’s exporters are not only being priced out of international markets but are also facing increasing pressure at home. The government’s heavy handed methods to curb imports (for example at the border region with Colombia) are likely to fuel corruption and contraband. The best solution would be to reintroduce a national currency but with their track record, Ecuadorians are unlikely to trust their politicians to work with an independent central that purely targets inflation and makes decisions beyond the electoral cycle. 5

Ecuador

*GDP Growth is based on quarterly figures and has been annualized.**2016 Forecasts are based on the IMF October 2015 World Economic OutlookAll Data has been provided by Banco Central de Ecuador, except the equity index which comes from Bloomberg.

30/09/10 30/09/14 30/06/15 30/09/15 1 Year Change Forecast for 2016

Real GDP Growth 4.39% 3.26% 1.04% 1.04% -2.22% 0.06%

CPI Inflation 3.44% 4.19% 4.87% 3.78% -0.41% 2.50%

Unemployment 7.46% 4.70% 5.60% 5.50% 0.80% 5.00%

Consumer Confidence N/A 45.20 41.60 39.50 -5.70 N/A

Current Account (USD Million) -892.20 -67.30 -289.10 -289.10 -221.80 -289.00

Foreign Reserves (USD Million) 4353.40 6689.20 4739.20 3511.60 -3177.60 N/A

Equity Index (Bolsa Guayaquil) 211.68 250.17 256.61 236.71 -13.46 N/A

PERU – Q

UARTERLY ECON

OM

ICS UPDATE – Q

3 2015

Peru has a GDP of $385 Billion (adjusted for PPP) and a population of 32 million, hence a GDP of around $12,000 per capita. This amounts to 0.34% of world GDP and 2.24% of US GDP.

Peru is similar to Colombia, in terms of being a commodity exporter that is still managing to grow, due to sound economic management. Its main exports are silver and copper and commodity exports amount to around 60% of total exports.

Growth is expected to remain above 3% and inflation is under control, but as in Colombia, the current account deficit has widened considerably which could lead to further pressure on the Sol, which has so far proven to be more resilient than other regional currencies. Inflation has been edging up lately and pushed real interest rates into negative territory. This could become a problem if current account deficits persist, as these need to be financed by foreign investors. However, inflation is expected to fall again over the coming year.Like Colombia, Peru would benefit from a liberalization of its labor market whose rigid rules are keeping a considerable share of its labor force in the informal sector. The lack of good infrastructure in many parts of the country is also an obstacle to growth.

Similar to Chile, Peru has been prudently managed and is currently running an almost balanced budget, its debt to GDP ratio remains close to a healthy 20% and its government has stayed on its centrist and pragmatic course.

6

Peru

*GDP Growth is based on quarterly and has been annualized.**2016 Forecasts are based on the IMF October 2015 World Economic OutlookReal GDP Growth, CPI Inflation and Unemployment provided by Instituto Nacional de Estadistica e Informatica de Peru; Policy Rate provided by Banco Central de Reserva del Peru; Exchange Rate provided by Bank of International Settlements; the rest comes from Bloomberg.

30/09/10 30/09/14 30/06/15 30/09/15 1 Year Change Forecast for 2016Real GDP Growth 10.22% 2.70% 3.87% 3.26% 0.56% 3.30%

CPI Inflation 2.37% 2.74% 3.54% 3.90% 1.16% 2.50%

Policy Rate 3.00% 3.50% 3.25% 3.50% 0.00% N/A

Unemployment 7.60% 5.60% 6.80% 6.10% 0.50% 6.00%

Current Account (% of GDP) -1.75% -3.75% -4.21% -4.21% -0.46% -3.80%

10 Year Yield 5.62% 5.63% 6.37% 7.58% 1.95% N/A

Effective Exchange Rate (Basket) 2.79 2.89 3.18 3.23 0.34 N/A

PARAGUAY – QUARTERLY ECO

NO

MICS U

PDATE – Q3 2015

Paraguay has a GDP of $61 Billion (adjusted for PPP) and a population of 7 million, hence a GDP of around $8,600 per capita. This amounts to 0.054% of world GDP and 0.35% of US GDP.

As the continent’s smallest economies, Paraguay has still a large informal sector consisting of micro enterprises, urban vendors as well as subsistence farmers in rural areas.

The commodity boom of the past decade helped Paraguay grow at double digit rates, albeit from a low basis. One of the country’s main exports are soybeans and other agricultural commodities. The fact that its main trading partners are Brazil, Russia and Argentina is not helpful, given that the former two are in a deep recession while the latter is also struggling with anemic growth. Its reliance on agricultural commodities makes the country especially vulnerable to adverse weather conditions.

Even though the current government seems to understand the importance of structural reform and infrastructure investment, there are substantial obstacles in Congress, partly due to ideology but also because of vested interests.

7

Paraguay

*GDP Growth is based on quarterly figures and has been annualized.**2016 Forecasts are based on the IMF October 2015 World Economic OutlookAll Data provided by Banco del Paraguay.

30/09/10 30/09/14 30/06/15 30/09/15 1 Year Change Forecast for 2015

Real GDP Growth 18.40% 10.10% 2.60% 2.60% -7.50% 3.80%

CPI Inflation 3.80% 4.10% 2.50% 3.70% -0.40% 4.50%

Economic Activity Index 150.20 198.60 201.90 200.50 1.90 N/A

URU

GUAY – QUARTERLY ECO

NO

MICS U

PDATE – Q3 2015

Uruguay has a GDP of $74 Billion (adjusted for PPP) and a population of 3.5 million, hence a GDP of around $21,700 per capita. This amounts to 0.85% of world GDP and 5.6% of US GDP.

Uruguay belongs to the well managed economies in the region, even if its macroeconomic outlook has been weakening. Relatively high inflation remains one of the main worries; otherwise its economy looks healthy and likely to avoid a recession.Nevertheless, these levels of inflation reduce the leeway of the central bank to provide monetary stimulus amid the downturn.

The country is also reliant on agricultural imports, mainly soybeans, grains and beef and its main trading partners are going through a slowdown (China and Argentina) or are deep in recession (Brazil and Venezuela). Its membership of the protectionist MERCOSUR whose members are going through a slowdown has become a liability, as it has reduced the exposure to better managed and thus more steadily growing export markets such as the member states of the Pacific Alliance.

With a budget deficit of 3% and debt of above 60% of GDP, the country’s fiscal position is not that strong and some adjustment might be required in the medium term.

Stronger institution and lack of political populism are certainly strengths of the country but there is limited room for both fiscal and monetary policy to support the economy if the slowdown continues.

8

Uruguay

*GDP Growth is based on quarterly figures and has been annualized.**2016 Forecasts are based on the IMF October 2015 World Economic OutlookData for real GDP growth, Policy Rate and the current account are provided by the Banco Central de Uruguay; data for CPI inflation, unemployment and industrial production are provided by Instituto Nacional de Estadistica de Uruguay; the exchange rate is based on the Big Mac Index published by The Economist; the rest of the data is provided by Bloomberg.

30/09/10 30/09/14 30/06/15 30/09/15 1 Year Change Forecast for 2016Real GDP Growth 6.66% 3.72% -0.14% -0.14% -3.86% 2.20%CPI Inflation 6.32% 8.36% 8.53% 9.14% 0.78% 7.90%Policy Rate 6.50% 9.25% 9.25% 9.25% 0.00% N/AUnemployment 6.60% 6.20% 7.40% 8.00% 1.80% 7.00%10 Year Bond Price 143.43 135.04 133.13 127.04 -8.007 N/ABusiness Loan Rate (Small Companies) N/A 7.43 6.74 6.84 -0.59 N/AExchange Rate (Big Mac Index) 2.63 4.98 4.92 4.92 -0.06 N/ACurrent Account (USD Millions) -280.27 -444.66 -335.30 -335.30 109.36 -212.70Foreign Reserves (USD Millions) 7914.00 17757.00 18324.00 16424.00 -1333.00 N/AIndustrial Production (YOY %) 0.14 11.18 5.92 -5.80 -16.98 N/A

LATIN AM

ERICA – QUARTERLY ECO

NO

MICS U

PDATE – Q3 2015

Contact & Disclaimer

9

In preparing this report, I have relied upon publicly available data supplied by third parties. Although reasonable care has been taken to gauge the reliability of this data, this report carries no guarantee of the accuracy or completeness and I cannot be held accountable for misrepresentation of data by third parties involved. This report is an opinion piece and for private information and is for discussion purpose only. This report does not constitute financial advice and should therefore not be used as a basis to make any decisions. This report is based on data and information available at the date of the report and takes no account of subsequent developments after that date. It may not be modified without my prior written permission. Under no circumstances do I accept responsibility for any consequences arising from any third party relying on this report or the opinions expressed therein. This report is not intended to form a basis of any decision by a third party to do or omit to do anything.

This report has been written in private capacity and any opinions expressed therein should not be associated in any way with my current or previous employers or any professional organizations I belong to.

If you have any questions or comments on this report, please feel free to contact me.

Third Party sources that have been used are outlined in the footnotes below each table.

Christian von Canstein, MSc

Email: chris_canstein@hotmail.com