private and confidential: for discussion purposes only the rise of latin america and peru’s...

Private and Confidential: For discussion purposes only

The Rise of Latin America and Peru’s stellar performanceOctober 2011

2

Adjustments in the 1980s & 90s paved the way for a golden decade in the 2000s

0%

100%

200%

300%

400%

500%

600%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013F 2016F

LATAM, average annual CPI inflation

Source: ScotiaFX Strategy, IMF.

15%

17%

19%

21%

23%

25%

27%

29%

31%

33%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013F 2016F


LATAM GDP per-capita (% of US', PPP basis)

LATAM GDP per-head: recovering lost ground… but still has a long way to goLATAM central banks have done their homework on the inflation front

0%

10%

20%

30%

40%

50%

60%

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Gross external debt (% of GDP)


Dependence on external financing has fallen dramaticallyDevelopment of domestic savings pools have been a supportive development across LATAM

0

200

400

600

800

1,000

1,200Ru

ssia

Hun

gary

Chin

a

Kore

a

Arge

ntina

Peru

Indi

a

Colo

mbi

a

Italy

Mex

ico

Spai

n

Chile

Braz

il

Cana

da

Japa

n

Thou

sand

s Assets in pension funds and public pension reserve funds(US$bn)

Source: ScotiaFX Strategy, country statistics, OECD

3

LATAM’s fundamentals are strong – FX reserves, fiscal stance & debt composition

0

50

100

150

200

250

300

350

400

Brazil Mexico Argentina Peru Chile Colombia

LATAM FX reserves, US$bn

Source: ScotiaFX Strategy, Bloomberg.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2006 2007 2008 2009 2010 2011 F 2012 F 2013 F 2014 F 2015 F 2016 F

Argentina Brazil Chile

Colombia Mexico Peru

General government gross debt (% of GDP)


Boosted by the ToT shock, the region's CBs have accumulated significant FX reserves

The region’s fiscal stance has strengthened, and looks great compared to DM Rise in fixed rate debt has helped reduce the region’s vulnerability

The regions FX reserves should serve as a current account buffer

0%

10%

20%

30%

40%

50%

60%

Floating rate Straight fixed rate Inflation indexed Exchange ratelinked

2000

2010

Composition of LATAM's debt (%)

Source: ScotiaFX Strategy, BIS.

-300

-200

-100

0

100

200

300

400

500

600

700

2011F 2012F 2013F 2014F 2015F

ColombiaChilePeruArgentinaMexico


US$bn

The current FX reserves of Argentina, Brazil, Chile, Colombia and Mexico are enough to cover the LATAM region's forecasted cumulative current accout for 2011-2015

4

LATAM benefited from strong terms of trade gains, supporting strong growth

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1999 2001 2003 2005 2007 2009 2011

Euro Z. G7 CEE E. Asia LATAM

Terms of trade of goods and services (index 1999 = 100)

Source: IMF, ScotiaFX Strategy.

However, growth in LATAM has been very strong, but not as impressive if you consider the positive ToT shock

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2000 2002 2004 2006 2008 2010 2012 2014 2016

3yr average

LATAM GDP y/y% growth


… now it is a large share of the population with increasing purchasing power, which should be supportive for commodities in the long run

LATAM experienced a very-favorable terms of trade shock over the past 10-years China and India have been a large share of the global population for a long time…

0%

10%

20%

30%

40%

50%

60%

1700 1820 1900 1920 1940 1950 1960 1970 1980 1990 2000 2009 2030

China + India as % of global population

Source: ScotiaFX Strategy, Angus Maddison - "Historical Statistics of the World Economy: 1-2008 AD"

0%

10%

20%

30%

40%

50%

60%

1700 1820 1900 1913 1940 1950 1960 1970 1980 1990 2000 2008

Source: ScotiaFX Strategy, Angus Maddison - "Historical Statistics of the World Economy: 1-2008 AD".

China + India as % of global GDP

5

Long term portfolio flows should remain supportive for LATAM

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2011 2016 E

Expected allocation to all EM strategies is expected to rise ~70% over the coming 5 years according to a survey by Pension & Investments.

Source: ScotiaFX Strategy, Pension and Investments.

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Peru Mexico

Colombia Chile

Brazil Argentina

Private capital flows into LATAM (US$mn)

Source: ScotiaFX Strategy, IIF.2011 & 2012 data are IIF forecasts.

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Peru MexicoColombia ChileBrazil Argentina

Portfolio flows into LATAM (US$mn)

Source: ScotiaFX Strategy, IIF.2011 & 2012 data are IIF forecasts.

• Portfolio inflows into LATAM should remain strong, as investors increase allocations seeking to diversify risks, while targeting higher returns, driven by a relatively solid fiscal position as well as a favorable growth outlook.

• Survey responses by US institutional investors suggest planned EM allocations should ris5 ~70% over the next 5 years, providing further support for EM assets.

6

PERU

7

Improvement in fundamentals has made Peru one of the ‘sexy’ EM stories

The country has built up a solid FX reserve war-chest Improvement in fundamentals is driving a sustained improvement in credit ratings

0% 50% 100% 150% 200% 250%

ChileRussia

PeruKoreaChina

South AfricaMexico

SwitzerlandSpainIndiaBrazil

CanadaGermanyPortugal

United StatesItaly

GreeceJapan

General Government Gross Debt (% of GDP)Source: IMF, ScotiaFX Strategy.

Peru enjoys a very solid fiscal position

05

101520253035404550

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

FX Reserves (US$bn)

Source: Bloomberg, ScotiaFX Strategy.

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

BB-

BB

BB+

BBB-

BBB

Investment grade

Source: Bloomberg, S&Ps, ScotiaFX Strategy.

Peru's sovereing long term foreign currency rating by S&Ps

Peru registered the 10th fastest growth rate in the world in ’00-’10

(economies >US$100bn)

0.0% 3.0% 6.0% 9.0% 12.0%

QatarChinaIndia

NigeriaArgentina

KazakhstanVietnam

United Arab EmiratesSingapore

PeruKuwait

BangladeshLibya

IndonesiaPakistan

EgyptPhilippines

Islamic Republic of IranMalaysiaMorocco '00-'10 real GDP CAGR.

Economies >US$100bnSource: IMF, ScotiaFX Strategy.

8

Peru likely to receive more FDI likely driven by growth + institutional improvements

FDI intentions 2011 - 2013Country RankBrazil 4Mexico 10Peru 16Chile 18Colombia 19Source: UNCTAD, ScotiaFX Strategy

Peru should remain a major FDI destination

Peru has a friendly business environment (rank out of 183 countries)

• Infrastructure spending, both domestic and foreign driven, should be an important growth driver

• Mining investment is expected to amount to US$40bn in the current decade (Ministry of Mines and Energy)

• Improving institutions have served to reassure foreign and domestic investors to commit capital to long term projects

Ease of Doing

Business Rank

Starting a Business

Dealing with Construction

PermitsRegistering

PropertyGetting Credit

Protecting Investors

Paying Taxes

Trading Across

BordersEnforcing Contracts

Closing a Business

Brazil 127 128 112 122 89 74 152 114 98 132Chile 43 62 68 45 72 28 46 68 68 91Colombia 39 73 32 55 65 5 118 99 150 29Mexico 35 67 22 105 46 44 107 58 81 23Peru 36 54 97 24 15 20 86 53 110 96Source: World Bank's Doing Business Survey, ScotiaFX Strategy

9

Risks

• President Humala has done a good job so far reassuring “portfolio” investors (the ~45% foreign ownership of “soberanos” is proof of that). He must also continue to reassure longer term “real economy” investors to continue to drive infrastructure investments. The smooth negotiation of the mining royalties was a good signal…

• A hard landing by the Chinese economy would be an important blow to Peru, and most economies with a heavy commodity dependence. The government must keep on building domestic growth generators - among which, continuing to develop the country’s middle class is key.

• Commodity price volatility is a major risk, as well as a potential reversal of portfolio inflows as DMs tighten currently loose policy (still a long term risk). The country should keep strengthening its balance sheet, as it has been doing.

10

Introduction to Scotia Capital

CONTACTS - GLOBAL FX STRATEGY

THE MAJORS & PRIMARY CURRENCIES

Camilla Sutton Chief Currency Strategist 416-866-5470 [email protected]

Eric Theoret Currency Strategist 416-863-7030 [email protected]

LATAM

Eduardo Suarez Senior Currency Strategist 416-945-4538 [email protected]

ASIA

Sacha Tihanyi Senior Currency Strategist 852-6117-6070 [email protected]

Should you wish to be added to anyone of our three distribution lists, please reach out to one of the above authors.

This report is prepared by The Bank of Nova Scotia (Scotiabank) as a resource for the clients of Scotiabank and Scotia Capital. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness and neither the information nor the forecast shall be taken as a representation for which The Bank or its affiliates or any of their employees incur any responsibility. Neither Scotiabank or its affiliates accept any liability whatsoever for any loss arising from any use of this report or its contents. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any of the currencies referred to in this report. Scotiabank, its affiliates and/or their respective officers, directors or employees may from time to time take positions in the currencies mentioned herein as principal or agent. Directors, officers or employees of Scotiabank and its affiliates may serve as directors of corporations referred to herein. Scotiabank and/or its affiliates may have acted as financial advisor and/or underwriter for certain of the corporations mentioned herein and may have received and may receive remuneration for same. This report may include forward-looking statements about the objectives and strategies of members of the Scotiabank Group. Such forward-looking statements are inherently subject to uncertainties beyond the control of the members of the Scotiabank Group including but not limited to economic and financial conditions globally, regulatory development in Canada and elsewhere, technological developments and competition. The reader is cautioned that the member's actual performance could differ materially from such forward-looking statements. You should note that the manner in which you implement any of strategies set out in this report may expose you to significant risk and you should carefully consider your ability to bear such risks through consultation with your legal, accounting and other advisors. Information in this report regarding services and products of Scotiabank is applicable only in jurisdictions where such services and products may lawfully be offered for sale and is void where prohibited by law. If you access this report from outside of Canada, you are responsible for compliance with local, national and international laws. Not all products and services are available across Canada or in all countries. All Scotiabank products and services are subject to the terms of applicable agreements. This research and all information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever nor may the information, opinions and conclusions contained in it be referred to without in each case the prior express consent of Scotiabank. Scotiabank is a Canadian chartered bank. The Scotia Capital trademark represents the corporate and investment banking businesses of The Bank of Nova Scotia, Scotia Capital Inc. and Scotia Capital (USA) Inc. - all members of the Scotiabank Group. TM Trademark of The Bank of Nova Scotia.

11

The BCRP’s role in the FX market has been more focused on reducing volatility

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

BRL CLP COP MXN PEN

Central bank intervention as % of daily spot turoverScheduled daily intervention for Chile & Mexico. For Brazil & Peru avg. daily USD purchases for July to mid-Sept. Does not include non-spot intervention. Colombia's intervention is calcualted as the # of days the intervention would have been triggered over the past 3 years, divided over the number of days in the same period.Source: ScotiaFX Strategy, central banks, BIS, Bloomberg.

The BCRP is a “heavy intervener,” but intervention is more focused on prudence… reducing the sol’s volatility given still high dollarization in the financial system

Dollarization has declined dramatically, but remains high

2.50

2.70

2.90

3.10

3.30

3.50

3.70

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

USD/PEN

Source: Bloomberg, ScotiaFX Strategy.

The BCRP has tolerated a gradual appreciation of the sol

0% 5% 10% 15% 20%

HUFPLNZARBRLCZK

MXNTRYCLP

BGN

IDRPHPINR

TWDTHBPENARSCNYHKD Historical volatility (previous year)

Source: Bloomberg,

ScotiaFX Strategy.

The sol is one of the least volatile currencies in all emerging markets

0%

10%

20%

30%

40%

50%

60%

70%

80%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: BCRP, ScotiaFX Strategy.

Banking sector dollarization coefficient (%)

private and confidential: for discussion purposes only the rise of latin america and peru’s...

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