LATIN AMERICA ECONOMIC OUTLOOK

Please refer to important information at the end of this report LATIN AMERICA ECONOMIC OUTLOOK DEEP DIVE | EMERGING MARKETS José Carlos Faria Head of Latin America Economic Research 20 DECEMBER 2018 2 This collection of charts summarizes the outlook for selected Latin American economies based on four main themes: economic growth, monetary policy, fiscal policy and balance of payments. It also includes our main regional macroeconomic forecasts for 2019–20. Highlights by country: •A painful adjustment continues in Argentina, where we see a challenge to fiscal policy from a severe recession and critical election. •While Brazil shows incipient signs of economic recovery, we expect a return to growth would require social security reforms. •Growth remains positive in Chile, as the government tries to revamp the fiscal accounts and pass reforms, but it looks vulnerable to a global slowdown. •In Colombia, the election of a market-friendly president has boosted market confidence, but we think the country needs reforms to reduce its dependence on oil. •A new president has pledged to transform Mexico, but too many changes on the policy front might hurt the country’s economic outlook. Brazil Pension reform needed •The economy is recovering slowly from a deep recession and will probably grow only 1.3% in 2018. •However, a market-friendly outcome to the presidential election and low interest rates will pave the way for a faster recovery in 2019. •Fiscal policy continues to be Brazil’s Achilles’ heel and stability depends on passing a crucial social security reform without further delay. Chile Strong momentum •The election of a market-friendly government has boosted business confidence. •The new government is acting to revamp fiscal accounts and has proposed tax and social security reforms. •Solid growth and higher inflation have prompted the central bank to normalize monetary policy. •Copper prices – and thus China – are important. Colombia Vulnerable to oil •After months of political uncertainty, the election of a market-friendly president has boosted confidence. •External revenues and fiscal targets continue to depend heavily on oil prices. Lower oil prices could increase the current account deficit. •The government’s efforts to promote fiscal consolidation rely on reforms that widen the tax base and reduce dependence on oil. Mexico New administration •Financial markets remained stable following the election of President Lopez Obrador in July. •However, AMLO’s first measures have undermined market confidence and affected asset prices. •While Mexico’s position is quite solid (small fiscal and current account deficits), AMLO’s ambitious spending plans do not bode well for economic stability. Argentina Painful adjustment •The gradual adjustment strategy pursued by President Macri proved too slow and ended dramatically in a confidence crisis. •An IMF bailout has allowed Argentina to weather the turbulence for now. •Implementing a massive fiscal adjustment amidst a severe recession during an election year will be Argentina’s main challenge. Country summary Sources: BNP Paribas 3 LATAM economic forecasts Sources: National sources, BNP Paribas forecasts. Forecasts are provisional and subject to changes. 4 CURRENT ACCOUNT (% of GDP)20172018F2019F2020F20172018F2019F2020FLatin America1.61.42.22.3Latin America-1.4-1.8-2.0-2.0Argentina2.9-2.5-1.52.5Argentina-4.9-4.5-2.0-0.5Brazil1.11.33.02.5Brazil-0.3-1.1-2.0-2.4Chile1.54.03.52.5Chile-1.5-3.1-3.4-3.0Colombia1.83.03.53.8Colombia-3.3-2.8-2.7-2.9Mexico2.02.32.01.6Mexico-1.6-1.2-1.6-1.6FISCAL BALANCE (% of GDP)20172018F2019F2020F20172018F2019F2020FLatin America6.59.26.44.9Latin America-5.2-4.8-4.8-4.6Argentina24.847.026.013.0Argentina-6.0-5.1-3.7-3.0Brazil3.04.03.54.0Brazil-7.8-7.5-7.2-6.6Chile2.32.92.62.6Chile-2.8-1.7-2.0-2.0Colombia4.13.03.53.5Colombia-3.6-3.1-2.4-2.3Mexico6.84.84.04.0Mexico-1.1-2.1-3.2-3.7EXCHANGE RATE (dome stic curre ncy/USD, ye a r e nd)INTEREST RATE (benchmark, year end)20172018F2019F2020F20172018F2019F2020FArgentina18.6238.3055.6057.50Argentina28.7555.0026.0010.00Brazil3.313.653.253.20Brazil7.006.507.507.50Chile615675610590Chile2.503.004.004.50Colombia2987311529702900Colombia4.754.255.005.50Mexico19.6620.0019.6019.00Me xi co7.258.008.007.50REAL GDP (% change)INFLATION (% change in CPI, year end) Economic Activity 1 5 6 INDEC index of economic activity (2004=100) Real GDP growth (y/y%) Consumer confidence (50=neutral) Unemployment (%) Argentina is facing a major economic deceleration this year amid a confidence crisis that has led to massive currency depreciation and sharp increase in interest rates to control inflation. A severe drought has also hurt agricultural production in 2018. We expect GDP to contract a hefty 2.5% this year. Although we expect agricultural production to rebound next year, we also forecast a 1.5% fall in GDP in 2019 mainly due to negative statistical carryover. We ex