79341079 hsbc tailwinds still stronger

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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.
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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


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


2011f 2012f 2013f

2

4

6

8

10

2006 2007 2008 2009 2010 2011f 2012f 2013f

LatAm LatAm ex Arg & Ven


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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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


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


2012f 2013f

6

7

8

9

10

11

12

2006 2007 2008 2009 2010 2011f 2012f 2013f

LatAm LatAm ex Ven


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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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


Industrial production (%, y-o-y) Unemployment rate (%, end-period)

0

2

4

6

8

10

12


2011f 2012f 2013f

0

3

6

9

12


2011f 2012f 2013f


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


Industrial production &unemployment


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Q1 2012

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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


Private consumption expenditure (%, y-o-y) Investment (%, y-o-y)

-4

0

4

8

12


2011f 2012f 2013f

0

5

10

15

20


2011f 2012f 2013f


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


Consumption & investment


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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


Trade balance (USDbn) Current account balance (% of GDP)

-10

0

10

20

30

40

50


2011f 2012f 2013f

-12

-8

-4

0

4

8


2011f 2012f 2013f


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


Trade balance & currentaccount


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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


Net FDI (USDbn) International FX reserves (ex-gold, USDbn)

0

20

40

60


2011f 2012f 2013f

0

100

200

300

400


2011f 2012f 2013f


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


FDI & international reserves


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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


2011f 2012f 2013f

0.0

0.5

1.0

1.5

2.0

2.5


2011f 2012f 2013f


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


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


Primary fiscal surplus (% of GDP) Fiscal balance (% of GDP)

-7

-5

-3

-1

1

3


2011f 2012f 2013f

-10

-5

0

5


2011f 2012f 2013f


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


Primary surplus & fiscalbalance


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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

[email protected]
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

79341079 hsbc tailwinds still stronger

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