LatinAmerica:Facingtherisksintheexternalscenario

CentralBankofChile,May 2016

RodrigoVergaraGovernor

However,inthepastfewdecadestheregionhasmadeprogressinimprovingitspolicyframeworks.Thisputsitonabetterstandtodealwiththechallengesahead,comparedwith

earlierepisodes.

Introduction

Globaldemandhasweakened,commoditypriceshavefallenandinternationalfinancialconditionsarenolongerasfavorableastheywereinrecentyears.

LatinAmericaisfacingamorechallengingexternalenvironment.

Inmanycases,thiscoupleswithcomplexsituationsathome.

Worldgrowthisgoingthroughasteeper- andlonger-than-expectedslowdowncycle.

(*) Projections included in the IMF’s WEO.Source: World Economic Outlook, IMF.

Actualandprojectedworld growth (*)(annual change,percent)

3

2

3

4

5

6

2

3

4

5

6

2010 2012 2014 2016 2018

Apr.11

WorldGDPatPPP

Apr.13

Apr.14

Apr.15

Apr.16

Apr.12

Therefore,accumulatedworldgrowthdifferssignificantlyfrominitialprojections.

(*) Projections included in the IMF’s WEO of respective months.Source: World Economic Outlook, IMF.

Projections for the level ofworld GDPatPPP(*)(index,2011=100)

4

100

105

110

115

120

125

130

100

105

110

115

120

125

130

11 12 13 14 15 16

Apr.11

WorldGDPatPPP

Apr.13

Apr.16

5

Lately,thelowerworldgrowthandespeciallyChina’sslowdownhaveresultedinsubstantialdropsincommodityprices.

Commodityprices(*)(index,2000-2016=100)

20

60

100

140

180

220

260

20

60

100

140

180

220

260

00 02 04 06 08 10 12 14 16

Energy

Metals

Grains

(*)GoldmanSachsaggregate index.Source:Bloomberg.

Commoditiesaccountforalargeshareoftheregion’sexports.

(*) Considers emerging economies in each region.Source: United Nations Conference on Trade andDevelopment

Exportsstructure(*)(percentageoftotal)

6

53.4

46.6

21.1

78.9

Commodities Other

Latin America Asia

Accordingly,the region’s termsoftrade have fallensignificantly…

Source: World Economic Outlook, IMF.

TermsoftradeinLatinAmerica(annualchange,percent)

7

-10-8-6-4-20246810

-10-8-6-4-202468

10

10 11 12 13 14 15 16

…andtradeflowshavedecelerated.

(*) Volume imports and exports of goods and services.Source: World Economic Outlook, IMF.

ForeigntradeinLatinAmerica(*)(annualchange,percent)

8

Imports

Exports

-5

0

5

10

15

20

25

-5

0

5

10

15

20

25

10 11 12 13 14 15 16

Financialconditionshaveworsened.Volatilityhasincreasedduetoperceivedhigherrisksassociatedto,amongotherfactors,theChineseeconomyandtheFed’sdecisions,butalsodueto

idiosyncraticissueswithintheregion.

9

Sovereignriskpremiums(*)(basispoints)

Stockexchangesindollars(basispoints)

(*) Risk premiumsmeasured using 5-yr CDS.Source: Bloomberg.

0

100

200

300

400

500

600

0

100

200

300

400

500

600

11 12 13 14 15 1620

40

60

80

100

120

140

20

40

60

80

100

120

140

11 12 13 14 15 16

EmergingAsia Emerging Europe DevelopedmarketsLatin America

Thissituationhastranslatedintoimportantmovementsintheregion’scapitalinflows

(*) Movingmonth for stocks and bonds. The Total considers the accumulated moving year.Source: Emerging Portfolio Fund Research.

10

CapitalinflowstoLatinAmerica(*)(billionsofdollars)

-40

-30

-20

-10

0

10

20

30

40

-10

-8

-6

-4

-2

0

2

4

6

8

10 11 12 13 14 15 16

Stocks

Bonds

Total(right axis)

Meanwhile,theregion’scurrencieshavedepreciatedsignificantly.

(1) Includes: Brazil, Chile, Colombia and Peru. (2) Korean Rep., Indonesia, Malaysia and Thailand. (3) Czech Rep.,Hungary, Poland and Rusia. Sources: Bloomberg and IMF’s WEO,October 2015.

Nominalexchange rate(accumulated change since trough ofMay 2013)

11

Asia(2)0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

May.13 Nov.13 May.14 Nov.14 May.15 Nov.15

Latin America(1)

Europe(3)

Thedropincommodityprices,thedeteriorationoffinancialconditionsandthereducedexternaldemand,pluslocalfactors,havedrivendown

theregion’sinvestmentrates.

Source: World Economic Outlook, IMF.

Investment inLatinAmerica(percent ofGDP)

12

14

16

18

20

22

24

14

16

18

20

22

24

00 02 04 06 08 10 12 14 16

GrowthforecastsforLatinAmericahavealsobeenreviseddownwardaccordingly.

(*) Projections included in WEO.Source: World Economic Outlook, IMF.

GrowthinLatinAmericaandtheCaribbean,andevolutionofprojections(*)

(annualchange,percent)

13

-1

0

1

2

3

4

5

6

7

-1

0

1

2

3

4

5

6

7

2010 2012 2014 2016 2018 2020

GDP

Apr.12 Apr.13Apr.14

Apr.15

Apr.16

This hasdistancedour economies’performancefromAsia,which haskepthigher growth rates.

(*) Projections included in WEO.Asean-5: Indonesia, Malaysia, Philippines, Singaporeand ThailandSource: World Economic Outlook, IMF.

Growth inLatinAmerica andAsia(annual change,percent)

14

ASEAN-5

LATAM

-2

0

2

4

6

8

-2

0

2

4

6

8

02 04 06 08 10 12 14 16

Insidetheregion,however,theoutlookisveryheterogeneous.

(*) Historic average is defined as 2000-2013growth.Source: Regional Economic Outlook, IMF.

Growthforecastfor2016(*)

15

Negativegrowth in2016

Positivegrowth in2016;belowhistorical average

Positivegrowth in2016;abovehistorical average

Inthisadversescenariofacingseveralofourcountries,therearestillsomeadjustmentspending.

Source: World Economic Outlook, IMF.

Regionalcurrentaccount(percent ofGDP)

16

-4

-3

-2

-1

0

1

2

-4

-3

-2

-1

0

1

2

00 02 04 06 08 10 12 14 16

Thefallincommoditypricesandtheeconomicslowdownhaveerodedfiscalpositions,limitingthespaceforstimuluspoliciesonthefiscalside.

(*) General Government GrossDebt.Source: IMF.

Public debt (*)(percent ofGDP)

17

Fiscalbalance(percent ofGDP)

30

35

40

45

50

55

60

30

35

40

45

50

55

60

10 11 12 13 14 15 16

-8

-6

-4

-2

0

-8

-6

-4

-2

0

10 11 12 13 14 15 16

Inthe region asawhole,inflationhasshownamild increase,but insomecountries the currencydepreciationhashad importanteffects on headline

andexpected inflation.This also limits the space for looser monetarypolicies.For 2016,inflation is expected todecline.

Source: World Economic Outlook, IMF. 18

Inflation(percent)

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

10 11 12 13 14 15 16

Infact,monetaryauthoritieshaveraisedthepolicyratesintheregion.

Sources: Bloomberg and World Economic Outlook, IMF. 19

Monetarypolicyinterestrates(percent)

EmergingEurope

LatinAmerica

ChinaEmergingAsiaexcludingChina

LatinAmericaexcludingBrazil 2

4

6

8

10

12

14

2

4

6

8

10

12

14

07 08 09 10 11 12 13 14 15 16

Overall,for afew decades the region hasbeenmakingsignificantprogresson anumberofareas:poverty hasdeclinedalongwith aincrease inper

capita income.

(*) The poor include the extreme poverty.Sources: ECLAC and IMF.

20

Poverty (*)(percent)

Extremepoverty

0

10

20

30

40

50

60

80 90 99 02 08 11 12 13 14

Poor

0

10

20

30

40

50

60

Thecentralbanks’credibilityhasstrengthened,astheyhavebeenabletoachieveimportantadvancesincontrollinginflation.

Source: World Economic Outlook, IMF. 21

Inflation(average annual change,percent)

132.4

151.2

6.4 5.00

40

80

120

160

80-89 90-99 00-07 10-160

40

80

120

160

Theregionmanagedtobenefitfromtheyearsofbonanzatobringdownitslevelsofexternaldebtandhoardinternationalreserves.

(*) Considers Argentina, Brasil, Chile, Peru and Colombia.Source: World Economic Outlook, IMF.

22

Externaldebt(percentofGDP)

Internationalreserves(*)(percent ofGDP)

0

5

10

15

20

0

5

10

15

20

97 00 03 06 09 12 15

42.6

35.0 34.9

26.8

0

15

30

45

80-89 90-99 00-07 10-160

15

30

45

Regardingour financial systems,capitaladequacy ratiosaregood,whilenonperforming loanshave diminished.

(*) Shows the region’s simple average.Source: Global Financial Stability Report, IMF.

23

RegulatoryCapital(*)(percentage ofrisk weighted assets)

NPL(*)(percentage oftotalloans)

12

13

14

15

16

17

10 11 12 13 14 1512

13

14

15

16

17

0

1

2

3

4

10 11 12 13 14 150

1

2

3

4

Inrecent years,we have made important advances invarious fields,especially regardingmacroeconomic stability.The current scenario stresses the importance ofmaking further

advances instrengthening our economic policies.

Takingstepstostrengtheninstitutionsisessential

Considering the importance ofcommodities for our economies,reducing the dependence ofour fiscalrevenues on them is key.

Financialopennesshasbroughtbenefitstoourregion,butitalsoleavesusmoreexposedtothevolatilityoftheinternationalscenario.Thisrequiresmakingadvancesinstrengtheningthe

regulationandsupervisionofourfinancialsystems.

Safeguarding the credibility ofour centralbanks hashelped us ensure that,despite the sharpdepreciation ofour currencies,inflation is still contained.

Increasing productivity is akey challenge.

LatinAmerica:Facingtherisksintheexternalscenario

CentralBankofChile,May 2016

RodrigoVergaraGovernor