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BBVA's 3rd Latin American Local Markets Conference - London 2017

Published 06/03/2017, 09:33
Updated 09/07/2023, 11:32
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I recently had the opportunity to attend BBVA (MC:BBVA)'s 3rd Latin American Local Markets Conference in London. It is now an established gathering and has become influential due to the high calibre of speakers and presenters. Not only were there presenters from BBVA including Heads of Divisions and Economists but we also had in person senior Central Bankers from Colombia, Argentina, Peru & Mexico (my personal favourite as there is a story at the end which I hope you’ll find interesting…perhaps amusing as well). So, with this in mind, these are my personal recollections and I hope in the following segments to give you a taste of the event through my eyes – a feeling as if you were there yourself.

Jorge Sicilia, Chief Economist – BBVA with a 'Macro overview'.

Jorge expected growth throughout LatAm with the exception of Mexico due to lower LatAm exchange rates. He say investment in specifically in Argentina, Peru & Chile. Current Account balances were improving but that there was not much room for Fiscal Policy Changes/Impulse. '...FX is working as a shock absorber...' and saw no significant Balance Sheet Effect. Additionally, '...expect lower commodity prices in most countries...except Mexico...', this was due to FX moves in USD/MXN.

He saw a worsening of ROE on listed companies as well as worsening EBITDA plus it will be a very crowded electoral calendar for 2017–2018 with many very discredited incumbents.

There was still time to reform – physical capital, human capital & reduce informality with a growth rate of 3–4 % ideally.

The key risks were: global liquidity (short term), Chinese slowdown (medium term), populism (aka Caudillismo...in the medium term) and inequality (longer term).

Next came Alvaro Vivanco, Head of Latin American Strategy – BBVA.

Alvaro broke his presentation up into three areas with three specific items in each area. They were:

A) Themes

1. It feels better, doesn't it? Stable commodity prices offset higher USD rates.

2. Political rules changed? Same players, same vested interests, same incentives, different outcome.

3. After the panic, stable flows. Portfolio flows have recovered but FI is not stretched.

B) Tactics

1. Can you trade LatAm as an asset? Relative asset overwhelms individual trades and he gave an example of BRL/MXN fell some 30% till Jan 2016 and then rose some 60% since then '...each country must be viewed on its own terms...'

2. Trading the 2nd (& 3rd) derivative. Rates locally are more anchored than the FX.

3. Don't worry too much about chasing trades. Fundamentals push flows and therefore push valuations.

C) Trades; here he gave some more examples.

1. Pressure remains still for Banixco to raise rates, especially as inflation is rising.

2. Positive impact of stronger COP on inflation and still has room to go.

3. Chile, CLP still a CPI anchor, rates are backed by inflation numbers and flows.

4. Peru, the Soreranos are becoming attractive, though not just yet.

5. Argentina, the 10yr vs USD looks attractive but as a long term trade.

6. Overall. '...very defensive Mexico...Argentina attractive...'.

Next came the main guest speakers, officials from various LatAm central Banks, starting with Ana Fernanda Maiguashca – Board Member and Co-Director of the Central Bank of Colombia (BANREP).

Ana spoke of an interesting year after the first rate hike in December.

The shock was the oil price and its related provision for food. Their main trading partners; Venezuela & Ecuador fared worse. The impact amounted to a '...spikes in inflation...'. It was coming down from 9% to just under 6% and targeted for 2%. The Current Account is expected to be -6 to -7%.

The adjustment – the shocks are over, but growth is lower (+1.2%) and domestic demand is also lower (-1.1%). She expects 2016 growth of 1.8% and '...don't see the strength of the economy to go beyond 2017...'. She expects GDP to rise 1.4% and domestic demand to rise by 0.4%. the C/A is expected to fall by USD 3.637 billion and as a percentage of GDP to fall by 4.6%. For 2017 she '...don't expect much more growth than 2016...'.

On other matters, she added that they were trying to model the El Nino effect as inflation initially rose and is now falling from lower food prices. The economy was becoming more '...tradeable...' in inflation. For 2016 she gave a total C/A deficit forecast of USD 13.323 billion.

Policy impact - '...2017 not going to be easier.'. She was aware the cut in Dec had surprised the market and though '...we are in pretty contractionary territory.'. This was NOT shared by all the seven member Board. '...in real life, I am not much of a dove or a hawk...therefore...there will be more rate cuts.'. However, '… next six months will be very difficult...' in relation to indexation.

Next came a Q&A session and she was asked:

Any chance of a 'peace' dividend? She replied '...see long term impacts...don't see short term impacts!'.

If the Fed starts tightening faster, what will Columbia do? ' She replied '...don't have intimate relationship that Mexico has.' She didn't think it will have a direct impact but may see turmoil brought on '...don't see such a large risk...'.

VAT impact? She replied that this will have a onetime impact.

Next came Demian Reidel – Board Member of Central Bank of Argentina (BCRA). He spoke about three areas:

1. Modernisation of the system – payments, fintech, etc.

2. Deepening & strengthening the local markets.

3. Macroeconomic developments – infrastructure.

He gave the example, to a laughter from the audience as he asked us to guess, what 100 pesos invested in the local market would have gained over the last 30 years. The answer = -98.5% return. This cost was protecting you form confiscation every 10 years...and not just over the last 10 years. Therefore, deeply negative interest rates. He added '...this has to change otherwise why would you invest?'.

He rhetorically asked; how do we correct this? Start by using interest rates as a monetary tool. The long run target is 5% with +/- 1.5% in 2019. He added '...we try to do this with flexible & open FX rate...a 'dirty' float...' and needed to remove excess liquidity from the previous regime. All the previous restrictions on hard currency had created an artificial demand. They needed to withdraw and to start an interest rate & inflation targeting regime.

Now, he saw a '...close to steady...' monetary side and many of the small local banks will have to merge as the inflation subsidy disappears.

They have introduced and are introducing inflation adjusted loans so changes to cash flow structure can see higher mortgages

They are introducing new bankruptcy laws as well. This was a '...flavour of everything that is happening.'.

There were now a Q&A session from the audience.

Will these changes stick? He answered most changes were under the Central Bank's domain, apart from the bankruptcy law.

What was the inflation outlook? He answered '...no-one is forecasting inflation with one target.' There was a lot of price adjustment NOT monetary inflation. In the second half of 2016 an approximate 8.9% inflation so an upper band of 17% does not seem too bad. Wage inflation is still a problem and added '...14% not the number you should have in mind.' and continued '...if we see inflation accelerating, we will take measures to control it.'.

Taxes? He answered that reducing labour taxes should promote growth. Spending is 40% of GDP. Efficiency would now increase. The price of how things are done is '...changing...'. The new Finance Minister is more in line with the Central Bank view.

Central Bank reserves? They are higher due to the tax amnesty. The amnesty was successful but it doesn't mean that all came in. USD deposits have grown and as for ARS rates '...ohh...I don't know...' many can now get USD finance.

The next presentation was Julio Velarde – Governor of Central Bank of Peru (BCRP), a great speaker and one whom I interacted partially later on with another CB Governor and which you can read later.

Julio started by recounting how 25 years ago when he joined BCRP they had – to general laughter of the audience – 1000% inflation which was an achievement as it was the lowest then in Latin America.

The last ten years they had seen better performance with the 4th highest growth rate in the world. Latin American in 2016 & 2017 has started with high growth and the expectation is for continued high growth.

Metal prices are rising after a slump of five years. These five years have been the longest slump in the last fifty years. He expects at this time because of this long low slump that he will see higher prices AND higher production.

In agricultural production he was optimistic as just three of the investments totalled USD 1.7 billion. Soft fruits & vegetables had variously risen by double to twenty times.

In 2016 he saw a surplus of USD 1.2 billion with GDP expected at 4.0%. This varied with industries at +16.6% for mining to -12.8% for fisheries. He expected public & private investment to be boosted in 2017, many mining projects were completed in 2016 therefore investment in this area fell by 49.6% but this expected to rise in 2017.

He next spoke about some of the various Public Private Partnerships (PPP), a) Line 2 of the Lima Metro, b) Southern Gas Pipeline, c) Lima Airport expansion & d) the new Cusco Airport.

He the spoke on the new tax regime for small companies & the red tape reduction, more investment in water and sanitation and rounded it off with their having the 4th lowest gross public debt in the Emerging Markets.

On other factors: CPI was higher on water shortage though inflation was 3.2% - the 3rd lowest in Latin America. The Dollarisation ration of the economy was 29% versus 67% in 2005...though he would have preferred 15 – 20%. BCRP also had a lower demand for hedging instruments (NDFs) due to a stable FX rate and international reserves are in a good state.

The last Central Banker to speak and perhaps in many ways the most anticipated was Javier Guzman – Deputy Governor of the Banco de Mexico (BANIXCO).

He started to amusement and irony with how they are '...living in exciting times in Mexico...'.

Mexico was similar to other EMs. A low rate of growth in the World economy complicated by the results of the U.S. Presidential Election and challenges of a domestic nature. A lower oil output and a higher public debt to GDP ratio.

Local & external factors – a moderate GDP rate of growth and signs of deceleration. Private consumption was higher, investment sideways and exports '...recovering...'. On the supply side, industrial production was sideways though services were higher. Leading indicators were under 100 and continuing lower. He saw growth in 2017 down to 1.7% from recent 2.95% and '...ALL subject to a lot of uncertainty.'. Inflation was higher due to higher gasoline prices and towards the 3% target in 2016 but still within the band. There was higher pressure on prices with liberalised gasoline prices and a higher minimum wage. He expected inflation to be up to 4.7% by the end of 2017 but falling thereafter.

Then came the U.S. Elections...and '...some quips from Mr. Trump...'.

Predictably from analysis USD/MXN went to 21 in Dec 2016 from 18 in Nov 2016. he expected higher overnight rates to 5.75% form recent 3% and '...most interest rate moves higher were of a preventative nature.'. He added that higher rates in a subdued economy way be questioned but longer term it would be much worse.

As for FX intervention '...part of the toolkit...' but under exceptional circumstances and not continual.

The Q&A session with audience was next:

Turnover in FX? Javier answered the MXN was in the top 12 in currency trading and volatility and it '...strengthens economic activity...'.

Preventative rate rises – do you see more and at what point would you stop? He responded that he did '...not have an objective for the exchange rate...'. Pass through was very low at the moment between inflation and FX.

BANIXCO staff scenarios are for 20% higher tariffs? He replied that it was very difficult to build a reasonable scenario at the moment with potentially higher USD/MXN rates and lower growth rates outlook in Mexico.

China/Mexico labour force? Diversification scenarios in case of trade protectionism? He expressed concern that in Mexico for many years up to 80% of all trade had been with one partner. Trying to diversify but right next door you have the biggest market in the World in the USA. So in the meantime, make the economy more efficient and attractive.

How much do you trust the current data; specifically inflation? He noted that a significant part related to structural works, for example telecommunications and longer term projects. However, you will see the completion of these projects and any aberrations such as these.

Earlier I promised an amusing story; so here it is! It relates to the last speaker, Sr. Javier Guzman (BANIXCO) & the penultimate speaker Sr. Julio Verlarde (BCRP).

Following the end of Sr. Guzman's presentation there was a short coffee break. I was very eager to ask Sr. Guzman two questions if he was available. I noted that he was chatting socially to his familiar Central Bank colleague and I assumed friend Sr. Verlarde and took the opportunity to introduce myself and beg his indulgence for a couple of quick questions. He graciously obliged.

First; have you ever met President Trump? He answered '…...no......'.

Secondly; would you like to? To which he answered emphatically, determinedly and very amusingly '…....NOOOO......'. His response and delivery were enough to make Sr. Verlarde laugh and almost spill his coffee and for me to also chuckle. We carried on talking, but I have to say that was one of the highlights of the day and proof that chatting with Central Bankers can lead to amusing stories.

Overall, I found the conference informative but I feel obliged to say that some of the CBs who spoke were soporific. Nevertheless, I’m glad I went.

As I have mentioned here and in my previous reviews, these are personal views & recollections from the event which I am happy to share with you. If you have any questions or queries, then please feel free to contact me.

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