EFTA01458975.pdf

8 December 2015 World Outlook 2016: Managing with less liquidity Countries' recent investment performances also allow us to identify the most challenging macroeconomic outlooks in the region, led again by Brazil and Argentina, but including also the special case of Chile. In the latter, the combination of worsening external backdrop and controversial reforms has badly affected confidence and investment, but this effect should be partly temporary in nature, as policy uncertainties are expected to fade, and macro policy is actively helping the recovery in confidence and growth. The suboptimal investment performance is also a good indicator of the need Figure 3: Public debt dynamics for a second round of reforms in the region. Unfortunately Mexico has been the only country to show a clear determination to push for reforms in a couple turning fragile for some countries of specific areas, particularly in the energy sector. By contrast, in Argentina, Brazil, and in particular in Venezuela, there has been an increasing intervention of some form of state capitalism, with expending governments, increasing trade protectionism, and economic controls. This appears to explain the $ It observed characteristics of the recent slowdown in the region, particularly •♦ 3 visible in the industrial sector, and in countries reporting significant increases in unit labor costs, typical of a middle income malaise. In this regard, recent presidential elections in Argentina provide room for hope. o • Out•••••• Xi) a40,10 sore, awe. evo• The new administration is expected to introduce corrective policies for existing macro-imbalances, while bringing Argentina back to international markets Saito SF. hra.,a4Mrants. after a likely resolution of the pending holdouts case. Similarly, a mid-term election in Venezuela could bring a more balanced policy making, although the risk of a power vacuum should not be disregarded. By contrast, ongoing political instability in Brazil is likely to remain a big burden for fiscal adjustment and economic performance at least in 2016. A warranted fiscal adjustment has been announced, and steps are being taken to reestablish much needed policy credibility, but President Rousseff's conviction and power to support these policies remain major question marks. iFiguie 4: Deutsche Bank forecasts: Low external debt is a plus but fiscal dynamics could worsen fast yO;,. ufle'; 4'4:5! z E4 2or.if 2C.I 16F Mr; The last several years of ultra-low global interest rates have been a bonus for Argentina GDP 45 1.0 -0 1 3.9 emerging countries and a likely rise in US rates has the potential to create CPI 386 279 373 23.6 CA bal.. %GDP -17 -24 -2 3 further turbulence in capital flows. Similarly, the recent decline in commodity &fal GDP 01 -3.7 -24 10 prices might prove too strong a test to external balances in producer countries. CPI 63 SO 85 6.2 However, low levels of hard currency debt, with Brazil, Chile, Peru, and Mexico CA bal.. %GDP .43 -15 -18 being actually creditors of the world economy, provide an exceptional buffer Chile GOP 19 2.1 2.2 2.7 CPI 44 4.4 36 35 this time around. Expectations for slow-motion rate normalization in the US are CA bal., %GOP -1.2 -0.7 -1.3 .09 another blessing for emerging economies in this cycle. Colernb. GDP 46 10 29 3.2 CPI 29 4.9 6.0 3.5 This notwithstanding, public debt dynamics show that countries like Brazil, CA bat, %GDP -5 2 -6.2 -53 4 1 Mexico GOP 2.3 2.3 2.7 3.2 Venezuela, and Colombia might face significant increases in their debt levels if CPI 40 2.5 31 3.4 they fail to reduce their large primary deficits. Furthermore, at current oil prices, CA bal.. %GOP -23 -2.5 -27 external conditions in Venezuela remain unsustainable, as a low level of Peru GOP 24 2.8 34 42 reserves barely covers the projected balance of payment deficit of a single year CPI 32 3.5 3.8 3.3 CA bal.. %GOP .40 46 43 under the status quo. Besides, a public debt restructuring appears difficult to .34 Veranueta GDP -97 -76 -3.2 avoid, with the government being harshly constrained politically by a CPI 320 1200 175.0 2530 protracted recession with inflation. CA bal . %GDP 46 '03 49 02 San. Hartmann 01406.• Bart ROSOMIC* Gustavo Cationero, (1) Deutsche Bank AG/London Page 41 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0119148 CONFIDENTIAL SDNY_GM_00265332 EFTA01458975