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ISSN 1474-5615
www.latinamericamonitor.com

Latin America Monitor

Southern Cone
Vol 30 Issue 8 August 2013

Business Monitor Internationals monthly regional report on political risk and macroeconomic prospects

CHILE This month's top stories

Balance Of Payments To Paraguay: Return To Mercosur To

Remain A Priority
Remain Tipped To Negative
We maintain that newly elected Paraguayan President
Horacio Cartes will continue to attempt to normalise rela-
tions between his country and the Mercado Comn del Sur
BMI View: Weaker external demand for Chilean mining exports will (Mercosur), but acknowledge that Paraguay's objection to
see the country's current account remain in deficit in the coming years. Venezuela's entry into the trade bloc remains a point of
Moreover, slimmer profit margins from lower commodity prices will contention. While Paraguay has diversified its export mar-
see inbound investment cool, which is likely to keep the capital and kets over recent years, it still sends nearly half its exports
financial accounts in deficit as well. That said, the country's strong to Mercosur, underpinning our view that it can ill afford a
business environment and robust stock of international reserves will further deterioration in relations.
page 6
keep Chile's balance of payments position weak but stable.
We maintain our forecast that Chile's cur- in 2013 and 6.7% in 2014, from 7.7 Uruguay: Weakening Consumer
rent account, which has been in surplus for % in 2012, while weaker demand and Posing Downside GDP Risk
seven of the past 10 years, will remain in excess supply will see the average price Weaker-than-expected private consumption is posing a
deficit, peaking this year at 3.7% of GDP, of copper fall to US$7,300 /tonne downside risk to our forecast for real GDP growth to slow
up from 3.5% in 2012, before narrowing this year and US$7,000/tonne next from 3.9% in 2012 to 3.8% this year. While relatively robust
to 3.3% of GDP in 2014 and 2.8% in year, from US$ 7,95 5/tonne in 2012. government consumption and fixed capital formation are
2015. Our view is underpinned by our Asia Given that copper typically makes up somewhat mitigating this risk to our headline forecast, we
Country Risk team's forecast for a slow- around 55.0% of Chile's total exports, would be likely our forecast down should unemployment
down in Chinese economic growth, and our with a third of that heading to China, and inflation remain elevated in the coming months.
Commodities team's below-consensus price we forecast that Chile's goods trade page 7
forecasts for industrial metals, which we surplus will shrink from US$3.4 bn (or
expect to weigh on Chile's goods trade bal- 1.3% of GDP) in 2012 to US$227.5 Regional: Assessing The Implications
ance in the next few years. We forecast that mn (0.1% of GDP) in 2013 Of Labour Market Weakness
Chinese real GDP growth will slow to 7.5% ...continued on page 4 We maintain our view that unemployment rates in most of
Latin America's largest economies will tick up this year, as
economic activity moderates or remains relatively weak.
ARGENTINA page 8

GDP Growth To Hit Bottom

BMI View: We continue to expect that Argentine real GDP growth will Regional Indicators
bottom in 2013, forecasting 1.8% growth this year after 1.9% last year,
2011 2012e 2013f 2014f
as a currency devaluation, which we expect to occur in H213, sends Southern Cone Indicators
inflation higher, and net exports drag on real GDP growth. We expect
Nominal GDP, US$bn 733.9 758.4 803.9 851.7
real GDP growth to accelerate to 2.9% next year on the back of a
Population, mn 68.0 68.6 69.2 69.9
rebound in private consumption and less of a drag from net exports.
GDP per capita, US$ 10,795.2 11,052.8 11,608.212,187.6
Over the next few quarters, we expect demand picture, continuing an abrupt
Real GDP growth, % 7.5 3.2 3.2 3.8
years of unorthodox economic policy, slowdown in the Argentine economy.
including expansionary monetary and While the monthly economic activity Inflation, % 7.4 7.2 10.9 12.0
fiscal policies and high levels of gov- indicator suggests Q113 saw an uptick Goods Exports, US$bn 187.3 181.4 187.4 200.8
ernment intervention in the economy, in growth, we expect real GDP growth to Goods Imports, US$bn 164.1 163.8 175.9 190.2
to collide with a weakening external ...continued on page 2 Notes: e/f = BMI estimate/forecast. Southern Cone = Argentina, Chile, Paraguay, Uruguay. Weighted by
nominal GDP. Source: 3 BMI

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 ARGENTINA
RISK SUMMARY
POLITICAL RISK
Three Top Generals Ousted
Argentine President Cristina Fernndez
de Kirchner has replaced top members of
the armed forces and the head of the joint
general staff in a surprise move that signals
greater politicisation of the military. The
shake-up of the military leadership comes
just months after the former defence minis-
ter was replaced by Augusto Rossi, formerly
a senior member of Fernndez' Frente Para la
Victoria wing of the ruling Peronist coalition.
Media reports indicate that some members
of the political opposition view the potential
replacements for the military's three top jobs
as being too close to Rossi and Fernndez
and, as such, too political.
Our Short-Term Political Risk Rating is 50.2.
ECONOMIC RISK
Price And Trade Controls
Argentina recently announced new price
controls on bread and limits to grain exports.
After the price of bread nearly doubled in
June, authorities stepped in to control prices
and requested that exporters divert flour
and wheat back to the domestic market.
The limit on bread prices is just the latest in
a series of efforts to control rapid consumer
price inflation in Argentina. Despite official
government statistics that prices are growing
by roughly 10.0% each year, we believe that
the actual rate of inflation is closer to the
20.0-25.0% per annum reported by regional
governments and independent economists.
Our Short-Term Economic Risk Rating is 46.3.
BUSINESS ENVIRONMENT
Repsol Rejects YPF Deal
Spanish energy company Repsol has rejected
an offer from Argentina's YPF to take a mi-
nority ownership position in YPF's planned
investment into the vast Vaca Muerta oil and
gas fields. The offer was part of Argentina's
attempts to reach a settlement with Repsol,
which owned YPF until the company's na-
tionalisation last year. Repsol maintains that
it has not been fairly compensated for the
expropriation of YPF and that the proposed
partnership would not have covered its
losses. We believe that the inability to reach
a deal with Repsol will continue to cast a
pall over investment into Argentina's vast
hydrocarbon resources.
Our Business Environment Rating is 48.3.
2 2 SOUTHERN CONE AUGUST 2013
...continued from bottom of front page
hit bottom in 2013, as these macroeconomic
imbalances come to a head. In particular, we
believe a sharp slowdown in private consump-
tion and a contraction in net exports of goods
and services will result in real GDP growth
slowing from 1.9% in 2012 to 1.8% this year.
We believe a currency devaluation in H213
will support a rebounding net exports picture,
while a consumer recovery drives faster growth
of 2.9% in 2014, with growth accelerating
steadily from 2015-2017.
Real GDP By Expenditure Breakdown
Private Consumption: While shopping
centre and durable goods sales posted strong
year-on-year (y-o-y) growth in the first few
months of 2013, we expect a number of factors
to converge, slowing real private consumption
growth to just 0.5% this year, down from
4.4% in 2012. Despite government statistics
that suggest consumer prices have increased on
average 10.7% y-o-y in the first four months
of 2013, we estimate the figure to be 23.9%
y-o-y over the same period and forecast that
that it will climb higher still, pushing the aver-
age for 2013 to 25.0%. As a result, we believe
real private consumption will be weakened.
As it currently stands, nominal wages are
struggling to keep up with inflation, and as
price growth accelerates, we see real private
consumption slowing markedly.
We believe that consumer sentiment has al-
ready turned, and we may see a deceleration in
real consumption before a devaluation occurs.
Mean 12-month inflation expectations have
actually headed higher since the government
announced price controls in February, suggest-
ing that consumers do not believe the govern-
ment is capable of controlling price growth.
Additionally, the consumer confidence index
in April fell to 41.7, the lowest level in over
three years. Finally, amid a slowing economy,
we have seen unemployment rise from 6.9%
in Q412 to 7.9% in Q113, in line with our
forecast for unemployment to increase to 8.5%
by end-2013. We expect a slight recovery next
year, due to easing inflation and base effects,
and we forecast 2.0% real private consumption
growth for 2014.
Government Consumption: We expect
slowing revenue growth, due to sluggish
economic activity, will weigh on total
spending and limit the contribution of real
government consumption to GDP growth.
As the Argentine government is shut out of
capital markets and can only borrow locally
at very high cost, we believe the government
has limited capacity to pursue substantial
expansionary fiscal policies this year. We
forecast a primary deficit of 0.7% of GDP
this year, wider than the 0.2% of GDP deficit
posted in 2012, but believe weaker revenues
will constrain spending growth, resulting in
real government consumption growth of just
3.0%, down from 6.5% growth in 2012.
Gross Fixed Capital Formation (GFCF): We
forecast real GFCF growth of 3.0% this year,
owing primarily to base effects, after a 4.9%
contraction last year, than to any improvement
in the investment climate, which we believe re-
mains quite weak. While high-frequency data
suggest a surge in industrial production, autos
manufacturing and construction in Q213,
posing an upside risk to our real GFCF fore-
cast, we believe that this activity will weaken
in the back half of the year, underscoring our
view for weak growth.
The surge in investment-related activity is
likely due to the liberalisation of strict import
control policies that limited businesses' access
to capital goods, parts, and accessories that
were in place for most of 2012. After these
policies were relaxed in early 2013, we saw a
surge in investment-related imports in April,
but we expect this pace of investment will not
continue throughout the year.
Net Exports: Exports and imports of goods
and services offset each other last year, but
in 2013 we expect net exports to deteriorate,
subtracting 0.9 percentage points (pp) from
real GDP growth. As discussed above, tight
import restrictions inflated the goods trade
surplus last year, but we believe the removal
of these policies as of this February will lead
to surging imports. We have already seen
this dynamic begin to develop, with mas-
sive y-o-y goods import growth of 31.9%
posted in April. For the first four months
of 2013, goods imports are up 11.4% y-o-y,
while exports are down 0.1%. That said, the
devaluation that we expect in the second half
of 2013 should support stronger exports and
limit import growth, and we forecast that the
drag of net exports on GDP will narrow to
just 0.4pp in 2014.
Risks To Outlook
If we were to see substantially stronger-than-
expected exports over the next few months,
Argentina could stabilise its external accounts
and delay a currency devaluation. We believe
this would lower the average rate of inflation
and lead to stronger real domestic demand
growth, at which point we would likely revise
up our growth forecast for this year.
www.latinamericamonitor.com
 XXXXXX
POLITICAL OUTLOOK

Supreme Court Ruling A Blow Over the medium term, we believe the
ruling is consistent with our view that the
political balance of power will shift away from
To Fernndez the Fernndez administration and toward
more moderate forces within either the broad
BMI View: We believe a recent decision by the Argentine supreme court to Peronist coalition or the opposition. By block-
overturn a landmark government reform bill poses a significant political threat ing the reform, we believe that the court has
to President Cristina Fernndez de Kirchner. This development reinforces stopped a policy whose end result would have
our view that the president's legislative allies will lose seats in this October's been the erosion of the judiciary's independ-
ence and the further aggregation of power in
midterm election and that her critics will be increasingly emboldened over
the FPV.
the coming months, ensuring that she is unable to run for a third term in 2015.
The judicial reform would have subjected
The Argentine supreme court recently de- term developments in Argentine politics. the judiciary to greater direct political pres-
clared unconstitutional a judicial reform In the short term, we believe the decision sure. Two of the more controversial compo-
bill pushed through by President Cristina supports our view that the ruling Frente Para nents that were struck include :
Fernndez de Kirchner, underscoring our la Victoria (FPV) party and its allies will lose
view that 2013 will see a weakening of the seats in this October's midterm election. Op- Direct Election Of The Council Of Magis-
president's political strength, a defeat of her position parties, judicial advocates, and civil trates: The council of magistrates is the body
allies in a mid-term congressional election, society organisations had spoken out against responsible for hiring and firing judges, and
and the emboldening of the president's crit- the reform, and large demonstrations in April its members are currently decided upon by
ics both in her own party and in the opposi- had focused on the reform as an example of lawyers, legal scholars, and judges. The reform
tion. Fernndez had proposed the reforms overreach by the president. would have replaced this system with direct
as part of her initiative to 'democratise' the The public rebuke by the supreme court election of council members, who would have
judiciary, an institution that has remained will make the president look weak ahead of been required to register as candidates with
stubbornly independent. the midterm congressional elections in Oc- political parties.
The courts have blocked the president's tober and has validated the views of many of
attempt to break up the Clarn media group, her critics. To the extent that it has any affect Expansion Of The Council Of Magistrates:
an organisation that has been critical of the on the campaign and electi on, the decision The reform would have increased the council
administration in the past. We see this ruling, is likely to embolden those who oppose the from 13 to 19 members, allowing the domi-
which came down in a lopsided six-to-one vote president and persuade some voters that the nant political party currently the FPV to
against the president's reform bill, as support- administration has gone too far, leading to put many like-minded candidates on the
ing our views on both short- and medium- greater support for opposition candidates. council as soon as the election in October.

DATA & FORECASTS

BMI View: Argentina posted real GDP risk to our forecast for growth to slow end of the year, will further exacerbate
growth of 3.0% y-o-y in Q113, which from 1.9% in 2012 to 1.8% this year. weakening consumer sentiment and
was stronger than the 2.1% y-o-y growth That said, we maintain that a currency purchasing power, weighing on growth
reported in Q412, thus posing an upside devaluation, which we expect by the in the second half of 2013.

2011 2012e Latest Period 2013f 2014f

Nominal GDP, US$bn [1,4] 410.3 414.4 - - 425.4 448.7
Population, mn [5] 40.8e 41.1 - - 41.5 41.8
GDP per capita, US$ [1,4] 10,065 10,079 - - 10,257 10,728
Real GDP growth, % change y-o-y [4] 8.9 1.9 3.0 Jan-Mar 1.8 2.9
Industrial production index, % y-o-y, eop [4] 1.6 -3.8 - - 3.0 4.0
Unemployment, % of labour force, eop [6] 6.7 6.9 7.9 Jan-Mar 8.5 7.8
Budget balance, % of GDP [7] -1.7 -2.6 - - -3.1 -1.8
Consumer price index, % y-o-y, eop [2,4] 9.5 10.8 10.3 May 25.0 14.0
Lending rate, %, eop [8] 13.5e 14.5 - - 15.0 15.0
Exchange rate ARS/US$, eop [9] 4.31 4.92 5.38 27 Jun 6.00 6.40
Goods exports, US$bn [4] 84.0 81.2 8.4 May 84.0 94.1
Goods imports, US$bn [4] 70.7 65.6 7.1 May 71.1 79.7
Balance of trade in goods, US$bn [4] 13.2 15.6 1.3 May 12.9 14.5
Current account balance, US$bn [4] -1.6 0.5 - - -0.0 2.8
Current account balance, % of GDP [4] -0.4 0.1 - - -0.0 0.6
Foreign reserves ex gold, US$bn [10] 46.4 43.3 37.8 27 Jun 42.0 42.0
Total external debt stock, US$mn [11] 139,715.3 140,000.0 - - 142,000.0 147,000.0
Total external debt stock, % of GDP [3,11] 34.1 33.8 - - 33.4 32.8
Total external debt stock % of XGS [11] 140.3 145.2 - - 142.3 133.2
Notes: e BMI estimates. f BMI forecasts. 1 Forecasted using parallel rate; 2 Historic data as reported by INDEC; 3 Nominal GDP forecasted using parallel rate. Sources: 4 INDEC/BMI; 5
World Bank/UN/BMI; 6 Argentina Ministry of Labour, Employment and Social Security/BMI; 7 MECON/BMI; 8 IMF; 9 BMI; 10 BCRA/BMI; 11 INDEC/World Bank/BMI.

www.latinamericamonitor.com AUGUST 2013 SOUTHERN CONE 3

 CHILE
RISK SUMMARY
POLITICAL RISK
Piera Meets Obama
Chilean President Sebastin Piera travelled
to the US in early June to meet US President
Barack Obama. The two leaders discussed
ways to advance a regional Asia-Pacific Trade
Pact and Chile's admittance into a US pro-
gramme that waives visa requirements for
visits by foreign nationals that last under 90
days. While Obama praised Chile's demo-
cratic political system and general adherence
to free market principles, very little was
said about what we view as the dominant
challenge to Chile's economy in the coming
years: namely, weakening external demand
for the country's industrial metals exports,
which we expect will lead to falling headline
growth in the coming years.
Our Short-Term Political Risk Rating is 75.8.
ECONOMIC RISK
Bachelet Opposes Project
Former president Michelle Bachelet an-
nounced her opposition in June to a major
project that would dam two Patagonian
rivers as part of a new hydroelectric plant
to power central Chile. Bachelet, siding
with environmental groups, challenged the
economic and environmental feasibility of the
plan. Chile's science and technology sectors
have seen increased investment in recent
years, and we believethe development
renewable energy sources could become a
dominant theme for Chile's rebalancing away
from a reliance on mining-sector investment.
Our Short-Term Economic Risk Rating is 74.0.
BUSINESS ENVIRONMENT
Unions Align With Protestors
On June 26, Confech, the main confedera-
tion of university student protestors, held its
fourth national mobilisation of 2013, occupy-
ing voting stations ahead of the upcoming
presidential primaries to be held at the end
of the month. For the first time since large-
scale student protests beg an in early 2011,
major unions announced their support of the
protests. We believe that the involvement of
unions could mark a new phase in the current
chapter of political unrest in Chile,posing
a moderate risk to Chile's strong business
environment rating through increased op-
erational risk at ports and mines.
Our Business Environment Rating is 64.0.
4 4 SOUTHERN CONE AUGUST 2013
...continued from top of front page America', June 19). Foreign direct investment
(FDI) has already begun to trend down, with
That said, we believe that a weaker ex- outflows of FDI exceeding inflows in each
change rate in relation to the US dollar (see of the last three quarters. Moreover, we have
'CLP: Currency To Remain Under Pressure,' already seen the beginnings of a re-pricing of
June 14) will moderately help to offset the the country's risk profile, with the yield on
decline in copper prices and Chinese de- Chile's global US$ 2020 government bond
mand by the lowering the cost of Chilean spiking in recent weeks, increasing the cost
exports, particularly in the manufacturing of future bond offerings.
sector. Chile posted an impressive export However, we also highlight that Chile's
performance in May, when the sell-off in business environment remains the strongest
the Chilean peso began, with goods exports in Latin America in our proprietary ratings,
up 23.2% y-o-y, the strongest reading since and the country's stockpile of international
June 2011. We believe that Chilean indus- reserves has remained steady despite weakness
trial exports could benefit from the ongoing in the current account. These factors will
recovery in the US economy, which is the help to buffer Chile against the effects of the
main destination for its manufactured goods absence of windfall revenues from copper
exports, at 13.7% of industrial exports in exports. Indeed, the central bank reported
2012. We have therefore revised up our holding US$40.2bn in foreign reserves in
export forecasts for 2013 and 2014, push- May, which is good for 6.1 months of import
ing our current account forecasts (see chart) cover. Although we forecast that reserves as
for those years slightly down from our prior a percentage of GDP to continue to decline
forecast of 4.0% and 3.6%, respectively. from a recent peak of 16.7% in 2011, we
believe that the central bank will maintain an
Current Account To Stay In The Red import cover in excess of five months through
Chile Current Account
to 2017. While we believe Chile's balance of
8
6 payments position is set to weaken, therefore,
4
our core view is that the country will avoid
2
0 an external account crisis.
-2
-4
Weaker Demand For Copper Will Be Key
-6
Chile Goods Exports (FOB)
-8
-10
9,000 70
8,000 65
-12
7,000
2005
2006
2007
2008
2009
2010
2011
2012
2013f
2014f
2015f
2016f
2017f
60
6,000
55
Current account balance, US$bn
Current account balance, % of GDP
5,000
50
4,000
Note: f = BMI forecast. Source; BMI, BCC
3,000
45
2,000 40
In addition, we believe that income out-
1,000 35
flows will remain moderate over the next 12 0 30
months, providing some relief to the current
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
account balance. We believe that profit re- Copper Exports
Total Exports (FOB), US$mn
patriation is likely to slow as multinational Copper Exports, % of Total (RHS)
mining firms see their profit margins narrow Source: BMI, BCC
on the back of weaker metals demand and
Risks To Outlook
lower prices. Chile's Q113 income deficit
With copper prices looking precarious from
(US$2.7bn) was the smallest the country has
a technical perspective, a sustained sell-off in
seen since Q109.
metals prices beyond our current forecast in
tandem with slower Chinese growth could
Financial Account Also Set For Continued
weigh heavily on Chile's external accounts in
Weakness
the coming months.
We believe that foreign investment into Chile
Such a scenario would result in much wider
will moderate in the coming years, keeping
current account deficits than we currently
the financial and capital accounts in deficit.
forecast. Slowing real GDP growth could
Indeed, our Commodities team expects that
also exacerbate growing discontent among
capital expenditures in Chile's mining sector,
workers at Chilean ports and industrial mines,
the engine of the country's recent growth, will
further weighing on inbound investment, and
stagnate as lower metals prices cut into profit
margins, with foreign mining firms likely to ensuring that the capital and financial account
become increasingly selective in choosing new balance remains in deficit and international
projects (see 'Mixed Capex Picture Across Latin reserves are drawn down.
www.latinamericamonitor.com
 XXXXXX
POLITICAL OUTLOOK

Bachelet's Education Proposal: in order to gain the support of the country's

active student protest movement, and the far
-left elements of her Concertacin de Partidos
Initial Thoughts por la Democracia bloc. According to recent
polling, just 25.0% of Chileans approve of the
BMI View: A new education reform proposal by former president and likely elec- current government's handling of education
tion frontrunner Michelle Bachelet highlights our view that a centre-left government policy, leaving ample room for Bachelet to
could enact moderately expansionary fiscal policies. Moreover, we expect that use the issue as a weapon against the candi-
date who emerges to lead President Sebastin
education reform will continue to be an important barometer for assessing the
Piera's centre-right Coalicin por el Cambio
overall ideological posture that Bachelet will adopt in the coming years.
bloc at the end of June.
Former president Michelle Bachelet, who is expected to cost between 1.5 and 2.0% of
we believe is likely to return to power after GDP. Althou gh the former president has not Plan To Increase Spending
Chile Central Government Revenues & Expenditures
November's election, has unveiled her plan yet announced an official plan to fund the
for education reform, a key proposal that bill, we expect, based on recent statements, Revenues, % chg y-o-y
30

we expect presages a period of moderately that she will seek to increase the income tax Expenditures, % chg y-o-y 25

expansionary fiscal policy by Chile's govern- on upper-income Chileans. 20

ment. As we have previously noted, we believe 15

that the election of a centre-left government, Budget Deficit Forecast Next Year 10
Chile Nominal Budget Balance, % Of GDP
combined with a growing impetus to stimulate 10 5

the economy in the face of a weak external en- 8 0

vironment, is likely to usher in a more liberal 6 -5

spending programme (see 'Domestic Politics 4 -10

Crib Sheet,' June 5).

Q111

Q211

Q311

Q411

Q112

Q212

Q312

Q412

Q113
2
We forecast that government expenditure Source: BMI, BCC
0
will increase by 10.0% in 2014, moving the
-2
central government's nominal budget bal- Risks To Outlook
ance from a surplus into a 0.8% of GDP defi- We note that despite Bachelet's more lib-
-4

cit. Compounding the effects of an increase -6

eral rhetoric, government expenditure as a
2006

2007

2008

2009

2010

2011

2012e

2013f

2014f

2015f

in spending on the country's fiscal accounts
will be that revenue growth will continue to
decline owing to lower commodity prices
and weakening demand for the country's
exports, principally copper. Bachelet's plan,
which calls for an end to for-profit education
in Chile, along with progress towards enact-
ing universal free education at all age levels,
percentage of GDP was comparable under
Note: e/f = BMI estimate/forecast. Source: BMI, BCC
the Bachelet and Piera administrations,
hovering around 17.0% of GDP under both
We believe that regardless of the ultimate governments. Therefore, although we fore-
shape of the reform, education will continue cast a nominal fiscal deficit in 2014, we do
to be a central issue in the run-up to the elec- not expect Chile's government to drastically
tion, and will be an important measure of abandon its historical commitment to fiscal
how far to the left Bachelet is willing to shift prudence over the coming years.

DATA & FORECASTS

BMI View: Unemployment in Chile con- in April, and the historically low rate of higher through the rest of the year, end-
tinues to tick up, with the jobless rate 6.0% at the start of the year. We expect ing 2013 at 6.8% as slowing economic
coming in at 6.4% in May, up from 6.2% unemployment to continue inching growth weighs on the labour market.

2011 2012 Latest Period 2013f 2014f

Nominal GDP, US$bn [1] 251.1 268.4 - - 288.0 304.6
Population, mn [2] 17.3 17.4 - - 17.6 17.7
GDP per capita, US$ [1] 14,540 15,407 - - 16,387 17,185
Real GDP growth, % change y-o-y [1] 5.9 5.6 4.1 Jan-Mar 4.8 4.8
Industrial production index, % y-o-y, eop [3] 5.3 -2.5 3.3 Apr 4.0 4.5
Unemployment, % of labour force, eop [4] 6.6 6.1 6.4 May 6.8 6.5
Budget balance, % of GDP [5] 1.3 0.4 - - 0.5 -1.1
Consumer price index, % y-o-y, eop [4] 4.4 1.5 0.9 May 2.3 3.2
Exchange rate CLP/US$, eop [6] 519.50 478.71 503.96 27 Jun 500.00 490.00
Goods exports, US$bn [1] 81.5 78.3 34.6 Jan-May 78.8 81.2
Goods imports, US$bn [1] 70.9 74.9 31.4 Jan-May 78.6 82.5
Balance of trade in goods, US$bn [1] 10.5 3.4 3.2 Jan-May 0.2 -1.3
Current account balance, US$bn [1] -3.3 -9.5 -1.7 Jan-Mar -10.4 -9.8
Current account balance, % of GDP [1] -1.3 -3.5 - - -3.7 -3.3
Foreign reserves ex gold, US$bn [1] 42.0 41.6 40.2 May 43.0 43.0
Total external debt stock, % of GDP [1] 39.3 43.9 - - 42.7 42.7
Notes: e BMI estimates. f BMI forecasts. Sources: 1 BCC/BMI; 2 World Bank/UN/BMI; 3 INE/BMI; 4 INE; 5 Dipres/BMI; 6 BMI.

www.latinamericamonitor.com AUGUST 2013 SOUTHERN CONE 5

 PARAGUAY
POLITICAL OUTLOOK
RISK SUMMARY
POLITICAL RISK Return To Mercosur To Remain
A Priority
Cartes Meets Europe Leaders
President Horacio Cartes travelled to Eu-
rope in June and July to meet with heads of
state in Europe, including European Com- BMI View: We maintain that newly elected Paraguayan President Horacio
mission President Jos Manuel Barroso. Cartes will continue to attempt to normalise relations between his country and
The EU had sent an electoral observation the Mercado Comn del Sur (Mercosur), but acknowledge that Paraguay's
team to Paraguay to monitor the country's objection to Venezuela's entry into the trade bloc remains a point of conten-
April elections, which were called after the tion. While Paraguay has diversified its export markets over recent years, it still
impeachment of former-President Fernando sends nearly half its exports to Mercosur, underpinning our view that it can ill
Lugo in 2012. Barroso expressed the support afford a further deterioration in relations.
of the European Commission for Paraguay's
re-integration into regional trade pact Mer- While we have long held that Paraguay would Paraguay is set to enjoy strong economic
cosur, and the two leaders discussed the attempt to normalise its relations with and re- growth this year, but we believe that the sim-
possibilities of an EU-Mercosur trade deal. join the Mercado Comn del Sur (Mercosur), mering dispute with Mercosur poses a down-
Our Short-Term Political Risk Rating is 45.6. we acknowledge that the issue of Venezuela's side risk to Paraguay's medium-term economic
entry in to the bloc remains a sticking point. outlook. While Paraguay has become less
ECONOMIC RISK That said, we expect President Horacio Cartes reliant on Mercosur as an export destination
Economy Surges On Trade to continue to seek re-entry into the bloc in over the years, it still remains highly exposed,
Paraguay's real GDP growth surged to
order to avoid jeopardising access to crucial sending nearly half of its exports, equal to
14.8% y-o-y in Q113 after a 0.4% y-o-y
export markets. 15.8% of GDP, to Argentina, Brazil and
contraction in the final quarter of 2012. We
Paraguay was suspended from the trade Uruguay. we believe the inability to normalise
forecast that Paraguay's economy will grow
bloc in June 2012 when member countries relations could imperil access to these key
by 7.0% this year after a 1.2% contraction
objected to the hasty impeachment of then- export markets in the future.
last year, largely due to soaring agricultural
President Fernando Lugo. While Paraguay was Admittedly, Paraguay has received observer
exports and a rebound in fixed investment,
suspended, Mercosur granted full membership status in the Pacific Alliance in late May, and
which contracted sharply in 2012 as the
to Venezuela, whose admission Paraguay had there is some speculation that if relations with
impeachment of Lugo heightened political
blocked since 2006 due to political tensions Mercosur worsened further that Paraguay
risk and sidelined many investors. The first
between the countries. Recent comments from would pursue further integration. While Para-
quarter growth reading was above our
Cartes suggest he maintains his country's stance guay might benefit from what we believe will
expectations, and if data were to remain
that its suspension from the bloc was illegal, be a greater pro-market orientation and more
similarly robust over the coming quarters,
and that, as a result, so to was the admission of meaningful economic integration in the Pa-
we would likely revise up our full year fore-
Venezuela without Paraguayan support. Media cific Alliance over the long term (see 'Regional
cast for 2013.
reports indicate that he has objected to the pro Divide To Widen Between Pacific Alliance And
Our Short-Term Economic Risk Rating is 56.5.
tempore presidency of the trade bloc passing to Mercosur ', May 30), at present we believe the
Venezuela, requesting that Paraguay resume its country can ill afford unnecessary worsening
BUSINESS ENVIRONMENT role in the organization. in its ties with Mercosur.
Pay-TV Picking Up
DATA & FORECASTS
Millicom International Cellular's Paraguayan
unit, Tigo Paraguay, requested a licence in BMI View: Foreign currency reserves increased to US$5.5bn in April, a 13.5% y-o-y
April from the telecommunications regula- increase, up from a 12.6% y-o-y increase in March. After a drought decimated the soy
tory authority, Conatel, to provide direct-to- harvest and depressed exports in 2012, we are seeing a strong crop supporting a rapid
home pay-TV services in the country. There build-up of reserves. We forecast reserves growing to US$6.1bn by end-2013, represent-
is growing potential for pay-TV services. ing 34.2% growth from end-2012 levels, but acknowledge there are risks to this view.
Tigo's potential move into satellite TV will
2011 2012 Latest Period 2013f 2014f
allow it to tap into this demand. The pay-TV
market is underdeveloped in Paraguay and Nominal GDP, US$bn [1] 25.9 25.4 - - 30.9 35.4
Population, mn [2] 6.6 6.7e - - 6.8 6.9
for this reason Conatel may believe it is in GDP per capita, US$ [3] 3,946 3,806 - - 4,550 5,119
the market's best interest to grant Tigo the Real GDP growth, % change y-o-y [1] 4.3 -1.2 14.8 Jan-Mar 7.0 4.8
licence, increasing investment and bringing Unemployment, % of labour force, eop [4] 6.0 7.9 - - 7.5 8.0
Consumer price index, % y-o-y, eop [5] 4.9 4.0 0.9 May 4.5 6.5
an experienced player into the satellite TV Exchange rate PYG/US$, eop [6] 4,435.00 4,197.00 4,480.00 27 Jun 3,800.00 3,900.00
sector. However, we caution that this would Goods exports, US$bn [5] 12.6 12.0 3.2 Jan-Apr 14.4 14.9
be damaging over the long-term, as a lack of Goods imports, US$bn [5] 11.7 11.1 3.8 Jan-Apr 12.2 13.0
Current account balance, % of GDP [1] 1.1 0.4 - - 4.4 3.4
competition will stunt growth due to higher
Foreign reserves ex gold, US$bn [7] 5.0 4.6 5.5 Apr 6.1 6.0
prices and a lack of consumer choice. Notes: e BMI estimates. f BMI forecasts. Sources: 1 BCP/BMI calculation; 2 World Bank/UN/BMI; 3 BCP, IMF; 4 DGEEC; 5
Our Business Environment Rating is 43.2. BCP; 6 BMI; 7 IMF

6 6 SOUTHERN CONE AUGUST 2013 www.latinamericamonitor.com


ECONOMIC OUTLOOK
Weakening Consumer Posing
Downside GDP Risk
BMI View: Weaker-than-expected private consumption is posing a downside
risk to our forecast for real GDP growth to slow from 3.9% in 2012 to 3.8% this
year. While relatively robust government consumption and fixed capital forma-
tion are somewhat mitigating this risk to our headline forecast, we would be
likely our forecast down should unemployment and inflation remain elevated
in the coming months.
Uruguay's Q113 real GDP data support our to persist over the coming months, we would
view that the economy continues to cool, in line most likely revise down the private consump-
with our forecast for real growth to slow from tion component of our real GDP growth
3.9% in 2012 to 3.8% this year. While Q113 forecast, dragging down the headline figure.
growth came in at 3.7%, ahead of Bloomberg Slightly offsetting the downside risk posed
consensus expectations, we see a growing risk by the consumption figure is the reading for
of further deterioration in economic condi- real government consumption, which increased
tions in the months ahead, such that there is by 5.2% y-o-y, a pace that far exceeds our
a growing possibility that we will revise down 3.0% growth forecast for the year. We forecast
our 2013 real GDP growth forecast. a more restrained fiscal policy this year, after
The largest downside risk to our GDP fore- 5.4% government consumption growth and a
cast comes from the 4.8% y-o-y real private widening primary deficit in 2012, but stronger-
consumption growth figure. The weakest since than-expected revenue growth in the first four
2009, Q113 growth data suggest that private months of 2013 suggests that government
consumption is currently set to underperform consumption growth may exceed our forecasts.
our forecast for 5.6% growth this year after Stronger-than-expected gross fixed capital
6.5% growth in 2012. While we expected a formation grew by 12.6% y-o-y in the first
weaker external environment to weigh on real quarter, faster than our forecast for 9.0%
GDP growth, we have seen an unexpected growth this year. We believe we may see
uptick in unemployment, potentially owing continued strong inbound foreign direct
to a weak tourist season at the start of this cal- investment supporting capital formation,
endar year. Real exports of goods and services particularly if exploration into Uruguay's
were down 9.9% in Q1, suggesting that the oil and gas sector and development of its
drag from the external account may prove to renewable energy resources continue at their
be greater than we realised. If this trend were current pace.
DATA & FORECASTS
BMI View: Uruguay reported a goods trade deficit of US$1.2bn for January-April as a
weak external environment and a strong peso hurt export competitiveness in the first
four months of the year. The shortfall was 30.1% wider than in the same period in 2012,
and we expect that, as with previous years, the deficit will widen further in the back half
of the year, underpinning our forecast for it to widen to US$3.7bn in 2013.
2011 2012 Latest Period 2013f
Nominal GDP, US$bn [2] 46.6 50.1 - - 59.6
Population, mn [3] 3.4 3.4e - - 3.4
GDP per capita, US$ [2] 13,773 14,771 - - 17,503
Real GDP growth, % change y-o-y [2] 6.5 3.9 3.7 Jan-Mar 3.8
Consumer price index, % y-o-y, eop [4] 8.6 7.5 8.1 May 7.0
Exchange rate UYU/US$, eop [6] 19.48 19.18 20.25 27 Jun 20.50
Goods exports, US$bn [2] 9.3 9.9 2.3 Jan-Apr 10.2
Goods imports, US$bn [2] 10.7 12.2 3.5 Jan-Apr 13.9
Current account balance, % of GDP [2] -2.9 -5.2 - - -5.5
Foreign reserves ex gold, US$bn [2] 10.3 13.6 14.8 27 Jun 16.1
Total external debt stock, US$mn [1,7] 18,345.0 21,071.5 21,071.5 Oct-Dec 24,730.5
Notes: e BMI estimates. f BMI forecasts. 1 In March 2013, the BCU adopted a wider definition of external debt, in ac-
cordance with international standards. As a result, the reported external debt stock increased. They only backdated this
methodological change to 1999, which explains the significant. Sources: 2 BCU/BMI; 3 World Bank/UN/BMI; 4 INE/BMI; 5
MEF/BMI; 6 BMI; 7 BCU/World Bank/BMI.
www.latinamericamonitor.com
URUGUAY
RISK SUMMARY
POLITICAL RISK
Teachers On Strike
Uruguay's secondary school teachers went
on strike in late June as part of a drive for
higher pay and greater government spending
on education. The strike affected all 19 of
the country's departments and has report-
edly caught the leftist Frente Amplio (FA)
administration of President Jos Mujica off
guard. The government is making efforts
to address the teachers' concerns, but it is
unclear whether it will b e able to meet the
union demands, given a tight fiscal position
this year after posting a primary balance
deficit in 2012. Consumer price inflation has
been high for the past few quarters, and with
a presidential election in 2014 public sector
salaries could become increasingly politicised
over the medium term.
Our Short-Term Political Risk Rating is 74.8.
ECONOMIC RISK
Shift In Monetary Policy
The Banco Central del Uruguay has an-
nounced a shift in its inflation fighting strategy.
As several rounds of rate hikes have proven
ineffective, the central bank will supplement
its efforts with a closer focus on monetary
supply, intervening in money markets to
control the pace of price increases. The bank
announced the change in early June and said
it would take effect in July, adding that it was
widening its inflation target band from 4.0-
6.0% to 3.0-7.0%. Inflation has been more
than 8.0% y-o-y for the past five months, and
we believe the government is coming under
increasing pressure to control price growth.
Our Short-Term Economic Risk Rating is 63.5.
BUSINESS ENVIRONMENT
Waste Regulations Tightened
Uruguayan President Jos Mujica signed into
law in late June new national standards for
2014f solid waste management as part of efforts
63.0 to improve the governance of the industry.
3.4 The legislation, the first of its kind in Uruguay,
18,440
5.1 deals with hazardous as well as other indus-
5.8 trial solid waste. Companies will have up to
19.80 six months to implement waste management
10.5
plans that comply with the new regulations
15.0
-6.0 and two years to bring their practices into
18.5 line with the standards, with violations pun-
26,914.3 ishable by fines of up to US$312,000.
Our Business Environment Rating is 59.8.
AUGUST 2013 SOUTHERN CONE 7
 REGIONAL
ECONOMIC OUTLOOK

Assessing The Implications Of education, healthcare and transport. However,

at present, we believe fiscal slippage is likely
to be muted given already-significant public
Labour Market Weakness spending commitments, and President Dilma
Rousseff's recent statement that the govern-
BMI View: We maintain our view that unemployment rates in most of Latin ment will meet its fiscal targets this year.
America's largest economies will tick up this year, as economic activity mod- Moreover, we believe the crux of the current
erates or remains relatively weak. We see potential for rising joblessness to political dialogue focuses on what the govern-
translate into growing social pressureand potentially prompt fiscal slippage, in ment is spending money on, rather than how
much money it is spending.
several economies in the coming months. We highlight Argentina, Venezuela
In addition, we do not rule out potential
and Brazil as the most vulnerable.
for higher unemployment to translate into
In our last regional unemployment update, Meanwhile, in Venezuela, we believe that mounting social pressure in Chile and Peru in
we highlighted that while we expect labour President Nicols Maduro will continue to the coming months. With economic activity set
market indicators to improve in most Latin struggle to assert his authority given signs of to slow to 5.4% in Peru this year (from 6.1%
American economies over the long term, the disunity within his party (see 'Post-Chvez Era in 2012) and 4.3% in Chile (from 5.6%) and
short-to-medium term picture will be much Crib Sheet And FAQ', May 24). This factor, unemployment set to tick up in tandem, we
more mixed. Given our forecasts for economic combined with high inflation and significant believe that citizens could increasingly demand
activity to slow or remain weak in many major goods shortages, means that an uptick in un- higher quality public services and more sub-
regional economies, we expect the broad trend employment could see public unrest re-emerge stantial social benefits from their governments.
to be for higher unemployment rates this year, in the coming months. Furthermore, given the Given that Peruvian President Ollanta
except in Mexico and Colombia. We highlight political vulnerability of both administrations, Humala has already come under fire from his
potential for these factors to drive an uptick in we see potential the governments to ramp up left-wing support base for failing to adequately
social tension, putting governments in the diffi- spending in order to appease protestors' de- redistribute the wealth from the country's
cult position of quelling these pressures through mands, resulting in fiscal slippage. However, mining boom since taking office in 2011,
increased spending, or risking widespread with growth slowing and the fiscal accounts in we believe he would likely be sympathetic
unrest in order to maintain a robust macro- Argentina and Venezuela already stretched, we to protestors' demands. That said, given the
economic position. Given demonstrations in believe both governments will be hard pressed government's prudent track record thus far,
Argentina and Venezuela earlier this year, and to meet such demands. we do not anticipate significant fiscal slippage
protests in Brazil, as well as little upside for The story in Brazil is slightly different would be likely.
real GDP growth in all three economies, we as ongoing protests across the country are Moreover, followingrecent protests over
believe they are the most likely to see rising directed at a range of issues including living education reform in Chile, and our view
social tensions, and potentially fiscal slippage, standards, corruption, government transpar- that former centre-left president Michelle
in the coming months. ency, and public spending (see 'Public Unrest: Bachelet is likely to return to the coun-
We forecast unemployment in Argentina Assessing The Policy Implications', June 20). try's top office later this year (see 'Domestic
and Venezuela to tick up to 8.5% and 9.0% While we expect a moderate uptick in real Politics Crib Sheet', June 5), we believe social
respectively this year, from 7.8% and 7.9% GDP growth from 0.9% in 2012 to 2.6% in spending could tick higher there as well in
at present, as economic activity slows. In the 2013, we forecast the country's jobless rate response to public demands. Indeed, given
case of Argentina, we have long highlighted to rise from 4.6% as of end-2012 to 5.4% by significant global headwinds, we anticipate
that President Cristina Fernndez de Kirchner end-2013, as a prolonged period of economic that 2013 will be a difficult year for many
was likely to remain unpopular in the coming weakness ahead prompts firms to reduce their Latin American sovereigns, meaning that
months, as the economy sputters and inflation labour costs. We believe that a weakening regional governments will increasingly face
remains high. Rising unemployment will only labour market is likely to exacerbate ongoing tough choices between stimulating growth
exacerbate these political dynamics, most social tensions, particularly given public dis- and maintaining sound macroeconomic
likely translating into further social unrest. content over the sub-par quality of services like policies in the coming months.

BMI Unemployment Forecasts, EOP

2013f 2014f 2015f 2016f 2017f
Argentina 8.5 7.8 7.3 7.5 8.0
Brazil 5.4 5.5 5.5 5.6 5.7
Chile 6.8 6.5 6.3 6.3 6.1
Colombia 8.5 8.5 8.4 8.4 8.3
Mexico 4.0 3.8 3.5 3.6 3.9
Peru 6.0 6.3 6.1 6.1 5.9
Venezuela 9.0 11.5 11.0 10.8 10.3
Source: BMI

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