Enestor Dos Santos – Principal Economist for Latin America at BBVA Research Macroeconomic outlook of the Pacific Alliance MILADAY - October 2015

Pacific Alliance / MILADAY 2015 Página 2 Pacific Alliance: the real Latam giant Pacific Alliance: macroeconomic prospects at the current juncture Index 1 2

Pacific Alliance / MILADAY 2015 Página 3 Pacific Alliance (PA): the real Latam giant Main contributions to world GDP growth in the next 10 years (PPP adjusted USD billions) Source: BBVA Research and FMI Main economies in 2013 (PPP adjusted USD millions) Source: BBVA Research y and FMI

Pacific Alliance / MILADAY 2015 Página 4 Pacific Alliance: a bloc committed to free trade Trade openness * ( % GDP, average) Source: COMTRADE and BBVA Research Latam: free-trade agreements Sourcee: OMC and BBVA Research * Exports plus imports as a share of GDP.

Pacific Alliance / MILADAY 2015 Página 5 Pacific Alliance: growth based on demographic dynamism and middle classes expansion Population growth rate (% annual, ) Source: BBVA Research Middle classes expansion (millions of people, ) Source: BBVA Research Population growth, demographic bonus Inequality reduction Increase of per capita income Middle classes expansion

Pacific Alliance / MILADAY 2015 Página 6 Potential growth is high. Certainly higher than in other Latam countries. However, contribution of productivity to GDP growth is relatively small (around 22%)… Pacific Alliance: a high potential growth Potential growth, next ten years (%) Fuente: BBVA Research …which means that PA countries should continue focused on adopting reforms to increase productivity PA average With reforms

Pacific Alliance / MILADAY 2015 Página 7 Human capital: low quality of education Tax revenues are very dependent on some few commodities Physical capital: poor infrastructure (energy in Chile) PA faces important challenges Infrastructure quality (Index: 0-7, 7 = highest quality) Source: BBVA Research and Banco Mundial High informality

Pacific Alliance / MILADAY 2015 Página 8 Pacific Alliance: the real Latam giant Pacific Alliance: macroeconomic prospects at the current juncture Index 1 2

Pacific Alliance / MILADAY 2015 Página 9 The external environment has not been as supportive as in the last years Page 9 1. Commodity prices slump Brent, USD/barrel Source: BBVA Research Economic Surprises … 2. China’s bumpy slowdown and government reaction China, Industrial Production, y/y, and PMI Source: BBVA Research …as well as expected events 3. Incoming Fed’s tightening Source: BBVA Research

Pacific Alliance / MILADAY 2015 Página 10 Growth has fallen, but less so in the PA Latam: GDP growth forecasts Source: BBVA Research Pacific Alliance: MEX, COL, PER, CHI Mercosur: BRA, ARG, VEN, PAR, URU The ugly: low productivity growth The bad: still highly dependent on commodities and global growth The good: lower vulnerability than in the past (flexible exchange rate, inflation targets, lower external and public debts, etc)

Pacific Alliance / MILADAY 2015 Página 11 Growth will be around 2.5% in PA countries in 2015 and 2016 Pacific Alliance: GDP growth forecasts Source: BBVA Research MEX: coupled with the US and pending on the impact of economic reforms CHI: subdued confidence (labor market, political noise, lower copper prices) affecting consumption and private sector investment. PER: Political noise drags private spending. Difficulties to execute public budget. Growth driven by infrastructure and copper production. “El Niño” would shave around 1pp of 2016´GDP COL: low oil prices will require fiscal adjustment. Construction and infrastructure investment (4G) will be a source of growth.

Pacific Alliance / MILADAY 2015 Página 12 Exchange rate depreciation, driven to a great extent by Fed’s liftoff and commodity prices Exchange rate vs USD in inflation targeting countries (index Dic 2014=100) Source: BBVA Research Depreciation against USD

Pacific Alliance / MILADAY 2015 Página 13 Inflation is being pushed up by strong depreciation, despite weak activity. CBs to react. Latam: Inflation (%yoy) and central bank target ranges Source: BBVA Research

Pacific Alliance / MILADAY 2015 Página 14 Uncertainty: is there commitment to sustain high long-run growth? Reforms are key. Latin America: Share of population by income Source: BBVA Research Politics: low approval rates and the risk of the return of populism Middle classes: some may oppose reform if feeling at risk of falling back to low income

Pacific Alliance / MILADAY 2015 Página 15 Political noise: a significant drag on many economies Latam: presidential approval ratings and time left until next government Source: BBVA Research and polling agencies Sep 2015

Pacific Alliance / MILADAY 2015 Página 16 All in all: PA still controls its future … Medium run: Populism Long run: Inequality Short run: lower global liquidity Medium run: Chinese slowdown Reforms that enhance productivity: Physical capital, human capital, reduce informality 2%-3% growth may be ideal environment to push reforms (not too high, not too low) … key to deal with risks Still on time to implement Reforms 2.0

Enestor Dos Santos – Principal Economist for Latin America at BBVA Research Macroeconomic outlook of the Pacific Alliance MILADAY - October 2015

Pacific Alliance / MILADAY 2015 Página 18 Annex: BBVA Forecasts Page 18