Global Economics

March 2014

Latin America Regional Outlook

Highlights

Positive Regional Growth Impact from Improved Global Economic Conditions Heightened Financial Market Stress Deepens Intra-Regional Credit Differentiation Divergent Inflation Drivers Lead to Uneven Monetary Policy Adjustments Domestic Financial Sector Strength Reduces Dependence on External Funding Sources Regional Governance Affected by Structural Reforms and Leadership Succession

Contents
Financial Market Metrics .......................................................................................... 2 Regional Outlook ...................................................................................................... 3 Brazil ........................................................................................................................ 4 Mexico ...................................................................................................................... 5 Argentina .................................................................................................................. 6 Colombia .................................................................................................................. 7 Venezuela ................................................................................................................ 8 Peru.......................................................................................................................... 9 Chile ....................................................................................................................... 10 Uruguay.................................................................................................................. 11 Macroeconomic Metrics ......................................................................................... 12 Key Economic Indicators ................................................................................... 13-14 Global Sovereign Credit Ratings ............................................................................ 15

Latin America Regional Outlook is available on scotiabank.com and Bloomberg at SCOT

Global Economics

March 2014

Latin America Regional Outlook

Financial Market Metrics March 2014

Currency Performance vs USD (March 2009 - March 2014) Colombia Five-year % change vs. USD Mexico Peru Uruguay Chile Brazil -54 -66 -70 -60 -50 -40 -30 -20 Argentina Venezuela -10 0 10 20 30 1 8 7 15 15 25

Currency Market Performance vs USD (March 2009 - March 2014) 80 60 40 20 0 -20 -40 -60 -80 Mar-09 Five-year % change vs. USD
BRL MXN ARS CLP PEN VEF COP UYU

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

500 400 300 200

Equity Market Performance (March 2009 - March 2014) Five-year % return in local-currency terms

600 500

Equity Market Performance (March 2009 - March 2014) Five-year % change in local-currency terms
Latin Am er ica (MSCI) Brazil Colo mbia Peru

400 300
125 129

Chile Mexi co Argentina

200 100

100 26 0 Brazil

58

58

68

Latin America (MSCI)

Chile

Colombia

Peru

Mexico Argentina

0 -100 Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Sovereign Debt Profile - Credit Default Swaps Argentina Venezuela Brazil Peru Colombia Mexico Chile 0 154 108 107 83
100

Credit Default Swap Market Trends (March 2009 - March 2014)

1934 1343

600 500 400 300 200

basis points
Brazil Chil e Colo mbia Peru Mexi co

74 500 1000

basis points 1500 2000

0 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Source: Thomson Reuters and Bloomberg.

Global Economics

March 2014

Latin America Regional Outlook

Regional Outlook March 2014

Pablo F.G. Brard 1 (416) 862-3876 pablo.breard@scotiabank.com

Daniela Blancas 1 (416) 862-3908 daniela.blancas@scotiabank.com

Positive Regional Growth Impact from Improved Global Economic Conditions The global economy is in acceleration mode on the back of the recovery evidenced in developed economies and the relatively stable momentum in the core group of emerging-market economies. Latin American growth prospects are promising, with economic conditions in the US and Europe improving, while China maintains a solid albeit somewhat lower pace of expansion. We estimate that the Latin American real GDP will grow by around 3.0% y/y in the 2014-15 period. A material improvement in the US economic outlook will have positive effects on trade flows in both Mexico and Colombia, influenced as well by developments in global energy markets, while Chinas stable growth trajectory will imply solid demand for commodity-exporting trade-intensive countries such as Peru and Chile. All of these four economies count on credible monetary policy regimes and solid macroeconomic frameworks, which provide enough flexibility to adjust in the case of a less benign international context. While the pace of economic activity remains very soft in Brazil, there are signs of modest and gradual acceleration in the current year. Following a decade of fast growth, Uruguay is experiencing a period of economic deceleration influenced by high inflation and weakened growth prospects in its key neighbouring countries. Finally, stagflation risk, exacerbated by heightened political uncertainties, has emerged in both Argentina and Venezuela. Heightened Financial Market Stress Deepens Intra-Regional Credit Differentiation The normalization of monetary policy in the developed countries led by the US Federal Reserve will remain a key issue driving periods of high volatility in emerging markets. Long-term US interest rates have been in ascendancy since early May 2013, triggering asset re-allocation in favour of more-developed markets (emerging markets account for less than 30% of the world equity market capitalization). Flight-toliquidity trading dynamics have caused sharp swings in emerging-market equity and debt securities; yet the global perception of Latin American sovereign credit risk varies from country to country. Reform-oriented economies such as Mexico and Colombia have been subject to credit rating upgrades over the past few months; while peripheral countries such as Venezuela and Argentina will remain as distressed credits in the foreseeable future. The US dollar has become more attractive on the back of a positive US economic cycle and the gradual unwinding of monetary stimulus, leading to currency adjustments and monetary policy shifts. There is evidence of increased dollarization of investment/loan portfolios among high-net-worth investors. Nevertheless, the undervalued Mexican peso has the potential to recover faster than other Latin American currencies after the current phase of increased market stress subsides. The Colombian peso may be subject to sporadic bouts of volatility, prompting intervention by the authorities, while the Brazilian real will continue to suffer from lackluster economic recovery conditions and the need for fiscal consolidation. Divergent Inflation Drivers Lead to Uneven Monetary Policy Adjustments Inflation trends are moving in multiple directions within the region. Colombia, Peru, Chile and Mexico present a manageable inflation outlook, whereas both Brazil and Uruguay have been confronting steadily increasing pressures. Venezuela and Argentina continue to flirt with hyperinflation. Brazil executed a pre-emptive monetary tightening phase (with 350 basis points in rate hikes) over the past twelve months to counteract emerging inflationary pressures and mitigate the adverse effect of capital outflows triggered by both local and external factors. Meanwhile, with inflation relatively under control, most Latin American countries (excluding Brazil, Argentina and Uruguay) have adopted a pro-growth monetary policy bias. The financially integrated core countries of Latin America are well prepared to face an adverse external shock. Brazil accounts for 50% of the US$750 billion in international reserves held by Latin American central banks. In brief, central banks have both the tools and the institutional strength to intervene and aptly communicate their policy adjustments without causing significant negative implications for investor sentiment. Domestic Financial Sector Strength Reduces Dependence on External Funding Sources Most countries count on wellcapitalized and provisioned local financial institutions. Moreover, the steady development of local-currency credit and securities markets provide a structural shield to counteract the negative spillovers from intensified currency market volatility in countries such as Mexico, Chile, Colombia and Peru. Mexico, and to a lesser degree Colombia, Peru and Chile present an attractive alternative for international fixed-income investors as all of these countries have been focusing on developing a deeper domestic bond market and boosting national savings through the development of private pension funds. We expect this trend to remain in place; however, a steady improvement in US growth and fiscal conditions will intensify demand for the US dollar and US dollar-denominated securities in the coming two years. Regional Governance Affected by Structural Reforms and Leadership Succession Regional integration initiatives (such as the Pacific Alliance or Mercosur trade agreements), the electoral cycles in Colombia, Brazil and Uruguay in 2014, the transition to the new government in Chile, and the implementation of reforms in Mexico will shape the political landscape in Latin America. Additionally, increasing demands to improve infrastructure in Brazil and to contain drug-related violence in Mexico and Colombia, coupled with social tensions and political instability in Venezuela and Argentina will remain as key factors affecting investor sentiment.
3

Global Economics

March 2014

BRAZIL

Latin America Regional Outlook

Pablo F.G. Brard 1 (416) 862-3876 pablo.breard@scotiabank.com

Capital Market Dynamics

Foreign Exchange Disappointing economic recovery dynamics, widening fiscal and external deficits, a bearish tone in core emerging-market assets due to the normalization of monetary policy conditions in the United States, and election-related policy uncertainties are all factors affecting the outlook for the Brazilian real (BRL), notwithstanding appreciation trends that have materialized in the past month. The central bank has intervened fiercely in defence of the currency in order to mitigate the potential pass-through inflationary effects from a weaker currency. Net international reserves (currently valued at US$360 billion) have declined by 5% over the past 12 months. Sovereign Debt & Credit Ratings Investor perceptions of Brazilian risk improved over the past two months following a steep erosion triggered by the soft economic performance and weaker fiscal conditions. However, market metrics point toward ongoing stress in core emerging-market assets with a keen focus placed on Chinese market developments and policy shifts; the cost of insuring Brazilian bonds implied by credit default swaps have recently declined after the steep increase recorded between May and August 2013. However, the risk of a credit rating revision has not vanished; Standard & Poors downgraded the outlook for Brazils rating to negative last June.

Economic Outlook
Growth Economic activity remains soft, yet there are signs of modest and gradual acceleration as the global economy adopts a stronger cyclical upswing with positive implications for emerging-market economies. Following a 2.3% expansion in 2013, we estimate that the Brazilian economy will grow by 2-2.5% in 2014-15, aided by investments in public sector infrastructure and increased energy sector production. Recent surveys point to higher gains in industrial production for the year ahead. Persistent improvement in real wages may also add to household consumption, to be slightly tempered by an increase in consumer leverage and interest costs. Inflation & Monetary Context The Monetary Policy Committee (COPOM) of the central bank will succeed in keeping inflationary pressures under control in light of lingering exchange rate pressures and tight labour market conditions. Last year, inflation escalated as a result of the 15% exchange rate depreciation and persistently high labour costs. Looking ahead, we anticipate a mild moderation of headline inflation in the current year to slightly below the 6% y/y mark. The central bank continues to voice its commitment to the monetary regime composed of inflation targets (4.5% +/- 2.0%) and a managed floating currency scheme in order to foster financial stability and secure local-currency purchasing power. Following the increase in the policy -setting SELIC target rate to 10.75% last February, the COPOM has accumulated 350 basis points in rate hikes over the past 12 months. The end of the tightening cycle is near. Fiscal & Current Account Balance Fiscal consolidation has emerged as a top priority for current policymakers. The Brazilian fiscal imbalance has become an issue of concern to global creditors and rating agencies. The consolidated public sector deficit increased to 3.6% of GDP (and the primary surplus declined to 1.7% of GDP) in early 2014. We are of the view that electionrelated dynamics in the context of increasing demands from society to improve infrastructure will entice an acceleration of public spending and that the fiscal gap will remain high throughout 2014. On the external front, there is evidence of a slight erosion in the current account, which reached a deficit of 3.7% of GDP in the last 12 months. Net foreign direct investment flows (at 2.9% of GDP) were insufficient to cover the external gap.

Institutional Framework & Political Environment

Governance The presidential elections scheduled for October will be the dominant event affecting the political environment. Following an unprecedented series of social unrest and public demonstrations against corruption and poor social conditions, President Dilma Rousseff has suffered from a decline in approval ratings. Now, the government faces a sensitive policy choice between promoting growth by increasing public investments (infrastructure and education) and containing inflation to preserve financial stability. Bilateral economic and political relations with China continue to deepen, moderating Brazils dependence on US economic cycles and financial market jitters. Financial Sector The Brazilian banking sector continues to develop under dominant participation of state-owned financial institutions. The stock of total credit reached 56% of GDP in 2013, up from 53% in 2012. In line with the tightening stance adopted by the monetary authorities, interest rates have been in ascendancy over the past 12 months, reaching average rates of 20%. Asset quality metrics point towards a record-low level of non-performing loans, which reached 3% of total loans (at 4.4% the NPL ratio was higher for consumer loans).

Global Economics

March 2014

MEXICO
Daniela Blancas 1 (416) 862-3908 daniela.blancas@scotiabank.com

Latin America Regional Outlook

Mario Correa 52 (55) 5229-2458 mcorrea@scotiacb.com.mx

Capital Market Dynamics

Foreign Exchange Rebounding economic activity, US Fed monetary policy adjustments and domestic political developments will continue to shape the Mexican pesos (MXN) performance in the short-term. In 2013, the currency lost only 3% against the US dollar (USD), being the best performer among its Latin American peers. In line with the losses registered in other emerging currencies, the USDMXNs volatility has increased, though it has recently stabilized around the 13.20 level. We expect the MXN to adjust in a gradual and orderly fashion. The central bank maintains a significant amount of international reserves, currently valued at US$180.8 billion, allowing authorities to intervene as needed to counter excessive volatility. Sovereign Debt & Credit Ratings Mexicos creditworthiness continues to improve. Last February, Moodys upgraded the countrys long-term sovereign credit rating by one notch to A3 from Baa1, the first agency to place Mexico in the A category. In 2013, Standard & Poors and Fitch upgraded Mexico to BBB+ with a stable outlook, highlighting the positive impact of the structural reforms approved in the last 18-months (particularly in the energy sector) on the countrys potential growth. Mexico currently ranks as the country with the second-lowest five-year credit default swaps in Latin America. However, foreign holdings of Mexican government bonds account for 56% of the total, making the country vulnerable to unexpected shifts in capital flows.

Economic Outlook
Growth The countrys economic expansion will likely accelerate in the 2014-15 period, after a soft performance in 2013. Real GDP expanded by 1.1% last year, the weakest result since 2009. Lackluster activity in the industrial sector, particularly in the construction segment, was the main contributor to the subdued economic performance. Additionally, public expenditure growth decelerated with the entrance of the new government; however, it has since recovered. Furthermore, the automotive industry will continue to be solid with new investment plans already underway. Last July, the government unveiled a plan to invest in infrastructure projects in the coming five years, which could start boosting construction in 2014. In addition, the recent approval of energy and utility sector reforms will begin to have a positive effect over the medium-term, improving economic projections. In line with stronger US growth in 2014 (2.8% for 2014 and 3% for 2015) and an accelerating local economy, we estimate that output will increase by 2.7% in 2014 and by 3% in 2015. Inflation & Monetary Context The inflation rate has increased in recent months, due to higher taxes derived from the fiscal reform approved last year; however, we expect inflation to decelerate to within the central banks official range (2-4%) by the end of the year. The central bank loosened monetary conditions, reducing the reference rate by 50 basis points to 3.50% in 2013, in response to the weaker economic performance, lower inflation and contained price expectations. We expect the current monetary policy stance to be maintained until the last quarter of the year. Fiscal & Current Account Balance Both the current and fiscal accounts will remain at manageable levels over the forecast horizon. By the end of 2013, Congress approved a fiscal reform which is expected to increase tax revenue by close to 1% of GDP in 2014 (1.4% estimate in the initial proposal). In line with this, the 2014 budget anticipates higher government spending, taking the fiscal deficit to 1% of GDP (significantly higher than the 0.4% shortfall anticipated for 2013). After reaching close to zero in 2012, the trade deficit widened in 2013 with imports growing at a faster pace than exports while remaining at a manageable level. With a slightly higher trade shortfall, the current account deficit will remain around 1.7% of GDP over the forecast period, adequately financed by foreign capital inflows.

Institutional Framework & Political Environment

Governance The political environment in Mexico has been shaped by several structural reforms legislated in the last 18 months. So far, telecommunications, education, labour, financial, fiscal and energy reforms have been approved. However, the secondary laws regulating many of these reforms are still to be finished, with the energy sector rules taking the centre of investors attention. Containing drug-related violence, establishing closer relations with the US and pursuing business-friendly policies will remain key focal areas for President Pea Nietos administration. Financial Sector The Mexican banking sector, with substantial participation by foreign institutions, remains well capitalized. All major Mexican institutions have fulfilled the requirements of the new Basel III rules, which establish a minimum capital ratio of 10.5% for banking institutions and a Tier 1 ratio of 7%. Private sector borrowing moderated throughout 2013; nevertheless, credit expanded by 10.2% y/y in January. The non-performing loan ratio increased to 3.4% in December, above the 2.5% registered a year earlier, due to financial problems among major homebuilders.

Global Economics

March 2014

ARGENTINA

Latin America Regional Outlook

Pablo F.G. Brard 1 (416) 862-3876 pablo.breard@scotiabank.com

Capital Market Dynamics

Foreign Exchange Devaluation pressures are mounting. Both in regulated and unregulated markets, the Argentine peso (ARS) will be subject to further depreciation waves against the US dollar (USD), despite recent signs of stabilization in local and foreign markets. The escalation of inflationary pressures coupled with the gradual depletion of international reserves, eroding public debt profile and sell-off pressure in emerging-market assets might prompt a new phase of policy-driven currency adjustments before the end of the year. The peso has depreciated by 38% against the USD over the past 12 months (by 60% when considering the unofficial exchange rate). The central bank lost US$14 billion in international reserves in the last year, representing a 30% decline. Sovereign Debt & Credit Ratings Argentinas creditworthiness has deteriorated materially. All international rating agencies maintain a negative outlook on the countrys long-term foreign-currency credit, with near-default ratings in some cases. Financial market metrics reinforce a bearish investor sentiment. The cost of insurance of sovereign bonds measured by credit default swaps increased sharply from 1,600 basis points (bps) to 2,800 bps in just one month. However, investors greeted with cautious enthusiasm the compensation settlement for the confiscation of assets from Repsol and the proposal to restructure the debt owed to Paris Club creditors.

Economic Outlook
Growth Real GDP may grow by 1% in 2014-15 as the government adopts measures to normalize relative price distortions. Consumer confidence, employment and industrial production metrics indicate a deterioration in economic conditions in recent months. The loss of purchasing power as a result of escalating inflationary and devaluation pressures will have a damaging effect throughout the year with a sharp deceleration in domestic consumption and business investment. Private sector investment will remain muted due to heightened political uncertainties, price-distorting subsidy policies and growing expectations of a sharp economic contraction. Inflation & Monetary Context Argentina is flirting with a very high inflation scenario. Following the adjustment to exchange rate policies and the introduction of new official statistics, average 12-month inflation expectations now exceed the 40% y/y mark. Due to well-entrenched inflationary pressures, retailers and manufacturers will be strongly affected by a sharp increase in marginal costs. In the absence of a credible monetary regime, the risk of interest rate controls on banking sector transactions is high. Moreover, escalating inflation and depreciation waves will continue to ignite wage demands by powerful trade unions, with adverse consequences for price stability. Fiscal & Current Account Balance A lack of fiscal discipline is at the core of the countrys economic distress. The combined negative effect of increased public sector spending, decelerating consumption and investment activity and inadequate access to multilateral funding will lead to a sharp fiscal imbalance measuring 5% of GDP in 2014. The authorities do not favour any changes to current subsidies, while the International Monetary Fund (IMF) still demands continuous improvement in the quality of inflation and GDP data. The external sector remains one of the few positive growth drivers, yet distortive intervention by the state in the agribusiness and energy industries may somewhat limit the export growth potential. Nevertheless, the development of vast energy resources (Argentina counts on the worlds second largest shale gas reserves) may prompt investorfriendly foreign policy and tax adjustments in this regard.

Institutional Framework & Political Environment

Governance The administration of President Cristina Fernandez-Kirchner is slowly responding to mounting local and international pressure to introduce adjustments to the current policy framework. Debt sustainability concerns and intensifying devaluation expectations may lead the government to normalize policy conditions. The erosion in purchasing power as a result of erratic policies may undermine the political capital of the ruling administration, which still has a strong influence on the judiciary and controls Congress until December 2015. Under the assumption of a possible stagflation scenario, social unrest will escalate in the near term. Government infighting will also multiply with increasing risks of crisis-led changes to the composition of public sector leadership. Financial Sector There are no apparent signs of stress in the local banking sector due to systemic leverage in the Argentine economy. However, domestic banks which have been forced to reduce their foreign-currency securities holdings, will remain cautious in the credit adjudication process under the uncertain macroeconomic context. IMF data point to an adequately capitalized local banking sector and manageable asset quality metrics. Consumer lending activity, supported by the governments interventionist policies, may remain in place despite the projected deterioration of household finances stemming from a sharp loss of consumer purchasing power.
6

Global Economics

March 2014

COLOMBIA

Latin America Regional Outlook

Daniela Blancas 1 (416) 862-3908 daniela.blancas@scotiabank.com

Capital Market Dynamics

Foreign Exchange The value of the Colombian peso (COP) has been affected by intensive central bank intervention combined with modest economic growth, loose monetary policy and more recently, US dollar (USD) strength caused by the withdrawal of monetary stimulus by the US Federal Reserve. The currency lost close to 10% vis--vis the USD in 2013, reaching the 2,060 mark by the end of February. In our view, the COP will recover somewhat against the USD but will close 2014 weaker than the previous year. The central bank is well positioned to support the currency, in the case of heightened volatility in global financial markets. Foreign reserves are currently valued at US$43.7 billion, which are complemented by a new two-year precautionary flexible credit line from the International Monetary Fund (approved in July) worth US$5.8 billion. Sovereign Debt & Credit Ratings Colombias sovereign credit remains stable after improving last year. In December, Fitch Ratings upgraded Colombias long-term foreign-currency credit rating from BBB- to BBB, changing the outlook from positive to stable. The agency decided to review the countrys sovereign credit profile in response to solid public finances, stronger economic resiliency in the face of external shocks and a positive outlook for growth. The increase followed a similar move by Standard & Poors in April, revising the countrys credit rating from BBB- to BBB, leaving a stable outlook in place. Moodys rates the country at Baa3 with a positive outlook. The debt-to-GDP ratio has been gradually decreasing from 36% of GDP in 2009 to 32% in 2012. Colombias five-year credit default swaps have been steadily declining since the negative shock in May, from above 160 basis points (bps) to 110 bps as of March.

Economic Outlook
Growth The Colombian economy is on a recovery track following the weaker growth performance observed since mid-2012; however, signs have been mixed and uneven across sectors. Real GDP expanded by 5.1% y/y in the third quarter of 2013, improving significantly from the 3.3% rate averaged in the first half of the year. Construction and infrastructure were the main contributors to growth, while the industrial sector continues to lag. Both public spending and household consumption are gaining momentum, fuelling import demand. Meanwhile, export growth remains modest and below the import pace due to supply problems, particularly in the mining sector. We maintain our view that the Colombian economy expanded by 4.1% in 2013 and will likely advance by 4% on average in 2014-15. Inflation & Monetary Context Inflation dynamics have improved significantly in Colombia in recent years. Headline inflation remains close to the lower limit of the central banks target range (2-4%), averaging 2% y/y in 2013, a record low for the country. In our view, inflation will accelerate to around 2.8% y/y by the end of 2014, responding to the rebound in economic activity. After cutting the reference rate by 200 bps over a 12-month period, the central bank has maintained the monetary rate at 3.25% since last March. We do not foresee any changes to the monetary stance in the coming quarters. Fiscal & Current Account Balance The government remains committed to fiscal consolidation, with the fiscal rule anticipating a decrease in the public deficit from 2% of GDP in 2014 to no more than 1% by 2022. The central government shortfall is expected to be around 2% of GDP in the 2014-15 period. The fiscal reform approved in 2012 combined with the expected increase in oil production in the coming five years support a positive outlook for the countrys fiscal balance. We anticipate a mild widening of the current account deficit to 3% of GDP in the 2014-15 period; however, the merchandise trade balance will likely remain in surplus. Export growth will resume in the forecast period, fuelled by higher oil production (relatively stable prices), while imports will remain strong as economic activity reactivates. Foreign direct investment inflows will remain strong, fully covering the external financing gap.

Institutional Framework & Political Environment

Governance Presidential elections, scheduled for May 2014, will be the focus of the political environment in the first half of the year. By the end of 2013, President Juan Manuel Santos announced that he will be running for a second term, with peace negotiations with the Fuerzas Armadas Revolucionarias de Colombia (FARC) and economic stability taking centre stage in his campaign. We anticipate controlled market volatility stemming from the electoral process. Structural reforms, and intraregional relations will continue to be key issues. Financial Sector The financial sector remains well-supervised and adequately capitalized. Credit growth has stabilized around the 13-16% y/y rate in the past 12 months, after running above the 18% mark on average in the previous year. Consumption loan growth has decelerated from 18.3% y/y in December 2012 to 12.3% in December 2013. The non-performing loan ratio has been gradually increasing, reaching 2.1% in October from 1.9% from previous year.

Global Economics

March 2014

VENEZUELA

Latin America Regional Outlook

Daniela Blancas 1 (416) 862-3908 daniela.blancas@scotiabank.com

Capital Market Dynamics

Foreign Exchange Currency controls and limited US dollar supply will remain in place in Venezuela for the foreseeable future. Nevertheless, the authorities are moving towards a trading band scheme, with the official rate of 6.30 bolivares per US dollar (USD) as the floor and the official USD auction price as the ceiling (around 11.8 in the latest auction). Additionally, the amount of USD offered through the SICAD system will increase, allowing more participants to enter the auction. In our view, with parallel market rate at around ten times higher than the official exchange rate and economic imbalances so pronounced, the new measures will fail to materially ease pressure on the currency. Accordingly, foreign reserves (currently valued at US$ 20.8 billion) will continue to decrease, after having lost 24% in the last year. Sovereign Debt & Credit Ratings Sovereign credit ratings for Venezuela will remain below investment grade for the foreseeable future. Rating agencies have highlighted that political instability and unconventional economic measures could trigger rating downgrades. Standard & Poors lowered the countrys long-term sovereign credit rating to B- last December, leaving a negative outlook in place. Venezuelas large fiscal dependence on oil export revenue, weak institutional framework, low external liquidity and mounting inflationary pressures will continue to weigh on risk ratings. Fitch maintains a B+ rating, the highest among the major rating agencies, while Moodys recently downgraded the country to Caa1; both hold a negative outlook. The cost of insuring government bonds, as measured by credit default swaps, remains the second highest in the region following Argentina, and has increased significantly since the beginning of the year to slightly over 1,400 basis points.

Economic Outlook
Growth The Venezuelan economic outlook remains subdued. Based on official data, the countrys real GDP grew by 1.6% in 2013 (5.6% in 2012) on the back of robust government spending. Despite the recent increase in the minimum wage, household consumption has been deterred by high inflation, goods scarcity and low job creation. Export growth, mainly oil shipments, has been decelerating. According to the Organization of the Petroleum Exporting Countries (OPEC), Venezuelan oil production (2.32 million barrels per day in December) has been decelerating gradually over the last year. Furthermore, investment will continue to be restrained, as the institutional framework remains weak. We expect all of these trends to remain in place in the coming years, limiting real GDP growth to a meager 0.3% in 2014 and 1% in 2015. Inflation & Monetary Context The inflation outlook continues to worsen, a trend that we expect to persist in the coming year. Supply shortages, low access to foreign goods and a limited domestic production capacity have boosted the annual inflation rate from 22% y/y in January to 56% in December. Overall inflation may be higher than that reported by official statistics, as an informal market has developed through which scarce goods are sold at higher prices, despite the governments recent efforts to control and lower prices in some goods. We expect that price distortions will remain high, with the annual inflation rate averaging around 40% y/y in 2014. Fiscal & Current Account Balance Both the fiscal and current account balances continue to deteriorate. A significant increase in public spending to boost economic activity while maintaining social programs, lower oil revenues which account for half of the countrys total revenue and off-budget expenditures have complicated the fiscal situation in Venezuela. According to International Monetary Fund estimates the fiscal deficit will average close to 13% of GDP in 2014-15. The current account surplus (around 2% of GDP) will continue to shrink over the forecast horizon on account of limited foreign investment (joint-venture projects with China and Russia will remain a key factor for external accounts), decreasing export growth and accelerating imports (to meet internal demand).

Institutional Framework & Political Environment

Governance The political environment in Venezuela will remain of high concern for investors and businesses. Increasing social discontent and massive demonstrations against government policies, goods scarcity, electricity shortages, high crime rates and poor economic conditions have emerged in recent weeks, increasing pressures on President Nicols Maduros regime. Additionally, lower support from other Chavista leaders complicates the political landscape. In our view, there is no evidence of an imminent change in the countrys leadership this year; rather, we foresee that the political transformation already underway will likely be gradual. Financial Sector The local credit context remains stable in Venezuela. Based on official data, credit growth (only in the banking system) accelerated through 2013, from 50% y/y to 62% y/y in December. Consumer and commercial lending, which accounts for 57% of total private lending, expanded on average by 63% y/y in 2013. The non-performing loans ratio decreased to 0.6% in July from 0.9% a year before.

Global Economics

March 2014

PERU
Daniela Blancas 1 (416) 862-3908 daniela.blancas@scotiabank.com

Latin America Regional Outlook

Guillermo Arbe 51 (1) 211-6052 guillermo.arbe@scotiabank.com.pe

Capital Market Dynamics

Foreign Exchange Central bank intervention, lower commodity prices, US dollar (USD) strength due to the shift in US monetary policy and higher demand for foreign currency from local pension funds have weighed on the Peruvian sol (PEN), weakening the currency by around 10% against the USD in 2013. We expect the USDPEN rate to trade at around 2.70-2.85 through the year, and to then resume its appreciation trend in 2015, as the authorities foster the process of structural dedollarization of the economy. Foreign reserves, currently valued at US$65 billion, will provide support to policy management if need be. Sovereign Debt & Credit Ratings Peru enjoys a favourable sovereign credit profile. In late October, Fitch Ratings upgraded Perus long-term sovereign credit rating from BBB to BBB+ with a stable outlook supported by fiscal strength, solid growth performance under a stable macroeconomic and financial environment and high resilience to external shocks. Standard & Poors also upgraded the nations credit rating from BBB to BBB+ last year, leaving a stable outlook in place. Moodys maintains a sovereign debt rating of Baa2, with a positive outlook. The central bank of Peru estimates that the gross public debt ratio will decrease from close to 20% of GDP in 2012 to around 16% in 2015. The cost of insurance against sovereign bond default measured by the five-year credit default swap rate has slowly decreased to 118 basis points (bps) from its peak of 173 bps in June.

Economic Outlook
Growth The Peruvian economic trajectory remains robust, although the pace of growth will continue to be slightly below the 6% mark in the 2014-15 period. Real GDP advanced by 5.0% y/y in 2013, the slowest pace since 2009, caused by lower domestic and external demand. In our view, economic activity will accelerate throughout 2014-15, as some mining projects will come on stream. Private consumption, although softer than in 2012, will continue to grow at around 5% y/y, supporting economic activity. Peru will remain vulnerable to shifts in Chinas economic performance and commodity prices; however, the countrys expanded growth base and available fiscal resources may mitigate external shocks. Inflation & Monetary Context Price pressures will remain well contained over the forecast horizon; however, we anticipate that inflation will continue to hover around the upper limit of the central banks tolerance range of 1-3% y/y. Headline inflation averaged 2.8% y/y in 2013, the lowest level in three years. In November, the central bank of Peru decided to cut the reference rate by 25 bps to 4%, the first move in two and a half years. Additionally, the central bank has been lowering the reserve requirement rates to ease monetary conditions. In our view, the authorities are approaching the end of the easing cycle, with no further significant adjustment expected. Fiscal & Current Account Balance The fiscal outlook is stable over the medium term. The non-financial public sector surplus will likely vanish by 2015 from around 0.8% of GDP in 2013, as a result of higher government spending coupled with lower commodity prices. Nevertheless, the lower surplus will likely be translated into higher public investment, particularly in social and infrastructure projects. We maintain our view that the trade balance will return to surplus over the forecast period, but remain below 2012 levels, while the nations terms of trade will deteriorate slightly. We expect imports to maintain a solid performance as local demand continues to be relatively strong. Exports are vulnerable to commodity prices; however, increasing copper production will boost shipments by 2015. Growing profits of foreign firms will lead to strong outflows, keeping the deficit on the income account in place. The overall current account deficit will remain around 4% of GDP in the 2014-15 period, to be mainly financed by sizable long-term capital inflows.

Institutional Framework & Political Environment

Governance The administration of President Ollanta Humala remains committed to maintaining a business-friendly environment as highlighted by an improving trend in investment and consumer confidence. However, social problems surrounding the mining sector, the implementation of infrastructure projects and violent resistance in confronting informal mining activities are some of the challenges that the current administration will continue to face. Relations with key neighbouring countries will favour regional integration. Financial Sector The Peruvian financial sector is well-equipped to face adverse external shocks. Growth in local-currency credit to the private sector has resumed its upward trend since mid-year, while foreign-currency lending has decelerated continuously since the beginning of 2013. The deposits dollarization ratio decreased slowly throughout 2013, reaching 40% as of November from 43% at the end of 2012.

Global Economics

March 2014

CHILE
Pablo F.G. Brard 1 (416) 862-3876 pablo.breard@scotiabank.com

Latin America Regional Outlook

Benjamin Sierra 1 (56 (2) 4644974 benjamin.sierra@scotiabank.cl

Capital Market Dynamics

Foreign Exchange The Chilean peso (CLP) has been immersed in a weakening phase against the US dollar (USD) since last October, mainly triggered by exogenous factors. Heightened global risk aversion affecting emerging-market assets combined with lower commodity prices and concerted efforts to increase USD holdings have all been factors weighing on the currency. Non-deliverable forward (NDF) markets point towards further weakness, in line with our view for the first half of the year. Thereafter, we expect the CLP to enter a stabilization phase as Chile begins to benefit from the renewed growth impetus in major advanced economies. Sovereign Debt & Credit Ratings Chile counts on a solid external debt profile, retaining the highest sovereign credit rating within Latin America. All international rating agencies maintain a stable outlook on the countrys long-term foreign-currency sovereign credit ratings, which are currently set as follows: Aa3 (Moodys), AA (Standard & Poors), and A+ (Fitch). Credit default swaps and yield spreads over US bonds position Chile at the top of the Latin American sovereign credit charts. Credible macroeconomic policies, a sound financial sector and a benign debt maturity profile are at the core of such favourable global perception of Chilean creditworthiness.

Economic Outlook
Growth The Chilean economy, which is estimated to have expanded by 4.0% in 2013, remains in a phase of gradual deceleration which will likely extend through the first half of 2014. However, we estimate that economic activity will begin to expand at a faster rate later in the year, reaching an average of 4.5% in 2014-15 supported by an improved external growth outlook and a gradual recovery of investment activity once the new administration takes over. The growth outlook remains extremely sensitive to external factors affecting metal markets (and price) developments. We are of the view that copper prices will tend to stabilize in 2014-15, supporting the countrys export sector. Inflation & Monetary Context The central bank is immersed in a pro-growth monetary policy easing phase in the context of a contained inflation scenario. We estimate that consumer price inflation will remain in line with the official 3% +/- 1% target over the next 24 months. The monetary authorities reduced the policy-setting short-term interest rate by 75 basis points (bps) to 4.25% over the past five months, and further cuts may be in store in the near term. Once the heightened financial market volatility associated with the normalization of US monetary policy subsides, we believe that Chilean consumer price inflation will also tend to stabilize around current levels. Fiscal & Current Account Balance The Chilean external sector remains highly sensitive to economic developments in China and the US, which will undoubtedly have an impact on the countrys terms of trade as well as on potential demand for the countrys main exports. We estimate that the current account deficit will range between 3.5% and 4% of GDP over the next 18 months on the back of a slight deterioration in the countrys trade balance (due to adjusting metal prices) while crude oil prices may decline. The incoming government reaffirmed its commitment to the structural fiscal rule (stipulating a balanced budget and supported by a sovereign wealth fund), which has allowed Chile to weather external economic and financial shocks in the past.

Institutional Framework & Political Environment

Governance The political environment will be dominated by the transition to a new government. The coalition administration of President-elect Michelle Bachelet, with a simple majority in both houses of Congress, will take office in March 2014. Following the appointment of a new Cabinet, the new government has hinted that the policy agenda will initially be centred on introducing major changes to the current educational system to meet growing demands from society amidst escalating social tensions in this regard. Beyond educational reform, changes to the income tax regime and redefinition of the energy matrix (in favour of fostering the development of the hydroelectricity sector and boosting power production) will also be on the policy agenda. Financial Sector The Chilean financial sector remains sound and well capitalized, as indicated in the assessment of the World Economic Forums Global Competitiveness Report. Domestic credit growth by deposit-taking financial institutions remains in deceleration mode, yet remains at still high rates of around 10% y/y per year. The internationalization of the Chilean banking sector is firmly advancing following the recent investment by a large Brazilian financial group. Local pension funds, which count on US$163 billion (equivalent to 59% of GDP) in assets under management (AUM), maintain a bias towards deeper dollarization of investment portfolios, in line with increasing demand for equity securities issued in high-income economies. Foreign-currency portfolio investments (which accounted for 42% of total AUM) increased by 21% y/y during 2013.

10

Global Economics

March 2014

URUGUAY

Latin America Regional Outlook

Pablo F.G. Brard 1 (416) 862-3876 pablo.breard@scotiabank.com

Capital Market Dynamics

Foreign Exchange The Uruguay currency environment is vulnerable to waves of sudden and sharp volatility. In line with other emerging-market currencies, the Uruguayan peso depreciated by 17% versus the USD over the past nine months following the US Feds announcement of gradual a unwinding of monetary stimulus. Renewed devaluation dynamics in both Brazil and Argentina forced the authorities to act even further by restricting non-resident investments in government securities in an effort to control adverse pass-through effects. The Uruguayan central bank will not hesitate to introduce additional policy measures to contain inflation-sensitive exchange rate volatility or intervene using foreign reserve holdings (currently valued at US$16.3 billion), if need be. Sovereign Debt & Credit Ratings The global perception of Uruguays credit risk remains sound despite heightened volatility affecting emerging-market assets. All major international agencies place Uruguays long-term foreign-currency credit in the investment grade category. Moreover, Moodys has maintained a positive outlook on Uruguays rating since July 2012. The sustained improvement of the public sector debt profile is a major success leading to a more stable macroeconomic environment. In fact, gross public sector debt declined to 59% from 112% of GDP over the past 10 years. Despite increased volatility in emerging markets, active external and domestic liability management has converged into an improved debt maturity profile for the next 24 months.

Economic Outlook
Growth The US$57-billion Uruguayan economy is experiencing a growth deceleration phase on the back of less benign external market conditions, weakening manufacturing activity, an adverse shock to the tourism sector and structural rigidities in indexation and exchange rate policies. Following an impressive annual average growth rate of 5.5% over the past decade, Uruguays real GDP will likely expand by 3-3.5% in the next 24 months, converging towards its potential growth rate. Deteriorating trade and investment conditions in neighbouring countries, coupled with an increase in international funding costs and eroding competitiveness resulting from an overvalued real exchange rate and high inflation, will likely limit the contribution of consumption to growth in the coming year. Inflation & Monetary Context Inflation is edging close to double-digit territory in Uruguay. Persistent currency depreciation pressures, structural wage indexation and tight labour market conditions will continue to act as the major drivers of inflationary expectations. The decelerating economic activity will contribute to moderate demand-side price pressures while intensifying labour union activism will remain a deterring force for price stabilization efforts in the coming years. The Central Bank is focused on tackling inflation as well as discouraging speculative foreign capital inflows. The political establishment is committed to keep a managed floating currency and inflation-targeting regime. Fiscal & Current Account Balance Uruguay enjoys a comfortable fiscal outlook. The consolidated general government deficit, estimated at 2.3% of GDP, will increase somewhat this year, yet it will remain in manageable territory. Once elections are over, fiscal consolidation efforts will be likely implemented to optimize public sector spending patterns. The current account deficit has been widening over the past year (to over 5% of GDP) as a result of strong import growth, increasing energy costs and negative cross-border trade activity. Looking ahead, we anticipate a narrowing of the external gap to 3-4 % of GDP in 201415 as economic growth decelerates. On a positive note, foreign direct investment inflows have fully covered the current account imbalance over the past decade.

Institutional Framework & Political Environment

Governance Presidential elections will take place in October 2014. The countrys strong judiciary and proactive development of political institutions will continue through the remainder of the decade. However, the electoral cycle will influence the political and policy context over the next 12 months. We envisage that the current business-friendly policy framework will remain in place after the vote. Nevertheless, we are of the view that union activism will remain strong over the next few years, representing at times a source of friction between the government and labour groups. Regional political developments in both Brazil and Argentina will also have an effect on Uruguays outlook. Financial Sector Securing financial stability is a top priority for the current administration. Capital adequacy and asset quality ratios remain strong following a steady decline in non-performing loans (to 1.3% from 18% of total loans the past decade). The banking sector is advancing in the process of de-dollarization, yet foreign-currency deposits still account for 75% of the total. Non-resident deposits have materially declined, accounting now for 14% of the total. Finally, the financial services industry has the potential for increased private-sector investment in the still state-dominated banking sector as total systemic credit remains relatively low as compared with peer regional countries.
11

Global Economics

March 2014

Latin America Regional Outlook

Macroeconomic Metrics
Regional GDP Growth 8 7 6 5 4 3 2 1 0 0.7 1.3 2.2 3.2 3.3 4.3 4.5 Annual % change

Current Account Balance 8 % of GDP 6

5.5

2004-13 2014f-15f

4 2 0 -2 -4 -4.1 -6 -4.1 -3.4 -3.3

2004-13 2014f-15f

1.9

-0.8 -1.7 -3.1

Consumer Price Inflation 40 35 30 10 25 20 15 10 5 0 0 Mar-09 2.8 3.1 3.1 4.1 8.3 5.8
2004-13 2014f-15f

Short-term Interest Rates 14 35.0 31.5 12 %

Brazil Colombia Peru Chile Mexico

Annual % change

8 6 4 2

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Public Sector Fiscal Balance 2 0 -2 -4 -6 -8 -10 -12 -14 -12.9 -4.8 -3.8 -3.3 -2.7 -2.3 -0.7 % of GDP

International FX Reserves 800

0.2

USD billion
Brazil Mexico Chile Peru Argentina Colombia Uruguay

700 600 500

2009-13 2014f-15f

Venez uela

400 300 200 100 0 Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Source: National authorities, IMF, OECD, Bloomberg and Scotiabank Economics.

12

Global Economics

March 2014

Latin America Regional Outlook

Key Economic Indicators

Brazil
Population (millions) as of 2012 198.4 1998 Ratios and Rates of Change Real GDP (% change) Industrial Production (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDBRL (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDBRL (eop) Exchange Rate (average) Central Bank Rate (eop %) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 1.0 -2.5 -2.4 20.4 -9.9 5.8 5.4 -2.5 58.8 2013e 2013 2.3 1.1 -3.7 19.8 -15.1 6.0 6.0 -3.3 57.2 2014f 2014 2.0 2.0 -3.6 17.0 -5.8 6.0 5.8 -3.5 58.0 2015 2015f 2.5 2.5 -3.2 17.2 -4.0 5.5 5.7 -3.0 57.0

Mexico
Population (millions) as of 2012 117.1 1998 Ratios and Rates of Change Real GDP (% change) Industrial Production (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDMXN (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDMXN (eop) Exchange Rate (average) Central Bank Rate (eop) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 2012 3.9 2.6 -1.2 5.3 7.8 3.6 4.1 -2.9 43.5 2013 2013e 1.1 -0.7 -1.2 5.6 -1.4 4.0 3.8 -4.1 44.0 2014 2014f 2.7 2.3 -1.6 5.7 -2.4 4.2 4.1 -4.1 43.9 2015 2015f 3.7 3.3 -1.8 5.9 -1.3 4.0 4.0 -3.5 43.9

2,224 2.05 1.98 7.25 243 223 19 -54 379

2,191 2.36 2.21 10.00 242 228 14 -81 376

2,107 2.50 2.48 11.25 255 247 8 -75 350

2,207 2.60 2.56 11.25 270 258 12 -70 370

1,246 12.9 13.0 4.50 371 371 0 -15 164

1,300 13.0 12.8 3.50 380 381 -1 -16 177

1,343 13.35 13.3 4.00 395 407 -12 -22 194

1,427 13.52 13.5 5.00 426 441 -15 -26 217

Argentina
Population (millions) as of 2012 41.0 1998 Ratios and Rates of Change Real GDP (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDARS (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDARS (eop) Exchange Rate (average) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 1.9 0.0 7.6 -14.3 25 23 -4.3 47.0 2013e 2013 3.8 -0.2 5.0 -32.6 28 25 -3.6 47.0 2014f 2014 1.5 -0.8 3.9 -61.0 38 33 -5.5 46.0 2015f 2015 1.0 -0.7 3.1 -23.8 25 28 -4.0 45.0

Colom bia
Population (millions) as of 2012 46.6 1998 Ratios and Rates of Change Real GDP (% change) Industrial Production (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDCOP (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDCOP (eop) Exchange Rate (average) Central Bank Rate (eop) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 4.2 -0.4 -3.3 7.6 8.8 2.4 3.2 0.2 32.8 2013 2013e 4.1 -1.3 -3.4 8.8 -9.2 1.9 2.0 -2.4 32.3 2014 2014f 4.5 2.8 -3.3 8.9 -2.6 2.8 2.5 -2.3 31.6 2015 2015f 4.5 3.2 -3.2 9.0 -1.0 3.0 3.0 -2.2 30.2

502 4.92 4.63 81 69 12 0 43

525 6.52 5.70 83 74 9 -1 31

473 10.50 8.51 85 77 8 -4 25

442 13.00 11.75 88 78 10 -3 20

373 1,767 1,785 4.25 60 59 1 -12 37

372 1,930 1,896 3.25 59 59 -1 -13 44

384 1,980 1,970 4.25 63 62 2 -13 46

407 2,000 1,994 5.50 66 64 2 -13 48

Source: National authorities, IMF, OECD, Bloomberg and Scotiabank Economics.

13

Global Economics

March 2014

Latin America Regional Outlook

Key Economic Indicators

Venezuela
Population (millions) as of 2012 29.5 1998 Ratios and Rates of Change Real GDP (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDVEF (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDVEF (eop) Exchange Rate (average) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 5.6 2.5 6.0 0.0 20 21 -17 46.0 2013e 2013 1.6 2.4 4.8 -32 56 41 -15 53.4 2014f 2014 0.3 2.0 4.4 -26 40 45 -13 56.0 2015 2015f 1.0 1.8 4.1 -23 30 35 -13 59.0

Peru
Population (millions) as of 2012 30.5 1998 Ratios and Rates of Change Real GDP (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDPEN (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDPEN (eop) Exchange Rate (average) Central Bank Rate (eop) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 6.3 -3.3 19 5.4 2.6 3.7 2.1 20.5 2013 2013e 5.0 -3.6 19 -9.6 2.9 2.8 0.8 18.6 2014 2014f 5.4 -4.2 18 -0.5 3.0 3.0 0.3 17.1 2015 2015f 5.6 -4.0 18 1.3 2.5 2.7 0.1 15.8

433 4.29 4.29 97 59 38 11 30

440 6.30 6.30 95 54 41 10 21

441 8.50 8.50 90 55 35 9 20

446 11.10 11.10 95 56 39 8 19

201 2.55 2.62 4.25 46 41 5 -7 64

204 2.80 2.74 4.00 42 42 0 -7 66

216 2.81 2.80 4.25 44 44 1 -9 67

231 2.85 2.84 4.25 48 46 2 -9 69

Chile
Population (millions) as of 2012 17.4 1998 Ratios and Rates of Change Real GDP (% change) Industrial Production (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDCLP (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDCLP (eop) Exchange Rate (average) Central Bank Rate (eop) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 2012 5.6 3.4 -3.5 6.7 7.8 1.5 2.9 0.6 11.2 2013e 2013 4.0 3.0 -3.5 6.1 -9.7 3.0 2.0 0.1 11.1 2014f 2014 4.1 3.5 -3.3 5.6 -3.7 3.1 2.9 -0.5 11.4 2015 2015f 4.5 3.7 -3.0 5.1 -2.8 3.0 3.0 -0.8 13.5

Uruguay
Population (millions) as of 2012 3.4 1998 Ratios and Rates of Change Real GDP (% change) Current Account (% of GDP) Foreign Reserves (months of imports) Exchange Rate USDUYU (% change) CPI (eop, % change) CPI (average, % change) Government Balance (% of GDP) Government Debt (% of GDP) Actual Numbers Nominal GDP (USD bn) Exchange Rate USDUYU (eop) Exchange Rate (average) Exports (goods, USD bn) Imports (goods, USD bn) Trade Balance (USD bn) Current Account (USD bn) Foreign Reserves (USD bn) 2012 3.9 -5.4 14.1 3.9 7.5 8.1 -2.8 59.6 2013e 2013 4.0 -4.4 16.9 -12.1 9.1 8.5 -2.3 58.9 2014f 2014 3.3 -4.3 18.1 -7.0 8.5 8.7 -3.0 59.1 2015 3.2 -4.0 17.8 -4.3 8.0 8.3 -2.3 58.8

269 479 486 5.00 78 75 3 -9 42

275 525 503 4.50 80 80 -1 -10 41

272 545 544 4.00 83 85 -2 -9 40

286 560 556 5.00 90 98 -8 -9 42

49.9 19.2 20.3 10 12 -2 -3 14

54.5 21.5 21.0 9 12 -3 -2 16

60.9 23.0 21.0 10 11 -2 -3 17

68.1 24.0 21.0 10 12 -2 -3 18

Source: National authorities, IMF, OECD, Bloomberg and Scotiabank Economics.

14 14

Global Economics

March 2014

Global Sovereign Credit Ratings Foreign Currency Long Term Ratings

INVESTMENT GRADE
M oody's
RATING AMERICAS EUROPE ASIA & OCEANIA MIDDLE EAST & AFRICA RATING AMERICAS

Latin America Regional Outlook

Standard & Poor's

EUROPE ASIA & OCEANIA MIDDLE EAST & AFRICA RATING AMERICAS

Fitch
EUROPE ASIA & OCEANIA MIDDLE EAST & AFRICA

Aaa

Canada United States

Austria Denmark Finland Germany Luxembourg Netherlands (-) Norway Sweden Switzerland

Australia New Zealand Singapore

AAA

Canada

Denmark Finland Germany Luxembourg Norway Sweden Switzerland United Kingdom (-)

Australia Hong Kong Singapore

AAA

Canada United States *-

Austria Denmark Finland Germany Luxembourg Netherlands (-) Norway Sweden Switzerland

Australia Singapore

Aa1

France (-) United Kingdom

Hong Kong

AA+ Kuwait Qatar United Arab Emirates

United States

Austria Netherlands

AA+

France United Kingdom

Hong Kong

Aa2

Macau

AA

Belgium France

New Zealand

Kuwait Qatar

AA

Belgium

New Zealand

Kuwait

Aa3

Bermuda (-) Cayman Islands Chile

Belgium (-)

China Japan South Korea Taiwan

Saudi Arabia

AA-

Bermuda (-) Chile

Czech Republic

China Japan (-) Taiwan

Saudi Arabia (+)

AA-

Bermuda (-)

South Korea

Saudi Arabia (+)

A1

Czech Republic

Israel Oman

A+

South Korea

Israel

A+

Chile

Czech Republic Slovakia

China Japan (-) Taiwan

A2

Poland Slovakia

Trinidad and Tobago

Slovakia

Oman

Malta

Israel

A3

Mexico

Malta

Malaysia (+)

AAruba Mexico Peru

Poland Slovenia

Malaysia

A-

Poland

Malaysia (-)

Baa1

Bahamas (-) Trinidad and Tobago

Russia

Thailand

South Africa (-)

BBB+

Ireland (+) Malta

Kazakhstan Thailand

BBB+

Mexico Peru

Ireland Italy (-) Slovenia (-)

Kazakhstan Thailand

Baa2

Brazil Panama Peru (+)

Italy Spain (+)

Kazakhstan (+)

Bahrain (-)

BBB

Bahamas (-) Brazil (-) Colombia Panama

Italy (-) Russia

Bahrain South Africa (-)

BBB

Aruba (-) Brazil Colombia Panama

Iceland Russia Spain

Bahrain South Africa

Baa3

Colombia (+) Costa Rica (-) Uruguay (+)

Iceland Ireland (+) Romania (-) Turkey

India Indonesia Philippines (+)

BBB-

Uruguay

Iceland Spain

India (-) Philippines

Morocco (-)

BBB-

Uruguay

Romania Turkey

India Indonesia Philippines

Morocco

SPECULATIVE GRADE
M oody's
RATING AMERICAS EUROPE MIDDLE EAST ASIA & OCEANIA & AFRICA RATING AMERICAS

Standard & Poor's

EUROPE ASIA & OCEANIA MIDDLE EAST & AFRICA RATING AMERICAS

Fitch
EUROPE ASIA & OCEANIA MIDDLE EAST & AFRICA

Ba1

Guatemala

Croatia Hungary (-) Slovenia

Morocco (-)

BB+

Romania (+) Turkey (-)

Indonesia

BB+

Costa Rica Guatemala (-)

Croatia (-) Hungary

Ba2

BB

Costa Rica Guatemala

Croatia Hungary (-) Portugal (-) Bangladesh Mongolia (-) Vietnam

BB

Ba3

Barbados (-) El Salvador

Portugal

Bangladesh

Tunisia (-)

BB-

Barbados (-) El Salvador (-)

Jordan (-)

BB-

El Salvador (-)

Sri Lanka

Tunisia (-)

B1

Dominican Republic

Mongolia Papua New Guinea Sri Lanka

Jordan Lebanon (-)

B+

Dominican Republic

Papua New Guinea Sri Lanka

B+

Venezuela (-)

Mongolia (-) Vietnam (+)

B2

St. Vincent and the Grenadines

Cambodia Vietnam

Ecuador (+)

Cambodia

Dominican Republic Ecuador

Lebanon (-)

B3

Argentina (-) Nicaragua

B-

Belize Jamaica Venezuela (-)

Cyprus Greece

Pakistan

Egypt Lebanon (-)

B-

Jamaica

Cyprus (-) Greece

Egypt

Caa1

Cuba Ecuador Venezuela (-) Belize Jamaica (+) Cyprus (-) Greece

Pakistan (-)

Egypt (-)

CCC+

Argentina (-)

CCC+

Caa2 Caa3 Ca

CCC CCCCC C SD Grenada

CCC CCCCC C RD Argentina (-)

Note : (+) positive outlook (-) negative outlook N.R. - Not Rated. When Moody's places a rating on watch in the short-term *+ denotes possible upgrade, *- denotes possible downgrade & * denotes developing. A credit is removed from the Watchlist when the rating is upgraded, downgraded or confirmed. Ratings as at M arch 2014

15 15

Global Economics

March 2014

Latin America Regional Outlook

INTERNATIONAL ECONOMICS GROUP

Pablo F.G. Brard, Head 1 (416) 862-3876 pablo.breard@scotiabank.com Daniela Blancas 1 (416) 862-3908 daniela.blancas@scotiabank.com Sarah Howcroft 1 (416) 862-3174 sarah.howcroft@scotiabank.com Tuuli McCully 1 (416) 863-2859 tuuli.mccully@scotiabank.com Estela Ramrez 1 (416) 862-3199 estela.ramirez@scotiabank.com

REGIONAL ECONOMISTS
Guillermo Arbe (Peru) 51 (1) 211-6052 guillermo.arbe@scotiabank.com Mario Correa (Mexico) 52 (55) 5229-2458 mcorrea@scotiacb.com.mx Benjamin Sierra (Chile) 56 (2) 4644974 benjamin.sierra@scotiabank.cl

Scotiabank Economics
Scotia Plaza 40 King Street West, 63rd Floor Toronto, Ontario Canada M5H 1H1 Tel: (416) 866-6253 Fax: (416) 866-2829 Email: scotia.economics@scotiabank.com

This report has been prepared by Scotia Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.
TM

Trademark of The Bank of Nova Scotia. Used under license, where applicable.