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 www.latinamericamonitor.com

Latin America Monitor

Andean Vol 32 Issue 10 October 2015

BMI Research’s monthly regional report on political risk and macroeconomic prospects

VENEZUELA This month’s top stories

Low Oil Prices To Weigh On Venezuela: Opposition Gains, But

Policy To Remain Largely Unchanged
External Accounts
The latest polling data support our long-held view that Ven-
ezuela’s opposition will make major gains in the legislative
elections scheduled for the end of 2015. Given the consoli-
BMI View: Given the centrality of the oil sector to Venezuelan exports dation of political power in the presidency over recent years,
and the collapse of the price of crude, the country's external accounts this will not have a significant immediate impact on policy.
will be under immense pressure over the coming quarters. Although page 4
the government's efforts to limit access to hard currency and the rapid
depreciation of the bolívar on the parallel exchange will significantly
Colombia: Border Closing
reduce imports, the current account balance will fall into negative ter- Will Not Temper Criminal Activity
A recent attack against Venezuelan soldiers near the
ritory for the first time in nearly two decades.
Venezuela-Colombia border reinforces our view that crimi-
We forecast that Venezuela's current Venezuelan exports are crude oil and nal gangs remain well entrenched in the region, posing a
account balance will come in at a 5.9% related products, and the precipitous persistent threat to security.
of GDP deficit in 2015, compared with decline in oil prices has significantly page 4
an average surplus of 6.7% of GDP over reduced hard currency inflows into the
the past decade. The 2015 figure will country. We now estimate that the total Peru: Construction Delays
represent the first foray into negative ter- value of Venezuelan oil production will Deteriorating Economic Outlook
ritory since 1998. Given our expectations be USD51.4bn in 2015, just under half The Peruvian economy will continue to gradually recover
for a slow recovery in the price of crude, of what it was in 2013, following a num- in the coming quarters, following a four-year deceleration
we expect current account deficits will ber of production and price adjustments in real GDP growth that ended in 2014. However, a weaker
persist over the coming years, and we are over the past several months (including mining sector and a rapidly deteriorating construction
forecasting shortfalls of 2.9% of GDP in two significant downgrades to our oil sector will keep economic growth structurally low in the
2016 and 1.0% in 2017. price forecasts). The government has coming years.
Venezuela's trade account, which has neglected to release any balance of pay- page 5
traditionally been tens of billions of dol- ments data since Q314, but we estimate
lars in surplus, is poised to post a small that based on oil prices and our Oil & Bolivia: Lower Growth Ahead
deficit in 2015. More than 95% of total ...continued on page 2
Bolivian headline growth will accelerate in 2015 as the
government implements a large stimulus programme to
offset lower investment into the country’s hydrocarbons
RISK INDEX TABLE industry.
page 8

BMI’s Country Risk Index scores countries on a 0-100 scale, evaluating short-term Regional Indicators
and long-term political stability, short-term economic outlook, long-term economic
potential and operational barriers to doing business. For a detailed methodology, visit 2013 2014e 2015f 2016f
bmiresearch.com or contact us using the details below. Andean Indicators

Short Term Long Term Operational Country Nominal GDP, USDbn 1,068.5 1,224.5 811.9 890.4
Political Economic Political Economic Risk Risk Population, mn 134.2 135.9 137.6 139.2
Peru 67.5 66.3 61.5 66.4 52.3 61.1
GDP per capita, USD 7,959.2 9,008.5 5,901.2 6,395.8
Colombia 66.5 60.4 63.0 66.2 50.3 59.1
Ecuador 53.3 55.4 50.2 58.1 46.2 50.5 Real GDP growth, % 3.9 1.2 1.5 2.0
Bolivia 50.6 58.3 44.3 59.3 40.7 48.6 Inflation, % 16.8 27.6 19.3 16.3
Venezuela 42.9 22.3 48.8 39.0 36.9 37.5 Goods Exports, USDbn 229.3 214.4 176.4 179.0
Regional Average 56.2 52.5 53.6 57.8 45.3 51.4
Goods Imports, USDbn 187.9 185.4 173.3 171.5
Global Average 63.9 50.3 61.3 51.0 49.9 54.4
Notes: e/f = BMI estimate/forecast. Andean = Bolivia, Colombia, Ecuador, Peru, Venezuela. Weighted by
Source: BMI.
nominal GDP. Source: BMI.

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  VENEZUELA
...continued from front page Simadi rate at its initiation, but that figure has cit will narrow from an estimated USD9.4bn
climbed to 4.9% as of August 25. All of these in 2014 to USD8.5bn in 2015. Tourism and
Gas team's estimate of production levels, total measures have the same effect as a massive cur- other service exports will struggle amid rising
goods export revenues in 2015 will decline by rency devaluation with regards to the volume criminal violence in Venezuela's cities, offset-
about a third versus 2014 levels. of goods purchased from abroad. ting the greater purchasing power foreigners
have in the country thanks to exchange rate
External Pressure To Drive Persistent Black Market Exchange Rate Highlights
Current Account Deficits Economic Mismanagement developments.
Venezuela – Current Account Balance, % Of GDP Venezuela – Exchange Rates, VEF/USD
3
800 FX Squeeze Will Reduce Imports
2 Black market
700
Venezuela – Goods Imports
Primary official 70
1
Sicad 600 60
0 Simadi
50
500
-1 40
400
-2 30

300 20
-3
10
-4 200
0
-5 100 -10
-6 -20
0
-30
Mar-13

Jul-13

Mar-14

Jul-14

Mar-15

Jul-15
Jan-13

Jan-14

Jan-15
May-13

May-14

May-15
Sep-13
Nov-13

Sep-14

Nov-14

Sep-15
-7

2009

2010

2011

2012

2013

2014e

2015f

2016f

2017f
2008
2013 2014e 2015f 2016f 2017f 2018f 2019f 2020f 2021f

e/f=BMI estimate/forecast; Source: BCV, BMI Source: Bloomberg, BCV, dolartoday, BMI
Goods imports, USDbn % chg y-o-y

e/f = BMI estimate/forecast. Source: BMI, BCV

Nevertheless, the government's heavy hand
in the foreign exchange market has forced a
painful adjustment on the imports side that will
help to offset the decline in export revenues,
although further reforms are still needed. The
government is legally the only source of foreign
exchange, and while detailed data regarding
dollar availability have not been made available,
anecdotal evidence suggests that obtaining hard
currency has become increasingly difficult. This
has created enormous obstacles for firms seeking
to import consumer, intermediate or capital
goods from abroad.
Lower Oil Sector Value Will Generate
Massive Headwinds
Venezuela – Oil Sector Value Forecasts, USDbn
100
90
80
70
60
50
This adjustment has been politically prob-
lematic as the shortage of imported goods has
become more severe and confidence in the Souring Investor Sentiment Will Weigh On
ruling party's ability to manage the economy Financial And Capital Account
has deteriorated amid a widespread acknowl- Meanwhile, these dynamics will similarly put
edgement among voters that the country has pressure on the financial and capital accounts.
reached a state of economic crisis. However, The multi-tiered exchange makes it difficult
as illustrated by the continued pressure on the for firms to plan for the future, while the
black market exchange rate, further exchange government's hostility towards the private
rate reforms are needed if policymakers hope to sector – which is likely to intensify in the lead-
bring order to the country's external accounts. up to the legislative elections scheduled for
The bolívar has lost nearly 90% of its value December – has badly tarnished Venezuela's
on the illegal parallel exchange over the past reputation regarding its business environ-
12 months and now trades at an astounding ment, limiting the extent to which private
VEF727.6/USD, compared with VEF80.69/ sector investment will help to fill the current
USD one year ago. Apart from a desire to im- account gap.
port, demand for US dollars has also increased
Smaller Income Deficit
on the back of ordinary Venezuelans' desire to To Provide Modest Support
hold onto greenbacks as a store of value amid Venezuela – Services and primary/secondary income, USDbn
triple-digit inflation and widespread uncer- 0

40
30
tainty about the Venezuelan economy. -5

20
Exports Under Pressure
-10
10
0 Venezuela – Goods Exports -15
2015f 2016f 2017f 2018f 2019f 2020f 120
Pre-December forecasts 100 -20
Forecasts after December downgrade
Forecasts after January downgrade 80
-25
Current forecasts 60

f=BMI forecast; Source: BMI 40 -30

20
-35

The government has also restricted the 0

2009

2010

2011

2012

2013

2014e

2015f

2016f

2017f
2008

-20
primary official exchange rate (at VEF6.292/ -40 e/f = BMI estimate/forecast. Source: BMI, BCV
USD) to only the most critical needs, including -60

food and medicine, while requiring most other However, Venezuela has secured improved
2014e
2009

2010

2011

2012

2013

2015f

2016f

2017f
2008

importers to obtain hard currency through
the weaker Sicad exchange rate, currently at
VEF12.80/USD. The introduction of the
Simadi exchange rate in February has allowed
the government to sell dollars at VEF199.5/
USD. According to the Banco Central de Ven-
ezuela (BCV), only 1.5% of total BCV foreign
currency transactions were conducted at the
Goods exports, USDbn % chg y-o-y
terms for its oil-for-loans programme with
e/f = BMI estimate/forecast. Source: BMI, BCV
China and secured additional bilateral funding
in recent months, helping to ease some of the
Meanwhile, much of Venezuela's income pressure on its external accounts. We expect
account deficit has historically come from that the confluence of these challenges will see
expatriated oil profits, which we expect will be international reserves – already near multiyear
significantly lower in the coming quarters. As a lows at USD15.4bn – continue to erode over
result, we forecast that the income account defi- the coming quarters.

2 2 ANDEAN – OCTOBER 2015 www.latinamericamonitor.com

POLITICAL OUTLOOK

Opposition Gains, But Policy To Critically, when asked about their intentions
on the vote scheduled for December 7, only
19.2% of the survey's respondents planned
Remain Largely Unchanged to vote for the ruling PSUV.
Given these trends, the PSUV is likely to
BMI View: The latest polling data support our long-held view that Venezuela's lose its majority in the National Assembly
opposition will make major gains in the legislative elections scheduled for the (the party holds 96 seats in the 165-seat
body), despite government efforts to turn
end of 2015. Given the consolidation of political power in the presidency over
the tide, through well-funded publicity
recent years, this will not have a significant immediate impact on policy.
campaigns and tightening election regula-
Growing frustration with the ruling Partido released inflation data since December 2014, it tions in ways that have proven detrimental
Socialista Unido de Venezuela (PSUV) will is likely to have reached triple digits (see 'Infla- to opposition candidates. Nevertheless, we
result in significant gains for the opposition tion Proxy Indicators Point To Persistent Price believe that opposition gains will have limited
in the December 7 legislative elections (see Pressures', May 12). Meanwhile, the scarcity of impact with regards to public policy, given
'PSUV Will See Major Losses In Legislative basic government-subsidised goods has led to the extent to which the legislative branch has
Election', April 21). This view is bolstered long queues, and at times public unrest. The ceded powers to the executive in recent years.
by recent polling data, which suggests that black market exchange rate, another means The Maduro administration will retain broad
support for the government, and the ruling of estimating costs consumer face, has soared policymaking ability, including with regards
party's standard-bearer President Nicolás to VEF686.7/USD, meaning a dollar is more to economic policy and the business environ-
Maduro, is on the decline. According the than 100 more costly than at the official ex- ment, which we do not expect to markedly
respected Caracas-based pollster Datanalisis, change rate of VEF6.292/USD. In addition, improve in the wake of the election.
Maduro's approval rating fell to 24.3% in Caracas and other major cities are plagued by However, if the opposition generates suf-
July, the lowest level since January, and is ap- violent crime, with the murder rate soaring to ficient momentum through the legislative
proaching the all-time low set in November. In the highest levels seen in a generation. elections, this may pave the way for a recall
contrast, the de facto leader of the opposition, Maduro's own explanation for the eco- referendum in 2016, which would unseat
Henrique Capriles, has seen his support hold nomic and social malaise is that it is due to President Maduro before his term ends in
relatively steady over the past two years, and nefarious efforts of the political opposition 2019. The government still enjoys huge ad-
in July it came in at 40.7%. Nevertheless, or the US; however, this has gained very vantages from a financial, organisational, and
given the strength of the presidency, we do little traction with the electorate, with only logistical perspective, and the PSUV will fight
not anticipate significant policy shifts over the 2.5% and 1.4% ascribing these factors as the hard to retain the presidency. It is too early
coming quarters, unless the elections serve as principal reasons for the country's problems, to predict the outcome of a still-hypothetical
a springboard to further changes in leadership respectively. According to Datanalisis, 59.3% post-recall referendum presidential election.
through a presidential recall referendum. of respondents believe that the primary cause Public opinion suggests that the wind is at
There is little doubt as to the causes of of the country's economic troubles is either the back of the opposition, and an eventual
public dissatisfaction with the government. Maduro or the PSUV government, by far victory under these circumstances is becom-
Although Venezuelan authorities have not the most prevalent response to the question. ing increasingly feasible.

DATA & FORECASTS

2011 2012 2013 2014e 2015f 2016f 2017f

Population, mn 29.4 29.9 30.3 30.7 31.1 31.5 31.9
Nominal GDP, USDbn 316.1 380.8 361.1 510.4 169.7 201.6 268.0
GDP per capita, USD 10,714 12,712 11,877 16,544 5,423 6,353 8,333
Real GDP growth, % y-o-y 4.2 5.6 1.3 -2.5 -5.6 -2.9 1.6
Consumer price inflation, % y-o-y, ave 26.1 21.3 44.7 61.8 78.3 59.7 40.0
Consumer price inflation, % y-o-y, eop 27.6 20.1 56.2 68.5 74.4 45.0 35.0
*Exchange rate VEF/USD, ave 4.29 4.29 6.08 6.29 29.27 37.15 39.15
*Exchange rate VEF/USD, eop 4.29 4.29 6.29 6.29 33.21 38.15 44.00
Budget balance, VEFbn -54.1 -79.5 -182.1 -411.6 -606.4 -774.1 -1,089.2
Budget balance, % of GDP -4.0 -4.9 -8.3 -12.8 -12.2 -10.3 -10.4
Goods and services exports, USDbn 95.5 99.5 91.1 81.2 55.2 54.5 54.1
Goods and services imports, USDbn 63.2 77.5 72.8 64.5 56.7 52.9 50.8
Current account balance, USDbn 24.4 11.0 5.3 8.3 -10.0 -5.8 -2.6
Current account balance, % of GDP 7.7 2.9 1.5 1.6 -5.9 -2.9 -1.0
Foreign reserves ex gold, USDbn 29.9 29.9 21.5 22.3 17.5 22.0 23.0
Import cover, months 5.7 4.6 3.5 4.1 3.7 5.0 5.4
Total external debt stock, USDbn 110.7 118.9 118.8 121.1 128.9 138.6 148.7
Total external debt stock, % of GDP 35.0 31.2 32.9 23.7 75.9 68.8 55.5
Crude, NGPL & other liquids prod, 000b/d 2,675.0 2,675.0 2,675.0 2,675.0 2,605.3 2,550.0 2,496.5
Total net oil exports (crude & products), 000b/d 1,976.0 1,957.9 1,943.2 1,926.5 1,843.8 1,773.5 1,704.6
Dry natural gas production, bcm 20.8 22.7 21.8 22.0 22.9 24.3 25.4
Dry natural gas consumption, bcm 22.6 24.6 23.6 24.5 25.3 26.6 27.7
e/f = BMI estimate/forecast; *from 2015 the exchange rate forecast is an average of the three official rates. Source: National Statistics Agencies, BMI

www.latinamericamonitor.com OCTOBER 2015 – ANDEAN 3

  COLOMBIA
POLITICAL OUTLOOK

Border Closing Will Not Temper reach into territory previously controlled by
the Rastrojos has prompted a series of violent
clashes in recent years, heightening security
Criminal Activity risks. Meanwhile, criminalisation of elements
within the Fuerzas Armadas Revolucionarias
BMI View: A recent attack against Venezuelan soldiers near the Venezuela- de Colombia would increase in the wake of a
Colombia border reinforces our view that criminal gangs remain well entrenched peace deal between the insurgent group and
in the region , posing a persistent threat to security. However, we see Venezuela's the government, strengthening the BACRIMs.
decision to close the border as not only a politicised response by President
Border Closing Only A Short-Term Fix
Nicolás Maduro, but also likely to stymie more substantive efforts to improve
However, while we see the elevated presence
the security environment in the border region. of the BACRIMs along the Colombian-Ven-
The recent flare-up of border tensions between between the two countries and reduce the po- ezuelan border as a security threat, President
Colombia and Venezuela is largely a result tential for much needed security cooperation. Maduro's most recent actions are unlikely to
of political posturing ahead of Venezuela's resolve the problem over the long term. Rather,
December 7 legislative election. It is highly BACRIMs To Remain A Persistent Threat we see the decision to close the border as ad-
likely that Colombia's criminal gangs had a Colombia's criminal gangs (known locally by dressing the symptoms rather than the cause
role (direct or indirect) in the August 19 shoot- the Spanish acronym BACRIMs) will likely of the insecurity in the region, and likely an
out that injured three soldiers in Venezuela's remain a persistent security threat in the years attempt by Venezuelan leader to bolster his
border state of Táchira. (This later spurred ahead, especially along the more than 2,000km faded popular appeal ahead of the country's
Venezuelan President Nicolás Maduro to close porous border with Venezuela. The groups December parliamentary elections. Indeed, we
the border for an 'indefinite' period of time, see significant profits from the smuggling of have long noted that, in the face of plunging
declare a 60-day state of emergency in five of heavily subsidised goods from Venezuela to approval ratings (Maduro's approval rating
the country's border municipalities, and expel Colombia – taking advantage of Venezuelan fell to just 24.3% in July, approaching an all
1,000 Colombian nationals from the country.) price controls and subsidies that have created time low and well below opposition leader
However, we see the attack as part of a larger an enormous disparity in the  price of goods Henrique Capriles), the Venezuelan leader
and more long-lasting trend, with anecdotal between the two countries. has attempted to deflect criticism and refocus
evidence suggesting criminal groups have had Moreover, while anecdotal evidence sug- popular attention on 'external threats', using
a large presence along the border area in both gests that the Rastrojos, once one of the most nationalist rhetoric to improve his domestic
Colombia and Venezuela for a number of years. powerful of the criminal gangs in Colombia, support. This has included statements alleging
While the strong presence of the criminal gangs have fragmented and begun to lose control of threats to Venezuelan sovereignty from the US
at the border offers increased security threats to territory along the border, the group's role has government, and more recently a ramping up
both states, closing the border will not offer a been usurped in large part by the Urabeños. of tensions with Guyana over a long-running
long-term solution, but rather increase tensions Indeed, the Urabeños's efforts to extend its territorial dispute.

DATA & FORECASTS

2011 2012 2013 2014e 2015f 2016f 2017f

Population, mn 46.4 46.9 47.3 47.8 48.2 48.7 49.1
Nominal GDP, USDbn 335.4 369.7 379.9 377.6 303.5 322.1 348.0
GDP per capita, USD 7,125 7,749 7,862 7,717 6,128 6,425 6,864
Real GDP growth, % y-o-y 6.6 4.0 4.9 4.6 3.1 3.5 3.4
Industrial production, % y-o-y, ave 4.9 -0.3 -1.3 1.5 1.0 3.3 5.3
Consumer price inflation, % y-o-y, ave 3.4 3.2 2.0 2.9 3.9 3.6 3.6
Consumer price inflation, % y-o-y, eop 3.7 2.4 1.9 3.7 3.4 3.6 3.5
Central bank policy rate, % eop 4.75 4.25 3.25 4.50 4.50 4.75 5.00
Exchange rate COP/USD, ave 1,848.02 1,796.81 1,869.35 2,002.55 2,675.00 2,700.00 2,675.00
Exchange rate COP/USD, eop 1,938.50 1,767.00 1,929.51 2,376.51 2,950.00 2,850.00 2,750.00
Budget balance, COPbn -12,647.0 -12,354.5 -15,625.0 -19,844.7 -24,778.2 -31,278.5 -28,133.8
Budget balance, % of GDP -2.0 -1.9 -2.2 -2.6 -3.1 -3.6 -3.0
Goods and services exports, USDbn 63.9 68.0 67.1 63.9 59.1 60.0 63.7
Goods and services imports, USDbn 62.9 68.9 69.9 75.2 70.7 71.3 74.6
Current account balance, USDbn -9.7 -11.3 -12.3 -19.8 -18.5 -18.8 -18.9
Current account balance, % of GDP -2.9 -3.1 -3.2 -5.2 -6.1 -5.8 -5.4
Foreign reserves ex gold, USDbn 32.3 37.5 43.6 47.3 45.9 45.4 46.4
Import cover, months 6.2 6.5 7.5 7.6 7.8 7.6 7.5
Total external debt stock, USDbn 76.9 79.9 92.0 98.6 102.6 111.3 121.2
Total external debt stock, % of GDP 22.9 21.6 24.2 26.1 33.8 34.6 34.8
Crude, NGPL & other liquids prod, 000b/d 932.1 962.6 1,022.0 1,010.0 1,030.4 1,041.1 1,026.5
Total net oil exports (crude & products), 000b/d 644.3 648.1 704.5 687.1 702.2 707.4 687.2
Dry natural gas production, bcm 10.9 10.2 10.2 10.4 10.5 10.5 10.4
Dry natural gas consumption, bcm 8.8 7.7 7.6 8.3 8.8 9.2 9.7
e/f = BMI estimate/forecast. Source: National Statistics Agencies, BMI

4 4 ANDEAN – OCTOBER 2015 www.latinamericamonitor.com

 PERU 
ECONOMIC OUTLOOK

Construction Delays as a share of GDP will expand from 63.0% in

2014 to 64.5% by the end of our 10-year fore-
cast. Peruvian households are benefiting from
Deteriorating Economic Outlook greater employment opportunities, especially
in the services sectors, which will continue to
BMI View: The Peruvian economy will continue to gradually recover in the com- increase disposable income.
ing quarters, following a four-year deceleration in real GDP growth that ended in
Government Consumption: Government
2014. However, a weaker mining sector and a deteriorating construction sector
consumption will remain relatively high in the
will keep economic growth structurally low in the coming years.
coming years, as officials implement counter-
• Resilient private consumption growth Mining Faces External Headwinds cyclical policies in light of rising external
will be the main driver of a recovery in A weakening outlook for commodities, amid headwinds associated with a poor outlook for
Peruvian headline expansion. growing signs of a slowdown in Chinese eco- commodities. We forecast government spend-
• Delays in major infrastructure projects nomic growth and tepid global demand, will ing as a share of GDP to increase from 11.8%
have been more prolonged than we result in slower activity in Peru's mining sector. in 2014 to 12.3% in 2024.
initially anticipated, driving a 7.6% y-o-y The mining sector accounts for about 12% of
contraction in construction activity, and GDP, and lower average prices for key metals Gross Fixed Capital Formation: Fixed capital
prompting us to downgrade our 2015 real produced in Peru, such as copper and gold, will formation will become less of a role in driving
GDP forecast from 3.8% to 3.2%. discourage investment into the industry over economic growth in the coming years. This is
• Although we forecast real GDP growth to our forecast period. mainly due to a lower-price environment for
pick up to 3.8% in 2016, this is below the commodities, a main destination of invest-
previous five-year average of 5.4%, due GDP By Expenditure ment in recent years, which will discourage
to more subdued mining sector activity. Final consumption, after averaging 73.3% of capital expenditure by major firms globally.
GDP over the past decade (2004-2014), will re- We forecast fixed capital formation to fall
Delays Dampen Investor Enthusiasm main the main driver of economic growth. Pri- from 25.8% of GDP in 2014 to 23.1% of
Ongoing delays in infrastructure projects will vate consumption alone accounted for 61.9% GDP in 2024.
keep construction sector growth weak for sev- of GDP over the last 10 years, amid improving
eral quarters. Investment in infrastructure has labour market dynamics and a rising middle Net Exports: Goods and services exports will
been on the forefront of President Ollanta Hu- class. Fixed investment has averaged 23.0% of grow at a slower pace in the coming years,
mala's agenda. However, only 10% of the 2,083 GDP over the past decade, although a weaken- driven by weaker mining exports. This will be
infrastructure projects that the government is ing outlook for the country's key mining sector the main factor keeping net exports of goods
planning between 2015 and 2021 have been will keep fixed investment growth stagnant. and services to remain negative as a share of
awarded, in large part due to delays in securing GDP, at -0.6% in 2024, compared to -1.6%
construction and environmental permits. Private Consumption: Private consumption in 2014.

DATA & FORECASTS

2011 2012 2013 2014e 2015f 2016f 2017f

Population, mn 29.8 30.2 30.6 31.0 31.4 31.8 32.2
Nominal GDP, USDbn 170.6 192.7 202.4 202.9 193.3 206.1 225.2
GDP per capita, USD 5,732 6,390 6,620 6,551 6,161 6,485 7,002
Real GDP growth, % y-o-y 6.5 6.0 5.8 2.4 3.2 3.8 4.1
Industrial production, % y-o-y, ave 6.9 6.0 5.1 3.8 3.6 3.5 2.4
Consumer price inflation, % y-o-y, ave 3.4 3.7 2.8 3.2 3.3 3.1 3.0
Consumer price inflation, % y-o-y, eop 4.7 2.6 2.9 3.2 3.4 3.2 2.8
Central bank policy rate, % eop 4.25 4.25 4.00 3.50 3.25 4.00 4.50
Exchange rate PEN/USD, ave 2.75 2.64 2.70 2.84 3.19 3.20 3.15
Exchange rate PEN/USD, eop 2.70 2.55 2.80 2.98 3.32 3.30 3.20
Budget balance, PENbn 4.8 6.7 2.6 -2.8 -7.4 -7.0 -6.8
Budget balance, % of GDP 1.0 1.3 0.5 -0.5 -1.2 -1.1 -1.0
Goods and services exports, USDbn 50.6 52.3 48.7 45.4 46.1 47.4 50.0
Goods and services imports, USDbn 43.7 48.5 49.9 48.5 49.0 50.0 53.0
Current account balance, USDbn -3.1 -5.2 -8.5 -8.0 -8.7 -8.6 -8.8
Current account balance, % of GDP -1.8 -2.7 -4.2 -4.0 -4.5 -4.2 -3.9
Foreign reserves ex gold, USDbn 48.8 64.0 65.7 62.3 63.0 65.0 67.0
Import cover, months 13.4 15.8 15.8 15.4 15.4 15.6 15.2
Total external debt stock, USDbn 45.0 54.1 56.7 58.3 60.3 64.0 68.3
Total external debt stock, % of GDP 26.4 28.1 28.0 28.7 31.2 31.1 30.3
Crude, NGPL & other liquids prod, 000b/d 155.3 156.0 170.5 175.0 178.3 182.5 186.7
Total net oil exports (crude & products), 000b/d -56.2 -63.6 -51.0 -53.4 -57.0 -60.0 -63.1
Dry natural gas production, bcm 11.4 11.9 12.2 12.7 13.2 13.7 14.3
Dry natural gas consumption, bcm 5.7 6.6 5.9 6.2 6.6 7.0 7.4
e/f = BMI estimate/forecast. Source: National Sources/BMI

www.latinamericamonitor.com OCTOBER 2015 – ANDEAN 5

  PERU

ECONOMIC OUTLOOK

PEN: Depreciation Not Over As PEN3.185/USD in 2015.

Peru's goods trade balance flipped from
a surplus to a deficit in 2014, marking the
External Headwinds Persist first annual shortfall since 2001, driven
mainly by a 7.8% contraction in exports.
BMI View: The Peruvian sol will continue to depreciate in the coming months, Weak exports will continue to keep the trade
driven in large part by weakness in global copper markets, which is undermining balance in deficit over the next few years,
trade dynamics. The unit will weaken into 2016 as well, as external headwinds which will increase depreciatory pressure
on the PEN. Indeed, the country's current
persist and economic growth remains structurally low.
account deficit came in at 4.0% of GDP in
Short-Term Outlook (Three-To-Six our end-2015 forecast of PEN3.320/USD. 2014 and we forecast it will widen to 4.4%
Months) this year, implying the largest shortfall since
Trade Pressures Continue To Build
Peru – Trade Balance, USDmn (12-Month Rolling Sum)
1998. We forecast the current account deficit
2009 Low Will Be Breached 12,000 will remain wide in 2016 at 4.1% of GDP.
Peru – Exchange Rate, PEN/USD
3.5 10,000 Slower Trending Economic Growth Ahead
3.4 8,000 Peru – Economic Activity Index, % chg y-o-y
3.3 (12-Month Moving Average)
6,000 10
3.2
4,000 9
3.1
8
3.0 2,000
7
2.9 0
6
2.8
-2,000 5
2.7
-4,000 4
2.6
Aug-99

Dec-00
Aug-01

Dec-02
Aug-03

Dec-04
Aug-05

Dec-06
Aug-07

Dec-08
Aug-09

Dec-10
Aug-11

Dec-12
Aug-13

Dec-14
Apr-00

Apr-02

Apr-04

Apr-06

Apr-08

Apr-10

Apr-12

Apr-14

3
2.5
2
Aug-05
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Aug-12
Feb-13
Aug-13
Feb-14
Aug-14
Feb-15
Aug-15

Source: BCRP, BMI 1

0
Source: Bloomberg, BMI Dec-08

Aug-09
Dec-09

Aug-10
Dec-10

Aug-11
Dec-11

Aug-12
Dec-12

Aug-13
Dec-13

Aug-14
Dec-14
Apr-09

Apr-10

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15
Long-Term Outlook (Six-To-24 Months)
The Peruvian sol (PEN), after depreciating We expect PEN weakness to continue into Source: BCRP, BMI

by nearly 9.0% in the year-to-date (as of Au- 2016 as trade dynamics remain unfavour- Weak exports will be a main driver of
gust 20), will weaken further in the coming able due to a further softening in Chinese lower-trending economic growth, which will
months. The main driver of PEN weakness demand for commodities. The unit has been encourage the BCRP to allow the unit to
will continue to be a deteriorating outlook for the best-performing currency among Latin remain weak for a prolonged period of time
the country's copper and gold exports, which American majors over the last few years due in order to stimulate export competitiveness
together account for about half of total goods to significant FX intervention by the Banco by reducing the amount of FX intervention.
exports. The devaluation of the Chinese yuan Central de Reserva del Perú (BCRP). How- We forecast real GDP growth of 3.2% in
on August 11 reinforced our below-consensus ever, the worsening outlook for the country's 2015 and 3.8% in 2016, a sharp slowdown
price forecasts for most commodities, and we commodity exports will likely encourage the from its peak of 8.5% in 2010. While we
expect Peruvian exports to remain subdued in BCRP to reduce FX intervention, in order believe the bulk of PEN depreciation is over,
the coming quarters. We see the unit breach- to boost competitiveness of non-commodity unfavourable trade and growth dynamics will
ing its 2009 low of PEN3.280/USD in the exports. We forecast the unit to average to keep the PEN weak by historical standards
coming months, which will be in line with PEN3.200/USD in 2016, compared to for several years.

DATA & FORECASTS

2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f

PEN/USD, ave % y-o-y -2.5 -4.2 2.5 5.0 12.2 0.5 -1.6 -1.6 1.9
PEN/USD, ave, PPP 1.52 1.53 1.52 1.53 1.55 1.56 1.59 1.61 1.63
Exchange rate PEN/EUR, ave 3.83 3.35 3.57 3.80 3.50 3.42 3.47 3.57 3.79
PEN/GBP, ave 4.43 4.21 4.19 4.66 4.84 5.25 5.20 5.18 5.53
PEN/CHF, ave 3.10 2.81 2.92 3.10 3.27 3.06 2.95 2.97 3.16
PEN/AUD, ave 2.84 2.73 2.61 2.56 2.36 2.18 2.14 2.17 2.21
JPY/PEN, ave 219.60 210.60 263.83 300.63 385.39 393.60 387.45 381.30 388.68
PEN/CNY, eop 0.42 0.40 0.45 0.48 0.53 0.53 0.51 0.51 0.50
f = BMI forecast; Source: BMI, World Bank

  Spot 2015 2016

PEN/USD, ave 3.258 3.185 3.200
PEN/EUR, ave 3.657 3.504 3.424
BCRP Policy Rate, % eop 3.50 3.25 4.00
Source: Bloomberg, BMI. Last Updated August 20 2015.

6 6 ANDEAN – OCTOBER 2015 www.latinamericamonitor.com

 ECUADOR 
ECONOMIC OUTLOOK

Government Efforts Support coming years. Nevertheless, so far the govern-

ment's efforts to secure funding have helped to
maintain broad stability in the country's foreign
Stability, Despite Headwinds reserves, suggesting that officials will be able to
weather the storm over the coming quarters.
BMI View: Low oil prices will weigh heavily on Ecuador's fiscal position and Reserves stand at USD4.39bn, representing
overall economic outlook, given the centrality of the hydrocarbons industry in 1.9 months of import cover – low by historical
standards but up slightly since the beginning
the country. This will put downward pressure on foreign reserve liquidity, and
of the year, when reserves stood at USD3.65bn
negatively impact investor sentiment towards Ecuador, but broad financial stability
(1.6 months of import cover).
is not at major risk over the coming quarters. Furthermore, the banking sector has been
Ecuador's economy will continue to face ing a number of unconventional deals. This resilient, with operating margins standing
significant headwinds in the coming quarters includes agreeing to sell a year's worth of crude at 10.4% in July, and averaging 10.5% over
due to the persistently low price of oil, its key exports to Thailand in return for USD2.5bn H115, compared to an average of 10.8% in
export. We forecast that due to the challenges through 2020, and transferring more than half 2014 and 9.2% in 2013. Total credit expansion
associated with the hydrocarbons sector, the of its gold reserves to Goldman Sachs in return has experienced a more consistent slowdown,
country's fiscal and current account deficits for 'instruments of high security and liquidity', with total credit growth falling from 15.5% y-
will be the widest experienced in more than a according to the Banco Central de Ecuador. o-y in January to 8.4% y-o-y in July, compared
decade, putting significant pressure on foreign These efforts, which demonstrate that the to an average of 12.0% in 2014 and 10.1%
reserve liquidity and by extension the wider depth of the challenges that the government is in 2013.
financial system. Nevertheless, recent data facing, have weighed on investor sentiment. In Over the coming months, we expect that
suggest that these factors do not pose immedi- mid-August, ratings agency S&P downgraded credit growth will remain relatively subdued
ate danger to broad banking sector stability, Ecuador's long-term sovereign credit rating to by historical standards as banks pare back their
likely due in large part to the government's B, one level below its previous B+ rating, cit- lending. However, we believe the worst of the
efforts to maintain a steady flow of dollars by ing tensions in the government and the fall in external headwinds have now largely passed.
other means. the price of oil as the principal factors for the Another significant drop in the price of oil,
Lower fiscal revenues have led the govern- move. Meanwhile, the yields on Ecuadoran while possible, is unlikely to be sustainable,
ment to attempt raising taxes and have made it bonds have soared, with the benchmark 2024 since high-cost crude shale oil producers –
difficult to finance popular social programmes, global bond surpassing the 12.0% at August 13. those that ultimately determine the marginal
both of which have contributed to heightened Given the country's dollarized economy, the output of the global oil supply – are able to
political tensions (see 'Tax Reform Controversy lack of US dollars has broad implications in the ramp up or draw down production levels very
Underscores Ongoing Tensions', June 22). The financial system, which depends on inflows to quickly. If prices drop precipitously below
country maintains a close relationship with maintain liquidity. We note that the low price around USD45.00/bbl, we would expect such
China, which has provided it with funding in of oil – which we expect will only gradually a significant drawdown of crude production
the past, but in recent months has sought to recover over the coming years – presents some that prices would relatively quickly be bid back
bolster finances by other means, such as strik- downside risk to the financial sector in the up above this level.

DATA & FORECASTS

2011 2012 2013 2014e 2015f 2016f 2017f

Population, mn 15.2 15.4 15.7 15.9 16.1 16.4 16.6
Nominal GDP, USDbn 79.3 87.6 94.5 100.5 105.0 113.6 121.8
GDP per capita, USD 5,199 5,655 6,002 6,290 6,471 6,897 7,290
Real GDP growth, % y-o-y 7.9 5.2 4.6 3.8 2.7 2.6 2.8
Consumer price inflation, % y-o-y, ave 4.5 5.1 2.7 3.6 3.3 4.0 4.0
Consumer price inflation, % y-o-y, eop 5.4 4.2 2.7 3.7 3.0 4.0 4.0
Exchange rate USD/USD, ave 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Exchange rate USD/USD, eop 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Budget balance, USDbn -0.1 -0.8 -4.3 -5.3 -5.6 -5.2 -5.2
Budget balance, % of GDP -0.1 -0.9 -4.6 -5.3 -5.4 -4.6 -4.3
Goods and services exports, USDbn 24.7 26.4 27.7 28.9 22.9 24.0 25.8
Goods and services imports, USDbn 26.5 27.7 29.7 30.2 27.8 28.2 29.9
Current account balance, USDbn -0.4 -0.2 -1.0 -0.6 -3.8 -3.4 -3.4
Current account balance, % of GDP -0.5 -0.2 -1.0 -0.6 -3.6 -3.0 -2.8
Foreign reserves ex gold, USDbn 3.0 2.5 4.4 3.9 3.5 4.0 5.0
Import cover, months 1.5 1.2 2.0 1.7 1.5 1.5 1.7
Total external debt stock, USDbn 16.5 16.9 20.3 21.2 22.9 24.6 26.3
Total external debt stock, % of GDP 20.8 19.3 21.5 21.1 21.8 21.7 21.6
Crude, NGPL & other liquids prod, 000b/d 500.8 504.7 527.2 557.1 568.2 579.6 588.3
Total net oil exports (crude & products), 000b/d 256.1 254.0 273.0 292.8 294.0 295.2 293.4
Dry natural gas production, bcm 0.2 0.5 0.5 0.7 0.7 0.7 0.7
Dry natural gas consumption, bcm 0.2 0.5 0.5 0.5 0.5 0.5 0.6
e/f = BMI estimate/forecast. Source: National Statistics Agencies, BMI

www.latinamericamonitor.com OCTOBER 2015 – ANDEAN 7

  BOLIVIA

ECONOMIC OUTLOOK

Structurally Lower Private Consumption:  This is the main driver

Growth Ahead
BMI View: Bolivian headline growth will accelerate in 2015 as the government
implements a large stimulus programme to offset lower investment into the
country's hydrocarbons industry. Thereafter, Bolivia will face structurally lower
growth due to low commodities prices and a poor investment environment,
which will limit the capacity for expansionary fiscal policy.
Bolivia's real GDP growth will remain structur-
ally lower over the coming years. A government
stimulus package, which includes infrastruc-
ture investment, will lead to elevated levels of
gross fixed capital formation this year, which
will drive a small uptick in headline growth
compared to 2014. In 2016 and beyond, the
government will reduce spending, due to lower
revenue from its key hydrocarbons sector. The
Bolivian government will look to attract min-
ing investment to its large, untapped lithium
reserves. However, this will not be enough to
offset the decline in hydrocarbons investment.
We forecast real GDP to grow by 4.9% in 2015
and average 3.9% in 2016–2024, compared
to an average of 5.1% over the past five years.
Structurally lower hydrocarbons prices
will cause international oil companies to
become more selective in their investment
decisions. Given that Bolivia has a relatively
poor investment environment, scoring 40.7
of 100 in our Operational Risk Index, the
14th of 17 ranked countries in Latin America,
firms will be hesitant to build new projects
in the country. As well, Bolivia traditionally
has had a large amount of support from the
Venezuelan government to develop its gas
resources. With the Venezuelan economy set
to deteriorate due to external account imbal-
ances brought on by currency controls and
falling dollar revenue from oil exports, the
Venezuelan government will likely reduce
financial assistance to Bolivia.
A concerted government effort to attract
firms to develop its lithium mining industry
will not be enough to see fixed investment
return to the highs seen over the past decade.
The country has the world's largest lithium
reserves, and the resource is poised to be in
high demand, given its use in battery produc-
tion. However, the outlook for the country's
natural gas industry is not as positive, and will
be a main drag to aggregate investment in the
medium term.
of Bolivia's economy, making up over 60.0%
of GDP. We expect private consumption's
share to grow to over 71.0% of GDP by 2020.
A deterioration in fixed investment will increase
private consumption's share of GDP.
Government Consumption:  Public spending
makes up 15.0% of Bolivia's economy. The
government's share of GDP will decline over
the coming years, as fiscal expansionary policies
are tempered due to weaker revenue. Indeed, by
2024, the end of our forecast period, the public
sector's share of GDP will fall to around 14.0%.
Gross Fixed Capital Formation:  Investment is
the second largest component of Bolivia's GDP,
making up over 20.0%. We expect this share to
decline to 16.0% by 2024 as investment into
the hydrocarbons sector declines. With fixed
capital growth set to decelerate in the coming
years, its share of GDP will head lower. 
Net Exports: Given Bolivia's traditionally ex-
port-oriented economy, net exports have played
a large role in the overall economy. However,
in 2014, the net exports balance fell to 1.3%
of nominal GDP compared to an average of
6.4% in the five years prior. We expect the net
exports balance to comprise less than 1.0%
of GDP, with the balance turning negative by
2021 amid weak hydrocarbons export growth.

DATA & FORECASTS

2011 2012 2013 2014e 2015f 2016f 2017f

Population, mn 10.1 10.2 10.4 10.6 10.7 10.9 11.1
Nominal GDP, USDbn 23.9 27.0 30.6 33.0 36.1 38.4 41.6
GDP per capita, USD 2,313 2,574 2,864 3,041 3,277 3,426 3,653
Real GDP growth, % y-o-y 5.2 5.2 6.8 4.3 4.9 3.1 4.5
Consumer price inflation, % y-o-y, ave 10.0 4.5 5.7 5.8 5.6 5.0 5.0
Consumer price inflation, % y-o-y, eop 6.9 4.5 6.4 5.2 5.0 5.0 5.0
Exchange rate BOB/USD, ave 6.95 6.92 6.92 6.91 6.88 6.87 6.85
Exchange rate BOB/USD, eop 6.96 6.91 6.91 6.91 6.86 6.85 6.83
Budget balance, BOBbn 1.4 3.3 0.2 -1.4 -6.5 1.7 4.0
Budget balance, % of GDP 0.8 1.8 0.1 -0.6 -2.6 0.7 1.4
Goods and services exports, USDbn 9.2 12.2 12.5 13.5 12.2 12.0 12.7
Goods and services imports, USDbn 9.2 9.6 10.9 12.9 12.2 12.4 12.6
Current account balance, USDbn 0.1 2.3 1.0 0.0 -0.3 -0.7 -0.3
Current account balance, % of GDP 0.3 8.4 3.3 0.0 -0.8 -1.8 -0.6
Foreign reserves ex gold, USDbn 12.0 13.9 14.4 15.1 13.9 13.2 13.6
Import cover, months 18.2 20.2 18.5 17.2 16.7 15.9 16.3
Total external debt stock, USDbn 6.4 6.9 7.9 8.8 9.9 10.8 11.2
Total external debt stock, % of GDP 27.0 25.6 25.8 26.6 27.3 28.0 26.9
Crude, NGPL & other liquids prod, 000b/d 48.6 55.9 63.1 66.0 64.6 68.5 70.9
Total net oil exports (crude & products), 000b/d -15.4 -15.4 -9.0 -7.0 -9.3 -6.4 -5.1
Dry natural gas production, bcm 15.8 18.2 21.3 21.8 22.6 23.5 24.5
Dry natural gas consumption, bcm 2.5 3.7 3.9 4.0 4.2 4.4 4.5
e/f = BMI estimate/forecast. Source: National Statistics Agency, BCB, BMI

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