HSBC Tailwinds Still Stronger

Latin American
ECONOMICS
Macro Global Economics Q1 2012
Tailwinds still stronger than headwinds

We expect global headwinds to hit Latin America less severely than in 2008-2009; growth in 2012 is forecast at 3.7%, below 2011s 4.2% Stable commodity prices and strong domestic consumption mitigate potential damage to growth prospects Policy firepower across the region offers an important tailwind and Brazil, in particular, is already moving aggressively to boost growth
By Andr Loes and the Latin America Economics Research team
Disclosures and Disclaimer This report must be read with the disclosures and analyst certications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Economics Latin America Q1 2012
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Contents
Key forecasts Tailwinds still stronger than headwinds Latin America at a glance
GDP Inflation Exchange rates Monetary policy rates Industrial production & unemployment Consumption & investment Trade balance & current account FDI & international reserves External debt & remittances Primary surplus & fiscal balance
2 3 17
18 19 20 21 22 23 24 25 26 27
Country profiles
Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela
29
30 33 36 39 41 44 46 48 50
Disclosure appendix Disclaimer
56 57
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Key forecasts
Latin America: HSBC key forecasts (%, y-o-y) Real GDP 2010 2011f 2012f 2013f CPI (year-end)* 2010 2011f 2012f 2013f Industrial production 2010 2011f 2012f 2013f Unemployment rate (year-end) 2010 2011f 2012f 2013f Private consumption 2010 2011f 2012f 2013f Current account balance (% of GDP) 2010 2011f 2012f 2013f International reserves (USDbn) 2010 2011f 2012f 2013f Total fiscal balance (% of GDP) 2010 2011f 2012f 2013f Exchange rate (vs USD, year-end) 2010 2011 2012f 2013f Monetary policy rates (%, year-end)** 2010 2011 2012f 2013f LatAm Argentina 6.3 4.2 3.7 4.1 8.1 8.2 7.2 7.2 7.8 2.9 3.9 3.7 6.2 5.5 5.6 5.6 6.3 5.4 4.7 4.5 -1.0 -1.0 -1.4 -1.4 595.2 705.3 738.3 776.2 -2.6 -2.2 -2.5 -2.1 n.a. n.a. n.a. n.a. 8.4 8.8 7.7 8.0 9.2 8.5 3.0 5.0 24.8 23.0 18.0 16.0 10.3 9.7 3.1 5.4 7.3 6.9 7.7 7.4 9.0 8.9 3.6 4.8 0.8 0.3 0.0 -0.3 52.1 45.5 43.0 41.0 -0.8 -2.3 -1.8 -0.9 3.98 4.30 5.00 5.65 9.0 9.0 9.0 9.0 Brazil 7.5 3.0 3.7 4.5 5.9 6.5 5.4 5.9 10.4 0.0 3.6 3.0 5.3 4.6 4.8 4.7 7.0 4.4 4.3 5.5 -2.2 -2.2 -2.1 -2.1 288.6 355.0 370.0 380.0 -2.5 -2.2 -2.4 -2.5 1.67 1.88 1.80 1.90 10.75 11.00 9.00 9.00 Chile Colombia 5.2 6.4 4.5 4.8 3.0 3.6 3.0 3.0 0.5 6.0 3.0 6.0 7.1 6.9 6.8 7.0 10.4 10.2 6.0 5.0 1.9 -0.6 -1.2 -0.8 27.9 39.5 41.5 42.7 -0.3 1.2 -0.5 -0.8 468 520 530 530 3.25 5.25 4.50 4.50 4.3 5.7 4.3 4.5 3.2 3.5 2.7 3.0 5.0 4.5 5.5 6.1 11.8 9.3 9.0 10.0 5.0 6.2 3.6 4.0 -3.1 -3.6 -3.8 -3.4 28.5 32.5 35.1 33.5 -3.0 -2.8 -2.4 -2.6 1920 1939 1800 1750 3.00 4.75 5.00 5.25 Mexico 5.4 3.7 3.4 3.0 4.4 3.5 3.9 3.4 6.0 3.9 3.6 3.3 4.9 4.5 4.2 4.2 5.0 5.0 5.1 2.7 -0.5 -0.9 -0.9 -1.0 113.6 142.5 157.6 181.4 -2.8 -2.5 -2.4 -2.0 12.37 13.93 13.20 13.50 4.5 4.5 4.5 5.0 Panama 7.6 9.7 7.0 6.5 4.9 6.4 4.8 4.2 3.7 5.0 5.8 5.0 6.5 5.0 4.7 4.5 24.4 16.5 11.3 8.5 -11.1 -14.0 -11.5 -9.5 2.5 2.6 2.7 2.9 -1.9 -3.0 -1.9 -1.5 1.0 1.0 1.0 1.0 3.1 2.0 2.6 3.1 Peru 8.8 6.6 4.8 5.7 2.1 4.5 2.5 2.6 14.1 8.6 6.0 6.8 8.2 7.9 8.0 7.5 6.0 6.2 5.2 5.8 -1.5 -1.6 -3.3 -3.6 44.2 49.5 49.2 53.2 -0.6 2.0 0.8 0.2 2.82 2.70 2.68 2.70 3.00 4.25 3.75 3.75 Uruguay Venezuela 8.4 6.3 5.0 4.0 6.9 8.3 7.0 6.2 3.5 3.2 6.2 5.0 6.7 6.6 6.4 6.6 11.5 9.1 5.7 4.3 -1.1 -0.2 -0.4 -0.7 7.7 10.7 11.0 11.3 -0.4 -0.3 -0.2 0.0 19.90 20.00 19.50 21.00 6.50 8.75 8.00 7.00 -1.5 3.7 4.0 1.9 27.4 29.9 30.4 32.1 -2.5 5.6 5.8 1.7 8.6 8.4 8.1 8.7 -1.9 3.1 7.5 1.8 5.2 9.8 5.6 5.1 30.3 27.5 28.2 30.2 -7.6 -6.2 -9.5 -2.5 2.6/4.3 4.3 4.3 6.5 17.9 17.0 16.5 18.5
* Average of consumer price indices from provincial statistical institutes used since 2007 ** For Panama, the values denote the deposit rate; for Argentina, the 1-day reverse repo rate, and for Venezuela, the average lending rate informed by the Central Bank (BCV) Source: Central banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC
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Tailwinds still stronger than headwinds

We expect global headwinds to hit Latin America less severely
than in 2008-2009; growth in 2012 is forecast at 3.7%, below 2011s 4.2%

Stable commodity prices and strong domestic consumption
mitigate potential damage to growth prospects

Policy firepower across the region offers an important tailwind and
Brazil, in particular, is already moving aggressively to boost growth
Global pain means headwinds for Latin America

The world faces a challenging year in 2012. The overhang of debt both sovereign and consumer has already hurt growth prospects in developed economies. HSBC forecasts for US growth in 2012 has been cut to 1.5% (see Kevin Logans US Economic Outlook, 28 November 2011) and Europe is expected to enter a recession, with HSBC forecasting growth to fall to -1.0% in 2012 (see Janet Henrys European Economics
Table 1. Latin America GDP growth forecasts have already taken a hit ______2011 _____ Previous Latest Date of revision Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela Latam
Source: HSBC
Quarterly: Make or break, 22 December 2011). Although China should sustain growth above 8.0% (see Qu Hongbins China inside out, 22 December 2011), the overall picture for 2012 is far gloomier than expected only some months ago. As the global slowdown unfolds, the picture for Latin American growth in 2012 also deteriorates. We now forecast lower growth in 2012 than in 2011 for Argentina, Chile, Colombia, Mexico, Panama, Peru, and Uruguay, as shown in Table 1. We expect Brazils growth to be slightly higher in
Andr Loes Chief Economist, Latam HSBC Bank Brasil S.A. +55 11 3371 8184 andre.a.loes@hsbc.com.br Sergio Martin Chief Economist HSBC Mexico S.A. +52 55 5721 2164 sergio.martin@hsbc.com.mx Dinkar Pawan Associate, Bangalore
_______ 2012 ______ Previous Latest Date of revision 5.0 4.0 4.5 4.2 3.9 7.2 5.3 4.5 4.0 4.2 3.0 3.7 4.5 4.3 3.4 7.0 4.8 5.0 4.0 3.7 21 December 2011 2 December 2011 No change since 4Q Latam Economics Quarterly In this report 30 November 2011 In this report In this report 4 January 2012 In this report
8.0 3.5 6.4 4.9 3.7 8.1 6.4 5.7 3.5 4.3
8.5 3.0 6.4 5.7 3.7 9.7 6.6 6.3 3.7 4.2
21 December 2011 2 December 2011 No change since 4Q Latam Economics Quarterly In this report No change since 4Q Latam Economics Quarterly In this report In this report 4 January 2012 In this report
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2012 than in 2011, reflecting the fact that the economy had already slowed down significantly in 2011 unlike other Latam countries and that Brazilian policymakers have already responded to the slowdown by cutting interest rates, reverting part of macro-prudential tightening and introducing tax rebates. Venezuela is also likely to show slightly higher growth in 2012 than in 2011 due to the stimulus associated with the electoral year (presidential elections will take place on 7 October 2012).
As usual, the peaks and troughs may be different for each country. We limited the time span for the peaks to the year 2008 in the case of the first period considered, and to the year 2011 for the current deceleration of growth. Peaks and troughs are dated, for each country, in the table. We conclude from the comparative analysis that the average difference from peak to trough is likely to reach 4.3% this year, much less intense than the 10.5% decline during the 2008-2009 period. There are three reasons for this, in our view. First, we do not expect an event as disruptive as the bankruptcy of Lehman Brothers that occurred during the 2008 crisis. The shock event, and the disorderly de-leveraging, wild reduction of inventories, the large depreciations which followed, all resulted in a sharp adjustment in 2008; most of these are either absent or much less pronounced now. We also highlight that both Brazil and Mexico experienced an aggravating factor of the credit crunch back in 2008 namely, excessive leveraging of companies on FX derivatives which seems absent now. Second, the pace of growth before the outbreak of the 2008 financial crisis in some countries was above potential GDP growth. When we look at the current state of affairs, however, we see that most Latin American economies are growing closer to capacity, which means any decline would likely be less severe.
2012 vs 2008: a less sharp but more protracted slowdown

Even as echoes of the 2008-2009 downturn are heard, we do not expect most Latin American countries to be hit as hard this time around as they were during the 2008 crisis. There are, of course, significant tail risks to our scenario. Our growth forecasts for the region would have to be lowered sharply if the difficulties in sovereign bond markets in Europe culminate in a rupture. But, in the absence of such a tail scenario, we believe that the outlook for the economy in Latin America is better than in 2008, and we are confident that this is not another example of economists being over-cautious in incorporating tail risks into their scenarios. Table 2 compares the loss of growth in the region in the 2008-2009 financial crisis with what we think will be the loss of growth during the current global slowdown.
Table 2. Loss of GDP growth in Latin America: During the current global slowdown, loss of growth maybe less intense than in 2008-2009 ______________________ 2008-09 crisis _______________________ ______Peak _______ _____ Trough ______ ____ Difference ____ Growth Quarter Growth Quarter In growth In quarters 8.5 7.1 5.2 5.5 2.5 13.1 11.7 10.2 7.8 2008-Q1 2008-Q3 2008-Q3 2008-Q2 2008-Q2 2008-Q2 2008-Q2 2008-Q2 2008-Q2 -0.8 -2.7 -4.8 0.1 -9.6 1.9 -1.2 -0.1 -5.8 2009-Q2 2009-Q1 2009-Q2 2008-Q4 2009-Q2 2009-Q3 2009-Q2 2009-Q2 2009-Q4 9.3 9.8 9.9 5.4 12.1 11.1 12.9 10.3 13.6 5 2 3 2 4 5 4 4 6 ______________ Expected current financial crisis _______________ ______Peak _______ _____ Trough ______ ____Difference ____ Growth Quarter Growth Quarter In growth In quarters 9.9 4.2 9.9 7.7 4.5 11.4 8.9 7.5 4.8 2011-Q1 2011-Q1 2011-Q1 2011-Q3 2011-Q1 2011-Q2 2011-Q1 2011-Q3 2011-Q1 1.5 2.1 3.3 3.6 2.8 6.7 3.5 3.7 2.5 2012-Q2 2011-Q4 2012-Q2 2012-Q1 2011-Q4 2012-Q3 2012-Q1 2012-Q3 2012-Q4 8.4 2.1 6.5 4.1 1.7 4.7 5.4 3.8 2.2 5 3 5 2 3 5 4 4 7
(%) Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela
Source: HSBC and Datastream
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In some cases, natural disasters resulted in a 2011 peak that was higher than in 2008. In Chile, the strong growth peak in 1Q 2011 reflected the low base in 1Q 2010, when the country experienced a severe earthquake. In Colombia, the higher-thanexpected pace of 3Q 2011 GDP growth partially reflected a shift in production that had been expected to take place during 1H, due to floods the country endured in the beginning of 2011. Third, Latin Americas pace of growth at the start of 2011 was strong and, in many countries, inflation was the most pressing problem (see Latin America Economics Quarterly Q2 2011: An inflation heat map). As a result, many counties tightened policy during 1H 2011. This was the case in Brazil, where monetary policy was tightened through a total 175bp hike in the policy rate from January to July, and macroprudential measures were implemented, intended to curb the growth of consumer credit. Fiscal policy was also tightened, and to a larger extent than we had expected. In Chile, tightening was also impressive. While there was no unconventional tightening, the policy rate was hiked 475bp from June 2010 to June 2011, with a total 2011 fiscal tightening of 1.5% vis--vis the 2010 fiscal stance. In this sense, while the external backdrop played a part in the slowdown observed in 2011, we believe it is fair to say that policy tightening, implemented to curb inflationary momentum, also played a role. The comparative analysis also suggests that the length of the slowdown that began in 2011 could be more protracted than that of 2008. This appears to be a logical consequence of the low growth that is expected for a considerable period of time in developed economies. Indeed, even though domestic consumption in many Latin American countries remains fairly robust, exposure to the rest of the world presents varying degrees of risks for the region. The figures in
Table 2 are useful to assess the risks to our country-by-country 2012 growth forecasts. The global slowdown transmits to local economies through concrete channels such as lower export growth and reduced external financing, as well as more subjective ones, like consumer and business confidence. We analyzed the impact of the following factors on Latin American economies: Trade links: the degree of exposure to the global economy, through trade links and openness. Financial links: the extent of financial ties to European banks and reliance on external financing. Policy firepower: the capacity and willingness of governments to cushion the slowdown with the use of economic policies. We analyzed monetary, fiscal, and currency policy aspects.
Trade links
Softer growth abroad means lower export growth for Latin American countries, and a negative impact on output of the export chain. In 2012, this may be more worrisome for the countries of the southern cone of South America. Europe is an important destination for their exports, consistently accounting for around 20% of total exports over time, as shown in Table 3. However, as most of this regions exports to Europe are commodities, slowing European demand could translate into a commodity price problem, which may be partially cushioned by the solid growth HSBC still forecasts for China.
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In a scenario of a prolonged cooling of average global growth, an analysis considering more permanent negative effects is required. Accordingly, the relative impact of reduced growth in exports for each country of the region should reflect the degree of openness measured by the sum of exports and imports as a percentage of GDP as well as the share of primary goods of GDP, given the greater sensitivity of commodity prices to the global cycle. Chart 1 shows the degree of openness and the share of the primary sector of GDP for each country of the region.
Chart 1. Openness and primary sector*/GDP, by country
70% Panama (RHS) Openness (2011f) Mexico 50% Uruguay 30% Argentina Brazil 10% 5% 10% 15% 20% 25% 30% 35% 30% 40% Colombia 60% Peru Chile Venezuela 90% 120%
commodity-exporting economies. In this sense, from a trade perspective, their growth is likely more vulnerable to a further worsening of the international situation, especially if it translates into lower commodity prices. Looking at Chart 1, we see that Colombia is a more closed economy than we would have expected. Furthermore, domestic consumption households plus government accounts for a more important part of the countrys GDP than it does in the above-mentioned countries, as shown in Chart 2. This suggests that from a trade perspective, Colombia is relatively more shielded from the external crisis. Heading south, both Brazil and Argentina are not particularly open economies Brazil is a pretty closed one. Brazil also shows a low share of the primary goods segment of GDP, with its important industrial base and a large services sector diluting the weight of the commodities segment. Despite the strong correlation between commodity prices and the BRL, the country is far from a commodity-dependent economy, and the impact of foreign trade-related developments on growth likely should be mild.
Primary sector/GDP (2009)

* Primary activities plus utilities Source: UNCTAD, Foreign trade departments and HSBC
As expected, the four Andean countries (we include Chile in this category) are quite exposed to the production of commodities, and three of them Chile, Venezuela, and Peru could be considered open economies. These three countries would fit the textbook definition of small, open,
Table 3. Exports for the European Union are important for the South American southern cone countries (% of total) to: Exports from: Argentina Brazil Chile Colombia Mexico Peru Uruguay Venezuela Latin America Latam (ex-Mexico)
Source: UNCTAD 2010. Calculations: HSBC
_____________ China________________ 1995 2000 2005 2010 1.4 2.6 1.8 0.4 0.0 6.4 5.9 0.1 1.1 1.7 3.1 2.0 5.1 0.2 0.2 6.4 4.0 0.2 1.1 2.0 8.0 5.9 12.0 1.1 0.5 10.9 3.5 1.4 3.6 5.5 10.2 15.5 25.8 4.9 1.4 15.5 15.5 9.5 9.0 13.0
_________________US __________________ 1995 2000 2005 2010 8.6 19.0 13.6 35.6 83.5 17.2 6.0 53.5 46.7 25.3 12.1 24.7 16.7 50.4 88.2 28.0 8.3 57.5 59.7 32.8 11.6 19.6 16.6 41.8 85.8 30.7 23.2 59.9 51.8 29.9 5.6 9.8 10.8 43.1 80.1 16.4 3.2 50.2 40.8 19.8
______________EU _______________ 1995 2000 2005 2010 21.9 29.0 27.6 25.0 3.9 30.7 21.2 10.1 16.7 24.1 18.2 28.4 25.7 13.9 3.5 22.0 16.3 6.5 11.8 19.6 17.4 23.3 24.0 13.4 4.3 17.3 17.6 8.6 12.7 18.2 17.4 21.8 18.6 12.6 4.9 17.8 22.1 7.2 12.7 16.9
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Chart 2. Consumption expenditure (households and government) is high in Latin America (% of GDP, as of 2009)
90%
84% 81%
80% 70% 60% 50%
79% 78% 77%
75%
73% 73%
59%
Uruguay surprises with a low primary sector-toGDP ratio, as the economy is not as open as one would expect of such a small country. The country seems more shielded from external trade than expected, but the dynamics of growth on neighboring Brazil and Argentina which together account for almost 30% of Uruguayan total exports could transmit to its own growth.
BRA URU COL MEX VEN PER ARG CHI PAN

Source: UNCTAD and HSBC
Financial ties: bank funding and FDI

Latin America has a current account deficit, so potential damages to external financing have to be closely monitored, as they may translate into limitations on growth. The most pressing financial implication from the cooling down of the world economy for Latin America relates to the importance of European banks as a source of international credit lines for the region. According to estimates detailed in our report published on 12 December 2011 (Andre Loes, et al., Latin America Economics: European banks funding: Don't panic, but keep a watchful eye), external funding originating from European banks accounted for more than 40% of total bank funding for the region as of June 2011, the most recent available data from the BIS. Chart 3 shows the amount of external funding from European banks for different countries of the region, as a percentage of both their exports and reserves. While the exposure overall looks manageable, it is worth highlighting that Chile and Uruguay look more exposed to a non-renewal of these external lines than the other countries.
In Argentina, the relatively low share of primary activities in its GDP seems to belie the importance of the commodities segment. A significant part of the industry is related to agribusiness, and the wealth effect of commodity prices is significant. Thus, though less exposed to a deterioration of trade dynamics than the Andean countries, we may expect more than just a mild impact in the case of further deterioration. Mexico is not particularly dependent on primary activities although its fiscal revenues could suffer from any reduction of oil prices. This characteristic is also seen in the breakdown of its exports, which are mainly comprised of manufactured goods. Mexico is a very open country, but its trade is directed to a single export destination, the US, which absorbs close to 80% of its total exports. In this sense, any negative impact from international trade would only be material if it affects US GDP growth. Panama possesses the characteristics one would expect in a small country that is a financial and transportation hub: a very open economy with low participation of primary activities in its GDP. Its growth may suffer from a reduction in trade volumes, as this would affect the revenues of the Panama Canal.
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Chart 3. Exposure to European funding is significant but looks manageable (June 2011)
80% 60% 40% 20% 0% ARG BRA CHI COL MEX PER URU VEN
than enough to compensate for the regional current account deficit, and we forecast it will continue to cover the external deficit of the region over the next several years. This resilience of FDI inflows, even during a period of low growth in developed markets, is partially due to the existence of long-term projects that demand significant equity participation in the region some already underway such as mining projects in the Andean countries, oil in Brazil and Colombia, and infrastructure in Brazil and Panama. While some of these projects are vulnerable to weakness in commodity prices, the nature of the investments is long term, and their economics are very attractive even at somehow lower commodity prices. Chart 4 shows the regions current account deficit, net FDI, and the ratio of net FDI to current account deficit.
Chart 4. Net FDI (USDbn) has been more than enough to finance the current account deficit (USDbn)
European international claims/ex ports European international claims/Reserv es

Source: UNCTAD, BIS, Central banks and HSBC
In 2008, total external funding for the countries of the region fell 10-20%, from peak to trough. When the contraction of lines was more pronounced, most lines coming due were not renewed, implying a significant rise in the cost of trade finance. Market participants suggest that this has already been occurring over the past couple of months, with the cost of lines rising up 50-60bp over this period. Alternative sources of USD-denominated funding are already coming into play, such as an expanded supply of lines from banks of other regions, as well as regional development banks. Yet, we believe that the cost of USD external funding may remain higher than typical for several quarters to come, with adverse effects for the exports of the region. The possibility of a sale of local subsidiaries of European banks with the corresponding repatriation flows may also be a threat to the stability of the currencies in less liquid FX markets. Other than the more immediate risk of a prolonged period of de-leveraging from European banks, other types of capital flows may also be affected, as the risk-on, risk-off scenario remains. We have already seen a significant reduction in Latin America corporate bond issuance in international markets, as well as the postponement of IPOs. Foreign direct investment has so far, however, been resilient. This is important for the external financing of the region, as FDI has been more
150 100 50 0 -50 2006 2007 2008 2009 2010 2011f 2012f 2013f FDI (USDbn) FDI/Cur. a/c def (RHS)
7 4 1 -2 -5
Cur. a/c def (USDbn)
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC estimates
It is also important to highlight the absence of any relevant currency mismatch in the region currently. This is a key difference vis--vis the 2008 crisis, when, in Brazil and Mexico, companies were highly leveraged in FX derivatives, typically with large, net-long local currency positions. This positioning magnified the currency depreciation beyond the levels which would be justified by the mere negative impulse coming from the external crisis which was already significant.
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Policy firepower, and governments eager to use it

Developed economies may have entered an economic permafrost that could easily last a decade. Yet, Latin America should be able to mitigate the effects of this more prolonged period of economic slowdown. Our emerging markets strategy team has calculated a useful policy flexibility index (Pablo Goldberg, What if 2008 happens again? 12 October 2011), reproduced in Table 4. It combines different indicators denoting the capacity of policy response of the most important emerging markets, as detailed in the note to the table. Among the six Latam countries included in the comparison, Brazil, Chile, and Colombia rank well, while Argentina, Mexico, and Venezuela rank less favorably. Regarding the less favored countries, it is worth adding some comments and caveats for Argentina and Mexico. In Argentina, while the capacity of the country to respond to external shocks with policy action has been declining over the past couple of years, we believe it should have declined even more, considering the current situation vis--vis the time when the index in the table had been estimated September 2011. The strong capital flight and the lacklustre growth in ARS-denominated deposits related to it during most of 2H 2011, have led to a rise in the interest rate on deposits, whereas the governments fiscal action has been limited by the move to reduce energy and transportation subsidies. As a result, we believe that Argentina should rank worse in terms of policy flexibility than what it is suggested by the index in Table 4. In the case of Mexico, it is the other way around. If we consider the USD72bn flexible credit line the country has with the IMF immediately
available and recently renewed Mexico should rank way better than it does in Table 4. The policy flexibility index provides the highest weight in its composition (25%) to the import coverage ratio.
Reserves reduce potential overshooting

On the strengths of the region, we start by noting that international reserves are at robust levels. In some countries, reserves are far above their levels of September 2008, the outbreak of the global financial crisis. While we expect the majority of Latin American central banks to let currencies float in the event of more pronounced global risk aversion, having high levels of international reserves is a positive, in our view. When markets seize up, overshooting may occur, and the ability to intervene in the currency markets may alleviate the potential for an economic slowdown beyond the intensity explained by the initial external shock.
Good enough fiscal accounts

Regarding fiscal policy firepower, on an aggregate level, government finances in Latin American countries are good in absolute terms, despite an unambiguous deterioration when compared to the pre-2008 period. Chart 5 shows the primary and total fiscal balance for the region. The usual national discrepancies apply here. While most of the countries in the region kept their fiscal deficits low enough to allow the necessary capacity of response despite the above-mentioned worsening some underwent a more pronounced deterioration. This is the case in Venezuela, where the fiscal deficit climbed to relatively high levels; we expect it to reach 9.5% of GDP in the 2012 electoral year, compared to an average below 3% of GDP up until 2008.
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Chart 5. Primary and total fiscal balance (both as % of GDP) for Latin America
With inflation finally slowing down

The capacity for policy response in the region seems more significant at the monetary, rather than fiscal, policy level. While policy interest rates are lower than at the end of 2008 when the region began its last monetary easing cycle inflation is also lower in most parts of the region, and it clearly lost momentum vis--vis the strength shown in the beginning of 2011. Brazil, Chile, Colombia, Mexico, Peru, and Uruguay currently follow an inflation-targeting regime (Argentina, Panama, and Venezuela do not). Most of these inflation-targeting countries currently have inflation either close or converging to their midpoint target, and HSBCs 2012 inflation forecasts project the continuation of this trend. Peru and Uruguay are exceptions.
4 2 0 -2 -4 2006 2007 2008 2009 Primary fiscal balance 2010 2011f 2012f 2013f Total fiscal balance
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC estimates
In Argentina, we also see a more pronounced fiscal deterioration. The mild worsening of the overall fiscal balance masks a more marked deterioration of the quality of the result with a growing reliance on non-traditional sources of revenue, such as the reserves of the BCRA and the gains of the nationalized pension system.
Table 4. Policy flexibility index by component most Latin American countries rank reasonably well _ Stock of FX reserves_ _ Fiscal balance __ Months of import cover z-score % of GDP z-score China Russia Taiwan Brazil Kazakhstan Ukraine Korea Colombia Chile Israel Singapore Thailand Philippines Indonesia Malaysia South Africa Argentina Mexico Venezuela Hong Kong Hungary Turkey India Poland Egypt Vietnam Pakistan 23.3 22.0 20.2 20.0 14.2 6.2 7.9 9.3 4.1 15.1 8.6 11.6 12.9 8.0 9.1 7.4 11.6 5.0 11.5 7.7 6.9 4.4 12.0 6.0 7.7 2.2 5.2 2.3 2.1 1.7 1.7 0.7 -0.7 -0.4 -0.2 -1.1 0.8 -0.3 0.2 0.4 -0.4 -0.2 -0.5 0.2 -1.0 0.2 -0.5 -0.6 -1.1 0.3 -0.8 -0.5 -1.4 -0.9 -1.6 -1.1 -3.2 -2.5 1.8 -2.8 2.1 -3.0 1.4 -2.8 3.2 -2.6 -2.9 -1.8 -5.1 -4.3 -2.0 -3.2 -3.5 2.5 2.0 -0.9 -8.0 -5.5 -9.0 -7.0 -6.5 0.3 0.4 -0.2 0.0 1.3 -0.1 1.4 -0.2 1.2 -0.1 1.8 0.0 -0.1 0.2 -0.8 -0.6 0.1 -0.2 -0.3 1.5 1.4 0.5 -1.7 -0.9 -2.0 -1.4 -1.3 Public debt/GDP _ __ Nominal rates __ % 26.9 11.7 35.4 65.0 12.9 39.3 32.0 35.9 10.5 71.1 93.5 43.0 44.4 25.2 55.1 36.9 43.3 42.9 30.5 31.6 76.1 40.3 64.9 56.0 73.3 51.5 57.6 z-score 0.9 1.6 0.5 -1.0 1.6 0.3 0.6 0.4 1.7 -1.3 -2.4 0.1 0.0 1.0 -0.5 0.4 0.1 0.1 0.7 0.6 -1.5 0.2 -1.0 -0.6 -1.4 -0.3 -0.6 % 6.6 8.3 1.9 12.0 7.0 7.7 3.3 4.5 5.3 3.3 0.5 3.5 4.5 6.8 3.0 5.5 10.6 4.5 14.5 0.5 6.0 5.8 8.3 3.5 9.8 14.0 13.5 z-score 0.0 0.5 -1.2 1.4 0.1 0.3 -0.8 -0.5 -0.3 -0.8 -1.5 -0.8 -0.5 0.1 -0.9 -0.2 1.1 -0.5 2.1 -1.5 -0.1 -0.2 0.5 -0.8 0.8 1.9 1.8 Residual inflation concerns % -0.3 0.5 1.0 1.1 0.3 -5.3 0.4 -1.3 0.0 0.4 0.2 1.5 0.8 1.5 -0.2 0.8 2.2 0.9 4.2 4.4 0.9 2.6 2.8 1.3 0.5 1.9 4.5 Ability Policy Flexibility to float Index, latest z-score z-score 0.7 0.3 0.0 0.0 0.4 3.3 0.3 1.2 0.5 0.3 0.4 -0.2 0.1 -0.3 0.6 0.1 -0.6 0.1 -1.7 -1.8 0.1 -0.8 -0.9 -0.1 0.3 -0.5 -1.8 0.6 -0.2 1.1 0.6 -0.6 -1.3 0.5 0.2 0.3 0.6 0.8 0.6 -0.1 0.2 0.2 0.4 -0.4 0.5 0.3 0.6 -0.8 -0.4 -0.3 -0.6 -0.8 -1.2 -0.9 1.00 0.78 0.60 0.50 0.50 0.42 0.30 0.29 0.25 0.23 0.15 0.09 0.08 0.00 -0.07 -0.08 -0.09 -0.18 -0.18 -0.23 -0.26 -0.47 -0.55 -0.59 -0.61 -0.86 -1.02
Note: Policy flexibility index ranks countries on six categories (weights between parenthesis): 1. reserves import coverage (25%); 2. fiscal balance (15%); 3. debt-to-GDP ratio (10%); 4. nominal interest rates (5%); 5. forecast inflation minus inflation target (25%); 6. ability to float the currency (20%) (net public external debt, hard currency loans as % of total bank loans; food and energy share in CPI). Source: HSBC, IMF, Bloomberg
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While in Peru the trend seems less concerning, as it is mainly explained by food inflation, in Uruguay, resilient demand-driven inflation does not seem to allow for convergence to the target, so far. Chart 6 shows the gap between inflation and the midpoint of the national targets. Yet, inflationary momentum has clearly lost steam across the region when compared to the beginning of 2011. As depicted by our inflation heat map, shown in Chart 7 an exercise intended to gauge the momentum of inflation most Latin American countries are currently witnessing either stable or decelerating inflation momentum.
Chart 6. Inflation looks manageable relative to targets
One possible limitation to monetary policy action could arise from the recent depreciation of most of the Latin American currencies. As shown in Chart 8, depreciation has been particularly strong in Brazil (BRL), Mexico (MXN), and Chile (CLP). While the maturity of the monetary policy regimes and lower FX volatility have led to reduced pass-through from depreciation to inflation in Latin America over time, countries where inflation expectations are less anchored at this time may experience more pass-through than others this is the case in Brazil and Argentina.
Latam countries seem ready to pull the policy trigger

Chart 8. Strong FX movements in 2H11 (%)
5 1 -3 -7 2007 2008 BRA MEX

Source: Central Banks, Datastream, HSBC
25 20 15 10 5 0 2009 CHI PER 2010 2011 COL URU -5 ARS BRL CLP COP MXN PEN URU
Depreciation btw 30th June & December 28, 2011

Source: Datastream, HSBC estimates
This is understandable, as this period has witnessed soft economic activity numbers, particularly in the bigger economies, curbing demand-pull inflationary pressures.
Despite residual inflation concerns in some of the countries of the region, the international backdrop has resulted in governments worrying more about growth than inflation. Thus, barring Argentina,
Chart 7. Inflation heat map showing weaker inflationary momentum than in 1H 2011
2008 (from April) Argentina Brazil Chile Colombia Mexico Peru Uruguay Venezuela Deceleration Moderate deceleration Strong acceleration Moderate acceleration Stable inflation 2009 2010 2011 (till November)
Methodology: We analyze the development of five different monthly inflation measures: Headline CPI, Core CPI, PPI, international food inflation (measured by CRB food) and international oil inflation (measured by the simple average of Brent, WTI and Dubai). The inflation indices are seasonally adjusted and the 3m/3m growth rates are calculated. For oil and food prices we convert the values in local currencies. Z-score for each inflation indicator is calculated using the formula: Z = (x - ) / ; where x is the current value, is the 24-month moving average and is the 24-month moving standard deviation. Source: HSBC estimates
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for which some of the limitations to countercyclical policy action have already been discussed, and Uruguay, where a stubborn inflationary problem has led the BCU to tighten monetary policy at the very end of 2011 and keep a cautious stance on fiscal policy, the other governments in the region seem more keen to pull the trigger on their policy tools should they need to. In fact, some have already done so. Brazil was the early mover, and is proving the most keen to ease. The BCB began alleviating monetary policy during 3Q 2011 through a traditional rates mechanism and macro-prudential measures. We expect the monetary policy committee to apply a further 200bp cut, bringing the rate to 9% by May 2012. On the fiscal side, despite the announced intention of the government to blend policy action in a way that tight fiscal policy provides room for increased monetary easing and the impressive fiscal tightening of 2011 we believe the need to reaccelerate the growth of infrastructure investment will lead to some relaxation of fiscal policy in 2012. We may then see Brazil showing a combination of significant easing in monetary policy with a slight easing of fiscal policy. Other countries have not yet started to ease, but we may see it happening soon. We expect Chile to follow in Brazils footsteps and begin to cut rates in the very beginning of 2012, for a total movement of 75bp in 1Q 2012. While fiscal accounts may deteriorate a little in 2012, we would expect this to be more the result of political pressure for more education-related spending and some weakness on the revenue side. In the case of additional worsening of the global economy, the lions share of the countercyclical burden may fall on the shoulders of the BCCh. Peru may cut rates 50bp in 2012, but we also think it is likely that the fiscal surplus eases to 0.8% of
GDP (from 2.0% in 2011), as revenues soften on the back of a less-upbeat commodity cycle and expenses increase with the introduction of more social programs. In Venezuela, the equation is simple. President Chavez is expected to seek re-election next October, and this time he or his party candidate, if he decides not to run may face a more split electorate. In a country where institutional limitations are almost nonexistent, we may expect aggressive easing measures provided that oil prices are supportive, which is HSBCs base-case scenario. Monetary easing has been applied in 2H 2011 with the lowering of the reserve requirement ratios, and fiscal spending should accelerate in 2012, reinforcing the push provided in 2011 by the massive governmental housing program. While we expect this to translate into higher inflation and the need for a managed devaluation of the VEF, we do not expect this to be addressed before 2013, after the elections. We expect Colombia, Mexico, and Panama to be in less of an easing mood, even if they are not restricted in their policy actions. Colombia is still struggling to contain strong domestic demand, and had surprised with a 25bp hike of its policy rate at its last meeting in November. The current monetary policy stance is stimulative, as the real interest rate remains below what is considered the neutral level. This, coupled with a pace of GDP growth which we believe will only gradually converge down to potential GDP growth during 2012, may lead to stability in the rate, as well as a fiscal stance that should be even tighter in 2012 than in 2011, boosted by the financial results of national oil company Ecopetrol. In Mexico, growth forecast at 3.4% for 2012 also means activity slightly above potential GDP
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growth. While the strength of domestic demand is less pronounced than in Colombia, increased exporting capacity has been supported by increasingly competitive USD-denominated unity labor costs, as shown in Chart 9. As the recent depreciation of the MXN may translate into some additional inflation, we see Banco de Mexico staying on hold, as well as a neutral fiscal impulse in 2012 we forecast a 2012 fiscal deficit practically at the same level as in 2011. Given its strong correlation with the US economy, the Mexican policy approach is naturally less domestic-driven than in Colombia, for instance. In this sense, a more marked deterioration of US economic activity could prompt some policy easing in Mexico, mostly through monetary easing.
Chart 9. Mexican labor costs matching Chinas (USD/hour)
Putting our 2012 GDP growth calls in perspective

As we noted in the beginning of this report, the loss of growth we expect to see in Latin America during the current global slowdown is likely to be less intense than that experienced in 2008-2009. Having already discussed the trade and financial links of the region to the global economy, as well as the capacity and willingness of the countries to use their policy firepower to respond to the current slowdown, it is worth assessing our 2012 GDP growth calls in light of these aspects. Chart 10 presents an extract of Table 2, depicting the differences, from peak to trough, of the pace of GDP growth for each country in 2008-2009, as well as the difference we forecast for the current slowdown. The timing of the peaks and the troughs may differ from country to country for both periods examined.
Chart 10. GDP loss in Latam: better now than in 2008-2009
4 3 2 1 0
2002 2003 2004 2005 2006 2007 2008 2009 2010
15 12 9 6 3 0
China (a)
Source: Banco de Mexico
Mexico (b)
(b)/(a) in %
VEN MEX BRA PER URU PAN CHI COL ARG

Loss of growth in 2008-09 Expected loss of growt h in 2011-12
Being a dollarized economy, Panama has limited firepower in monetary policy, though some remains, as it can manage reserve requirements, for example. Fiscal policy, the countrys main policy tool, is expected to contribute negatively to growth in 2012. Fiscal policy will need to be tightened, first, due to the 2011 peak in inflation, and, second, due to compliance with the fiscal responsibility law, which imposes a 2.0% limit on the fiscal deficit in 2012.
Source: HSBC and Datastream
The intensity of the loss of growth forecast for Chile, Colombia, Panama, Peru, and Uruguay looks easy to understand. The forecasts generally represent a reasonable fraction of what occurred during the 2008 financial crisis roughly between one-third and two-thirds of the growth loss of 2008-2009. Some of these countries have economies that are strongly correlated with primary activities, which means
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they are more exposed to the global cycle. However, HSBCs house view is that commodity prices should hold up well even if our forecasts are less upbeat than in the recent past as China, the commodity buyer of last resort, should keep growing at a healthy 8.5% pace in 2012. The other four countries Argentina, Brazil, Mexico, and Venezuela which are at the extremes in Chart 10, merit some explanation. The loss of growth we expect during the current slowdown is either more or less of the same magnitude as that experienced in 2008 (Argentina), or else a very small fraction of it (Brazil, Mexico, and Venezuela). In Argentina, the country is in worse shape entering the current slowdown than it was during the 2008 crisis. We are already seeing a significant deterioration of the fiscal result and an intensification of capital flight, which is implying a deceleration of growth and, at the same time, is severely reducing the policy firepower of the country. The situation in 2008 was better. In the case of Venezuela, the main difference between the two periods is the price of oil. As we do not expect the price of oil to collapse this time as it did in 2008 the capacity to use policy tools to respond counter-cyclically is present. And, in our view, the government will not shy away from using these tools during the electoral campaign in 2012. Brazil and Mexico, the power houses of the region, deserve a more detailed explanation.
to curb the growth of consumer credit and implemented by the previous administration in December 2010, continued to be applied throughout the year, and have only recently started to be reverted. Fiscal policy has also been tightened, and to a larger extent than we expected. The year 2011 may have closed with a tightening of around 1.3% of GDP in fiscal accounts, a result of tighter controls on current spending, the postponement of infrastructure spending originally budgeted for 2011, and higher-than-expected fiscal revenues. This strong combination of tightening has been reinforced since the end of 2Q 2011 by an industrial recession. The industrial sector, already suffering from a combination of an appreciated currency and rising labor costs, has received an additional hit from the exports side, with the more marked slowdown of developed economies. The result has been a contraction of industrial activity which apparently only started to revert at the end of the year. Looking at Chart 11, which shows Brazil HSBC PMI, one sees how significant the split between manufacturing and services sector dynamics in Brazil has been recently. In this sense, while the external backdrop played a part in the slowdown observed in 2011, it is fair to say that the deceleration of the Brazilian economy a very closed one, as shown in Chart 1 has been partly self-inflicted, as a result of a necessary cooling of the economy induced by policy to tame a dangerous inflationary push. Going forward, we expect policy easing to be significant, and we believe this stimulus may be effective in countering the headwinds coming from the external conditions.
Brazil
Brazil has been an early mover into slowdown mode. Facing very strong inflationary momentum at the onset of 2011, the new Dilma Rousseff administration adopted a strong tightening bias to policy. Monetary policy was tightened via a 175bp hike in the policy rate from January to July 2011, while macro-prudential measures, intended
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Chart 11. Brazil HSBC PMI shows poor industry dynamics
60 55 50 45 40 35 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 PMI Manufacturing

Source: HSBC and Markit
PMI Serv ices
Second, Mexican exports have been gaining market share in US imports, as well as diversifying exports to other countries. We are optimistic that this trend will prevail given the competitiveness of Mexican manufacturing labor costs. In particular, Mexico currently enjoys a 5th place ranking among auto exporters in the world, and prospects are promising with estimates of production increasing as much as 50% in the coming years. Third, the automatic stabilizers, the real interest rates and the real exchange rate, have been moving in the right direction to support the economy in the face of the slowdown. In effect, real interest rates have remained low, between 0% and 1%, and the real exchange rate has depreciated above 20% over the past few months, although we expect some appreciation in 2012. Fourth, Mexico enjoys a sound macroeconomic framework with strong international reserves, including resources from the IMF flexible credit line, close to 20% of GDP; a low fiscal deficit at 2.4% of GDP; and a low public sector debt-to-GDP ratio of 36%, of which only one-fourth is external. In sum, during 2011, favorable conditions prevailed such as economic growth above potential GDP growth, loose monetary conditions because of low interest rates and a depreciated real exchange rate and the US economys being resilient and avoiding recession. In 2012, we expect less favorable conditions such as slightly weaker though still above potential GDP growth; some real exchange rate appreciation, although still-loose monetary conditions with low interest rates; and some deceleration in US GDP growth. Under these growth conditions in 2011 and the prospects for 2012, we do not see the need for the central bank to stimulate further the economy by loosening its monetary policy stance. Our view is that monetary policy will remain on hold for an
Last but not least, the leveraged conditions that prevailed in the Brazilian corporate sector in 2008 and which amplified the credit crunch coming from abroad are absent today. All these points combined explain why we expect Brazil to lose only 2.1% in its pace of growth, from peak to trough, during the current global slowdown, vs the deceleration observed in the 2008-2009 crisis, which was been much more pronounced, at 9.8%.
Mexico
We expect Mexico to maintain its economic resilience and expand 3.4% in 2012, a good defensive position to face the current slowdown. It is worth noting that this projection, although lower than the expected 3.7% economic activity rate in 2011, is above the potential GDP growth rate, which we estimate at 3.0%. We project this above-potential economic growth, even in the face of a moderate US economy growth rate, for four main reasons. First, we cite strengthening domestic demand, which has been presenting good results for retail sales, and strong 3Q11 consumption growth of 5.2%. We expect these dynamics to continue with the injection of election-related spending in 2012 and better consumer confidence levels.
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extended period of time, and that the bank will be vigilant in curbing inflationary pressures coming from the pass-through to inflation from exchange rate moves and the closing of the output gap. These conditions of healthy economic growth, even in the absence of monetary policy stimulus, provide support to our view that Mexico will lose only 1.7% of its pace of growth, from peak to trough, during the current global slowdown, vs a loss of 12.1% in 2008-2009.
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Latin America at a glance
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GDP
Real GDP (annual) (%, y-o-y) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 5.4 8.5 4.0 4.6 6.7 5.2 8.5 7.7 4.7 9.9 2007 5.7 8.7 6.1 4.6 6.9 3.3 12.1 8.9 7.2 8.8 2008 4.3 6.8 5.2 3.7 3.5 1.2 10.1 9.8 8.7 5.3 2009 -1.7 0.9 -0.3 -1.7 1.5 -6.1 3.2 0.9 2.0 -3.2 2010 6.3 9.2 7.5 5.2 4.3 5.4 7.6 8.8 8.4 -1.5 2011f 4.2 8.5 3.0 6.4 5.7 3.7 9.7 6.6 6.3 3.7 2012f 3.7 3.0 3.7 4.5 4.3 3.4 7.0 4.8 5.0 4.0 2013f 4.1 5.0 4.5 4.8 4.5 3.0 6.5 5.7 4.0 1.9
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
GDP growth forecasts by country (%, y-o-y)
Latin America GDP growth data and forecasts (%, y-o-y)
13 8 3 -2 ARG BRA CHI COL MEX PAN 2013f PER URU VEN
8 6 4 2 0 -2 2006 2007 2008 2009 2010 2011f 2012f 2013f
2011f
Source: HSBC estimates
2012f
LatAm
Real GDP (quarterly) (%, y-o-y) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela _______________ 2010 _______________ 1Q 2Q 3Q 4Q 6.3 6.8 9.3 1.7 4.0 4.5 7.9 6.2 9.2 -4.8 7.7 11.8 8.8 6.4 4.7 7.6 6.6 10.0 10.3 -1.7 6.1 8.6 6.9 6.9 3.3 5.1 8.0 9.6 7.7 -0.2 5.3 9.2 5.3 5.8 5.1 4.4 7.9 9.2 6.5 0.5 _______________ 2011 ________________ 1Q 2Q 3Q 4Qf 5.3 9.9 4.2 9.9 4.7 4.5 9.3 8.9 6.7 4.8 4.2 9.1 3.3 6.6 5.1 3.2 11.4 6.8 4.7 2.5 4.1 9.3 2.1 4.8 7.7 4.5 10.4 6.6 7.5 4.2 3.2 6.0 2.2 4.5 5.3 2.8 8.0 4.5 6.5 3.5 ______________ 2012 ________________ 1Qf 2Qf 3Qf 4Qf 3.1 3.6 2.4 4.2 3.6 3.4 7.5 3.5 5.7 3.9 3.4 1.5 3.4 3.3 4.0 3.4 7.0 3.9 6.0 4.7 3.9 2.9 4.2 4.3 3.6 3.2 6.7 5.6 3.7 4.0 3.9 4.1 3.5 6.2 5.9 3.5 6.8 6.2 4.6 3.4
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Inflation
Inflation (annual, end-period) (%, y-o-y) Latin America Argentina* Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 4.8 9.8 3.1 2.6 4.5 4.1 2.2 1.1 6.4 17.0 2007 7.3 25.6 4.5 7.8 5.7 3.8 6.4 3.9 8.5 22.5 2008 9.5 20.0 5.9 7.1 7.7 6.5 6.8 6.7 9.2 31.9 2009 6.6 16.1 4.3 -2.6 2.0 3.6 1.9 2.9 5.9 26.9 2010 8.1 24.8 5.9 3.0 3.2 4.4 4.9 2.1 6.9 27.4 2011f 8.2 23.0 6.5 3.6 3.5 3.5 6.4 4.5 8.3 29.9 2012f 7.2 18.0 5.4 3.0 2.7 3.9 4.8 2.5 7.0 30.4 2013f 7.2 16.0 5.9 3.0 3.0 3.4 4.2 2.6 6.2 32.1
* Average of consumer price indices from provincial statistical institutes used since 2007 Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Inflation forecasts by country (%, y-o-y)
Latin America inflation data and forecasts (%, y-o-y)
30 25 20 15 10 5 0 ARG BRA CHI COL MEX PAN 2012f 2013f PER URU VEN
10 8 6 4 2 2006 2007 2008 LatAm

2009
2010
2011f 2012f 2013f
2011f
LatAm ex Arg & Ven
Inflation (quarterly, end-period) (%, y-o-y) Latin America Argentina* Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela _______________2010 _______________ 1Q 2Q 3Q 4Q 7.4 21.3 5.2 0.3 1.8 5.0 2.7 0.8 7.1 28.2 7.2 23.1 4.8 1.2 2.3 3.7 2.8 1.6 6.2 28.2 7.2 23.5 4.7 1.9 2.3 3.7 4.2 2.4 6.3 28.5 8.1 24.8 5.9 3.0 3.2 4.4 4.9 2.1 6.9 27.4 _______________ 2011 ________________ 1Q 2Q 3Q 4Qf 7.8 22.6 6.3 3.4 3.2 3.0 5.5 2.7 8.2 28.7 7.9 23.4 6.7 3.4 3.4 3.3 6.5 2.9 8.6 25.1 8.4 24.9 7.3 3.3 3.7 3.1 6.1 3.7 7.8 26.7 8.2 23.0 6.5 3.6 3.5 3.5 6.4 4.5 8.3 29.9 ______________ 2012 ________________ 1Qf 2Qf 3Qf 4Qf 7.6 21.7 5.7 2.9 2.4 3.7 5.6 3.6 7.1 30.5 7.5 21.0 5.6 2.7 2.3 4.2 5.4 3.5 7.5 28.3 7.3 19.2 5.3 2.7 2.6 4.4 5.3 2.7 7.5 29.5 7.2 18.0 5.4 3.0 2.7 3.9 4.8 2.5 7.0 30.4
* Average of consumer price indices from provincial statistical institutes used since 2007 Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
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Exchange rates
Exchange rates vs USD (annual) (end-period) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 n.a. 3.06 2.14 547 2240 10.81 1.0 3.21 24.42 2.2 2007 n.a. 3.15 1.77 498 2014 10.92 1.0 3.00 21.53 2.2 2008 n.a. 3.45 2.34 629 2223 13.82 1.0 3.14 24.40 2.2 2009 n.a. 3.80 1.74 506 2043 13.08 1.0 2.89 19.50 2.2 2010 n.a. 3.98 1.67 468 1920 12.37 1.0 2.82 19.90 2.6/4.3 2011 n.a. 4.30 1.88 520 1939 13.93 1.0 2.70 20.00 4.3 2012f n.a. 5.00 1.80 530 1800 13.20 1.0 2.68 19.50 4.3 2013f n.a. 5.65 1.90 530 1750 13.50 1.0 2.70 21.00 6.5
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC
Exchange rate forecasts by country (per USD, end-period)
Exchange rate forecasts by country (per USD, end-period)
20 15 10 5 0 ARG BRA MEX 2012f

1500 1000 500 0 PAN 2013f

PER
URU
CLP 2012f 2013f
COP
Exchange rates vs USD (quarterly) (end-period) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela _______________2010 _______________ 1Q 2Q 3Q 4Q n.a. 3.88 1.78 526 1920 12.36 1.0 2.84 19.45 2.6/4.3 n.a. 3.93 1.80 543 1916 12.89 1.0 2.83 21.12 2.6/4.3 n.a. 3.96 1.69 485 1799 12.63 1.0 2.80 20.30 2.6/4.3 n.a. 3.98 1.67 468 1920 12.37 1.0 2.75 19.90 2.6/4.3 _______________ 2011 ________________ 1Q 2Q 3Q 4Q n.a. 4.05 1.63 482 1871 11.89 1.0 2.75 19.25 4.3 n.a. 4.11 1.56 467 1770 11.71 1.0 2.75 18.40 4.3 n.a. 4.20 1.85 461 1750 13.88 1.0 2.70 20.30 4.3 n.a. 4.30 1.88 520 1939 13.93 1.0 2.70 20.00 4.3 ______________ 2012 ________________ 1Qf 2Qf 3Qf 4Qf n.a. 4.46 1.90 525 1875 13.60 1.0 2.71 20.50 4.3 n.a. 4.58 1.90 530 1875 13.50 1.0 2.70 20.50 4.3 n.a. 4.77 1.85 530 1850 13.40 1.0 2.69 20.00 4.3 n.a. 5.00 1.80 530 1800 13.20 1.0 2.68 19.50 4.3
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC
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Monetary policy rates
Policy rates (annual, %) (end-period) Latin America Argentina* Brazil Chile Colombia Mexico Panama* Peru Uruguay Venezuela* 2006 9.6 6.2 13.25 5.25 7.50 7.02 5.1 4.50 n.a. 15.2 2007 9.9 8.0 11.25 6.00 9.50 7.50 4.6 5.00 7.25 21.7 2008 11.8 10.5 13.75 8.25 9.50 8.25 3.5 6.50 7.75 21.7 2009 7.7 9.0 8.75 0.50 3.50 4.50 3.5 1.25 6.25 18.9 2010 8.4 9.0 10.75 3.25 3.00 4.50 3.1 3.00 6.50 17.9 2011 8.8 9.0 11.00 5.25 4.75 4.50 2.0 4.25 8.75 17.0 2012f 7.7 9.0 9.00 4.50 5.00 4.50 2.6 3.75 8.00 16.5 2013f 8.0 9.0 9.00 4.50 5.25 5.00 3.1 3.75 7.00 18.5
* For Panama the values denote the deposit rate; for Argentina the 1-day reverse repo rate & for Venezuela the average lending rate informed by the Central Bank (BCV) Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
Policy/interest rate forecasts by country (%)
Latin America policy/interest rate data and forecasts (%)
20 15 10 5 0 ARG BRA CHI COL 2012f

12 11 10 9 8 7 6
MEX 2013f
PAN
PER
URU
VEN
2006
2007
2008 LatAm
2009
2010
2011f
2012f
2013f
LatAm ex Ven
Policy rates (quarterly, %) (end-period) Latin America Argentina* Brazil Chile Colombia Mexico Panama* Peru Uruguay Venezuela* _______________2010 _______________ 1Q 2Q 3Q 4Q 7.4 9.0 8.75 0.50 3.00 4.5 3.3 1.25 6.25 18.4 8.1 9.0 10.25 1.00 3.00 4.5 3.2 1.75 6.25 17.7 8.4 9.0 10.75 2.50 3.00 4.5 3.0 3.00 6.50 17.4 8.4 9.0 10.75 3.25 3.00 4.5 2.7 3.00 6.50 17.9 _______________ 2011 ________________ 1Q 2Q 3Q 4Q 9.0 9.0 11.75 4.00 3.50 4.5 2.5 3.75 7.50 17.1 9.3 9.0 12.25 5.25 3.50 4.5 2.3 4.25 8.00 17.4 9.2 9.0 12.00 5.25 4.00 4.5 2.1 4.25 8.00 17.5 8.8 9.0 11.00 5.25 4.75 4.5 2.0 4.25 8.75 17.0 ______________ 2012 ________________ 1Qf 2Qf 3Qf 4Qf 8.3 9.0 10.00 4.50 4.75 4.5 2.3 3.75 8.75 17.5 7.7 9.0 9.00 4.50 4.75 4.5 2.4 3.75 8.50 15.5 7.7 9.0 9.00 4.50 4.75 4.5 2.5 3.75 8.50 16.0 7.7 9.0 9.00 4.50 5.00 4.5 2.6 3.75 8.00 16.5
* For Panama the values denote the deposit rate; for Argentina the 1-day reverse repo rate & for Venezuela the average lending rate informed by the Central Bank (BCV) Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights
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Industrial production & unemployment

Industrial production (%, y-o-y) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 5.3 8.4 2.8 3.2 11.2 5.7 7.0 7.5 5.3 10.1 2007 5.4 7.5 6.0 4.1 10.9 2.0 11.7 11.1 5.9 6.9 2008 1.8 1.1 3.1 0.2 -3.0 -0.1 14.2 9.1 12.1 1.4 2009 -7.3 -4.9 -7.4 -6.7 -5.2 -7.6 3.7 -6.3 -4.0 -11.7 2010 7.8 10.3 10.4 0.5 5.0 6.0 3.7 14.1 3.5 -2.5 2011f 2.9 9.7 0.0 6.0 4.5 3.9 5.0 8.6 3.2 5.6 2012f 3.9 3.1 3.6 3.0 5.5 3.6 5.8 6.0 6.2 5.8 2013f 3.7 5.4 3.0 6.0 6.1 3.3 5.0 6.8 5.0 1.7
Industrial production (%, y-o-y)
Unemployment rate (%, end-period)
12 10 8 6 4 2 0 ARG BRA CHI 2011f

12 9 6 3 0
COL MEX PAN PER URU VEN 2012f 2013f
ARG BRA CHI COL MEX PAN PER URU VEN 2011f
2012f
2013f
Unemployment rate (end-period) (%) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 7.0 9.3 8.4 6.0 12.0 3.5 9.1 7.5 10.9 10.1 2007 6.5 7.8 7.4 7.2 11.2 3.4 7.3 8.4 9.2 8.2 2008 6.6 7.4 6.8 8.5 11.3 4.3 6.4 8.4 7.6 7.5 2009 7.1 8.4 6.8 10.0 12.0 4.8 6.9 8.4 7.3 7.9 2010 6.2 7.3 5.3 7.1 11.8 4.9 6.5 8.2 6.7 8.6 2011f 5.5 6.9 4.6 6.9 9.3 4.5 5.0 7.9 6.6 8.4 2012f 5.6 7.7 4.8 6.8 9.0 4.2 4.7 8.0 6.4 8.1 2013f 5.6 7.4 4.7 7.0 10.0 4.2 4.5 7.5 6.6 8.7
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Consumption & investment
Private consumption expenditure (%, y-o-y) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 6.4 7.8 5.2 7.1 6.4 5.7 4.4 6.4 6.1 15.5 2007 6.5 9.0 6.1 7.0 7.3 4.0 0.9 8.3 7.0 16.9 2008 4.6 6.5 5.7 4.5 3.5 1.8 -2.1 8.7 8.5 6.3 2009 0.1 0.5 4.2 0.9 0.9 -7.1 -2.8 2.4 0.9 -2.9 2010 6.3 9.0 7.0 10.4 5.0 5.0 24.4 6.0 11.5 -1.9 2011f 5.4 8.9 4.4 10.2 6.2 5.0 16.5 6.2 9.1 3.1 2012f 4.7 3.6 4.3 6.0 3.6 5.1 11.3 5.2 5.7 7.5 2013f 4.5 4.8 5.5 5.0 4.0 2.7 8.5 5.8 4.3 1.8
Private consumption expenditure (%, y-o-y)
Investment (%, y-o-y)
12 8 4 0 -4 ARG BRA CHI COL MEX PAN PER URU VEN 2011f
20 15 10 5 0 ARG BRA CHI COL MEX PAN PER URU VEN 2011f
2012f
2013f
2012f
2013f
Investment (%, y-o-y) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 12.6 18.2 9.8 2.3 18.1 9.9 16.6 18.9 18.5 36.3 2007 13.0 13.6 13.9 11.2 14.4 6.9 41.0 22.6 7.9 28.2 2008 10.8 9.1 13.6 19.4 9.9 5.9 25.3 28.3 19.0 2.2 2009 -10.8 -10.2 -10.3 -15.9 -0.8 -11.3 -6.2 -8.6 -6.0 -19.1 2010 14.9 21.2 21.9 18.8 8.3 2.3 11.6 23.0 13.8 1.0 2011f 8.3 15.1 5.5 14.4 13.6 8.1 14.5 6.1 9.3 12.4 2012f 6.1 0.9 5.4 9.7 8.9 6.3 12.1 9.5 6.7 10.1 2013f 6.6 5.5 7.1 12.0 9.9 3.0 11.3 13.4 5.8 6.5
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Trade balance & current account

Trade balance (USDbn) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 101.0 12.3 46.5 9.6 0.3 -6.1 -1.7 9.0 -0.8 32.0 2007 78.6 11.2 40.0 10.8 -0.6 -10.1 -3.2 8.3 -1.1 23.3 2008 83.2 12.6 24.7 22.8 1.0 -17.3 -4.5 3.1 -3.1 44.1 2009 84.2 16.9 25.3 23.9 2.5 -4.7 -2.1 5.9 -1.5 18.0 2010 67.0 11.6 20.3 8.5 2.1 -3.0 -4.6 6.7 -1.9 27.1 2011f 93.3 9.9 26.5 14.1 1.0 -5.3 -5.6 8.5 -2.4 46.7 2012f 76.7 8.8 23.4 15.9 -2.1 -7.7 -5.5 5.1 -2.6 41.4 2013f 65.3 8.0 20.1 9.6 -0.6 -9.9 -5.7 4.6 -2.8 41.9
Trade balance (USDbn)
Current account balance (% of GDP)
50 40 30 20 10 0 -10 ARG BRA CHI COL MEX PAN PER URU VEN 2011f
8 4 0 -4 -8 -12 ARG BRA CHI COL MEX PAN PER URU VEN 2011f
2012f
2013f
2012f
2013f
Current account balance (% of GDP) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 1.7 3.8 1.3 4.9 -1.8 -0.5 -3.1 3.0 -2.0 14.4 2007 0.5 2.8 0.1 4.5 -2.9 -0.9 -7.1 1.3 -0.9 7.7 2008 -0.4 2.2 -1.7 -1.9 -2.8 -1.5 -11.8 -3.7 -6.4 13.4 2009 -0.3 3.6 -1.5 1.6 -2.1 -0.7 -0.2 0.2 -0.3 3.2 2010 -1.0 0.8 -2.2 1.9 -3.1 -0.5 -11.1 -1.5 -1.1 5.2 2011f -1.0 0.3 -2.2 -0.6 -3.6 -0.9 -14.0 -1.6 -0.2 9.8 2012f -1.4 0.0 -2.1 -1.2 -3.8 -0.9 -11.5 -3.3 -0.4 5.6 2013f -1.4 -0.3 -2.1 -0.8 -3.4 -1.0 -9.5 -3.6 -0.7 5.1
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FDI & international reserves
Net FDI (USDbn) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 32.5 3.1 -9.4 5.1 6.7 20.1 2.5 3.5 1.5 -0.5 2007 91.3 5.0 27.5 10.0 9.0 29.7 1.8 5.4 1.2 1.6 2008 88.8 8.3 24.6 7.1 10.6 26.3 2.4 6.2 2.1 1.2 2009 71.8 3.3 36.0 4.8 7.1 15.3 1.8 4.4 1.6 -2.5 2010 87.9 6.0 36.9 6.4 6.9 18.7 2.4 7.1 2.4 1.2 2011f 134.6 5.0 70.3 14.3 13.7 20.5 2.8 6.7 2.9 2.0 2012f 100.1 5.0 36.0 12.5 11.0 20.3 3.1 5.8 3.2 2.0 2013f 115.9 10.0 43.0 14.1 13.5 25.0 3.3 7.5 3.0 2.0
Net FDI (USDbn)
International FX reserves (ex-gold, USDbn)
400 60 300 40 20 0 ARG BRA CHI COL MEX PAN PER URU VEN 2011f
200 100 0 ARG BRA CHI COL MEX PAN PER URU VEN 2011f
2012f
2013f
2012f
2013f
International FX reserves (ex-gold) (USDbn) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 279.9 32.0 85.8 19.4 15.4 67.7 1.8 17.2 3.1 37.4 2007 410.3 46.2 180.3 16.9 21.0 78.0 1.8 27.7 4.1 34.3 2008 468.3 46.4 206.8 23.2 24.0 85.4 1.7 31.2 6.4 43.1 2009 508.0 48.0 239.1 25.4 25.4 90.8 2.3 33.2 8.0 35.8 2010 595.2 52.1 288.6 27.9 28.5 113.6 2.5 44.2 7.7 30.3 2011f 705.3 45.5 355.0 39.5 32.5 142.5 2.6 49.5 10.7 27.5 2012f 738.3 43.0 370.0 41.5 35.1 157.6 2.7 49.2 11.0 28.2 2013f 776.2 41.0 380.0 42.7 33.5 181.4 2.9 53.2 11.3 30.2
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External debt & remittances
External debt (USDbn) Latin America Argentina Brazil Chile Colombia Mexico Panama* Peru Uruguay Venezuela 2006 566.5 108.8 172.6 49.8 40.1 107.6 7.8 28.7 9.3 41.8 2007 649.7 124.5 193.2 55.9 44.7 123.1 8.2 33.1 11.0 55.9 2008 677.4 124.9 198.3 63.5 46.4 129.9 8.5 34.6 10.6 60.7 2009 736.0 116.4 198.2 73.7 53.7 163.8 10.2 34.1 12.2 73.8 2010 875.2 128.6 256.8 87.3 64.8 190.1 10.4 40.1 12.1 84.9 2011f 967.8 132.3 307.0 91.4 65.6 198.8 11.5 43.4 13.5 104.4 2012f 1026.4 140.6 336.4 92.3 67.2 198.6 12.8 45.2 14.0 119.4 2013f 1077.5 147.6 360.7 94.3 69.0 207.7 14.0 45.2 14.5 124.5
Source: Central Banks, Finance and Economy Ministries, Comptroller General's Office of the Republic of Panama, National Statistics Institutes, HSBC. LatAm aggregate data is based on IMF nominal USD weights * For Panama the values represent the Public external debt
External debt (USDbn)
Remittances (% of GDP)
400 300 200 100 0 ARG BRA CHI 2011f

2.5 2.0 1.5 1.0 0.5 0.0 COL MEX 2012f PAN 2013f
PER
URU
VEN
ARG
BRA
CHI 2011f
COL
MEX PAN 2013f
PER
URU
VEN
2012f
Remittances (% of GDP) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 1.5 0.5 0.4 2.3 2.4 2.7 1.5 2.4 0.6 1.3 2007 1.3 0.4 0.3 1.9 2.2 2.5 1.3 2.0 0.5 1.3 2008 1.1 0.2 0.3 1.7 2.0 2.3 1.0 1.9 0.6 1.2 2009 1.0 1.2 0.2 1.0 1.8 2.4 0.9 1.5 0.4 0.5 2010 0.9 0.1 0.1 2.2 1.4 2.1 0.7 1.4 0.3 1.0 2011f 0.8 0.2 0.1 1.2 1.5 2.0 0.7 1.5 0.3 1.2 2012f 0.9 0.2 0.1 2.3 1.6 2.1 0.8 1.4 0.4 1.0 2013f 0.9 0.2 0.1 2.2 1.5 2.1 0.8 2.4 0.4 0.8
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Primary surplus & fiscal balance

Primary fiscal surplus (% of GDP) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 3.0 3.5 3.2 8.4 0.2 2.5 4.9 4.0 3.2 0.5 2007 2.8 3.2 3.3 8.8 1.0 2.2 6.9 4.9 2.2 -1.2 2008 2.5 3.1 3.4 4.8 0.9 1.8 4.6 3.7 1.7 -1.2 2009 0.2 1.5 2.0 -4.0 -1.1 -0.1 1.9 -0.6 1.2 -6.7 2010 0.8 1.7 2.8 0.1 -1.1 -0.9 2.3 0.6 1.2 -6.6 2011f 1.3 0.5 3.1 1.7 -1.0 -0.4 -0.3 3.2 1.2 -4.6 2012f 0.9 1.0 2.6 0.0 -0.9 -0.3 0.6 2.0 1.4 -6.5 2013f 1.0 1.5 2.5 -0.3 -0.4 -0.2 0.5 -9.0 1.6 0.2
Primary fiscal surplus (% of GDP)
Fiscal balance (% of GDP)
3 1 -1 -3 -5 -7 ARG BRA CHI 2011f

5 0 -5 -10 COL MEX 2012f PAN PER URU VEN ARG BRA CHI COL MEX PAN 2013f PER URU VEN
2013f
2011f
2012f
Fiscal balance (% of GDP) Latin America Argentina Brazil Chile Colombia Mexico Panama Peru Uruguay Venezuela 2006 -0.9 1.9 -3.6 7.9 -0.5 0.1 0.5 2.1 -0.5 -1.6 2007 -0.8 1.1 -2.8 8.4 -1.2 0.0 3.5 3.1 -0.1 -2.9 2008 -0.7 1.2 -2.0 4.3 0.3 -0.1 1.5 2.1 -1.4 -2.7 2009 -3.3 -1.7 -3.3 -4.4 -2.3 -2.3 -1.0 -1.9 -1.5 -8.2 2010 -2.6 -0.8 -2.5 -0.3 -3.0 -2.8 -1.9 -0.6 -0.4 -7.6 2011f -2.2 -2.3 -2.2 1.2 -2.8 -2.5 -3.0 2.0 -0.3 -6.2 2012f -2.5 -1.8 -2.4 -0.5 -2.4 -2.4 -1.9 0.8 -0.2 -9.5 2013f -2.1 -0.9 -2.5 -0.8 -2.6 -2.0 -1.5 0.2 0.0 -2.5
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Country profiles
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Argentina
Reality check
We expect economic growth in Argentina to slow in 2012, driven by a slowdown in its biggest trading partner, Brazil, and continued capital outflows into USDs. Dealing with dollarization is the main policy challenge in the short term. Argentine savers and investors have been increasing purchases of dollars since April 2011, putting pressure both on central bank reserves, which are used to repay debt, and on the peso. President Christina Fernandezs government has continued to fight depreciation, however, and has responded to the pressure from dollarization by imposing currency controls. Financial repression is working for now, aided by higher interest rates. The thirst for dollars has pushed funding costs and rates upwards, and higher rates, in turn, will likely slow growth further. This could create conditions for the authorities to allow the currency to depreciate more quickly. Nevertheless, the timing of any such change is uncertain. That said, dollarization has receded recently, and the central bank is back to purchasing reserves in net terms. There are several reasons behind this. First, the government enacted several regulations to increase the supply and reduce the demand for dollars (see EM FX Roadmap: The newest new normal, page 11). Second, interest rates paid to institutional depositors increased 650bp in the most recent quarter, rising to an average 18.8% in Q4 from an average 12.3% in Q3. Third, some investors may have over-dollarized, anticipating a level of depreciation that has not materialized thus far, and, accordingly, are now rebalancing their portfolios. Fourth, economic activity is decelerating, leading to lower imports. Fifth, ARS peso demand tends to increase for seasonal reasons in December. The key issue is that the fundamental reason behind dollarization a stronger ARS in real terms remains in place for now, suggesting that dollar demand could regain strength in the future. Another key policy challenge is to keep wage rises below the current inflation rate during the bargaining process that will start early in 2012. Real-term increases in labor costs could make faster depreciation less effective in real terms. As the economy slows, so, too, will the deterioration in the external accounts, as both industrial and energy imports will be reduced. On the fiscal side, the government appears committed to reducing the burden of energy and transportation subsidies, which approached 4% of GDP in 2011. This is a significant political challenge, as some residential consumers will be affected. It is not clear whether the money saved by eliminating subsidies will be spent elsewhere. In 2008, an expansionary fiscal policy was funded through the primary surplus and the nationalization of pension funds. Now, such a policy would be difficult to finance, and monetizing a deficit could feed dollar demand or inflation. Recovering the twin surpluses which appears to be the objective requires lower growth, and this is the key political challenge for an economy that is used to living with growth running well above potential.
Javier Finkman Economist HSBC Bank Argentina S.A. +54 11 4344 8144 javier.finkman@hsbc.com.ar
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Inflation is set to moderate in 2012
though Q1 wage negotiations will be key to achieve that We believe that in order for our forecast of inflations dropping 5pp to 18% to materialize, wage inflation and expectations must decline significantly and relatively early in 2012. Consumer prices and wage inflation peaked at the end of Q3. Benchmark annual wage negotiations are set to take place in February-March. While the government is attempting to coordinate wage agreements at around 18%, we believe the low 20s range is more plausible. For that outcome to emerge, though, inflation expectations will have moderate throughout Q1.
40 30 y-o-y % 20 10 0 Jan-07 Jan-08 Jan-09 12m ex pectations Consumer prices

Source: INDEC, provincial statistics institutes, UTDT
Jan-10 Jan-11 Priv ate sector w ages
We expect authorities to target a slow pace of ARS depreciation, delaying major adjustments for later in the year. Perhaps more important, a significant slowdown of economic activity in the near term will be key to cooling expectations and allow wage deceleration to take place.
With higher interest rates, deposit and credit growth rates are converging
as deposit growth accelerates while loan growth slows Interest rates paid to institutional depositors increased 650bp in the most recent quarter, rising to an average 18.8% in Q4 from an average 12.3% in Q3, in order to gain deposits in the midst of strong dollarization. Commercial loan growth is slowing while term deposits are growing faster as a result of higher rates, marginally easing the funding pressure on banks. In addition, rates are beginning to come down following an almost ARS20bn central bank liquidity injection in the last 30 days (data as of 16 December). A key challenge is to sustain current dynamics after December when the seasonal increase in peso demand begins to fade.
6 5 m-o-m % 4 3 2 1 0 Aug-10 Dec-10 Apr-11 Aug-11 Peso deposits Wholesale rate (RHS) Peso loans
22 20 16 14 12 10 Dec-11 annual % 18
Source: BCRA. December is average through the 16th. The interest rate is the wholesale CDs interest rate (BADLAR) paid by private banks
Dollar outflows have subsided

1,000 800 600 400 200 0 -200 -400 -600 -800 -1,000 05-Jan 30-Mar 22-Jun 14-Sep 07-Dec 8 6 4 2 0 -2 -4 -6 -8
CB purchases
Source: BCRA
Dollar deposits (RHS)
due to several factors New regulations targeting both supply and demand of FX have created some relief in the market: (1) oil, gas, and mining companies have to settle all their export proceeds in the local FX market; (2) insurance companies had to repatriate their foreign investments; and (3) dollar purchases require an ex ante authorization from tax authorities. Higher interest rates have helped to slow down the dollarization process. Lower economic growth implies lower imports, actually fueling the trade surplus. Probably some families and companies over-dollarized in anticipation of a level of depreciation that has not taken place, so they are now rebalancing their portfolios or selling dollars to pay for current expenses. Peso demand tends to increase for seasonal reasons in December.
USDm
w-o-w %
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Argentina: Macro framework

Argentina: HSBC forecasts 2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate end-year (%) Prices & wages CPI, average (% y-o-y)* CPI, end-year (% y-o-y)* WPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Broad money supply M3 (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) ** 5-yr yield, end-year (%) ARS/USD, end-year ARS /USD, average ARS /EUR, end-year ARS /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (ex gold) (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of int'l reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (ARSbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP) 2007 2008 2009 2010 2011f 2012f 2013f
8.5 212.7 5399 7.8 5.2 18.2 8.4 34.6 9.3 10.9 9.8 8.0 19.4 23.4 25.8 6.2 15.2 3.06 3.08 3.83 3.69 46.5 34.2 12.3 8.0 3.8 3.1 1.5 5.2 16.1 19.0 32.0 11.3 4.2 108.8 47.8 47.8 1.9 1.8 3.5 246.3 37.6 61.1 28.7 66.6
8.7 260.5 6534 9.0 7.6 13.6 7.5 34.4 7.8 12.7 25.6 17.5 20.0 20.2 11.7 8.0 12.9 3.15 3.12 4.25 4.05 55.8 44.6 11.2 7.4 2.8 5.0 1.9 4.7 20.1 30.6 46.2 12.4 5.5 124.5 40.5 53.7 1.1 1.1 3.2 260.2 32.0 70.8 27.2 58.9
6.8 323.4 8017 6.5 6.9 9.1 1.1 34.5 7.4 24.8 20.0 5.9 23.4 11.3 2.0 10.5 16.8 3.45 3.19 4.84 4.77 70.0 57.4 12.6 7.0 2.2 8.3 2.6 4.8 25.5 28.7 46.4 9.7 5.3 124.9 38.2 60.5 1.2 1.4 3.1 311.7 30.2 64.4 19.9 47.8
0.9 302.5 7409 0.5 7.2 -10.2 -4.9 34.8 8.4 14.5 16.1 4.3 17.3 12.8 -5.2 9.0 16.0 3.80 3.79 5.43 5.34 55.7 38.8 16.9 10.9 3.6 3.3 1.1 4.7 -20.5 -32.5 48.0 14.8 3.8 116.4 35.9 54.6 -1.7 -0.6 1.5 349.7 30.5 61.8 20.4 50.9
9.2 368.7 8925 9.0 9.4 21.2 10.3 34.9 7.3 23.2 24.8 6.3 29.3 36.9 8.7 9.0 14.0 3.98 3.91 5.32 5.19 68.1 56.5 11.6 3.0 0.8 6.0 1.6 2.4 22.4 45.7 52.1 11.1 3.4 128.6 35.9 59.2 -0.8 0.2 1.7 410.2 28.4 69.4 18.8 46.8
8.5 468.6 11208 8.9 11.8 15.1 9.7 34.7 6.9 23.5 23.0 9.2 33.1 30.0 23.7 9.0 12.0 4.30 4.13 5.81 5.57 81.5 71.5 9.9 1.3 0.3 5.0 1.1 1.3 19.5 26.6 45.5 7.6 3.4 132.3 42.5 57.9 -2.3 -1.4 0.5 491.6 25.4 74.4 15.9 40.3
3.0 515.8 12191 3.6 4.6 0.9 3.1 34.3 7.7 20.0 18.0 13.5 23.0 23.0 5.1 9.0 10.0 5.00 4.62 7.20 6.42 77.4 68.6 8.8 0.0 0.0 5.0 1.0 1.0 -5.0 -4.2 43.0 7.5 3.4 140.6 42.9 61.2 -1.8 -0.9 1.0 626.8 26.3 79.4 15.4 39.7
5.0 538.9 12585 4.8 7.1 5.5 5.4 34.4 7.4 16.7 16.0 19.8 17.0 20.0 5.0 9.0 10.0 5.65 5.32 8.19 7.69 83.7 75.7 8.0 -1.5 -0.3 10.0 1.9 1.6 8.2 10.4 41.0 6.5 3.4 147.6 47.3 63.2 -0.9 0.0 1.5 770.7 26.9 84.4 15.7 41.0
* Average of consumer price indices from provincial statistical institutes used since 2007. ** 1-day reverse repo rate. Source: Central Bank, Ministry of Finance, INDEC, provincial statistical institutes, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts.
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Brazil
Some recovery in 2012
The Brazilian economy lost momentum in the second half of 2011, reflecting slower growth in the US and Europe, volatility in the international market and the impact this had on expectations, and the fiscal and monetary tightening in Brazil undertaken during 2010 and the early part of 2011 to curb inflation. We believe that part of the explanation for weaker growth is the pressure inflation puts on household budgets, especially for the new middle class, for which consumption growth rates had been particularly high. Brazils authorities have already responded to weaker growth, using strategies from their 2008 playbook. The first cut in interest rates was made in August 2011. The government reversed course on measures aimed at curbing credit growth and more recently, reintroduced tax exemptions on white goods. It also cut the IOF tax on foreign equity investments and on consumer loans, and in December, provided a stimulus for credit growth by allowing larger deposit banks to satisfy part of their reserve requirements by acquiring credit assets or debentures from their smaller competitors (a measure that should ease wholesale funding conditions faced by mid-sized banks). Economic activity is likely to begin 2012 on a slow note. We expect the growth rate to fall to just 3% in 2011, due to slower growth in consumption and investment. However, we expect growth to gain momentum during the year, especially in the second half, in response to government measures and increased spending. We forecast GDP growth will reach 3.7% in 2012. Inflation will remain the key challenge for policymakers. We believe the 12-month CPI rate is likely to fall to about 5.5% by the second quarter (within the target range), but resist further declines, ending 2012 at 5.4%. We expect the central bank to respond to sluggish growth early in 2012 and the modest improvement in inflation expectations by cutting the Selic rate to 9% by May 2012. We believe inflation remains a key risk for 2013. A strong finish for domestic demand may lead to inflationary pressures similar to those observed in late 2010 and early 2011, particularly in the services sector. Unless these are offset by lower commodity prices in BRL terms (or a positive supply shock), inflation could start rising towards 6%. The correction of commodity prices observed at the end of 2011 already appears to have had an impact on Brazilian exports. The trade surplus observed in both November and December fell short of expectations, leading us to revise our forecast for the current account balance from 1.9% to 2.2% of GDP. In 2012, our forecast for the current account deficit (1.9% of GDP) assumes a trade surplus close to USD20bn. However, if the price action in commodity prices observed at the end of 2011 persists into the new year, the risks of a substantial shortfall in this surplus are significant. Although Brazils external solvency indicators have improved significantly over the past several years, negative news on the trade balance could emerge as an unexpected driver for the BRL as we enter 2012.
Constantin Jancs Economist HSBC Bank Brasil S.A. +55 11 3371 8183 constantin.c.jancso@hsbc.com.br Marcos Ross Fernandes Economist HSBC Bank Brasil S.A. +55 11 3847 9787 marcos.r.fernandes@hsbc.com.br
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Fiscal policy will likely be less restrictive in 2012
as we expect the government to increase investment spending The fiscal adjustment pursued by the administration in 2011 was more successful than we originally predicted, with the primary fiscal balance of the consolidated public sector expected to end 2011 at 3.2%. The strong fiscal performance in 2011 reflected the impact of 2010 economic growth on fiscal revenues, windfall revenues for the Treasury (such as those resulting from court rulings in favor of the Federal Revenue Service), and lower-than-expected government investment spending. In 2012, revenue growth will be more muted, and we believe the government is less likely to restrain government investment spending. As a result, although fiscal policy helped lower GDP growth in 2011, we expect it to stimulate economic activity in 2012.
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
Primary Fiscal Surplus of the Central Government - % GDP
Jan-11
Jan-08
Jan-09
Jan-10
Jul-09
Jul-10
Sources: Central Bank and HSBC. Note: excludes Petrobras capitalization.
Jul-11
Jul-08
Inflation would be lower under the new IPCA weights
and this is helping to improve market inflation expectations for 2012 We forecast IPCA inflation to end 2011 at 6.5% and to fall to 5.4% by the end of 2012. Part of this decline in inflation reflects the recently announced revision to IPCA weights. The chart shows actual IPCA data (based on 2002/03 household survey data) and what the IPCA would have been under the 2008/09 Household Survey weights. The decline of the weight of services and administered prices means that inertia will be lower than in the past, and that current inflation will be more responsive to monetary policy. However, the 2013 outlook is cloudy: economic stimuli will likely result in strong growth at the margin in 2H 2012, which together with World Cup-related effects, could push inflation close to 6% again.
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% Jan-09
2002/2003 - Household Surv ey 2008/2009 - Household Surv ey
Jul-09 Jan-10
Jul-10 Jan-11 Jul-11
Sources: IBGE and HSBC
Domestic demand growth slowed down substantially
but is expected to recover in 2012 The gap between GDP growth and domestic demand growth has narrowed to its lowest level since 2005, driven by measures to curb credit growth, tighten fiscal policy, and weaken demand. Household consumption, investment, and government consumption have all decelerated markedly. All together, these should have positive implications for the medium-term inflation outlook. The government is aggressively implementing stimulus measures, leading us to believe that growth will rebound in 2012.
12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 Domestic Demand GDP
3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11

Source: IBGE
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Brazil: macro framework

Brazil: HSBC forecasts 2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Broad money supply M3 (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 2-yr yield, end-year (%) BRL/USD, end-year BRL/USD, average BRL/EUR, end-year BRL/EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (ex gold) (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of int'l reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (BRLbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP) 2007 2008 2009 2010 2011f 2012f 2013f
4.0 1088.4 5944 5.2 2.6 9.8 2.8 17.6 8.4 4.2 3.1 3.3 7.2 18.1 17.0 13.25 12.3 2.14 2.18 2.82 2.73 137.8 91.4 46.5 13.6 1.3 -9.4 -0.9 0.4 16.5 24.1 85.8 11.3 24.6 172.6 23.7 96.3 -3.6 -3.1 3.2 1186.1 48.9 70.4 6.4 55.3
6.1 1366.0 7379 6.1 5.1 13.9 6.0 18.1 7.4 3.6 4.5 9.4 7.3 17.4 22.3 11.25 12.8 1.77 1.95 2.60 2.66 160.6 120.6 40.0 1.6 0.1 27.5 2.0 2.1 16.6 32.0 180.3 17.9 38.7 193.2 21.8 123.3 -2.8 -2.3 3.3 1426.1 50.9 65.9 4.4 55.3
5.2 1652.8 8835 5.7 3.2 13.6 3.1 18.8 6.8 5.7 5.9 9.8 9.9 17.8 23.8 13.75 12.2 2.34 1.83 3.23 2.68 197.9 173.2 24.7 -28.3 -1.7 24.6 1.5 -0.2 23.2 43.6 206.8 14.3 38.9 198.3 17.6 131.0 -2.0 -0.8 3.4 1595.9 51.7 62.0 4.8 56.5
-0.3 1621.6 8583 4.2 3.9 -10.3 -7.4 14.7 6.8 4.9 4.3 -4.1 8.4 15.8 10.5 8.75 11.8 1.74 2.00 2.50 2.76 153.0 127.6 25.3 -24.3 -1.5 36.0 2.2 0.7 -22.7 -26.3 239.1 22.5 31.6 198.2 13.0 121.0 -3.3 -3.5 2.0 1862.0 59.2 64.0 3.7 62.9
7.5 2142.1 11231 7.0 3.3 21.9 10.4 17.3 5.3 5.0 5.9 13.9 9.2 15.6 9.1 10.75 12.3 1.67 1.76 2.22 2.32 201.9 181.6 20.3 -47.5 -2.2 36.9 1.7 -0.5 32.0 42.3 288.6 19.1 29.3 256.8 19.9 186.7 -2.5 -1.5 2.8 1748.4 46.4 63.5 3.1 49.5
3.0 2466.5 12821 4.4 2.1 5.5 0.0 17.5 4.6 6.6 6.5 6.0 9.6 13.9 10.1 11.00 11.8 1.88 1.68 2.42 2.33 254.6 228.1 26.5 -54.0 -2.2 70.3 2.8 0.7 26.1 25.6 355.0 18.7 32.6 307.0 14.1 242.4 -2.2 -1.5 3.1 1949.7 47.1 62.6 3.0 50.1
3.7 2428.6 12526 4.3 2.6 5.4 3.6 18.0 4.8 5.6 5.4 5.1 9.0 13.2 7.4 9.00 11.5 1.80 1.87 2.59 2.65 272.8 249.4 23.4 -50.4 -2.1 36.0 1.5 -0.6 7.1 9.3 370.0 17.8 36.7 336.4 13.5 273.6 -2.4 -1.6 2.6 2085.7 46.0 63.6 2.5 48.5
4.5 2709.5 13869 5.5 3.1 7.1 3.0 19.0 4.7 5.9 5.9 4.5 8.9 14.3 7.9 9.00 11.5 1.90 1.85 2.47 2.54 293.3 273.1 20.1 -57.4 -2.1 43.0 1.6 -0.5 7.5 9.5 380.0 16.7 36.8 360.7 13.2 299.7 -2.5 -1.7 2.5 2229.6 44.4 64.6 2.3 46.8
Source: Central Bank, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts
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Chile
Bracing for external impact
Economic activity decelerated in H2 2011, partly due to a series of supply disruptions affecting first mining then manufacturing production. As these have subsided, we expect national account estimates to show that the economy returned to close to potential annualized GDP growth of 4-5% towards the end of the year. Going forward, we expect the external situation to be a drag on the Chilean economy. Its openness, both through trade and financial channels, will likely make it difficult for the country to avoid the impact of worsening problems in the eurozone. In contrast, our positive outlook for China should support commodity exports and prices. Mining should be a positive factor for GDP growth in 2012, but there are risks to the downside. Our forecast for next year is based on a return to more typical strike activity, following an abnormally high level of disruptions in 2011, and includes the impact from the startup of new operations, which would compensate for lower ore grades in mature copper mines. In addition, the importance of mining production to GDP growth has increased, as the update of national accounts by the central bank raised the estimated weight of the sector in the economy. Inflation has surprised to the upside in recent months, but we expect it to head towards the middle of the central bank target of 2-4%, with risks to the downside due to the slowdown in economic activity. We forecast that the central bank will ease monetary conditions gradually, cutting the monetary policy rate by 75bp, to 4.50%, throughout the first quarter. However, risks are tilted towards a worsening of the external environment and a larger impact on Chile. Should this be the case, we would expect the central bank to react with faster and more pronounced easing of monetary policy. Fiscal accounts have worsened in recent years, and potential reforms of the educational system, resulting in increased public funding of education, will put additional pressure on fiscal balances. The government expects to discuss a tax reform to increase fiscal revenues in H1 2012. Making the temporary hikes to corporate taxes that were set to end in 2013 permanent is likely to be one of the measures instituted to raise revenue. In this context, we see the burden of countercyclical policies falling on the shoulders of the central bank. Only a significant deterioration of the outlook for the economy would prompt active intervention by fiscal authorities, we believe.
Jorge Morgenstern Economist HSBC Bank Argentina S.A. +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar
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New national accounts elevate the weight of mining Sector weights on GDP (%) Goods Agriculture, silviculture, fishery Mining Manufacturing Electricity, gas, water Construction Services Retail, restaurants, hotels Transportation Financial Others Subtotal Financial intermediation Import duties and VAT 2003 39.4 4.8 8.4 16.4 2.9 6.9 55.5 9.7 6.9 15.0 23.9 94.9 -3.4 8.4 2008 38.5 3.3 14.0 11.2 2.7 7.3 53.0 9.7 4.8 17.4 21.1 91.5 * 8.5
altering GDP growth estimates from 2008 onwards The Central Bank of Chile will estimate national accounts using 2008 as a reference year going forward (2003 previously). Revised estimates for 2008-2011 will be published in March. The weight for each sector in the economy will be adjusted annually going forward. Notable changes in the weights of mining and manufacturing reflect positive and negative changes, respectively, in their relative prices. For 2011, the impact of the revision coming from the aggregate of both sectors should be negative and significant: it accumulates 0.5pp less of annual GDP growth through Q3. For 2012, the expected recovery of mining could bring a similar impact in the opposite direction.
Source: BCCh. *Starting with the 2008 reference year, financial intermediation will be deducted from each sectors value added.
Government balance and assets
12 9 6
% GDP
18 15 12 9 6 3 0 01 03 05 07 09 11e 13e 15e Structural

% GDP
3 0 -3 -6
Effectiv e Treasury assets -RHS-
The upcoming tax reform should result in higher revenues Fiscal accounts were hit by the 2008/9 crisis and the 2010 earthquake, resulting in a higher-expenditures-to-GDP ratio. A year later, 2011 fiscal dynamics showed a substantial structural deficit in a highly supportive environment. The 2012 balance will likely stand below the budget estimate as the outlook has worsened since it was unveiled. The governments target to reach a -1% structural deficit by 2014 implies effective deficits and thus little, if any, contribution to the Economic and Social Stabilization Fund (FEES). Moreover, the assumption of 5.4% average GDP growth for 2013-2015 lies above the consensus estimate (4.8%). The pressure for higher public funding of education should dent even more the fiscal balances going forward. Tax reform is targeted for discussion in 2012. We believe it will result in a substantial increase in fiscal revenues to keep the health of the fiscal position going forward.
Source: Dipres, Ministry of Finance, HSBC. 2011-2015 balances are budget estimates.
Recent rise in inflation relates to foodstuff and weak FX
15 10
y-o-y %
5 0 -5 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 CPI ex food and energy Energy Foodstuff Target
and should revert with economic activity slowdown Inflation approached the top of BCChs target in late 2011. The upswing of recent months reflected the pass-through of a weaker currency into the price of tradable goods. This contributed 0.7pp more towards annual inflation in November than in August. For non-tradables, inflation was steady. In particular, food prices have accelerated. Beyond the exchange rate effect, beef prices rose due to the lack of cheaper Paraguayan meat, restricted due to a food and mouth disease outbreak. If the latter is resolved in 1H12, the result could be deflationary pressures. We do not expect a further weakening of the currency to be a factor going forward. In 2012, the prevailing factor for inflation should then be the deceleration of economic activity and, thus, we envision inflation converging back to the center of the target.
Source: INE, HSBC
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Chile: Macro framework

Chile: HSBC forecasts 2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Broad money supply M3 (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5-yr yield, end-year (%) CLP/USD, end-year CLP/USD, average CLP/EUR, end-year CLP/EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (ex gold) (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of int'l reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (CLPbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP) 2007 2008 2009 2010 2011f 2012f 2013f
4.6 146.8 8932 7.1 6.4 2.3 3.2 21.6 6.0 3.4 2.6 7.9 3.5 11.4 10.2 5.25 5.6 547 530 684 636 58.7 35.9 9.6 7.2 4.9 5.1 3.5 8.4 42.2 17.7 19.4 6.5 4.1 49.8 41.3 45.4 7.9 7.7 8.4 12993 16.7 4.4 3.0 19.7
4.6 164.3 9900 7.0 7.1 11.2 4.1 19.8 7.2 4.4 7.8 14.0 4.5 14.7 14.3 6.00 6.3 498 522 672 679 68.0 44.0 10.8 7.5 4.5 10.0 6.1 10.6 15.8 22.6 16.9 4.6 6.9 55.9 62.7 51.9 8.4 8.2 8.8 10810 12.5 4.0 2.4 14.9
3.7 170.7 10185 4.5 0.5 19.4 0.2 19.7 8.5 8.7 7.1 22.7 5.3 19.1 14.8 8.25 5.9 629 522 881 781 66.3 57.7 22.8 -3.3 -1.9 7.1 4.2 2.2 -2.5 31.1 23.2 4.8 7.7 63.5 52.7 60.2 4.3 4.3 4.8 15262 17.1 3.4 2.0 19.1
-1.7 161.2 9523 0.9 7.5 -15.9 -6.7 16.7 10.0 0.3 -2.6 -14.9 4.0 -1.4 12.0 0.50 5.4 506 560 724 789 54.0 39.9 23.9 2.6 1.6 4.8 3.0 4.6 -18.5 -30.9 25.4 7.6 9.5 73.7 41.3 69.6 -4.4 -4.5 -4.0 19006 20.7 4.1 2.5 23.2
5.2 203.4 11901 10.4 3.3 18.8 0.5 13.5 7.1 1.4 3.0 3.5 4.7 11.2 1.1 3.25 5.8 468 510 627 676 71.0 55.2 8.5 3.8 1.9 6.4 3.1 5.0 31.5 38.3 27.9 6.1 8.8 87.3 47.8 81.7 -0.3 -0.4 0.1 19663 18.9 5.6 2.8 21.7
6.4 250.1 14503 10.2 3.8 14.4 6.0 11.2 6.9 3.3 3.6 6.5 5.0 20.0 0.1 5.25 5.1 520 478 695 673 78.9 69.2 14.1 -1.6 -0.6 10.1 4.0 3.4 11.0 25.5 39.5 6.8 10.4 91.4 39.2 85.0 1.2 1.1 1.7 23000 19.0 6.4 2.6 21.6
4.5 235.1 13511 6.0 2.5 9.7 3.0 10.2 6.8 2.9 3.0 3.7 4.0 12.0 5.5 4.50 4.7 530 527 763 732 75.9 75.8 15.9 -2.7 -1.2 12.2 5.2 4.0 -3.7 9.4 41.5 6.6 10.4 92.3 42.6 87.0 -0.5 -0.6 0.0 25000 20.0 5.3 2.3 22.3
4.8 252.0 14352 5.0 2.5 12.0 6.0 10.2 7.0 3.2 3.0 3.7 4.0 8.0 5.0 4.50 4.7 530 530 769 766 80.5 79.6 9.6 -2.0 -0.8 8.0 3.2 2.4 6.0 5.0 42.7 6.4 10.4 94.3 46.4 89.0 -0.8 -0.8 -0.3 25000 20.0 5.3 2.1 22.1
Source: Central Bank, INE, Ministry of Finance, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts
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Colombia
Still a soft-landing story
Real GDP surprised to the upside in 3Q11 and printed a 7.7% y-o-y increase. Although impressive, 3Q performance was helped by some degree of postponed activity. Earlier in the year, floods had not allowed the government to pursue the committed infrastructure projects, while energy and mining activities were also held back. Construction surged 18.1% y-o-y in 3Q, a remarkable reversal given the 3.1% decline in 1H. In turn, mining accelerated to 18.4% y-o-y in 3Q from 10.4% y-o-y in the previous quarter. However, the resumption of heavy rains could have affected activity in late 2011 and this could also be the case at the beginning of next year. Together with some deterioration of confidence indicators and the incipient slowdown of domestic demand, the latter forebodes softer growth in 4Q (which we place at 5.3% y-o-y). Even so, we now estimate that GDP could have expanded 5.7% in 2011. This would leave a significant 1.8% carryover effect into next year, which means that Colombian GDP could rise by this magnitude notwithstanding zero sequential growth in each quarter of 2012. A soft landing of the Colombian economy is still our base-case scenario. True, slower external demand is likely to contribute negatively to growth dynamics. Nevertheless, ruling out an international credit crunch, the investment drive is poised to continue. Sharp infrastructure deficiencies (particularly the lack of roads) create the need for further public works while the energy and mining sectors should persist as attractors of foreign capital. The current account deficit should stay at high levels and reach 3.8% of GDP in 2012, a figure that looks manageable even under stress conditions (see Colombia Economics & Strategy: Fit for lean times, 26 October 2011). Hence, in light of our low-for-longer international rates scenario, we are of the view that high international liquidity will keep underpinning the ongoing long-term investment boom and that Colombia will grow 4.3% in 2012, around our estimate for the potential rate. In line with the latest official projections, we believe that the 2011 fiscal deficit will stand at 2.8% of GDP for the consolidated public sector. Thus, the deficit will be lower than original expectations (3.5% of GDP) due to higher growth and better-than-expected tax collection figures. The government foresees an even lower deficit in 2012 (1.8% of GDP) given the strong financial result of Ecopetrol this year. Despite this, we are less optimistic and forecast a 2.4% of GDP deficit considering the Constitutional Courts ruling that dictates compensations for the victims of the armed conflict. Monetary policy is still stimulative. The real MPR (considering 12-month-ahead inflation expectations) stands at 1.3%, below our 2% estimate of the neutral rate. Regarding the division within the Monetary Policy Committee between hawks (more concerned about the impact of strong domestic demand on inflation) and doves (who put more weight on the potential impact of the global financial crisis), we believe that the dovish position will prevail as inflation decelerates into 2012. In our view, interest rates will remain on-hold for most of next year, although we cannot rule out a pre-emptive increase by year-end (+25bp to 5%), an attempt to bring rates to a more neutral level.
Ramiro Blazquez Economist HSBC Argentina S.A. +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar
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Colombia: Macro framework

Colombia: HSBC forecasts 2006 2007 2008 2009 2010 2011f 2012f 2013f
Real GDP (% y-o-y) Nominal GDP (COPbn) Nominal GDP (USDbn) Private consumption (% y-o-y) Gross fixed investment (% y-o-y) Industrial production (% y-o-y) Unemployment rate, average (%) CPI, end year (% y-o-y) CPI, year average (%) Total fiscal balance (%GDP) Primary fiscal balance (%GDP) Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (%GDP) Remittances (USDbn) Foreign direct investment (USDbn) Foreign direct investment (%GDP) External debt , year end (USDbn) External borrowing requirements (USDbn) Monetary policy rate, year end (%) Foreign reserves, year-end (USDbn) COP/USD, year-end COP/USD, average
Source: HSBC forecasts, DANE, BanRep
6.7 383898 162.7 6.4 18.1 11.2 12.0 4.5 4.3 -0.5 0.2 25.2 24.9 0.3 -3.0 -1.8 3.9 6.7 4.1 40.1 -3.7 7.50 15.4 2240 2359
6.9 431072 206.3 7.3 14.4 10.9 11.2 5.7 5.5 -1.2 1.0 30.6 31.2 -0.6 -6.0 -2.9 4.5 9.0 4.4 44.7 -3.1 9.50 21.0 2014 2090
3.5 481037 244.3 3.5 9.9 -3.0 11.3 7.7 7.0 0.3 0.9 38.5 37.6 1.0 -6.8 -2.8 4.8 10.6 4.3 46.4 -3.8 9.50 24.0 2223 1969
1.5 508532 235.0 0.9 -0.8 -5.2 12.0 2.0 4.2 -2.3 -1.1 34.0 31.5 2.5 -5.0 -2.1 4.1 7.1 3.0 53.7 -2.1 3.50 25.4 2043 2164
4.3 548273 289.8 5.0 8.3 5.0 11.8 3.2 2.3 -3.0 -1.1 40.8 38.6 2.1 -8.9 -3.1 4.0 6.9 2.4 64.8 1.9 3.00 28.5 1920 1892
5.7 599852 329.1 6.2 13.6 4.5 9.3 3.5 3.4 -2.8 -1.0 53.8 52.7 1.0 -11.8 -3.6 4.8 14.3 4.3 65.6 -2.6 4.75 32.5 1939 1867
4.3 642298 347.2 3.6 8.9 5.5 9.0 2.7 2.5 -2.4 -0.9 56.4 58.4 -2.1 -13.2 -3.8 5.5 12.5 3.6 67.2 0.7 5.00 35.1 1800 1850
4.5 690310 394.5 4.0 9.9 6.1 10.0 3.0 2.8 -2.6 -0.4 63.1 63.7 -0.6 -13.6 -3.4 6.0 14.1 3.6 69.0 1.4 5.25 33.5 1750 1775
Real GDP growth: Heading towards a soft landing
Contributions to GDP growth (demand-side breakdown)
10
10
8 %, y-o-y 6 4 2 0 3.12f 4.11f 2.10 1.08 4.08 3.09 1.11

y-o-y % 5 0 -5 2008 2009 2010 2011e 2012f Private consumption Gross investment GDP
Source: DANE, HSBC
Public Consumption Net exports
Source: DANE, HSBC
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Mexico
Resilience: Making the best of it
We maintain our view that Mexico may be more resilient than expected in the difficult global environment. Although we have recently lowered our GDP growth estimate to 3.4% from 3.9% for 2012, we would like to emphasise that the new projection is above consensus, currently at 3.1%, and above potential GDP, which we estimate at 3.0% (see Mexico Economics & Strategy: Fine tuning GDP forecast, but maintaining strong consumption view, 30 November 2011). US industrial production is expected to grow at a modest rate in 2012. This, coupled with a depreciated exchange rate, may stimulate exports and inhibit imports. Additional support comes from stronger domestic demand and the increased expenditure associated with an electoral year. Moreover, low interest rates may encourage consumption and investment. Our view on the exchange rate has become more conservative with our forecast average for 2011 at MXN13.5/USD and the year-end rate at MXN13.2/USD (see Latam FX Focus: MXN: Cheap but not guarantee of a recovery, 23 November 2011). This would represent depreciation of about 8.0% with respect to 2011. While we acknowledge that the pass-through to inflation from the exchange rate is low, we expect the exchange rate to have some impact on inflation in 2012. Our estimate is that inflation may reach 3.9%, when previously we had a projection of 3.7%. We believe that the monetary authorities will maintain the policy rate at 4.5% for an extended period of time. The economy will grow above potential and monetary conditions are already loose, making action by the monetary authorities unnecessary, in our view. While there might not be any near-term upward pressure on inflation, the current level should deter the authorities from cutting rates. A more solid macroeconomic framework than during the 2008-09 crisis should support the Mexican economy with high international reserves, low public sector debt at 36.0% of GDP, and a low fiscal deficit at 2.4% of GDP. Our base scenario is subject to negative risks due to the high level of uncertainty that might make the global scenario more complicated. A big hit to confidence from an intensified sovereign crisis in the eurozone would deepen the negative impact on the growth side, reducing world trade. This, at the same time, would also generate constraints on the availability of credit globally. If such risks were to materialize, the negative impact on the Mexican economy could be severe, affecting exports and growth. In addition, if some of the negative risk in the US economy, such as the obstruction of the renewal of the payroll tax reduction and the extension of unemployment benefits, were to materialize, the US demand for Mexican goods would likely decline. This reduction would harm the exportoriented Mexican industrial sector and its positive effect on domestic demand through its investment and workers consumption.
Sergio Martin Chief Economist HSBC Mexico S.A. +52 55 5721 2164 sergio.martinm@hsbc.com.mx Lorena Dominguez Economist HSBC Mexico S.A. +52 55 5721 2172 lorena.dominguez@hsbc.com.mx Claudia Navarrete Economist HSBC Mexico S.A. +52 55 5721 2422 claudia.navarrete@hsbc.com.mx
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Monetary conditions index
Stable monetary policy rate The central banks position has been very clear establishing a neutral monetary policy. Lately, Banxicos decisions have been subject to economic growth prospects and exchange rate dynamics. Under our base scenario, which considers a 3.4% economic growth rate for 2012 (consensus: 3.1%), we do not see the need for further economic stimulus with a rate cut. In addition, we see loose monetary conditions in the economy. In effect, we see low real interest rates in the range of 0% to 1%, as well as a more depreciated real exchange rate at 13.1% in relation to pre-crisis levels.
120 110 100 90 80 70 20 06 2007 2008 20 09 2010 20 11
Source: HSBC estimate with data from Banxico
Core and non-core inflation
Inflation starts becoming a source of concern Another factor that supports this view is that according to the inflation trend, which is at 3.5% in the medium term, we see limited room for cutting the policy rate because markets will not accept negative real interest rates in Mexico. We see a range up to 100bp for cuts, which, given the possibility that the uncertain global outlook may persist for quite some time, monetary authorities could use to maneuver. In our view, the probability that rates will be cut during 2012 are even lower than before due to the change of the central banks view regarding the balance or risks for inflation to neutral from favorable in its December policy decision. In our view, this change reflects Banxicos concerns about pressures on inflation in 2012.
6.0 5.5 5.0 (%) 4.5 4.0 3.5 3.0 2007 2008 Core 2009 2010 2011 Non Core
10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0
Source: Banxico
(%)
Percentage of analysts expecting a rate cut

70 60 50 (%) 40 30 20 10 0 2H Aug 1H Sep 2H Sep 1H Oct 2H Oct 1H Nov 2H Nov 1H Dic rate cut in 2011 rate cut in 2012
A rate cut: the most expected scenario? Market sentiment about interest rate policy has been divided and this has been mirrored in market analysts opinions (Banamex survey, several dates in 2H11). Currently, there are 12 of 19 analysts who expect a rate cut in January, March, April, or December of 2012. Our expectation is that the policy rate will stay on hold for an extended period of time until 3Q13, with the first move being a hike.
Source: Banamex
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Mexico: Macro framework

Mexico: HSBC forecasts 2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) PPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Broad money supply M3 (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%) 5-yr yield, end-year (%) MXN/USD, end-year MXN/USD, average MXN/EUR, end-year MXN/EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (ex gold) (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of int'l reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (MXNbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP) 2007 2008 2009 2010 2011f 2012f 2013f
5.2 951.8 8956 5.7 1.9 9.9 5.7 20.4 3.5 3.6 4.1 7.1 5.1 14.3 21.9 7.0 7.3 10.81 10.90 13.51 13.09 249.9 256.1 -6.1 -4.5 -0.5 20.1 2.1 1.6 16.7 15.4 67.7 3.2 79.3 107.6 47.6 52.9 0.1 -1.7 2.5 1756.9 16.9 54.8 5.8 22.7
3.3 1035.8 9611 4.0 3.1 6.9 2.0 20.3 3.4 4.0 3.8 3.7 5.4 9.7 20.8 7.5 7.8 10.92 10.93 14.74 14.21 271.9 281.9 -10.1 -8.9 -0.9 29.7 2.9 2.0 8.8 10.1 78.0 3.3 94.5 123.1 50.9 67.7 0.0 -1.9 2.2 1959.8 17.3 55.4 5.3 22.7
1.2 1092.0 9994 1.8 1.1 5.9 -0.1 20.6 4.3 5.1 6.5 10.5 6.0 16.8 7.1 8.3 8.3 13.82 11.15 19.34 16.73 291.3 308.6 -17.3 -16.3 -1.5 26.3 2.4 0.9 7.2 9.5 85.4 3.3 141.3 129.9 53.3 72.9 -0.1 -1.6 1.8 2498.7 20.5 56.9 5.2 25.7
-6.1 879.7 7940 -7.1 3.5 -11.3 -7.6 20.8 4.8 5.3 3.6 2.0 4.6 6.8 -3.5 4.5 7.5 13.08 13.51 18.71 19.05 229.7 234.4 -4.7 -6.4 -0.7 15.3 1.7 1.0 -21.2 -24.0 90.8 4.7 99.0 163.8 52.7 67.4 -2.3 0.0 -0.1 2887.9 24.3 96.4 11.0 35.2
5.4 1035.3 9214 5.0 2.8 2.3 6.0 19.8 4.9 4.2 4.4 4.4 3.4 12.9 2.6 4.5 6.1 12.37 12.63 16.53 16.75 298.5 301.5 -3.0 -5.6 -0.5 18.7 1.8 1.3 29.9 28.6 113.6 4.5 100.0 190.1 52.2 79.7 -2.8 -1.7 -0.9 3080.9 23.6 110.4 10.7 34.2
3.7 1139.9 10015 5.0 2.6 8.1 3.9 20.0 4.5 3.5 3.5 3.9 3.9 14.0 5.3 4.5 5.4 13.93 12.45 18.39 17.66 352.1 357.4 -5.3 -10.2 -0.9 20.5 1.8 0.9 18.0 18.6 142.5 4.8 115.0 198.8 42.5 83.2 -2.5 -1.7 -0.4 3357.6 23.7 115.6 10.1 33.8
3.4 1130.5 9805 5.1 9.2 6.3 3.6 22.1 4.2 3.7 3.9 4.3 4.1 16.0 4.1 4.5 5.6 13.20 13.50 19.01 19.44 408.9 416.6 -7.7 -10.6 -0.9 20.3 1.8 0.9 16.1 16.5 157.6 4.5 128.8 198.6 37.8 79.1 -2.4 -1.7 -0.3 3655.2 24.0 119.5 10.6 34.5
3.0 1220.0 10445 2.7 1.4 3.0 3.3 22.4 4.2 3.7 3.4 3.7 4.1 16.4 3.9 5.0 6.1 13.50 13.40 19.80 19.30 452.1 462.0 -9.9 -12.4 -1.0 25.0 2.1 1.0 10.6 10.9 181.4 4.7 154.6 207.7 34.4 83.4 -2.0 -1.6 -0.2 3916.8 24.0 124.3 10.2 34.1
Source: Central Bank, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts
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Panama
Domestic forces drive growth
The Panamanian economy continues to show vigorous growth rates, with transportation, storage, construction, and tourism-related services being the most dynamic sectors. The economic growth prospects for 2012 are encouraging at 7.0%, although the pace is slower than the estimated growth rate at 9.7% in 2011. In effect, the Panama Canal expansion project and the governments ambitious investment program will continue to drive domestic demand; however, the expected lower global growth might reduce the Panama Canal activity and moderate tourism spending. This robust economic expansion will continue to be offset by the deterioration in the countrys external position. The current account is expected to reach a deficit of 11.0% in 2012, slightly below the 14.0% of GDP expected for 2011. The main financing source will continue to be foreign direct investment. We expect this type of inflow to continue to increase due to Panamas legislation that provides tax and labor benefits to international firms, as well as the countrys favorable economic prospects. However, the countrys high dependence on foreign savings represents a vulnerability, as it could turn on abrupt adjustments in domestic demand. Inflation has continued to increase, having reached an annual rate of 6.8% in November 2011. This is the highest reading since November 2008. The acceleration in inflation is mainly attributed to the international increase in commodity prices, as inflation in Panama constitutes a significant component of imported goods, particularly oil. This has been exacerbated by the robust economic expansion that has pressured the domestic front. A moderation in commodity prices derived from expected slower growth globally would help alleviate pressure on inflation in 2012. However, high government expenditures remain an upside risk for inflation. As a result, the IMF has suggested maintaining fiscal discipline. We expect the fiscal balance to continue to print a deficit due to the large public investment program. We estimate a fiscal deficit of 1.9% of GDP for 2012, below the 3.0% deficit expected for 2011, complying with the fiscal Responsibility Law, which imposes limits of 3.0% and 2.0% for 2011 and 2012, respectively. However, it will be important to monitor the level of public sector investment that has not yet been disbursed and that might put pressure on the fiscal balance going forward. The financing of the deficit will continue to be mainly covered through external sources with no problem, in our opinion. In addition, the Minister of Finance has announced that the creation of the Sovereign Wealth Fund will be a priority in 2012. The main objective of this government initiative will be to save part of the additional revenues from the expanded Panama Canal and have resources available to tackle national emergencies or apply countercyclical policies.
Lorena Dominguez Economist HSBC Mexico, S.A. +52 55 5721 2172 lorena.dominguez@hsbc.com.mx
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Panama: Macro framework

Panama: HSBC forecasts 2006 2007 2008 2009 2010 2011f 2012f 2013f
Real GDP (% y-o-y) Nominal GDP (PABbn) Nominal GDP (USDbn) Private consumption (% y-o-y) Gross fixed investment (% y-o-y) Industrial production (% y-o-y) Unemployment rate, average (%) CPI, end-year (% y-o-y) CPI, year average (%) Total fiscal balance (%GDP) Primary fiscal balance (%GDP) Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (%GDP) Remittances (USDbn) Foreign direct investment (USDbn) Foreign direct investment (%GDP) Public external debt, year end (USDbn) External borrowing requirements (USDbn) Deposit rate, year-end (%) Foreign reserves, year-end (USDbn) PAB/USD, year-end PAB/USD, average
8.5 17.1 17.1 4.4 16.6 7.0 9.1 2.2 2.5 0.5 4.9 8.5 10.2 -1.7 -0.5 -3.1 0.3 2.5 14.6 7.8 0.7 5.1 1.8 1.0 1.0
12.1 19.8 19.8 0.9 41.0 11.7 7.3 6.4 4.2 3.5 6.9 9.3 12.5 -3.2 -1.4 -7.1 0.3 1.8 9.0 8.2 1.6 4.6 1.8 1.0 1.0
10.1 23.0 23.0 -2.1 25.3 14.2 6.4 6.8 8.8 1.5 4.6 10.3 14.9 -4.5 -2.7 -11.8 0.2 2.4 10.4 8.5 3.1 3.5 1.7 1.0 1.0
3.2 24.1 24.1 -2.8 -6.2 3.7 6.9 1.9 2.4 -1.0 1.9 11.1 13.3 -2.1 0.0 -0.2 0.2 1.8 7.4 10.2 0.2 3.5 2.3 1.0 1.0
7.6 26.6 26.6 24.4 11.6 3.7 6.5 4.9 3.5 -1.9 2.3 11.3 15.9 -4.6 -3.0 -11.1 0.2 2.4 8.9 10.4 3.1 3.1 2.5 1.0 1.0
9.7 30.3 30.3 16.5 14.5 5.0 5.0 6.4 5.9 -3.0 -0.3 14.8 20.4 -5.6 -4.2 -14.0 0.2 2.8 9.3 11.5 5.0 2.0 2.6 1.0 1.0
7.0 33.7 33.7 11.3 12.1 5.8 4.7 4.8 5.4 -1.9 0.6 17.7 23.1 -5.5 -3.9 -11.5 0.3 3.1 9.2 12.8 4.5 2.6 2.7 1.0 1.0
6.5 36.9 36.9 8.5 11.3 5.0 4.5 4.2 3.9 -1.5 0.5 19.6 25.3 -5.7 -3.5 -9.5 0.3 3.3 8.9 14.0 3.6 3.1 2.9 1.0 1.0
Source: Comptrollers General Office, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts
Fiscal balance
800 600 400 200 0 -200 -400 -600 -800 -1,000 2001 2003 2005 2007 2009 2011f
6.0 4.0 2.0
GDP annual growth
-2.0 -4.0 -6.0
(%)
0.0
11 10 9 8 7 6 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011f 2012f
(USDm)
Fiscal balance
Source: Ministry of Finance
as a % of GDP
Source: Comptrollers General Office
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Peru
Tensions begin to surface
After the blow to expectations resulting from the election of Ollanta Humala as President of Peru, conflict in the Cajamarca region threatens to unleash a new idiosyncratic shock on business confidence. On claims that it would disrupt water supply, Cajamarca recently became paralyzed due to protests demanding the demise of the Conga gold mine project (the largest mining project in Peru). President Humala declared a state of emergency in the region and replaced most of his ministers in a massive cabinet reshuffling. Even if the presidents first reaction was to uphold the property rights of investors (while deciding that the dispute over Conga be settled by a commission of international experts), uncertainty could linger for some time into the future, in our view. We believe that doubts will persist as to whether the government will be able to appease social demands targeting the mining industry. As a result, we look to lower growth ahead. We have revised our 2012 growth forecast downwards to 4.8% from 5.3% previously (see Peru Economics & Strategy: Weathering the storm, 7 October 2011). The slightly less appealing short-term growth prospects are mostly a consequence of more sluggish private investment as conflicts could delay projects, while mining companies could increasingly adopt a wait-andsee stance. Despite the latter, fixed capital formation could rise in 2012 at a faster pace than in 2011 (while overall investment would slow down due to less dynamic inventory stockpiling). We expect the increase in gross capital formation to stand at 9.5% next year after only 6.1% in 2011. This is because, following a 12.5% decline this year, we expect a 15.5% rebound in public investment in 2012. We should bear in mind that public works became paralyzed in 2011 by the change of administration and also because of the withdrawal of the fiscal stimulus introduced back in 2008. This led to a very high fiscal surplus, which we estimate at 2% of GDP. However, it is likely that on the back of softer commodity prices, revenues could be lower in 2012. Expenses are set to increase given the normalization of public works and also as a result of social programs. We therefore look to a reduction of the fiscal surplus to 0.8% of GDP in 2012, which could be even lower if the international crisis deepens. Despite the surge of inflation (which could reach at least 4.5% y-o-y in December 2011), we believe that the inflation outlook is prone to decelerate on the back of softer activity, particularly in the absence of a renewed commodities push. This was the main reason why inflation trended upwards in 2011. Lower growth would propel the central bank to begin a moderate easing cycle in 1Q12 and cut rates by 50bp to 3.75%, we believe. In addition, this could be accompanied by a reduction in reserve requirements. We believe that the continuity of a prudent macroeconomic management featuring moderate fiscal surpluses and low inflation will be the trademark of the Humala Administration. Thus, growth in 2013 should accelerate to 5.7% of GDP and it could be boosted further as mining projects begin to blossom in 2014. The downside risks to our forecasts mainly arise from a hard landing in China and the intensification of social conflicts (which could prompt the government to adopt more populist measures).
Ramiro Blazquez Economist HSBC Bank Argentina S.A. +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar
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Peru: Macro framework

Peru: HSBC forecasts 2006 2007 2008 2009 2010 2011f 2012f 2013f
Real GDP (% y-o-y) Nominal GDP (PENbn) Nominal GDP (USDbn) Private consumption (% y-o-y) Gross fixed investment (% y-o-y) Industrial production (% y-o-y) Unemployment rate, average (%) CPI, end year (% y-o-y) CPI, year average (%) Total fiscal balance (%GDP) Primary fiscal balance (%GDP) Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (%GDP) Remittances (USDbn) Foreign direct investment (USDbn) Foreign direct investment (%GDP) External debt , year end (USDbn) External borrowing requirements (USDbn) Monetary policy rate, year end (%) Foreign reserves, year-end (USDbn) PEN/USD, year-end PEN/USD, average
Source: HSBC forecasts, INEI, BCRP
7.7 302.3 92.3 6.4 18.9 7.5 7.5 1.1 2.0 2.1 4.0 23.8 14.8 9.0 2.9 3.0 2.2 3.5 3.8 28.7 1.9 4.50 17.2 3.21 3.28
8.9 335.2 107.1 8.3 22.6 11.1 8.4 3.9 1.8 3.1 4.9 27.9 19.6 8.3 1.4 1.3 2.1 5.4 5.1 33.1 1.6 5.00 27.7 3.00 3.13
9.8 372.6 127.4 8.7 28.3 9.1 8.4 6.7 5.8 2.1 3.7 31.5 28.4 3.1 -4.7 -3.7 2.4 6.2 4.9 34.6 1.7 6.50 31.2 3.14 2.93
0.9 381.7 126.7 2.4 -8.6 -6.3 8.4 2.9 2.9 -1.9 -0.6 26.9 21.0 5.9 0.2 0.2 1.9 4.4 3.4 34.1 2.1 1.25 33.2 2.89 3.01
8.8 434.6 153.9 6.0 23.0 14.1 8.2 2.1 1.5 -0.6 0.6 35.6 28.8 6.7 -2.3 -1.5 2.2 7.1 4.6 40.1 2.3 3.00 44.2 2.82 2.83
6.6 487.6 176.7 6.2 6.1 8.6 7.9 4.5 3.4 2.0 3.2 45.2 36.7 8.5 -2.8 -1.6 2.6 6.7 3.8 43.4 2.2 4.25 49.5 2.70 2.75
4.8 540.6 200.6 5.2 9.5 6.0 8.0 2.5 3.1 0.8 2.0 45.6 40.5 5.1 -6.7 -3.3 2.9 5.8 2.9 45.2 2.4 3.75 49.2 2.68 2.70
5.7 586.4 217.2 5.8 13.4 6.8 7.5 2.6 2.6 0.2 -9.0 50.7 46.0 4.6 -7.8 -3.6 3.3 7.5 3.5 45.2 2.4 3.75 53.2 2.70 2.69
Private and public investment (% GDP)
Investment to contribute less to GDP growth in 2012
35 30 25 % GDP 20 15 10 5 0 13.1 3.6 17.4 16.5 16 4.5
Public inv estment Priv ate inv estment 5.2 5.2 3.8 2.9 19.5 22.4 23.1 5.7
15 10 5 0 -5 -10 2005 2006 2007 2008 2009 2010 2011e 2012f
88-92 93-97 92-02 03-07 08-10 2011e 2012f

Source: MEF, HSBC Source: INEI, HSBC
Priv ate consumption Inv estment GDP grow th
Public consumption Net ex ternal demand
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Uruguay
Inflation, still inflation
Economic activity shows little signs of being impacted by the deteriorating global outlook. On the contrary, domestic demand grew rapidly in Q3 and initial indicators suggest the trend continued in Q4. Industrial production has been affected negatively since October by the temporary shutdown for maintenance of the oil refinery. Thus, sequential growth should have decelerated markedly in Q4, but this temporary factor should revert at the start of 2012. In 2012, the construction of new pulp mill projects should contribute over 0.5pp to GDP and we expect that a deceleration of private consumption will be the main factor leading to lower GDP growth. The challenge will come from the external environment, particularly with the expected deceleration of economic activity in neighboring (and key export destinations) Brazil and Argentina. The main macroeconomic problem for authorities continues to be stubborn inflation. Inflation has remained considerably above the ceiling of the central bank target (set at 4-6% since June) throughout the year. Moreover, since the end of Q3, it also started to climb in annual terms. While part of the recent inflationary spike can be attributed to the pass-through of a weaker currency, prices of non-tradable goods also accelerated and accounted for most of the headline inflation. Thus, the decline of commodity prices could reduce some inflationary pressures going forward, but the source of the problem relates more, in our view, to a pace of domestic demand growth that continues to surpass the potential of the economy. In response, monetary authorities decided in December to pursue a tighter monetary policy, hiking the monetary policy rate (TPM) 75bp to 8.75%, in a decision that surprised market participants. In Uruguay, monetary policy appears to influence inflation more by a stronger exchange rate and guiding for expectations than by the deceleration in demand caused by a higher interest rate. We expect the central bank to maintain this contraction stance throughout the year, cutting the TPM back to 8% by year-end, but keeping it above current and expected inflation. A resilient performance in a difficult environment should cement Uruguays return to investmentgrade status in 2012. Persistent high inflation could be the main hurdle, in our view. The government continued to improve its debt profile via liability management operations that resulted in a smoother payments schedule, higher average maturity, and a rising share of local currency debt. The consolidation of fiscal balances in the favorable phase of the business cycle has been partial though. Fiscal accounts continue to be part of the strategy to counter inflation, via the partial postponement of tariff adjustments of publicowned companies. Next year, this should continue being the case, although we expect lower energy costs should reduce the need for tariff hikes.
Jorge Morgenstern Economist HSBC Bank Argentina S.A. +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar
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Uruguay: Macro framework

Uruguay: HSBC forecasts 2006 2007 2008 2009 2010 2011f 2012f 2013f
Real GDP (% y-o-y) Nominal GDP (UYUbn) Nominal GDP (USDbn) Private consumption (% y-o-y) Gross fixed investment (% y-o-y) Industrial production (% y-o-y) Unemployment rate, average (%) CPI, end year (% y-o-y) CPI, year average (%) Total fiscal balance (%GDP) Primary fiscal balance (%GDP) Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (%GDP) Remittances (USDbn) Foreign direct investment (USDbn) Foreign direct investment (%GDP) External debt , year end (USDbn) External borrowing requirements (USDbn) Monetary policy rate, year end (%) Foreign reserves, year-end (USDbn) UYU/USD, year-end UYU/USD, average
4.7 476.7 19.5 6.1 18.5 5.3 10.9 6.4 6.4 -0.5 3.2 4.0 4.8 -0.8 -0.4 -2.0 0.1 1.5 7.6 9.3 -1.1 n.a. 3.1 24.42 24.40
7.2 560.4 25.9 7.0 7.9 5.9 9.2 8.5 8.1 -0.1 2.2 4.5 5.6 -1.1 -0.2 -0.9 0.1 1.2 4.8 11.0 -1.0 7.25 4.1 21.53 21.67
8.7 653.1 26.9 8.5 19.0 12.1 7.6 9.2 7.9 -1.4 1.7 5.9 9.1 -3.1 -1.7 -6.4 0.1 2.1 7.9 10.6 -0.4 7.75 6.4 24.40 24.25
2.0 706.9 36.0 0.9 -6.0 -4.0 7.3 5.9 7.1 -1.5 1.2 5.4 6.9 -1.5 -0.1 -0.3 0.1 1.6 4.4 12.2 -1.5 6.25 8.0 19.50 19.64
8.4 807.7 40.6 11.5 13.8 3.5 6.7 6.9 6.7 -0.4 1.2 6.7 8.6 -1.9 -0.5 -1.1 0.1 2.4 5.9 12.1 -1.9 6.50 7.7 19.90 19.89
6.3 912.5 45.3 9.1 9.3 3.2 6.6 8.3 8.1 -0.3 1.2 8.1 10.5 -2.4 -0.1 -0.2 0.1 2.9 6.3 13.5 -2.8 8.75 10.7 20.00 19.25
5.0 1011.8 51.8 5.7 6.7 6.2 6.4 7.0 7.4 -0.2 1.4 9.0 11.6 -2.6 -0.2 -0.4 0.2 3.2 6.1 14.0 -2.9 8.00 11.0 19.50 19.55
4.0 1117.5 55.2 4.3 5.8 5.0 6.5 6.2 6.6 0.0 1.6 10.3 13.1 -2.8 -0.4 -0.7 0.2 3.0 5.4 14.5 -2.6 7.00 11.3 21.00 20.25
Source: Central Bank, Ministry of Finance, INE, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts
Domestic debt surpassed 45% of total gross debt after Decembers swap
Private sector demand, resilient so far, is expected to decelerate in 2012
100 % of gross debt 80 % y-o-y 60 40 20 0 2004 2005 2006 2007 2008 2009 2010 2011e Local
Source: BCU
15 10 5 0 -5 -10 2010 Multilateral Other foreign

Source: BCU
II
III
IV
2011
II
III
Priv ate consumption Public consum & inv estm. Net ex ports
Priv ate fix ed inv estment Inv entories GDP
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Venezuela
The electoral party
Supported in the continuity of high oil prices, the short-term activity outlook is positive for Venezuela. We believe that real GDP could grow at least 4% next year after a 3.7% expansion in 2011. President Chvezs 21st century socialism approach has translated into increasing state involvement in the economy. As in 2011, we expect public spending to be the main driver of growth dynamics. We must keep in mind that presidential elections will be held in October and that Mr. Chvezs popularity hovers around 50% (according to pollster Datanlisis), well below the 70% approval rating enjoyed by the President when he was re-elected in 2006. The massive housing program put together by the government to a large extent accounted for the acceleration of growth in 3Q11, to 4.2% y-o-y from 2.5% in 2Q. The activity rebound has been in tandem with the remonetization of the economy and the easing of monetary policy through lower reserve requirements on banks. The flipside to remonetization is slower capital flight, which came down to USD17bn in 3Q11 from an all-time high of cUSD26bn in 2Q10. We believe that this was related to a so-far effective repression of USD demand, the stabilization of oil prices at a high level, and the anchoring of the FX rate. We believe that the short-term activity boom driven by the political cycle is prone to continue in 2012, as the government deepens the fiscal push to win the elections. Despite inflation running close to 30% per annum, the Chvez administration is likely to anchor the trade-related exchange rate (currently at VEF4.30/USD) for another year. This is because a weaker VEF would seriously impair the purchasing power of lower income segments, which are chavismos core constituency. Fixing the exchange rate and preventing inflation from accelerating will be leveraged in a bucketful of petrodollars and rising indebtedness, in our view. We estimate that gross dollar issuance in 2012 could stand in the range of USD18-20bn, up from USD16bn in 2011. Also, by end-2012, bilateral indebtedness (ChinaRussia) could be taken to at least USD20bn. This being said, we cannot rule out a depreciation of the SITME rate (FX rate for financial flows) as it would bear a limited political cost and reduce capital flight. Unfortunately, all parties come to an end. From an economic point of view, it is clear that the high inflation differential of Venezuela will lead to a weaker exchange rate at some point in time, particularly if chavismo stays in office for another term. Hence, our forecasts feature a devaluation of the trade-related FX rate to VEF6.5/USD in early 2013 that would stabilize nominal GDP (in USD terms) at roughly the same level as in 2012. Growth would halve to 1.9% as devaluations in Venezuela are usually contractive, even though they have a positive fiscal impact (government revenues are linked to the dollar). This is because of the embryonic condition of Venezuelan industry, which precludes the possibility of expanding exports or substituting imports. Moreover, even though devaluation would create a positive wealth effect for Venezuelans holding vast overseas savings, they are unlikely to repatriate them given the widespread perception of weak property rights.
Ramiro Blazquez Economist HSBC Bank Argentina S.A. +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar
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PdVSA debt repayment in oil exports by agreement

Thousand bpd 1200 1000 800 600 400 200 0 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Source: IPD Latin America, PdVSA
Belarus ACEC CIC PetroCaribe New Chinese Fund Chinese Heavy Fund I Chinese Heavy Fund II JBIC II JBIC I
A new financing source not shown in traditional debt metrics A more recent and less transparent government source of financing emerged in the form of energy supply cooperation agreements with different countries and organizations. While some of them consist on the exchange of machinery or goods and services for oil, some are direct loans to the government and PdVSA. The key and most relevant of these energy supply agreements is the one with China. Since these agreements establish a progressive increase in the credit lines, we estimate that USD20bn will be outstanding by end-2012. Taking into account all bilateral agreements, up to 37.5% of PdVSAs exports (900k barrels per day) could be to some extent compromised in the coming years, according to energy consulting firm IPD Latin America, up from 430k b/d in 2011.
Venezuela and PdVSA bonded debt profile

USDbn 16 14 12 10 8 6 4 2 0 2012 2015 2018 2021 2024 2027 2030 2033 2036
Total Amortizations (Ven + PdVSA)

Source: HSBC and Bloomberg
Total Interests (Ven + PdVSA)
The costs of FX anchoring After President Chvezs re-election in 2006, the threat to property rights embodied by nationalizations of private companies, along with inconsistent macro policies, doubled capital flight to cUSD20bn a year. The existence of capital controls meant that both individuals and firms operating in Venezuela had to find alternative means to secure hard currency. The swap of foreign currencydenominated bonds issued by the sovereign and PdVSA for dollars in overseas accounts became the main instrument to access greenbacks. With the creation in 2010 of the SITME (Integrated System for Foreign Exchange Transactions), the government has regulated these operations. Most of the issuance of dollar-denominated securities carried out nowadays is aimed at feeding capital flight. In order to keep the implicit exchange rate fixed at VEF5.30/USD, new issues have come out at high coupons. As can be seen in the chart, this is beginning to have an impact in terms of interest payments, which are now significant for the next five years.
Private sector outflows have slowed down...
0 -5 -10 -15 -20 -25 -30 -35 -40 2002-III 2001-II 2003-IV 2000-I 2005-I
Capital Controls
2007-III
2008-IV
although they could pick up again soon Using 4Q accumulated flows, our measure of the private sectors capital flight decelerated to USD17bn in 3Q11 from an all-time high of cUSD26bn in 2Q10. Stricter controls and a stable oil outlook sedated dollar demand in 2011. Dollar scarcity could deepen in 2012 as capital flight accelerates. FX pressure would be fueled by the combination of electoral uncertainty and the fiscal and monetary stimulus put together by the government to boost the business cycle, which should intensify in the run-up to the election. Real money demand could drop in 2012 as the high inflation differential should deepen the overvaluation of the VEF, thus fostering portfolio dollarization. We therefore place private capital outflows at USD23bn in 2012, up from USD19bn in 2011.
USDbn
2006-II
Source: BCV, HSBC
2011-II
2010-I
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Venezuela: Macro framework

Venezuela: HSBC forecasts 2006 Production, demand and employment GDP growth (% y-o-y) Nominal GDP (USDbn) GDP per capita (USD) Private consumption (% y-o-y) Government consumption (% y-o-y) Investment (% y-o-y) Industrial production (% y-o-y) Gross domestic saving (% GDP) Unemployment rate end-year (%) Prices & wages CPI, average (% y-o-y) CPI, end-year (% y-o-y) WPI, end-year (% y-o-y) Manufacturing wages, nominal (% y-o-y) Money, FX & interest rates Broad money supply M3 (% y-o-y) Real private sector credit growth (% y-o-y) Policy rate, end-year (%)* 5-yr yield, end-year (%) VEF/USD, end-year VEF /USD, average VEF /EUR, end-year VEF /EUR, average External sector Merchandise exports (USDbn) Merchandise imports (USDbn) Trade balance (USDbn) Current account balance (USDbn) Current account balance (% GDP) Net FDI (USDbn) Net FDI (% GDP) Current account balance plus FDI (% GDP) Exports (% y-o-y) Imports (% y-o-y) International FX reserves (ex gold) (USDbn) Import cover (months) Public and external solvency indicators Commercial banks FX assets (USDbn) Gross external debt (USDbn) Short term external debt (% of int'l reserves) Private sector external debt (USDbn) Consolidated government balance (% GDP) Central government balance (% GDP) Primary balance (% GDP) Gross public domestic debt (VEFbn) Gross public domestic debt (% GDP) Gross public external debt (USDbn) Gross public external debt (% GDP) Gross public sector debt (% GDP) 2007 2008 2009 2010 2011f 2012f 2013f
9.9 183.2 6911 15.5 9.6 36.3 10.1 19.8 10.1 13.7 17.0 15.9 18.2 86.9 39.3 15.2 12.4 2.2 2.2 2.7 2.6 65.6 33.6 32.0 26.5 14.4 -0.5 -0.3 14.2 17.7 39.9 37.4 13.4 3.1 41.8 30.8 15.2 -1.6 0.3 0.5 36.2 9.2 30.1 16.4 25.6
8.8 226.2 8325 16.9 13.8 28.2 6.9 14.2 8.2 18.7 22.5 17.2 17.7 46.8 37.8 21.7 13.7 2.2 2.2 2.9 2.8 70.0 46.7 23.3 17.3 7.7 1.6 0.7 8.4 6.7 38.9 34.3 8.8 3.5 55.9 52.0 16.9 -2.9 3.1 -1.2 36.0 7.4 43.3 19.1 26.5
5.3 255.5 9178 6.3 4.8 2.2 1.4 13.6 7.5 31.4 31.9 32.4 24.2 23.5 -4.5 21.7 20.3 2.2 2.2 3.0 3.2 95.0 51.0 44.1 34.3 13.4 1.2 0.5 13.9 35.8 9.2 43.1 10.2 7.9 60.7 45.4 14.0 -2.7 -1.2 -1.2 30.5 4.6 49.1 18.3 22.9
-3.2 190.9 6699 -2.9 1.5 -19.1 -11.7 12.6 7.9 28.6 26.9 30.9 23.0 22.1 -9.1 18.9 24.1 2.2 2.2 3.1 3.0 57.6 39.6 18.0 6.0 3.2 -2.5 -1.3 1.8 -39.4 -22.2 35.8 10.8 8.8 73.8 46.7 12.2 -8.2 -5.1 -6.7 53.2 7.6 66.2 32.3 39.9
-1.5 232.1 7958 -1.9 2.1 1.0 -2.5 12.2 8.6 29.1 27.4 26.8 25.4 13.0 -6.5 17.9 25.9 2.6/4.3 2.6/4.3 3.5/5.8 3.5/5.8 65.7 38.6 27.1 12.1 5.2 1.2 0.5 5.7 14.1 -2.6 30.3 9.4 6.0 84.9 52.3 7.7 -7.6 -4.8 -6.6 90.3 9.0 82.3 35.4 44.5
3.7 300.8 10084 3.1 6.4 12.4 5.6 12.2 8.4 27.2 29.9 27.4 26.5 29.9 13.2 17.0 24.0 4.3 4.3 5.8 3.5/5.8 94.1 47.4 46.7 29.4 9.8 2.0 0.7 10.4 43.1 22.7 27.5 7.0 5.5 104.4 55.8 8.1 -6.2 -3.4 -4.6 100.4 6.8 99.3 33.0 39.8
4.0 376.5 12351 7.5 11.2 10.1 5.8 9.1 8.1 30.2 30.4 27.8 27.0 35.2 11.4 16.5 23.0 4.3 4.3 6.2 6.0 97.0 55.6 41.4 21.2 5.6 2.0 0.5 6.2 3.1 17.4 28.2 6.1 5.0 119.4 53.7 8.7 -9.5 -6.6 -6.5 128.1 6.9 117.3 31.1 38.0
1.9 382.7 12306 1.8 3.4 6.5 1.7 12.1 8.7 31.3 32.1 35.2 26.5 31.7 2.2 18.5 25.0 6.5 6.5 9.4 9.4 98.4 56.4 41.9 19.6 5.1 2.0 0.5 5.7 1.4 1.5 30.2 6.4 7.0 124.5 55.0 9.3 -2.5 -3.0 0.2 155.0 6.2 124.3 32.5 38.7
* The values denote the average lending rate informed by the Central Bank (BCV) Source: Central Bank, Thomson Reuters Datastream, Bloomberg, HSBC estimates and forecasts.
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Notes
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Notes
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Notes
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Disclosure appendix
Analyst Certification
Each analyst whose name appears as author of an individual section or individual sections of this report certifies that the views about the subject security(ies) or issuer(s) or any other views or forecasts expressed in the section(s) of which (s)he is author accurately reflect his/her personal views and that no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendation(s) or view(s) contained therein: Andre Loes, Javier Finkman, Sergio Martin, Lorena Dominguez, Jorge Morgenstern, Ramiro Blazquez and Constantin Jancso
Important Disclosures
This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice. Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products. The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results. Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. * HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 2 This report is dated as at 05 January 2012. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Disclaimer
* Legal entities as at 04 March 2011 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation HSBC Bank Brasil S.A. - Banco Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; CA HSBC Securities Mltiplo (Canada) Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Av. Faria Lima, 3.064 - 4 andar Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; Itaim Bibi - So Paulo - SP - Brasil CN HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai CEP 01451-000 Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Telephone: 55 11 3371 8184 Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC Securities SA, Athens; HSBC Fax: 55 11 3847 5669 Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC website: www.hsbc.com.br Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch This document has been elaborated, produced and approved by HSBC Bank Brasil S.A. - Banco Mltiplo for the general information of its wholesale customers. If this research is received by a customer of a HSBC Group member, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Hong Kong, this document has been distributed by The Hongkong and Shanghai Banking Corporation Limited in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited makes no representations that the products or services mentioned in this document are available to persons in Hong Kong or are necessarily suitable for any particular person or appropriate in accordance with local law. All inquiries by such recipients must be directed to The Hongkong and Shanghai Banking Corporation Limited. In Korea, this publication is distributed by either The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") or The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch ("HBAP SEL") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (FSCMA). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. Both HBAP SLS and HBAP SEL are regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. HSBC Mxico, S.A., Institucin de Banca Mltiple, Grupo Financiero HSBC is authorized and regulated by Secretara de Hacienda y Crdito Pblico and Comisin Nacional Bancaria y de Valores (CNBV). HSBC Bank (Panama) S.A. is regulated by Superintendencia de Bancos de Panama. Banco HSBC Honduras S.A. is regulated by Comisin Nacional de Bancos y Seguros (CNBS). Banco HSBC Salvadoreo, S.A. is regulated by Superintendencia del Sistema Financiero (SSF). HSBC Colombia S.A. is regulated by Superintendencia Financiera de Colombia. Banco HSBC Costa Rica S.A. is supervised by Superintendencia General de Entidades Financieras (SUGEF). Banco HSBC Nicaragua, S.A. is authorized and regulated by Superintendencia de Bancos y de Otras Instituciones Financieras (SIBOIF). The stated opinions do not constitute a criterion about the quality of the issues referred to, the solvency of the issuers or their activities or of financial intermediaries or securities brokers who participate in the transactions. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or any advice or recommendation with respect to investment or financial decision. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified. HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. This document is intended to be distributed worldwide by HSBC. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. Copyright 2012, HSBC Bank Brasil S.A. - Banco Mltiplo, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of HSBC Bank Brasil S.A. - Banco Mltiplo. MICA (P) 208/04/2011 and MICA (P) 040/04/2011
[317504]
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Global Economics Research Team

Global
Stephen King Global Head of Economics +44 20 7991 6700 stephen.king@hsbcib.com Karen Ward Senior Global Economist +44 20 7991 3692 karen.ward@hsbcib.com Madhur Jha +44 20 7991 6755 madhur.jha@hsbcib.com
Global Emerging Markets

Pablo Goldberg Head of Global EM Research +1 212 525 8729 pablo.a.goldberg@hsbc.com Bertrand Delgado EM Strategist +1 212 525 0745
bertrand.j.delgado@us.hsbc.com
Emerging Europe, Middle East and Africa

Murat Ulgen Chief Economist +44 20 7991 6782 Agata Urbanska +44 20 7992 2774
Europe & United Kingdom

Janet Henry Chief European Economist +44 20 7991 6711 janet.henry@hsbcib.com Astrid Schilo +44 20 7991 6708 Germany Lothar Hessler +49 21 1910 2906 France Mathilde Lemoine +33 1 4070 3266 astrid.schilo@hsbcib.com
muratulgen@hsbc.com agata.urbanska@hsbcib.com
Alexander Morozov +7 495 783 8855 alexander.morozov@hsbc.com Simon Williams +971 4 507 7614 simon.williams@hsbc.com melismetiner@hsbc.com.tr
lothar.hessler@hsbc.de
Melis Metiner +90 212 376 4618
mathilde.lemoine@hsbc.fr
Latin America
Andre Loes Chief Economist, Latin America +55 11 3371 8184 andre.a.loes@hsbc.com.br Argentina Javier Finkman Chief Economist, South America ex-Brazil +54 11 4344 8144 javier.finkman@hsbc.com.ar Ramiro D Blazquez Senior Economist +54 11 4348 5759 Jorge Morgenstern Senior Economist +54 11 4130 9229 Brazil Constantin Jancso Senior Economist +55 11 3371 8183 Marcos Fernandes +55 11 6847 9787 Mexico Sergio Martin Chief Economist +52 55 5721 2164 Claudia Navarrete Economist +52 55 5721 2422 Central America Lorena Dominguez Economist +52 55 5721 2172
North America
Kevin Logan Chief US Economist +1 212 525 3195 kevin.r.logan@us.hsbc.com Ryan Wang +1 212 525 3181 ryan.wang@us.hsbc.com
Asia Pacific
Qu Hongbin Managing Director, Co-head Asian Economics Research and Chief Economist Greater China +852 2822 2025 hongbinqu@hsbc.com.hk Frederic Neumann Managing Director, Co-head Asian Economics Research +852 2822 4556 fredericneumann@hsbc.com.hk Leif Eskesen Chief Economist, India & ASEAN +65 6239 0840 leifeskesen@hsbc.com.sg Paul Bloxham Chief Economist, Australia and New Zealand +61 2925 52635 paulbloxham@hsbc.com.au Donna Kwok +852 2996 6621 Trinh Nguyen +852 2822 6975 Ronald Man +852 2996 6743 Luke Hartigan +612 9255 2635 Sun Junwei Associate Sophia Ma Associate donnahjkwok@hsbc.com.hk trinhdnguyen@hsbc.com.hk ronaldman@hsbc.com.hk lukehartigan@hsbc.com.au
ramiro.blazquez@hsbc.com.ar
jorge.morgenstern@hsbc.com.ar
constantin.c.jancso@hsbc.com.br marcos.r.fernandes@hsbc.com.br
sergio.martinm@hsbc.com.mx
claudia.navarrete@hsbc.com.mx
lorena.dominguez@hsbc.com.mx
58
Andr Loes, Latin America HSBC Bank Brasil S.A. +55 11 3371 8184 andre.a.loes@hsbc.com.br Andr Loes is HSBCs chief economist for Latin America, having joined HSBC in August 2008 as chief economist for Brazil. Previously, he was a partner at an asset management concern and chief economist, head of equity research and head of equity at a major Spanish bank based in Brazil. Earlier, he served as aide to Brazils foreign trade secretary in the Ministry of Industry and Foreign Trade, and he led the economic department of the Brazilian National Association of Investment Banks (ANBID). Andr holds a bachelors degree and a masters degree in economics, both from the Federal University of Rio de Janeiro, and a doctorate in economics from Universit de Paris, France.
Javier Finkman, South America ex-Brazil HSBC Bank Argentina S.A. +54 11 4344 8144 javier.r.nkman@hsbc.com.ar Javier Finkman joined HSBC in 1996 as Argentina Director of Equity Research and became Chief Economist for Argentina in 1998. In 2008, he was appointed Chief Economist Southern America (ex-Brazil). He is also a regular writer for nancial newspapers and teaches nance at the Universidadde Buenos Aires.
Sergio Martin, Mexico HSBC Mexico S.A. +52 55 5721 2164 sergio.martin@hsbc.com.mx Sergio Martin joined HSBC in 2008 as the Chief Central America Economist. He now concentrates on Mexico. Previously, he was senior economist at the International Monetary Fund for more than seven years. Earlier, he was the chief economist for Mexico for two major banks in Mexico. His work experience also includes government positions in the Planning and Budget Ministry and the Council of Economic Advisors to the President of Mexico. Sergio holds a PhD in Economics from the New School for Social Research.
Lorena Dominguez, Panama, Mexico HSBC Mexico S.A. +52 55 5721 2172 lorena.dominguez@hsbc.com.mx Lorena works as an economist with HSBC Latin Americas research team. In this capacity, she has covered Mexico and Chile and now follows Central America. She holds an MSc in Economics from the University of Essex.
Jorge Morgenstern, Argentina, Chile, Uruguay HSBC Bank Argentina S.A. +54 11 4130 9229 jorge.morgenstern@hsbc.com.ar Jorge Morgenstern is an economist with the Latin America Research Team based in Argentina, covering Argentina, Chile, and Uruguay. Jorge received a graduate degree in economics from the Universidad Torcuato Di Tella and holds a bachelor in arts from the Universidad de Buenos Aires, where he teaches macroeconomics. Prior to joining HSBC, he worked for a local consulting rm and the Center for Financial Research at the Universidad Torcuato Di Tella.
Ramiro Blazquez, Argentina, Colombia, Peru, Venezuela HSBC Bank Argentina S.A. +54 11 4348 5759 ramiro.blazquez@hsbc.com.ar Ramiro Blazquez is currently Senior Economist within the Latin America Research Team based in Argentina, covering Ecuador, Venezuela, Chile and Argentina. Ramiro is a graduate of the Universidad Torcuato Di Tella with an Executive MBA in Business and Economics. Prior to joining HSBC, he worked for the International Monetary Fund in Buenos Aires, the Center for Financial Research at the Universidad Torcuato Di Tella and the Presidential Ofce of the Argentine Republic.
Constantin Jancso, Brazil HSBC Bank Brasil S.A. +55 11 3371 8183 constantin.c.jancso@hsbc.com.br Constantin joined HSBC in June 2010 as a senior economist in Brazil. Previously, he worked as a xed income strategist for Brazil and Mexico (based in New York) and as an economist (based in So Paulo) at a major Spanish bank. Earlier, he was a partner at a Brazilian macroeconomic consulting rm. Constantin holds a BA in Economics from the University of Michigan and an MA in Economics from Fundao Getlio Vargas (SP).
Issuer of report: HSBC Bank Brasil S.A. Banco Mltiplo

HSBC Tailwinds Still Stronger

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Latin American

Macro Global Economics Q1 2012

Tailwinds still stronger than headwinds

By Andr Loes and the Latin America Economics Research team

Economics Latin America Q1 2012

Disclosure appendix Disclaimer

Economics Latin America Q1 2012

Economics Latin America Q1 2012

Tailwinds still stronger than headwinds

than in 2008-2009; growth in 2012 is forecast at 3.7%, below 2011s 4.2%

mitigate potential damage to growth prospects

Brazil, in particular, is already moving aggressively to boost growth

Global pain means headwinds for Latin America

Economics Latin America Q1 2012

2012 vs 2008: a less sharp but more protracted slowdown

Source: HSBC and Datastream

Economics Latin America Q1 2012

Economics Latin America Q1 2012

Primary sector/GDP (2009)

Economics Latin America Q1 2012

80% 70% 60% 50%

79% 78% 77%

BRA URU COL MEX VEN PER ARG CHI PAN

Financial ties: bank funding and FDI

Economics Latin America Q1 2012

European international claims/ex ports European international claims/Reserv es

Cur. a/c def (USDbn)

Economics Latin America Q1 2012

Policy firepower, and governments eager to use it

Reserves reduce potential overshooting

Good enough fiscal accounts

Economics Latin America Q1 2012

With inflation finally slowing down

Economics Latin America Q1 2012

Latam countries seem ready to pull the policy trigger

5 1 -3 -7 2007 2008 BRA MEX

Depreciation btw 30th June & December 28, 2011

Economics Latin America Q1 2012

Economics Latin America Q1 2012

Putting our 2012 GDP growth calls in perspective

VEN MEX BRA PER URU PAN CHI COL ARG

Source: HSBC and Datastream

Economics Latin America Q1 2012

Economics Latin America Q1 2012

Chart 11. Brazil HSBC PMI shows poor industry dynamics

60 55 50 45 40 35 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 PMI Manufacturing

PMI Serv ices

Economics Latin America Q1 2012

Economics Latin America Q1 2012

Latin America at a glance

Economics Latin America Q1 2012

GDP growth forecasts by country (%, y-o-y)

Latin America GDP growth data and forecasts (%, y-o-y)

8 6 4 2 0 -2 2006 2007 2008 2009 2010 2011f 2012f 2013f

Economics Latin America Q1 2012

Inflation forecasts by country (%, y-o-y)

Latin America inflation data and forecasts (%, y-o-y)

10 8 6 4 2 2006 2007 2008 LatAm

2011f 2012f 2013f

LatAm ex Arg & Ven

Economics Latin America Q1 2012

Exchange rate forecasts by country (per USD, end-period)