Latin America 2. Banking on Democracy: Financial Markets and Elections in Emerging Economies. Javier Santiso, MBA, PhD Professor of Economics & Vice president, ESADEgeo Ex Chief Economist Emerging Markets (BBVA, OECD) 1
Politics Matter to Financial Markets: Ukraine 214 Dow Jones-UBS Commodity Index Russian stock market and currency performance Source: JP Morgan Asset Management, 214.. 2
Politics Matter to Financial Markets: Argentina 214 3
1. The Shifting Wealth: The World of Yesterday 2. Banking on Democracy: Markets & Politics 4
Difference in Average Growth (%) Global Crisis and the Shifting Wealth of Nations: An Accelerator of Transition - The World of Yesterday Growth Gap between Developing/Emerging & Advanced. 6 5 4 3 2 1-1 -2 5
199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Average % of GDP Global Crisis and the Shifting Wealth of Nations: An Accelerator of Transition The World of Yesterday Public Debt and Growth Dynamics. 12 1 8 6 4 2 Emerging and Developing Advanced 6
Miles de millones Global Crisis and the Shifting Wealth of Nations: An Accelerator of Transition - The World of Yesterday Reserve Holdings in USD Billion. Emerging and Developing $6. $5. $4. $3. Advanced Economies 63% 37% $2. $1. $ 2% 8% January 199 November 29 7
Jan-8 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Aug-8 Sep-8 Oct-8 Nov-8 Dec-8 Dec-8 Jan-9 Feb-9 Mar-9 Apr-9 May-9 Jun-9 Jul-9 Aug-9 Sep-9 Oct-9 Nov-9 Dec-9 Dec-9 Jan-1 Basis Points Global Crisis and the Shifting Wealth of Nations: An Accelerator of Transition The World of Yesterday Public Debt and Sovereign Spreads. 8 7 6 5 4 3 2 1 Emerging Markets (big 5) Europe Risk EM Markets: Embig weighted of Brazil, Mexico, Russia, Turkey & Phillipines Europe Risk: Median Greece, Ireland, Portugal and Spain 8
Mar Apr- May Jun- Jul-9 Aug Sep Oct- Nov Dec Jan- Feb Ma Apr Ma Jun Jul- Au Se Oct No De Jan Fe Basis Points Basis Points Mar- 9 May- 9 Jul-9 Sep- 9 Nov- 9 Jan- 1 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Basis Points Basis Points Global Crisis and the Shifting Wealth of Nations: An Accelerator of Transition - The World of Yesterday Sovereign Credit Default Spreads. 25 2 15 1 5 China Italy 7 6 5 4 3 2 1 Indonesia Hungary 6 4 2 South Africa Greece 4 Morocco Ireland 3 2 1 9
The shifting wealth of nations is there to stay GDP Growth Emerging and Developing Economies vs. Advanced Economies (%) GDP Growth by World Regions (%) Emerging Economies World Advanced Economies +5.3 +3.4 +1.4 China India World Latam US EU Average growth rate between 28 and 218e Source: Based on IMF Forecasts, 214. 1
1. The Shifting Nations: The World of Yesterday 2. Banking on Democracy: Markets & Politics 11
Share of World GDP, PPP A Cognitive Crisis: The Political Dimension Autocratic States vs. Democracies 8% 7% 6% 5% 4% 3% 2% Defective or Non-Democracies Democracies 71% 61% 28% 37% 58% 4% Source: OECD Development Centre 21 (based on IMF and Bertelsmann Transformation Index data) 12
The democratic wave is scaling up as the internet wave Number of Democracies* Internet Users per 1, inhabitants Break-up of Soviet Union Developed World 1 Rise of Facism End of WWII World 8 Developing World 6 4 2 End of WWI 1 8 6 4 Take-off and spread of technologies: Faster in democratic countries? Finland Spain Tunisia 18 2 4 6 8 19 2 4 6 8 2 12 2 Egypt *Countries with population >5, 199 1995 2 25 28 212 Source: Based on Polity IV Project and UIT and Internetworldstats.com, 214. 13
This is just the beginning: One big innovation wave is ahead of Industrial Internet Great Britain United States Industrial Internet WATT s steam engine Steam Locomotive Telegraph Electrical generators Indoor plumbing PC Broadcast Radio Mobile Data Web 2.5 2. 1.5 1..5 (GDP per capita, % increase on previous year) 13 5 165 17 5 18 5 19 5 21 22 Source: Based on Robert Gordon, NBER Working Paper and own projections, 214.. 14
198 1981 1982 1983 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 28 Number of countries Polity Index The Middle Class Bonus: Strong Supports for Democracy 2 Number of Democracies Number of autocracies Average Democracy Score (scale -1 to 1) 9 18 8.9 16 8.8 14 8.7 12 8.6 1 8.5 8 8.4 6 8.3 4 8.2 2 8.1 8 Source: Banking on Democracy, MIT Press, 213. 15
Underweight Overweight Latin America 2.: A Major Decoupling The end of the Election cycle,4,3,2,1, -,1 -,2 -,3 -,4-9 -8-7 -6-5 -4-3 -2-1 1 2 3 4 5 6 7 8 9 = election month Source: Banking on Democracy, MIT Press, 213. 16
sep-92 jun-93 mar-94 dic-94 sep-95 jun-96 mar-97 dic-97 sep-98 jun-99 mar- dic- sep-1 jun-2 mar-3 dic-3 sep-4 jun-5 mar-6 dic-6 sep-7 jun-8 mar-9 dic-9 sep-1 Latin America 2.: A Major Decoupling The end of the Election cycle Presidential elections are losing their negative impact on risk premium they used to have in the past: The year 214 will confirm this trend? Uncertainty during Electoral Periods Embi spread Latin America, bps Source: JP Morgan and BBVA Research 2 18 16 14 12 Mexico and Brasil's elections Sovereign spreads in Latin America (EMBI+, bps) Brasil's elections Lehman Brothers Crisis 1 8 6 Current elections 4 2 17
Latin America 2.: A Major Decoupling The end of the Election cycle Chile: Political event is not an issue. An Ex-Emerging Market? During the presidential elections of 2 and Chile Presidential Election Day = 16 Jan 2 Sovereign Bond Spread (lhs.) Chile: recommendations (1:overweight, :neutral, -1:underweight) Presidential election date Exchange Rate (basis 1=-1) 1, 3 11 25 15,5 1 2 95, 15 1 First Round Second Round 9 85 -,5 5-1 -75-5 -25 25 5 75 1 8-1, Jul-97 Jul-98 Jul-99 Jul- Jul-1 Source: Banking on Democracy, MIT Press, 213. 18
Latin America 2.: A Major Decoupling The end of the Election cycle Chile: Political event is not any more an issue.... The presidential election of 26 Same in 29-1 and 213-14 Chile Presidential Election Day = 15 Jan 26 1 Chile: recommendations Presidential election date Sovereign Bond Spread (lhs.) (1:overweight, :neutral, -1:underweight) 1, Exchange Rate (basis 1=-1) 15 75 1,5 5 95 9, 25 First Round Second Round 85 -,5-1 -75-5 -25 25 5 75 1 8-1, Jul-1 Jul-2 Jul-3 Jul-4 Jul-5 Jul-6 Source: Banking on Democracy, MIT Press, 213. 19
ene-75 ene-77 ene-79 ene-81 ene-83 ene-85 ene-87 ene-89 ene-91 ene-93 ene-95 ene-97 ene-99 ene-1 ene-3 Latin America 2.: A Major Decoupling The end of the Election cycle Mexico: Elections and Financial Markets. The Perfect Storms every 6 years (FX Slumps, %) 7 6 5 4 3 2 1-1 -2-3 Source: Banking on Democracy, MIT Press, 213. 2
Latin America 2.: A Major Decoupling The end of the Election cycle Mexico: A risk country before the election date. In 2 due to the risk of transparency of the election process. Mexico Presidential Election Day = 2 Jul 2 Sovereign Bond Spread (lhs.) Exchange Rate (basis 1=-1) 11 Mexico: recommendations (1:overweight, :neutral, -1:underweight) 1, Presidential election date 42 Election date 17,5,5 15 37 12,5, 32 1 -,5 97,5 27 95-1 -75-5 -25 25 5 75 1-1, Jul-97 Jul-98 Jul-99 Jul- Jul-1 Source: Banking on Democracy, MIT Press, 213. 21
Latin America 2.: A Major Decoupling The end of the Election cycle Mexico: A risk country before the election date. In 26 due to the risk of AMLO (López Obrador). In 212: Same decoupling maintained. Mexico Presidential Election Day = 2 Jul 26 Sovereign Bond Spread (lhs.) Exchange Rate (basis 1=-1) Mexico: recommendations (1:overweight, :neutral, -1:underweight) 1, Presidential election date 11 16 Election date 18 16,5 14, 135 12 -,5 1 11-1 -75-5 -25 25 5 75 1 98-1, May-2 May-3 May-4 May-5 May-6 Source: Banking on Democracy, MIT Press, 213. 22
Latin America 2.: A Major Decoupling The end of the Election cycle 25 Brazilian & emerging bond spreads 2 15 1 5 Brazil EMBI+ spread EMBI+ spread 3, 2,5 2, 1,5 1,,5, -,5 Electoral year Real/Dollar Volatility Electoral year -1, Plan Real End Plan Real -1,5 1993 1994 1995 1996 1997 1998 1999 2 21 22 Source: Bloomberg Daily change in %, monthly moving average Electoral year Source: JP Morgan Source: Banking on Democracy, MIT Press, 213 23
Latin America 2.: A Major Decoupling The end of the Election cycle Wall Street Strategists's Recommendations on Brazil Bond Debt 22 Rating Change Date ABNAmro Neutral from Overweight May 1st Goldman Sachs Neutral from Overweight May 1st Santander Investments Neutral from Overweight May 3rd Deutsche Bank Neutral from Overweight May 9th JP Morgan Chase 1st reduction of overweight June 4th 2d reduction of overwight July 1st Overweight to marketweight July 22th Moved to Underweight December 9th BCP Securities Sell August 8th Morgan Stanley Downgrade to underperform August 12th Salomon Smith Barney Changes in marcoeconomic forecast August 2th UBS Warburg Increased Overweight August 3th Bear Stearns Cuts to Underweight September 19th Merrill Lynch Moved to Underweight September 25th Goldman Sachs Moved to Underweight September 27th Merrill Lynch Moved back to Marketweight October 4th 22 Source: Based on JBIC and Wall Street investment banks reports, 22. Source: Banking on Democracy, MIT Press, 213 24
Latin America 2.: A Major Decoupling The end of the Election cycle 45% 4% 35% Spread Brazil-Emerging Countries and Electoral Polls 22 Voter intention for Lula in the opinion polls (left) bp. 14 12 1 8 1 8 6 Domestic Public Debt Composition Others Exchange rate indexed 3% 25% 6 4 2 4 2 Fixed rate Interest rate indexed 2% Source: Datafolha, JP Morgan Source: Banco Central do Brazil Source: Banking on Democracy, MIT Press, 213 25
Latin America 2.: A Major Decoupling The end of the Election cycle Spread Brazil-Emerging Countries and Electoral Polls 45% 1994 bp 52 32% Spread Brazil-Emerging Countries and Electoral Polls 1998 pb. 2 Voter intention for 4% Lula in the opinion polls 35% (left) 3% 25% 42 32 22 12 2-8 3% 28% 26% 24% 22% Voter intention for Lula in the opinion polls (left) 15 1 5-5 2% -18 2% -1 Source: Banking on Democracy, MIT Press, 213 26
Latin America 2.: A Major Decoupling The end of the Election cycle The Brazilian case: Differences among periods although the same candidate in both periods From Lula Preta to Lula de Mel Brazil 22 Brazil 26 24 22 2 4.1 3.9 3.7 3.5 3 25 2.5 2.4 2.3 18 3.3 2 2.2 16 14 12 Election date 3.1 2.9 2.7 15 2.1 2 1-1 -9-8 -7-6 -5-4 -3-2 -1 1 2 3 4 5 6 7 8 9 1 2.5 1-1 -9-8 -7-6 -5-4 -3-2 -1 1 2 3 4 5 6 7 8 9 1 1.9 Sovereign Bond Spread (lhs.; basis points) Exchange Rate (BRL/US$) Sovereign Bond Spread (lhs.; basis points) Exchange Rate (BRL/US$) Source: Banking on Democracy, MIT Press, 213 27
Latin America 2.: A Major Decoupling The end of the Election cycle The political cycle and capital markets: Banks recommendations in Brazil From Lula Preta to Lula de Mel Source: Banking on Democracy, MIT Press, 213. 28
Argentina Brazil Chile Colombia Mexico Peru Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Poland Portugal Spain Sweden United Kingdom Brazil still have challenges ahead (as Latin America) Income inequality before and after taxes and transfers (Gini coefficient, around 2) 6 Inequality before taxes and transfers Inequality after taxes and transfers 5 4 3 2 1 Source: Based on OECD Development Centre. 29
Average performance Brazil still have challenges ahead (as Latin America): A Re-Coupling in 214? Public spending a on education and performance in PISA b 6 Finland Macao-China Korea 5 4 Uruguay Lithuania Chile Brazil Mexico Argentina Colombia Spain Portugal Education spending per pupil is still five times lower in Latin America than in OECD countries... But quality is as big a problem as quantity 3 5. 1. 15. 2. 25. Public spending per pupil in primary and secondary education in equivalent USD Notes: a) Public spending is calculated as average of available data since 2. b) Countries performance average on the PISA science scale 3
The Changing Face of Political Risk in Emerging Markets Overt seizures of foreign assets by host countries in emerging markets essentially evaporated by 198 (with some Latin exceptions, 2-215). However, other political risks to corporate assets (for example from potential regulatory action) have risen dramatically since then. 31
214: Fasten your Seat Belts? 32
214: Fasten your Seat Belts? 33
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