Top Charts Of 2017: Implications For The Year Ahead

We showcase five charts featured in analysis in 2017. These charts not only illustrate the most important trends for the Americas region over the past year, but provide insight into the issues that will be prominent in the year ahead. In particular, we expect Venezuela to remain on the verge of collapse, key elections across the region to present a potential turning point for policy making, and the advent of low carbon technologies to drive investment into natural resources.

Venezuela On The Edge

Venezuela emerged as a dominant discussion point in 2017. Our core view that a default would occur in the second half of the year played out in part, with a technical default taking place in November 2017 ( see 'Sovereign Default Is Likely In 2017', 4 November 2016). We now anticipate a hard default in the second half of 2018 ( see 'Venezuela Q&A: The Year Ahead', 7 December 2017).

Deficit-Fuelled Money Supply Growth Has Driven Hyperinflation
Venezuela - M2 Money Supply & % chg y-o-y
Source: BCV, BMI. Originally Published: 21 November 2016

Top Charts Of 2017: Implications For The Year Ahead

We showcase five charts featured in analysis in 2017. These charts not only illustrate the most important trends for the Americas region over the past year, but provide insight into the issues that will be prominent in the year ahead. In particular, we expect Venezuela to remain on the verge of collapse, key elections across the region to present a potential turning point for policy making, and the advent of low carbon technologies to drive investment into natural resources.

Venezuela On The Edge

Venezuela emerged as a dominant discussion point in 2017. Our core view that a default would occur in the second half of the year played out in part, with a technical default taking place in November 2017 ( see 'Sovereign Default Is Likely In 2017', 4 November 2016). We now anticipate a hard default in the second half of 2018 ( see 'Venezuela Q&A: The Year Ahead', 7 December 2017).

Two charts epitomised Venezuela's economic woes, covering both industry and country risk dynamics, and indicate why the economic situation will deteriorate further in 2018.

Over 2018, we expect further social instability in the country as inflation spirals ever higher, driven by a substantial and rapid expansion in the money supply. The chart below ( from, 'No Improvement Barring Major Policy Changes', 21 November 2017), a version of which has been published in multiple articles over the course of 2017 ( including, 'Wide Budget Gap Will Fuel Inflation', 23 February 2017, 'Economic Crisis Will Not Abate In 2017', 31 May 2017 and 'Money Supply Growth To Keep Venezuela In Hyperinflation', 14 August 2017), captures the runaway printing of money conducted by the Banco Central de Venezuela in an effort to cover the country's gaping budget deficits. This substantial increase in the money supply has, in turn, fuelled hyperinflation which ground the nation's economy to a halt.

We expect deficit monetisation will gain steam in 2018, as the current government has shown no indication that it is willing or able to alter its policy mix. As the upward inflationary spiral continues, living conditions will further deteriorate, placing even greater strain on Venezuela's social fabric. This suggests that the level of instability is likely to rise in the months ahead.

Deficit-Fuelled Money Supply Growth Has Driven Hyperinflation
Venezuela - M2 Money Supply & % chg y-o-y
Source: BCV, BMI. Originally Published: 21 November 2016

The Venezuelan economy's reliance on the oil industry has tied the fate of the two together. We expect oil revenues will remain insufficient to cover forthcoming debts, underlining our view for a hard default in 2018. BMI's Oil & Gas team has closely followed the erosion of Venezuela's oil industry, tracking production declines and deterioration in the quality of equipment. State-owned PdVSA will remain unable to invest in supportive infrastructure including ports and upstream production facilities as it directs funds toward repaying its ballooning debt burden. With substantial crude volumes being sent as loan repayment to China and Russia, revenue generating shipments will remain of poorer quality, thereby reducing demand from importers, particularly in the US.

Moreover, rising US sanctions on Venezuela have left banks wary of guaranteeing payments for imports ( see, 'Potential US Sanctions On Venezuelan Oil: Implications', 27 July 2017). Consequently, whilst we have seen a rise in crude prices in recent months, (and expect higher prices in 2018), this will not be sufficient to offset years of underinvestment in infrastructure. All of this is illustrated in the chart below, run on October 16 2017, tracking US imports of Venezuelan crude ( see, 'Venezuelan Setbacks Will Benefit Neighbouring Exporters'). Venezuelan crude exports to the US reached the lowest level in 26 years in 2017, with further declines expected in 2018 ( see, 'Quick View: Venezuela Unable To Regain US Market Share', 12 January 2018).

With the economy so heavily reliant on oil revenues, and the regime unwilling to enact necessary economic reforms to abate the ongoing collapse in oil output, we do not anticipate any improvement in the government's ability to pay its external obligations. Given a lack of reform, limited international reserves and a daunting debt repayment schedule, we believe a hard default is most likely in H218, when the country is faced with several billion dollars in debt payments.

Teetering On Decline
US - Crude Imports From Venezuela, 000b/d, And Share Of Total US Imports
Source: EIA, BMI. Originally Published: 16 October 2017

Rising Discontent Indicates Potential Policy Shifts In Latin America

One of the most all-encompassing trends of 2017 for the Latin America region was rising political risk. With major scandals, sluggish economic growth, and elections on the horizon for most of the region in 2018, our Latin America Country Risk team produced a comprehensive review of the depth of political risk in ' Discontent With Established Politicians Opens Door For Outside Candidates', published September 20 th 2017. Summarised most succinctly in the chart below, the level of dissatisfaction, not only with current governments (as illustrated in the chart) but the broader political establishment, bodes poorly for policy continuity following major elections across the region in 2018.

In contrast, President Mauricio Macri's 52% approval rating stands out in the chart below. Argentina is one of our Country Risk team's favourite growth markets in 2018 and is benefitting from relative political stability compared to its regional neighbours (see 'Key Themes For Latin America In 2018', 5 December 2017).

Public Dissatisfied With Sitting Presidents
Latin America - Presidential Approval Rating, % of Total
Source: Poliarquia Consultores, Plaza Publica, Pew, Gallup, MDA. Originally Published: 20 September 2017

In the context of rising discontent in Latin America, BMI's Political Risk Event Calendar, published by our Political Risk team in July 2017, clearly illustrates why 2018 could be a crucial year for policy direction in the region over the coming years. Of the most significant political risk events globally in 2018, Latin America accounts for three of them, with elections in Colombia, Mexico and Brazil all on the calendar. The stakes of elections are highest in Mexico (July) and Brazil (October). Recent polls suggest the greatest likelihood for victory for anti-establishment candidates who could shift economic policy in a less investor-friendly direction.

Latin America Prominent
Political Risk Event Calendar 2018
Source: BMI . Originally Published: July 2017

Low Carbon Trend Driving Cobalt Prices

One of the most wide-reaching industry trends globally for 2017 was the upsurge of the low carbon industry. BMI's industry teams have been following this trend for several years, and produced a series of articles, a special report and a webinar in 2017 alone. 2017 was notable as the year the trend entered the mainstream. Essential to our views has been our mining and power teams' coverage of the rising importance of batteries in enabling low carbon technologies, such as electric vehicles (EV) ( see special report, Batteries: Transforming The Energy System, Shaping The Future, September 16 2016) - identifying key commodities which will benefit from rising demand for battery components. Two metals at the forefront of this trend are cobalt and lithium. In March, BMI's commodities team wrote "We are positive on the lithium and cobalt sectors based on the bright prospects for batteries and EV vehicles demand", in their 'Global Commodities Strategy' (March 9 2017), and included the below chart. We first highlighted the anticipated rally in cobalt prices in October 2016, and in March outlined why the sharp price growth would continue apace ( see, 'Despite Hurdles, Cobalt Production To Take Off', 17 October 2016).

Positive Outlook For The Cobalt Sector
Three-Month LME Cobalt Prices, USD/tonne (weekly)
Source: Bloomberg, BMI . Originally Published: 9 March 2017

In the succeeding months, cobalt prices continued to rise sharply, ending 2017 at USD75,205/tonne ( see chart below). Whilst predominantly mined in the Democratic Republic of the Congo, political risk and uncertainty over ethical supply there is leading a revival in other cobalt rich countries, with Canada poised to benefit. Leveraging existing mining infrastructure, Canada has seen a strong uptick in interest in cobalt mining driven by junior miners, a trend we expect to continue given its superior mining business environment.

Low Carbon Metals Demand View Playing Out
Three-Month LME Cobalt Prices, USD/tonne
Source: BMI, Bloomberg
see, 'Lithium Output To Take Off In 2019 On Deal-Making, Spending Ramp Up', January 4 2018
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