Millicom International Cellular SA & Oxford Economics Ltd on the Long-term Macro-economic Forecasts for Latin America Call
Sep 16, 2016 AM EDT
MIICF - Millicom International Cellular SA
Millicom International Cellular SA & Oxford Economics Ltd on the Long-term Macro-economic Forecasts for Latin America Call
Sep 16, 2016 / 07:00AM GMT
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Corporate Participants
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* Tim Pennington
Millicom International Cellular S.A. - CFO
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Conference Call Participants
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* Sarah Hunter
Oxford Economics - Head of Americas Macro Consulting
* Stephen Bechade
Citi - Analyst
* Lena Osterberg
Carnegie Investment Bank AB - Analyst
* Stefan Gauffin
Nordea Markets - Analyst
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Presentation
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Operator [1]
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Good morning, ladies and gentlemen, and welcome to Millicom's macroeconomic webcast.
This presentation will be hosted by Tim Pennington, Millicom's Chief Financial Officer, and Sarah Hunter, Oxford Economics. This conference is being recorded. Following the formal presentation an interactive Q&A session will be available.
I would now like to hand the call over to Tim Pennington, Millicom's Chief Financial Officer. Please go ahead.
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Tim Pennington, Millicom International Cellular S.A. - CFO [2]
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Thank you, and thank you for joining us this morning to go through this macroeconomic outlook. As you recall, on the second quarter call I said that we had commissioned a macro outlook.
Our own view is that we are in fundamentally strong economies, with good long-term outlooks, strong demographic growth with, clearly, short-term challenges.
We're aware that our markets have got limited coverage from a macroeconomic point of view and we wanted to give analysts and investors the opportunity to see what we saw in terms of the long range outlook.
As a consequence of that, we commissioned Oxford Economics to give us a long range macro outlook in our LatAm markets.
Oxford Economics are a leading macroeconomic forecaster. They have their own forecasting model; they don't rely on others. The views expressed by Oxford Economics are their own views; they're not necessarily our views. We wanted to give you now this opportunity to share in the output that Oxford Economics gave us.
So, with that, I would like to welcome and hand over to Sarah Hunter from Oxford Economics. Thank you, Sarah.
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [3]
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Hi, good morning, everyone, and thank you for joining us. As Tim mentioned, I'll be going through our long-term macroeconomic outlook for the seven economies that Millicom is involved in in the LatAm region.
I'm going to begin with a brief overview of the methodology we used to put together the outlook. I'll then run through some headline comparator slides, a bit of detail on the individual economies, and I'll finish up with a broad conclusion about the relative position and countries of interest.
So, beginning with the methodology then, as Tim mentioned, we have our own proprietary economic forecast models that we've developed, and run and used to put together our macroeconomic outlook. For this particular exercise, we made use of three of our quantitative models.
The first one, our global economic model, it's a macroeconomic model of the world economy. It allows us to forecast pretty much every economy in the world through a fully integrated system of equations that look at, for example, the impact of different oil price profiles on some of the economies that we'd be interested in talking about today. And because it's a rigorous quantitative tool, we know that our forecasts are consistent and logically stack up, as it were.
The second tool we made use of is an econometric model that we built somewhat recently to enable us to produce detailed projections for households. This includes household income by income band and household consumer spending by type of product, so type of goods or service.
It's a very powerful, very detailed econometric tool that lets us really dive into the weeds on households. For this particular project it allowed us to look at how the development of the middle class is going to progress across the economies that Millicom is interested in and invested in.
Finally, we used our risk tool, our economic and political risk evaluator tool, the tool we've developed in partnership with a company called Control Risk that you might be familiar with. It allows us to look at the relative riskiness across a number of different measures for each of the countries.
We can highlight and essentially trade off security risk against institutional environment risk, against corruption risk, those sorts of things, and come up with an overall view on these on the countries that Millicom is interested but, more generally, on all economies in the global system.
So, with that introduction then, I'll dive into some of the actual results and the headline numbers that came out of the study.
To begin with, a little bit on what we think matters for the countries that we have are going to discuss today. Broadly speaking, we can split these factors down into three.
For the countries who are commodity producers, commodity prices are, obviously, crucial. Here we're talking about Bolivia; Columbia oil and for Columbia coal as well; Guatemala and Paraguay, who are much more focused on agricultural products. These countries have been heavily influenced by the recent volatility in commodity markets and now the -- what you might call from a lower base, but more benign environments that we're currently seeing.
The next major driver, and it picks up three of our economies in particular, is what's happening in the US. This is especially important for El Salvador, Guatemala and Honduras.
These are all economies that not only receive significant remittances from citizens that are working and based in the US. They're also economies which are very integrated with the US in terms of their export profile. What happens in the US matters for these economies, and so I'll spend a little bit of time later on talking about our outlook there.
Finally, we also have to consider domestic factors. And, in particular, the policy environment, and what the constraints on that might be.
For Bolivia and Costa Rica, they're currently running quite substantial government deficits. This is obviously going to limit the role that fiscal policy can play, in terms of stimulating growth over the medium term.
The interest rate environment, so monetary policy is also crucial. Here what we see at the moment is Colombia and the Colombian Central Bank, battling somewhat to get inflation under control. Though it does look like it's turned a corner now.
So, we have relatively high interest rates there, which has been the policy response to the inflation pickup we've seen in the last year. That, obviously, then acts as a limiter or a hamperer on growth, particularly on investments.
So moving on then and talking a little bit more about the outlook, going forward. It's generally positive for the economies that Millicom is particularly interested in. Five of the six countries are going to beat the LatAm average growth rate for the next decade. The only exception to that's going to be El Salvador.
Bolivia and Honduras, in particular, have got, in growth rate terms, a very robust outlook, with both of them expected to see growth just shy or even at the 5% per annum, over the next decade. This is really a function of the fact these two economies are relatively poor, compared to others in our sample, so they have the biggest potential for catch-up growth, if you like.
Of the other economies, Colombia, Costa Rica, Guatemala and Paraguay, a slightly slower growth spurt, as I said, still pretty robust there, and all of them are going to see at least -- we expect at least 3% per annum, over the next decade.
Lagging behind somewhat, is El Salvador, where a combination of slightly less favorable economic fundamentals and challenges [to] the security environment are going to, in relative terms, hamper growth, although we do still expect the economy to expand by around 2% per annum, each year, over the next decade.
I mentioned security as one of the factors that's a major influence of our long-term outlook, in particular for El Salvador.
Other factors that are important, are the business environments. Here Costa Rica, Paraguay, and actually to some extent, Colombia actually have relatively friendly business environments and policies in place, and these will support investments in growth.
Also, we are for this part of the world, particularly concerned with political stability and corruption; and perhaps, more importantly, the attempts that governments are making to fight corruption, and introduce a politically stable environment. As we'll see later on, there's some countries that have more success than others in this area, and that has an influence on our long-term outlook.
Digging below the GDP headline numbers then, looking specifically at households and trying to hone in a little bit on the middle class. Largely speaking, the outlook for average incomes and for households more generally, is really determined by the overall economic environment.
In growth rate terms, as we saw previously, it's Honduras and Bolivia that have got the best outlook, although they will still be relatively poor, even at the end of our sample period, 2026.
At the other end of the spectrum, Colombia and Costa Rica are the richest economies in the sample. Here, although the growth rate is going to be slower, they're still very much going to have relatively high incomes by the end of the sample. For Costa Rica, indeed, average household incomes being, in real terms, are going to top $30,000 we think, by 2026; so, a relatively high level.
In terms of the development of the middle class, that average income level, does spill over to determining to a great extent, the size of the middle class, which for our purposes here, we've defined as households with income of at least $20,000 a year.
As for Colombia and Costa Rica, have the highest proportion, both now and we expect to through to 2026. Bolivia and Honduras are at the other end.
Other notable economies in this particular measure is Paraguay. Where although average household incomes are slightly above or around the average for the sample countries, in terms of the households that are in the middle class, it's relatively low. This is really a function of the relatively unequal position of income in the economy. With that distribution, you get a relatively limited slice of the middle class, given the average income level.
Having said that, it's still not particularly small and by the end we expect for Paraguay, that around 30% of households will have breached that income threshold, to be classed as middle class.
Finally, in terms of diving into the detail and thinking a little bit around the major factors that are of interest to Millicom and its position in the region, the exchange rate.
The bulk of the current -- the countries that are the sample operate some sort of managed peg. The exception to that is Colombia, where the exchange rate essentially floats, so it moves along with market forces.
Right at the other end of the spectrum El Salvador, which is completely dollarized, so obviously, there's zero exchange rate risk there.
Just briefly touching on Colombia, the exchange rate has depreciated really quite sharply, over the last 18 months/two years. That's entirely driven by what's happened to oil prices, [as they are] a big exporter of oil and coal, and so the collapse in those commodity prices went hand in hand with the collapse in the -- somewhat the collapse in their exchange rate.
Going forward, we expect a much more benign environment in terms of commodity price movement, and that's really reflected in the exchange rate. It's a very gentle depreciation from where we are right now. If anything, there are some short-term upside risks if our forecast for oil prices is slightly lower than the actual outcome.
Of the other countries in the sample, as I mentioned, they all run some forms of managed float or a moving peg, if you like. Relative to one another, Bolivia has got significant reserves and so is in the strongest position to maintain their peg.
But in reality, we think that all of the countries in the sample, are in a good position to maintain the peg. We don't see, for any of them, a significant risk of the market forcing a devaluation on the Central Bank.
Summing, to some extent, what I've just set up, and looking then at market potential in terms of size and growth outlook. As I've already mentioned a couple of times, in terms of growth rates, Honduras and Bolivia certainly offer the strongest growth potential over the next decade.
But, as I mentioned earlier on, that's really a function of the fact that they're starting from the lowest base if you like, in terms of income levels. So they've got the greatest catch-up potential and we would expect them to grow fastest over the next decade.
Of the other economies in the sample, Colombia and Guatemala, as you can see from the chart on the left-hand side of the slide, these are the largest economies in the sample, so in terms of absolute size, absolute number of households, they are the biggest and they offer the best opportunities there.
And, they've got somewhat robust growth outlooks as well, as I said, faster than the average for Latin America. So, both of them sitting around the 3.5%/4% range.
Costa Rica and Paraguay also fairly positive outlook. Again, Paraguay sitting up around that 4% mark.
At the bottom, within the sample at least, El Salvador. We do see a slightly weaker growth outlook here. As I said, a function of economic fundamentals and that security environment. But still, compared to, say, of developed economies, it's relatively strong growth, around 2% per annum over the next decade.
Moving on now and talking in a bit more detail on the individual countries. Bolivia, obviously very, very influenced by what happens to -- in the slide it says commodity prices but really we're talking about oil. It's a major oil exporter, and oil revenues are the major revenue source for the government.
The economy went through quite a sharp slump and slowdown over the last couple of years; again, as, really, a result of what happened to oil prices over that time. We've also seen the government's budget position worsen significantly. They're now running with a deficit of around 6% of GDP; so quite substantial.
Looking forward, we do expect there to be some recovery in oil and natural gas prices, their major exports. Indeed, we've already seen that. Oil is now back up and just creeping towards the $50 a barrel range, whereas in January, it was down below 30 barrels at one point -- $30 a barrel, excuse me, at one point. So obviously some recovery there and we expect that to gradually continue. That will aid revenues in the economy going forward.
It also has a lot of potential. It's a relatively low income economy, so there's a lot of potential for catch-up growth. We see that coming through over the next decade and we expect growth to be around the 5% per annum mark by the mid to late 2020s.
Moving on then to Colombia. It's the largest economy of the Millicom countries that we've considered. It's also got the second highest income level, just behind Costa Rica.
Here, again it's another resource economy. Similar to Bolivia, it's very much influenced by what happens in oil and coal markets. Unlike Bolivia, as I said earlier on, it's got a fully floating exchange rate. The exchange rate is very much tied to what happens to the oil price, as you can see in this chart on the bottom left-hand box of the slide.
As I mentioned, looking ahead we do think that commodity prices are going to recover somewhat, although relatively slowly. That will really feed through to the currency, so we don't see significant downside risk to the currency. We don't expect a further sharp depreciation. If anything, there could be some upside risk to our forecast, if we get a stronger than expected recovery in commodity markets.
In terms of its income level, it's relatively high for the sample. It's a relatively large middle class and that, coupled with the large absolute size of the economy, means that it is Millicom's biggest market right now.
The political environment is obviously improving. Certainly, the ceasefire between the government and FARC that was signed in June is a big step forward. We will be looking to see, obviously, what happens in the vote on that ceasefire agreement in the autumn, so in a couple of months' time. There is some risk around that, but generally we see conditions as improving.
This coupled with a relatively favorable business environment and some good, if you like, macro policies, so fiscal prudence and a credible monetary policy regime, should stand Colombia in good stead. That's really what's underpinning that just about 4% per annum growth that we expect to see over the next decade.
Moving on then to Costa Rica, as I previously mentioned it's the most developed country in the sample of economies that Millicom operates in. This is really reflected both in its income levels and in its institutional environment. So it's the lowest risk economy in that regard, of the seven that we're talking about today.
The budget deficit, the government position, is something of a concern. It's a very large deficit that they're running at the moment. In fact, they were recently downgraded by S&P, as a result of that budget position. Moody's, I believe, yes, put them on to a negative outlook for their rating. So there is some concern there and we do look to the government to implement some reforms, particularly around tax and tax rates, to improve that position.
We are assuming that those reforms will ultimately happen and the fiscal position will improve. That will put the economy in good stead and we should see growth around -- well, just shy of that 4% rate, so around 3.7%/3.8% over the forecast horizon.
Moving on then to El Salvador, a somewhat more challenging environment, perhaps, than some of the other economies that we're going to discuss this morning, for two reasons. One is around the issues around security and corruption and the environment, and the somewhat weaker political backdrop, so lack of progress to address these issues.
In addition to that, El Salvador is also -- of the seven countries in the sample here, it has the worse demographic outlook. The working age population, while still growing, is going to grow relatively slowly compared to some of the other economies. It doesn't have the very young cohort size that some of our other countries do. Those two things together are really going to hamper growth.
As a result, it is the only country in the sample of seven that's going to grow more slowly than the Latin America average we expect over the next decade. So although income levels right now are relatively high, we don't see as fast growth in them compared to the other countries. Of the seven countries, we broadly assess this to have the weakest outlook.
Moving on then to Guatemala, it's along with -- mention it with El Salvador and Honduras, the next country I'll talk about, very dependent on the US, particularly with remittances. In most of these countries, remittances are between 10% and up to 20% of GDP, so really quite substantial.
It's also very dependent on commodities, in particular agricultural commodities. That can introduce some volatility to its exchange rate, although the monetary authorities do intervene to limit volatility. So it's not as volatile as, say, Colombia.
Looking ahead, improving conditions in the US, and really quite rapid population growth, particularly if compared to, say, El Salvador, are going to bolster the medium-term growth prospects. We see growth at around about 3% per annum over the next decade.
The security environment is something of a risk. But unlike El Salvador and Guatemala, they are actually making efforts to improve conditions and to reform the environment, particularly around corruption. The establishment of the CICIG is going some way to helping with that, particularly as that institution has prosecution powers. So it can, and has, gone after some fairly high profile targets.
All in all, a relatively solid outlook for Guatemala in terms of growth rates and growth prospects, and certainly in comparison to, say, El Salvador, a comparatively good position.
Moving on to Honduras then, the third of the, if you like, Latin -- or Northern Latin American economies that we're going to discuss today. Somewhat similar to Guatemala really. It doesn't have the commodity position to worry about; it's not a major commodity exporter. But other than that, it's a relatively similar economy.
Again, very closely linked with the US; remittances are very important. The recovery in the US is really going to help, both in terms of that remittance income, but also in terms of the US as an export market for Honduran goods and services.
Security, again, is also something of a risk and the corruption environment too. But, again, reforms are being made. Unlike Guatemala, they have established, with the help of the OAS, the MACCIH, as an organization to try and tackle this.
We are looking for more progress to be made around these issues in Honduras, and there is something of a risk to our forecast attached to that. In our baseline, we assume that they will make further reforms and conditions will improve. Again, that gives us a growth rate slightly higher than what we expect to see in Guatemala, of pushing 4% per annum over the next decade.
Finally then for the countries that I'm going to consider today, Paraguay. It's a relatively poor country in the sample, so it sits third above Bolivia and Honduras, but below the others. It is also very dependent on agricultural exports.
In particular, it's the country that's gone through the least amount of industrialization, so it is still very, very dependent on those agricultural exports. This also then gives us some volatility around the currency. Although as other countries do, the authorities do intervene in the markets, to limit that volatility so it's not as exposed as, say, Colombia.
It also has challenges around inequality. These are particularly related to land rights and land ownership. So wealth and equality and income and equality are both what you get as a result of that. That puts some limits on growth. A lot of households don't have much social income that they can spend.
It also shows up in our forecast for how the middle class is going to develop. It does put something of a limit on size of the middle class, both at the moment and going forward, because we don't expect significant changes there.
Having said all of that though, the growth outlook is still pretty robust. We do expect it to be at or just below 4% per annum over the next decade, really driven by catch-up growth and that recovery in commodity markets that we expect to see.
In summary, which markets look attractive of the Millicom seven and which ones perhaps less so? In pure growth rate terms, as I said at the start, Bolivia is very attractive. It's a very fast-growing economy.
In terms of risk, Costa Rica is probably the least risky of the seven economies. But, of course, it's likely to grow more slowly, because it is that much more developed and that much wealthier right now.
Perhaps more in the middle, Guatemala and Colombia, obviously the biggest two markets from Millicom's perspective. We expect to see fairly robust growth, not quite as pacey as Bolivia and Honduras, but still close to that 4% per annum mark.
Finally, at the other end for El Salvador, the security issues, we do see those as a significant problem. That, coupled with the somewhat weaker economic fundamentals that I mentioned earlier, are really going to weigh on growth, and so that together makes the market least attractive. So it has the security challenges, and it's also got the least robust growth outlook.
Okay, thank you very much for listening, and I hope it was an interesting, informative presentation. I'm very happy to take any questions that anyone might have at this time.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Stephen Bechade, Citi.
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Stephen Bechade, Citi - Analyst [2]
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My first question is I'm slightly surprised by some of the high budget deficits, and what we can then therefore imply by potential future increases in tax rates, whether it be corporation tax or income tax in various countries.
And then my second question would be, I guess if Tim is still on the line, Tim, how are you integrating these forecasts into your planning at Millicom? It looks like quite a few countries look to be roughly at an inflection point in GDP growth. Is that something that you're factoring into your planning for next year?
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Tim Pennington, Millicom International Cellular S.A. - CFO [3]
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Thanks Stephen. Why don't we let Sarah answer the first one, and I'll try and pick up the second?
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [4]
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Great, thank you. Yes, so looking at the budget deficit positions, I'd say, yes, there's a couple of countries where the deficits are really quite substantial. That would be Bolivia and Costa Rica.
For Bolivia, the issue there really is around oil revenues, so oil revenues have fallen obviously very sharply, as you might imagine, over the last 18 months, 2 years. The government spending has yet to really catch up with that, if you like, and so they end up running quite a substantial deficit.
In terms of how we see that playing out over the forecast for Bolivia, you can see it somewhat in the chart on GDP growth rates. So we do have GDP growth slowed quite sharply over the last couple of years, we have it slowing further into this year before a gradual recovery back up to that around 5% mark.
That is in large part due to commodity prices and part of that story is that we that we do expect government spending to moderate, and that's going to help get the deficit position under control.
What's also going to help, of course, is that we do expect oil prices to recover and so revenues to recover. As I've mentioned, we've already seen some of that coming through; as I'm sure you know, oil prices have recovered this year after hitting the low in January.
We do see prices continuing to recover, albeit it quite slowly through next year and out into the medium term. So this year we expect oil prices to be pretty flat, sitting just shy of $50 a barrel, and then to recover after that as the supply adjustments feed through and push prices up.
There it is a constraint on growth, certainly in the short term, but we don't think it's going to be a constraint in the medium term. We think the position is going to essentially resolve itself.
The other economy where I would particularly highlight the budget deficit is Costa Rica, as I mentioned when I was talking about the individual country reviews. Here we are looking for reforms, particularly of the tax base and reforms to the tax environment to increase revenues and obviously pull down that deficit.
This is something we're concerned about. It's something that others are concerned about too. As I mentioned, two of the big three ratings agencies have downgraded Costa Rica as a result of this budget position, so we're not the only ones that are thinking about this and are flagging it.
In terms of the timing, we don't see any reforms coming through in the immediate term. We don't think that the president and the government have the mandate to push those changes through at the moment. We do expect, though, that to change after the next election and we expect to see some changes after that.
Now, clearly, if that doesn't materialize then that is certainly a downside risk to our forecast. Ultimately we would expect that to feed through to give us higher borrowing rates, and Costa Rica has already got relatively high interest rates.
That will, ultimately, dampen growth over the medium and long term. So there's certainly a risk around the forecast. We expect the position to improve over the medium term, if you like, but it is a risk, that's for sure.
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Stephen Bechade, Citi - Analyst [5]
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Can I just follow up briefly? Clearly, in the UK and the US you've seen some -- a wave of what some people describe as populist political movement and a lot of these LatAm countries have very populist government. Do you think it's fair that these governments will be able to reign in government spending as a preference over raising taxes?
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [6]
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It's a good question. Typically, what we see in this region is that conditions force governments to change, and to change their position and to reform.
Obviously, a good example that's happening right now is Argentina where, ultimately their populist government was, by the electorate, replaced with a -- you might call a much more conservative government who are now implementing reforms to improve the budget position. Obviously, there's a lot of challenges in Argentina, but essentially to improve the economic fundamentals and put the economy in a much stronger position.
So I think it is likely that these positions will ultimately be reformed and will ultimately be resolved, because the market will force that, or the populist will force that because economic conditions will deteriorate.
So in terms of the forecast, it's to some extent a question of timing. Yes, we're relatively optimistic on Costa Rica and do expect to see reforms coming through in the next couple of years.
There is a risk that that doesn't happen and so the growth outlook would be weaker but ultimately we would expect these changes to be made, because these countries are not like the US. They don't enjoy the position that the US does in the international financial system and so, eventually, they do have to make these changes or face defaults and other consequences like that.
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Tim Pennington, Millicom International Cellular S.A. - CFO [7]
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Thanks, Sarah. So just to pick up on your second question, Stephen, do we integrate these forecasts into our own plans? I think the answer to that is we -- generally, when we put our plans together we have our own macro forecast; [they're generally reflections] of what we find from other people, so we have our own view.
I think we certainly concur and then Sarah's work supports our own view, long term, these are attractive economies to be in. They'll have above-average GDP growth. Crucially, for our market, the demographics will increasingly be attractive to us as the middle-class grows at an even more rapid rate.
Our long-term thesis, if you like, is supported by Sarah's work and informs our long-term investment horizons and the things that we're trying to do in the long term.
I think the challenge for us, clearly, is what we do in the short term. We've said this to you before, 2015, we saw quite significant FX impacts, but they didn't impact too much on the business or the local economies. 2016, we've seen a bigger impact on the local economies and then travelling through to the businesses.
Our business is a long term one. I think, given we have a long-term view in it, we won't be changing our investment horizons and our investment approach. Tactically, we may tweak it here and there.
You've heard us say on the second-quarter call we're pushing more into cable and moving a little bit away from mobile in terms of our investment, particularly 3G investment. Again, that is macro and market driven.
On the FX side I think we have to take a long-term view on there again. You've quizzed me in the past many times on what we can do on hedging and I think basically we have to ride hedging, do some matching assets and liabilities, which we try and do, but as you know that's very difficult.
The third area is tax. I think what you're driving at is certainly something we've seen. We're seeing -- we saw new taxes in El Salvador, which has dampened our performance. There is tax reform in Columbia and Guatemala on the books, going through. I think we will expect to see a slightly more difficult tax environment over the next -- probably the next couple of years.
But the point of this exercise is to reaffirm and to coordinate with our own views that, long term, these are fundamentally good markets for us to be in. Therefore, we have to invest and position our business for the long term, which is what we do and what our forecasts and our budgeting is all about.
I hope that covers that, Stephen.
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Stephen Bechade, Citi - Analyst [8]
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Great thanks.
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Operator [9]
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(Operator Instructions). Lena Osterberg, Carnegie.
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Lena Osterberg, Carnegie Investment Bank AB - Analyst [10]
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I have a question on the balancing of the budget in Bolivia. Do you have any views on which oil price per barrel it will be balanced at this time?
Also, did I understand it correctly that Colombia is not at a budget deficit at the moment?
And then I also didn't hear the growth rates you were expecting for El Salvador?
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [11]
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Okay, thank you, yes, I'll just make a note of those, so I don't forget to answer one of them.
For Colombia, no, we do see the government running a deficit at the moment; it's around 4% of the GDP. To some extent, that's a result of the weaker growth environment that they've had over the last year or 18 months.
That's really been a result of the big shift in terms of trade, so essentially the big fall in commodity prices that we've seen. That affects their direct revenue, and it also affects the revenues that come in from other parts of the economy that are themselves exposed to commodity markets.
Again, somewhat similarly to Bolivia, we do see the position resolving itself over time, particularly as revenues improve -- sorry, oil prices rise. This will lead to revenues, direct revenues rising and then obviously an improvement in the economic outlook as well, which will also support revenue growth.
I think your other question was on the growth outlook for El Salvador, so here, at the moment, it's relatively slow compared to the other economies in the sample, and so sitting around just shy of 3% at the moment.
We see it slowing down to around 2% per annum over the long term. It's really driven by two issues, one is in contrast to the other economies in the sample, the demographic outlook here isn't that positive.
It is still growing working age populations, but it's still an increasing size of the middle class, the number of households and what have you, but it's relatively slow growth compared to some of the other economies which have got very young population, so very big cohorts of children for instance which you'll see over the next decade will become adults and form their own households, and enter the workforce.
For El Salvador there's less of that going on, so that's going to weigh on growth relative to the other economies.
And yes, we are concerned about the security and institutional environments more generally, and the operating environment affirms. In El Salvador we see less political steps to improve the situation and that then weighs on our growth outlook in the medium term.
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Lena Osterberg, Carnegie Investment Bank AB - Analyst [12]
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Okay, did you have a view on which oil price is needed to balance the budget in Bolivia and Colombia?
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [13]
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Sorry, yes, your question. Certainly higher than it is right now, and so I think we'd be for both of them, we'd be looking at high -- possibly not $100 a barrel, but it's certainly up there, particularly for Bolivia. So much higher than it is right now, and that explains to a great extent why Bolivia's budget deficit is so substantial.
In terms of oil price forecast, we certainly don't expect oil prices to get back to that $100 a barrel level any time really over the next five years and even out into the 2020s.
There is some transition, and some changes to be made in -- particularly in Bolivia. The government in Colombia does seem to have made moves in that direction, which is good to see from a fiscal sustainability perspective. In Bolivia perhaps more needs to be done, so there's more risk around the forecast in that regard.
But as I said earlier, essentially for these countries the market eventually does force these kind of transitions, because they can't run big budget deficits forever. Eventually, changes do have to be made, and it's to a great extent a matter of when.
Bolivia, we do expect changes to come through. We've obviously got potentially President Morales not being re-elected, because he lost his referendum to extend his -- the term limits. Then, potentially, that opens up the possibility of some new government coming in, with new policies, and having to implement these kinds of changes to improve the economic situation.
So we do expect it to happen. It's a question of when we see it happening over the next few years, and that will then help with the growth outlook into the long term.
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Lena Osterberg, Carnegie Investment Bank AB - Analyst [14]
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Thank you.
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Operator [15]
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Stefan Gauffin, Nordea.
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Stefan Gauffin, Nordea Markets - Analyst [16]
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A couple of questions. First of all, perhaps you haven't implemented this in your models, but the peace treaty with the FARC guerilla, how can that impact Colombia, or what assumptions would you make in terms of the impact on the economy?
And then secondly, a little bit more explicit, what type of oil price assumptions do you have in your models for the coming two to three years?
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [17]
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Sure, so perhaps starting with the first on the peace agreement. It's certainly true in terms of a quantitative model, it's not a lever we can pull.
We don't have a variable for peace agreement signed yes or no. But we can in terms of our judgment implement what we think the peace agreement means in terms of the economic outlook.
Broadly speaking in the near term, presuming it's accepted and then it's formally agreed and remains in place. We think this should be generally positive, it reduces uncertainty in the economy, that's good for business investment. So it should be good for growth all other things equal.
I think we do have some questions, and to some extent we'll have to see what happens, around what is essentially the political environment. At the moment, the Government is very conservative. As I mentioned earlier they run a very fiscally conservative position, generally running budget surpluses. Not at the moment, because of what's happened to oil prices, but in general, in the past, that's been the case.
They also have a very credible monetary policy framework with a very fixed inflation target and they respond, and have responded just recently, by raising rates to meet that target. So it's a very conservative approach to monetary policy as well.
We are going to be watching how the ceasefire and then we expect the subsequent shift or movement of the left wing into the more mainstream politics what impact that will have; if it will result in more socialist policies coming through, which are perhaps less encouraging for growth in some regard. Those kind of issues, we're certainly going to be monitoring.
We don't see that process happening in the short term. It's going to take time, obviously. But over the medium term, so perhaps after the 2020s, it's something to be aware of and to keep track of. We don't, at the moment, see it having a significant impact on growth, but we will be monitoring the situation going forward.
In terms of the oil price forecast that we have, yes, so right now, we think for the rest of this year, the price is going to sit around about $47/$48 a barrel, so just shy of $50.
Then moving through into next year and beyond, it's just a very, very gradual rise. We expect, by the end of next year, we're going to be somewhere in the high $50s and then, after that, moving into the low $60s. So by the end of 2019, we think we're going to be around $62 a barrel.
A very, very slow gradual rise, and this is really due to the fact that we see some supply adjustments and that's what's going to give the slight upward lift. But broadly speaking, in terms of the global economy, it's a relatively weak growth environment, particularly for developed economies.
We don't see any significant adjustments to supply and, in particular, we don't expect the OPEC cartel to dramatically shift its position and start limiting supply. They don't seem to be going in that direction and we think it looks much more like it did, in fact, in the early 1980s, when OPEC supply grew quite rapidly and we, again, had another period of very low oil prices.
That's the kind of position we think we're in right now and that's the reason why we expect prices to remain somewhat subdued in the short term.
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Operator [18]
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(Operator Instructions). Stephen Bechade, Citi.
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Stephen Bechade, Citi - Analyst [19]
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I guess it's a little bit hard for us to find out what the new government in Guatemala is targeting. Seeing it's important to the Millicom Group, maybe you could give us a few insights as to what the change in government in Guatemala results in, in that country.
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [20]
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In terms of the economic outlook you mean?
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Stephen Bechade, Citi - Analyst [21]
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The economic outlook, what the new president wants to do with government spending versus the old one, how that changes the model. Any insights you have with the change in government in Guatemala.
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Sarah Hunter, Oxford Economics - Head of Americas Macro Consulting [22]
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Sure. So, obviously, it is a relatively new government; elected just last year. I think in terms of policy, we see them going into two -- well, major thrust around tackling corruption and crime, and that's -- obviously, we have the CICIG, which was established under the previous president, but they've really ramped up efforts this year if you like.
The new president has also been very responsive in terms of dismissing members of his government that are tainted with corruption and some of those other challenges to the business environment that you typically see in Latin America.
So this, in terms of the economic environment, is generally very positive. It's a good thing to see. [Graft] is not good for business; it's wasteful in terms of resources. The resources should be deployed and invested in more productive ways and it creates uncertainty as well, because you don't know, as a business, what you might have to pay out and when and that's generally bad business, doesn't like uncertainty as a general rule.
So, in that regard, that push is very positive and it's certainly one of the things we have underpinning the pickup in growth that we see over our forecasts.
In terms of the budget position, the previous government certainly made some efforts to shrink the deficit and improve conditions. We see that broadly continuing, although at a slower pace over the next few years.
We expect the deficit to settle in the medium term at around 1% of GDP and then to stay there. That's quite a lot lower than what it has been in the recent past. Again, we do see that as a sustainable level for the deficit and that will help with the economic environment having a fiscally prudent government who's focusing on the right things if you like, so that corruption environment, investment in infrastructure; those sorts of things. That's a good and supportive piece of the puzzle for economic growth.
Generally, we're quite optimistic on the new government. They seem like they're doing the right things and making the right noises.
Of course, the devil is always in the delivery and the detail and so we'll continue to monitor the situation. But, from first glance, it's relatively positively, particularly around that corruption and crime issue, which the new government seems to be willing to tackle much more than the previous authorities.
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Stephen Bechade, Citi - Analyst [23]
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Thank you.
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Operator [24]
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As there are no further questions at this time, I would like to hand the call back to Tim Pennington. Please go ahead.
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Tim Pennington, Millicom International Cellular S.A. - CFO [25]
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Thank you and thank you for joining us this morning for this discussion on the macro outlook of our markets. Thank you to Sarah for undertaking that for us; very much appreciate that.
The PowerPoint presentation Sarah went through is on our website as well as some supporting data.
Thank you and good morning.
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Operator [26]
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Thank you. This concludes Millicom's macroeconomic webcast. Thank you for your participation. You may now disconnect.
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