Brazil Economic Outlook

New York

Alexandre Tombini Governor

September 2013

Main topics
Inflation
Inflation is retreating Monetary policy limiting FX pass-through
Gradual economic recovery Investment is recovering Reforms will have positive effects on growth Brazil is resilient due to sound fundamentals Central Bank has buffers and instruments to mitigate adverse effects
2

Growth

UMP Exit

Inflation
Supply shocks (commodities and fresh food prices)
affected inflation trajectory in 2H12 and 1H13

BCB started to act early in 2013 to bring inflation to a

declining trend

BCBs actions mitigate ER pass-through

Ten consecutive years of inflation within the target zone
3

Inflation adversely affected by supply shocks

15 12 10.5 YoY % 9 6 3 0 Sep 12 Nov 12 Sep 11 Jan 11 Jan 12 Jan 13 May 11 May 12
2nd supply shock (fresh food)

6.1 4.7
1st supply shock

Mar 13

Nov 11

Mar 11

Mar 12

May 13

Jul 11

Jul 12

CPI

Food and Beverages

CPI ex-Food and Beverages

4

Source: IBGE

Jul 13

Monetary policy actions

BCB acted in early 2013 to mitigate second order effects of supply shocks. After tapering signaling, BCB mitigate the ER pass-through risk
%

20

Jan

Apr

15 %

10

Jan 06

Jan 11

Jul 06

Jul 07

Jul 08

Jul 09

Jul 10

Jul 11

Jul 12

Jan 07

Jan 08

Jan 09

Jan 10

Jan 12

Policy rate
Source: BCB/BM&F

Swap reference rate - 360-day term

5

Jan 13

Jul 13

May

Nov

Dec

Feb Mar

Jun

Communication Policy rate

9.0 8.6 8.2 7.8 7.4 7.0

Inflation is receding
8 7 6 YoY % 5 4 3 2 Feb 13 Mar 13 Apr 13 May 13 Jul 13

jun 13 6.7

ago 13 6.1

dez 13 5.8

Nov 13

Aug 13

Sep 13

CPI
Source: IBGE / BCB (Focus)

Expected CPI (Focus)

6

Dec 13

Jan 13

Jun 13

Oct 13

Inflation within target bands

Ten consecutive years of inflation in target zone in 2013
18 16 14 12 10 8 6 4 2 0

% 12 months

Dec 99

Dec 00

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 12

Dec 13

CPI
Source: IBGE / BCB

Inflation Report (Jun 13)

7

Dec 14

Dec 11

Gradual economic recovery

Economic growth drivers Employment, wages and credit
Agriculture: record grain crop expected for 2013 Tax reforms to reduce costs

Reforms to boost productivity and competitiveness

Infrastructure concessions to private sector Rebalance: Consumption x Investment
8

Growth dynamics in 2013

Real GDP QoQ Growth in 1Q13
China Turkey Japan South Korea Chile Brazil Canada Australia UK Colombia US South Africa Poland Mexico Germany France Euro Area Russia Spain Italy

Real GDP QoQ Growth in 2Q13 1.6 1.5

Colombia Turkey China Brazil South Korea Japan South Africa Germany UK US Australia France Chile Canada Poland Euro Area Spain -0.1 Russia -0.3 Italy -0.3 Mexico -0.7

2.2 2.1
1.7 1.5 1.1 0.9 0.7 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3

1.0 0.8 0.8 0.6 0.5 0.5 0.3 0.3 0.3 0.2 0.2 0.0 0.0 -0.2 -0.2 -0.3 -0.4 -0.6 -1 -0.5 0 0.5 1 1.5
* qoq sa

-1

3
9

Source: Bloomberg

Economic growth is expected to gather pace

2013
China India World Australia* Mexico South Korea* Brazil Russia South Africa Japan Canada US UK Germany France Euro Area Spain Italy
* April.

7.8 5.6 3.1 3.0 2.9 2.8 2.5 2.5 2.0 2.0 1.7 1.7 0.9 0.3 -0.2 -0.6 -1.6 -1.8 -5 -2 1 4 7 10

China India South Korea* World Australia* Russia Mexico Brazil South Africa US Canada UK Germany Japan Euro Area France Italy Spain 0

2014
7.7 6.3 3.9 3.8 3.3 3.3 3.2 3.2 2.9 2.7 2.2 1.5 1.3 1.2 0.9 0.8 0.7 0.0
2 4 6 8 10
10

Source: IMF (WEO forecasts, April and July 2013)

Stronger investment
Gross Fixed Capital Formation
5.0 4.0 3.0 QoQ S.A (%) 2.0 1.0 0.0 -1.0 4.7

3.6

1.5

-2.0
-3.0 -2.4 1Q 12
Source: IBGE

-1.9
2Q 12

-1.4 3Q 12 4Q 12 1Q 13 2Q 13
11

MoM % sa
115 55 75 95

2007 = 100 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 5.8% (YoY %)

Jul 02 Jul 03 Jul 04 Jul 05 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 11 Jul 12 Jul 13
5.5
Retail Sales

14 12 10 8 6 4
5.4% (YoY %)

Source: BCB/IBGE
Retail Sales

Unemployment Rate
YoY %

YoY % 0 20 30 40

10

1 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 12

Support for domestic demand

7 Mar 08 Total Sep 08 Mar 09 Sep 09 Mar 10 Employment Real Income Real Payroll

Sep 10
Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 16.1 8.7 4.3 2.5 1.8

Credit Outstanding

Employment and Labor Income

Households (nonearmarked credit)

Record grain harvest expected in 2013

190 185 180 175 170 165 160 155 150 145 140 135 130 125 120

production of grains
2013/2012 = 15.7% 161.9 160.1

187.3

million tons

2007
Source: IBGE

2008

2009

2010

2011

2012

2013*
13

Estimated in August 2013

Reforms to boost growth

Tax reforms to reduce costs Payroll tax cuts Tax incentives for infrastructure and R&D investment bonds Measures to increase competitiveness and investments Building a skilled labor force (Science without Frontiers and
Pronatec Programs) Concessions program revamped Highways, railroads, ports and airports Oil & gas
14

Brasil prepared for UMP exit

Sound external economic fundamentals
Flexible exchange rate regime first line of defense

Robust international reserves (USD374 billion)

CB actions to mitigate economic and financial risks, excessive
volatility and FX markets disruption

Sound financial system

15

Brazil Net External Creditor

International Reserves
400 350 300
US$ billion
375.2

Net External Creditor 210

170
130
US$ billion

250 200 150 100 50 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

90 50 10 -30

-70
-110
-80.1

as of Sep 20th 2013

Source: BCB

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013*
*July 2013

16

External Debt of EMEs

External Debt / GDP Turkey Chile South Africa Peru Mexico Brazil Indonesia Colombia India
*IIF forecast.

Short Term External Debt / Total

48.3 48.8 43.9 44.7

Turkey
Indonesia India

27.1 27.7 24.1 26.0

32.7 34.9 29.5 31.4 30.2 29.8 25.6 29.6 28.7 27.9 21.4 21.4 20.9 21.4

25.2 25.9
22.5 23.9 19.4 16.6 16.2 16.1 13.5 13.6 13.3 13.6 9.4 9.4

Mexico
Chile South Africa Colombia Peru Brazil

15

2012

25

35

2013*

45

55

*IIF forecast.

10 2012

15

20 2013*

25

30
17

Source: Datastream / IIF

* Brazil data includes intercompany debt transactions and domestic debt in hands of foreign investors

Low nonresident holdings of Gov. debt

2012 (% of Total Debt)
Australia France Germany Italy Mexico US South Africa UK Turkey Spain Canada Russian Federation Brazil South Korea Japan India
72.2 63.5 61.3 35.1 33.2 32.1 32.0 31.9 29.6 29.1 23.5 19.4

17.6
14.3 8.9 6.7

10

20

30

40

50

60

70

80
18

Source: IMF (Fiscal Monitor April 2013)

Brazil is Leading Recipient of FDI

USA China Belgium Hong Kong UK Singapore Brazil

2010
114.7 85.7 82.7 50.6 48.6 48.5 46.9 43.3 42.8 40.8 35.2 32.5

197.9

USA China Belgium Hong Kong Brazil Australia Singapore Russian UK Canada France Germany Italy India Spain

2011
124.0 103.3 96.1 66.7 65.8 64.0 52.9 51.1 41.4 40.9 40.4 34.3 31.6 29.5 0 50 100 150 200

226.9

USA China Hong Kong Brazil

2012
72.5 65.3 62.5 58.9 54.4 48.5 47.2 44.1 39.6 27.3 26.4 22.6 19.3 0 50 100

146.7 119.7

UK France
Singapore Australia Canada Russian Ireland India Chile Luxembourg Belgium

Germany Russian
Ireland Spain Australia Switzerland France Saudi Arabia 0

30.6 29.2
50 100 150 200

150 19

Source: UNCTAD

CAD comfortably financed by FDI

FDI / CAD (in %, 2012) Chile Peru Colombia Brazil Mexico Indonesia India Turkey South Africa 27.9 26.3 19.0 171.5 138.6 120.3 319.3 Mexico Brazil Indonesia Colombia Peru CAD (12M Acc., %GDP)*

-1.3

-3.2
-3.3 -3.5 -3.5 -4.0

111.0
82.5

Chile
India South Africa Turkey

-5.1
-6.5 -6.6
-8 -6 -4 -2 0
20

100

200

300

400

* June 2013

Source: UNCTAD

Capital flows
40 accum. 12 months (US$ billion) 35 30 25

Flows increased even after tapering talk (May 22 2013)

20
15 10 5
Jul 12 Apr 12 Jan 12 Jan 13 Apr 13 Oct 12 Jul 13

Equities
Source: BCB

Fixed Income
21

Timely Central Bank action to mitigate risks

FX interest rate swaps and FX repo program (launched on
Aug 22)
Goal: provide hedge to economic agents, liquidity to domestic FX market
and reduce excessive market volatility

Measures (weekly auctions during 2013): FX interest rate swap auctions: USD2 billion FX Repo: USD1 billion

USD100 billion (equivalent) until the end of 2013,

considering issues before the program announcement The program succeeded in taming ER volatility and providing FX hedge and liquidity
22

Efforts to reduce risks are successful

Source: BCB

23

Brazil has a sound financial system

Regulatory Capital to Risk-Weighted Assets
Germany Turkey Brazil Mexico United Kingdom South Africa Canada United States France Korea Japan India Russia Italy Australia Spain 10 18 17 17 16 16 15 15 14 14 14 14 14 13 13

( Provisions NPL) / Capital

Brazil Mexico Korea, Republic of Turkey Canada Russian India United States Australia United Kingdom Japan South Africa Spain Italy -74 10 9

Liquid Assets to Short Term Liabilities

Brazil Germany Korea, 111 88 80 77 76 51 48

183
141

-3
-3 -6 -10 -12

Russian Italy
United States Turkey Japan Canada Mexico Australia United Kingdom

-15
-15 -16 -21 -22 -28

47
44 38 36 28 0 50 100 150 200 24

12 11 12 14 16 18 20

South Africa
India 0

-100

-50

Source: IMF /FSI (latest available data)

Banks have a low share of external funding

100% 80% 60%

Origin of Bank Funding

4.3 11.2 17.9 9.4

95.7
40% 20% 0%
Public-owned

88.8

82.1

90.6

Private-owned

Foreign-controlled

Total
Jul 13

Domestic
Source: BCB

External

25

Final Remarks
26

Final remarks Inflation is receding and Central Bank is

committed to ensure it will remain on a declining path

Growth is gathering momentum and concession

program will support investment and confidence

Brazil is prepared to face the transition to

normalize global monetary environment
27

Brazil Economic Outlook

New York

Alexandre Tombini Governor

September 2013

28

Glossary
BCB Central Bank of Brazil

BM&F
CAD EME FDI FGV Focus IBGE IMF UMP UNCTAD

Brazilian Exchange Company

Current Account Deficit Emerging countries Foreign Direct Investment Getulio Vargas Foundation Brazilian Market Survey sponsored by BCB Brazilian Institute of Geography and Statistics International Monetary Fund Unconventional Monetary Policy United Nations Conference on Trade and Development
29