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Brazil Economic Outlook

New York

Alexandre Tombini Governor

September 2013

Brazil Economic Outlook New York Alexandre Tombini Governor September 2013 1

1

Main topics

Inflation

Inflation is retreating

Monetary policy limiting FX pass-through

Growth

UMP Exit

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

Brazil is resilient due to sound fundamentals − Central Bank has buffers and instruments to mitigate

2

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

BCB’s actions mitigate ER pass-through

Ten consecutive years of inflation within the target zone

trend • BCB’s actions mitigate ER pass-through • Ten consecutive years of inflation within the target

3

Inflation adversely affected by supply shocks

15 12 9 6 3 2nd supply 1st supply shock shock (fresh food) 0 CPI
15
12
9
6
3
2nd supply
1st supply shock
shock (fresh
food)
0
CPI
Food and Beverages
CPI ex-Food and Beverages
YoY %
Jan 11
Mar 11
May 11
Jul 11
Sep 11
Nov 11
Jan 12
Mar 12
May 12
Jul 12
Sep 12
Nov 12
Jan 13
Mar 13
May 13
Jul 13

10.5

6.1

4.7

Source: IBGE

Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12

4

%

Jul 07

Jan 07

Jul 13

Jan 13

Jan 06

Jul 10

Jul 06

Jan 10

Jul 08

Jan 08

Jul 09

Jan 09

Jul 12

Jan 12

Jan 11

Jul 11

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

9.0 20 Communication 8.6 8.2 ↓ 7.8 7.4 Policy rate 7.0 15 10 5 %
9.0
20
Communication
8.6
8.2
7.8
7.4
Policy rate
7.0
15
10
5
%
Nov…
Dec…
Jan…
Feb…
Mar…
Apr…
May…
Jun…
Dec… Jan… Feb… Mar… Apr… May… Jun… Policy rate Source: BCB/BM&F Swap reference rate -

Policy rate

Source: BCB/BM&F

Jan… Feb… Mar… Apr… May… Jun… Policy rate Source: BCB/BM&F Swap reference rate - 360-day term

Swap reference rate - 360-day term

Jan… Feb… Mar… Apr… May… Jun… Policy rate Source: BCB/BM&F Swap reference rate - 360-day term

5

Jul 13

Mar 13

Feb 13

Apr 13

May 13

Nov 13

Aug 13

Sep 13

Dec 13

Jan 13

Jun 13

Oct 13

Inflation is receding

8 jun 13 ago 13 6.7 7 6.1 dez 13 6 5.8 5 4 3
8
jun 13
ago 13
6.7
7
6.1
dez 13
6
5.8
5
4
3
2
YoY %
8 jun 13 ago 13 6.7 7 6.1 dez 13 6 5.8 5 4 3 2

CPI

Source: IBGE / BCB (Focus)

8 jun 13 ago 13 6.7 7 6.1 dez 13 6 5.8 5 4 3 2

Expected CPI (Focus)

8 jun 13 ago 13 6.7 7 6.1 dez 13 6 5.8 5 4 3 2

6

Inflation within target bands

Ten consecutive years of inflation in target zone in 2013

18 16 14 12 10 8 6 4 2 0 CPI Inflation Report (Jun 13)
18
16
14
12
10
8
6
4
2
0
CPI
Inflation Report (Jun 13)
% 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 11
Dec 12
Dec 13
Dec 14

Source: IBGE / BCB

02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec

7

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

and competitiveness − Infrastructure concessions to private sector • Rebalance: Consumption x Investment 8

8

Growth dynamics in 2013

Real GDP QoQ Growth in 1Q13

Real GDP QoQ Growth in 2Q13

China 1.6 Colombia Turkey 1.5 Turkey Japan 1.0 China South Korea 0.8 Brazil Chile 0.8
China
1.6
Colombia
Turkey
1.5
Turkey
Japan
1.0
China
South Korea
0.8
Brazil
Chile
0.8
South Korea
Brazil
0.6
Japan
Canada
0.5
South Africa
Australia
0.5
Germany
UK
0.3
UK
Colombia
0.3
US
US
0.3
Australia
South Africa
0.2
France
Poland
0.2
Chile
Mexico
0.0
Canada
Germany
0.0
Poland
France
-0.2
Euro Area
Euro Area
-0.2
Spain
Russia
-0.3
Russia
Spain
-0.4
Italy
Italy
-0.6
Mexico
-1
-0.5
0
0.5
1
1.5
2

Source: Bloomberg

* qoq sa

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
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
-0.1
-0.3
-0.3
-0.7
-1
0
1
2
3
9

Economic growth is expected to gather pace

2013 2014 China 7.8 7.7 India 5.6 6.3 World Australia* Mexico South Korea* Brazil 3.1
2013
2014
China
7.8
7.7
India
5.6
6.3
World
Australia*
Mexico
South Korea*
Brazil
3.1
3.9
3.0
3.8
2.9
3.3
2.8
3.3
2.5
3.2
Russia
2.5
3.2
South Africa
2.0
2.9
Japan
2.0
China
India
South Korea*
World
Australia*
Russia
Mexico
Brazil
South Africa
US
Canada
UK
Germany
2.7
Canada
1.7
2.2
US
1.7
1.5
UK
0.9
1.3
Germany
0.3
Japan
1.2
France
-0.2
Euro Area
0.9
Euro Area
-0.6
France
0.8
Spain
-1.6
Italy
0.7
Italy
-1.8
Spain
0.0
* April.
-5
-2
1
4
7
10
0
2
4
6
8
10

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

-1.8 Spain 0.0 * April. -5 -2 1 4 7 10 0 2 4 6 8

10

Stronger investment

Gross Fixed Capital Formation 4.7 5.0 4.0 3.6 3.0 2.0 1.5 1.0 0.0 -1.0 -2.0
Gross Fixed Capital Formation
4.7
5.0
4.0
3.6
3.0
2.0
1.5
1.0
0.0
-1.0
-2.0
-1.4
-1.9
-2.4
-3.0
1Q 12
2Q 12
3Q 12
4Q 12
1Q 13
2Q 13
QoQ S.A (%)

Source: IBGE

1.5 1.0 0.0 -1.0 -2.0 -1.4 -1.9 -2.4 -3.0 1Q 12 2Q 12 3Q 12 4Q

11

Support for domestic demand

Retail Sales

115 5.4% 95 (YoY %) 75 5.8% (YoY %) 55 2007 = 100
115
5.4%
95
(YoY %)
75
5.8%
(YoY %)
55
2007 = 100
Credit Outstanding 40 30 20 10 0 YoY %
Credit Outstanding
40
30
20
10
0
YoY %

16.1

8.7

Retail Sales Total Households (nonearmarked credit) Unemployment Rate Employment and Labor Income 14 7 12
Retail Sales
Total
Households (nonearmarked credit)
Unemployment Rate
Employment and Labor Income
14
7
12
5
4.3
10
3
2.5
8
1.8
5.5
6
1
4
Employment
Real Income
Real Payroll
MoM % sa
Jan 07
Jul 02
Jul 07
Jul 03
Jan 08
Jul 04
Jul 08
Jan 09
Jul 05
Jul 09
Jul 06
Jan 10
Jul 07
Jul 10
Jul 08
Jan 11
Jul 09
Jul 11
Jul 10
Jan 12
Jul 12
Jul 11
Jan 13
Jul 12
Jul 13
Jul 13
YoY %
Mar 08
Jan 12
Sep 08
Mar 12
Mar 09
May 12
Sep 09
Jul 12
Mar 10
Sep 12
Sep 10
Nov 12
Mar 11
Sep 11
Jan 13
Mar 12
Mar 13
Sep 12
May 13
Mar 13
Jul 13

Source: BCB/IBGE

Mar 10 Sep 12 Sep 10 Nov 12 Mar 11 Sep 11 Jan 13 Mar 12

12

Record grain harvest expected in 2013

production of grains 187.3 190 185 180 2013/2012 175 ∆ = 15.7% 170 165 161.9
production of grains
187.3
190
185
180
2013/2012
175
∆ = 15.7%
170
165
161.9
160.1
160
155
150
145
140
135
130
125
120
2007
2008
2009
2010
2011
2012
2013*
million tons

Source: IBGE

Estimated in August 2013

140 135 130 125 120 2007 2008 2009 2010 2011 2012 2013* million tons Source: IBGE

13

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

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 market’s disruption

Sound financial system

mitigate economic and financial risks, excessive volatility and FX market’s disruption • Sound financial system 15

15

US$ billion

2004
2007

1983

2010
2013

1986

1995
1998

1989

1992

2001

Brazil Net External Creditor

International Reserves

400

375.2

350

300

250

200

150

100

50

0

Source: BCB

as of Sep 20 th 2013

Net External Creditor

210 170 130 90 50 10 -30 -70 -80.1 -110 US$ billion 1983 1986 1989
210
170
130
90
50
10
-30
-70
-80.1
-110
US$ billion
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013*

*July 2013

10 -30 -70 -80.1 -110 US$ billion 1983 1986 1989 1992 1995 1998 2001 2004 2007

16

External Debt of EMEs

External Debt / GDP 48.3 Turkey 48.8 43.9 Chile 44.7 32.7 South Africa 34.9 29.5
External Debt / GDP
48.3
Turkey
48.8
43.9
Chile
44.7
32.7
South Africa
34.9
29.5
Peru
31.4
30.2
Mexico
29.8
25.6
Brazil
29.6
28.7
Indonesia
27.9
21.4
Colombia
21.4
20.9
India
21.4
15
25
35
45
55
*IIF forecast.
2012
2013*
Short Term External Debt / Total 27.1 Turkey 27.7 24.1 Indonesia 26.0 25.2 India 25.9
Short Term External Debt / Total
27.1
Turkey
27.7
24.1
Indonesia
26.0
25.2
India
25.9
22.5
Mexico
23.9
19.4
Chile
16.6
16.2
South Africa
16.1
13.5
Colombia
13.6
13.3
Peru
13.6
9.4
Brazil
9.4
5
10
15
20
25
30
*IIF forecast.
2012
2013*

Source: Datastream / IIF

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

Datastream / IIF * Brazil data includes intercompany debt transactions and domestic debt in hands of

17

Low nonresident holdings of Gov. debt

2012 (% of Total Debt) Australia 72.2 France 63.5 Germany 61.3 Italy 35.1 Mexico 33.2
2012 (%
of Total Debt)
Australia
72.2
France
63.5
Germany
61.3
Italy
35.1
Mexico
33.2
US
32.1
South Africa
32.0
UK
31.9
Turkey
29.6
Spain
29.1
Canada
Russian Federation
23.5
19.4
Brazil
17.6
South Korea
14.3
Japan
8.9
India
6.7
0
10
20
30
40
50
60
70
80

Source: IMF (Fiscal Monitor April 2013)

South Korea 14.3 Japan 8.9 India 6.7 0 10 20 30 40 50 60 70 80

18

Brazil is Leading Recipient of FDI

 

2010

 

2011

 

2012

 

USA

       

197.9

USA

       

226.9

USA

     

146.7

China

   

114.7

 

China

   

124.0

 

China

   

119.7

Belgium

 

85.7

Belgium

 

103.3

 

Hong Kong

 

72.5

 

Hong Kong

 

82.7

Hong Kong

 

96.1

 

Brazil

 

65.3

UK

 

50.6

 

Brazil

 

66.7

UK

 

62.5

Singapore

 

48.6

Australia

 

65.8

 

France

 

58.9

Brazil

 

48.5

Singapore

 

64.0

Singapore

 

54.4

Germany

 

46.9

Russian

 

52.9

Australia

 

48.5

Russian

 

43.3

 

UK

 

51.1

Canada

 

47.2

Ireland

 

42.8

Canada

 

41.4

Russian

 

44.1

Spain

 

40.8

France

 

40.9

Ireland

 

39.6

Australia

 

35.2

Germany

 

40.4

 

India

 

27.3

 

Switzerland

 

32.5

 

Italy

 

34.3

Chile

 

26.4

France

 

30.6

India

 

31.6

 

Luxembourg

 

22.6

 

Saudi Arabia

 

29.2

Spain

 

29.5

Belgium

 

19.3

0

50

100

150

200

0

50

100 150 200

0

50

100

150

Source: UNCTAD

  19.3 0 50 100 150 200 0 50 100 150 200 0 50 100 150

19

CAD comfortably financed by FDI

FDI / CAD (in %, 2012) Chile 319.3 Peru 171.5 Colombia 138.6 Brazil 120.3 Mexico
FDI / CAD (in %, 2012)
Chile
319.3
Peru
171.5
Colombia
138.6
Brazil
120.3
Mexico
111.0
Indonesia
82.5
India
27.9
Turkey
26.3
South Africa
19.0
0
100
200
300
400

Source: UNCTAD

CAD (12M Acc., %GDP)* Mexico -1.3 Brazil -3.2 Indonesia -3.3 Colombia -3.5 Peru -3.5 Chile
CAD (12M Acc., %GDP)*
Mexico
-1.3
Brazil
-3.2
Indonesia
-3.3
Colombia
-3.5
Peru
-3.5
Chile
-4.0
India
-5.1
South Africa
-6.5
Turkey
-6.6
* June 2013
-8
-6
-4
-2
0
-3.5 Peru -3.5 Chile -4.0 India -5.1 South Africa -6.5 Turkey -6.6 * June 2013 -8

20

Capital flows

Flows increased even after tapering talk (May 22 2013) 40 35 30 25 20 15
Flows increased even after tapering talk (May 22 2013)
40
35
30
25
20
15
10
5
0
accum. 12 months (US$ billion)
Jan 12
Apr 12
Jul 12
Oct 12
Jan 13
Apr 13
Jul 13

Source: BCB

Equities5 0 accum. 12 months (US$ billion) Jan 12 Apr 12 Jul 12 Oct 12 Jan

Fixed Income10 5 0 accum. 12 months (US$ billion) Jan 12 Apr 12 Jul 12 Oct 12

12 months (US$ billion) Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13

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

• The program succeeded in taming ER volatility and providing FX hedge and liquidity 22

22

Efforts to reduce risks are successful

Efforts to reduce risks are successful Source: BCB 2 3

Source: BCB

Efforts to reduce risks are successful Source: BCB 2 3

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

18 17 17 16 16 15 15 14 14 14 14 14 13 13 12
18
17
17
16
16
15
15
14
14
14
14
14
13
13
12
11
10
12
14
16
18
20

( Provisions NPL) / Capital

Brazil 10 Mexico 9 Korea, Republic of -3 Turkey -3 Canada -6 Russian… -10 India
Brazil
10
Mexico
9
Korea, Republic of
-3
Turkey
-3
Canada
-6
Russian…
-10
India
-12
United States
-15
Australia
-15
United Kingdom
-16
Japan
-21
South Africa
-22
Spain
-28
Italy
-74
-100
-50
0

Source: IMF /FSI (latest available data)

Liquid Assets to Short Term Liabilities

Brazil 183 Germany 141 Korea,… 111 Russian… 88 Italy 80 United States 77 Turkey 76
Brazil
183
Germany
141
Korea,…
111
Russian…
88
Italy
80
United States
77
Turkey
76
Japan
51
Canada
48
Mexico
47
Australia
44
United Kingdom
38
South Africa
36
India
28
0
50
100 150 200
Japan 51 Canada 48 Mexico 47 Australia 44 United Kingdom 38 South Africa 36 India 28

24

Banks have a low share of external funding

100%

80%

60%

40%

20%

0%

Source: BCB

Origin of Bank Funding

4.3 11.2 9.4 17.9 95.7 88.8 90.6 82.1
4.3
11.2
9.4
17.9
95.7
88.8
90.6
82.1

Public-owned

4.3 11.2 9.4 17.9 95.7 88.8 90.6 82.1 Public-owned Domestic Private-owned Foreign-controlled External Total Jul

Domestic

Private-owned

Foreign-controlled

11.2 9.4 17.9 95.7 88.8 90.6 82.1 Public-owned Domestic Private-owned Foreign-controlled External Total Jul 13 2

External

Total

Jul 13

11.2 9.4 17.9 95.7 88.8 90.6 82.1 Public-owned Domestic Private-owned Foreign-controlled External Total Jul 13 2

25

Final

Remarks

Final Remarks 26

26

Final remarks

Inflation

Bank is

committed to ensure it will remain on a declining

path

is

receding

and

Central

Growth is gathering momentum and concession program will support investment and confidence

Brazil

is

prepared

to

face

the

transition

to

normalize global monetary environment

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

Brazil Economic Outlook New York Alexandre Tombini Governor September 2013 28

28

Glossary

BCB Central Bank of Brazil

BM&F Brazilian Exchange Company

CAD Current Account Deficit EME Emerging countries FDI Foreign Direct Investment FGV Getulio Vargas Foundation Focus Brazilian Market Survey sponsored by BCB IBGE Brazilian Institute of Geography and Statistics

IMF International Monetary Fund UMP Unconventional Monetary Policy

UNCTAD United Nations Conference on Trade and Development

Monetary Fund UMP Unconventional Monetary Policy UNCTAD United Nations Conference on Trade and Development 29

29