Get documents about "Chairman
Document Sample
Brazil Economic Outlook
Alexandre Bassoli
May, 2007
0
This presentation
What are the drivers of the exchange rate appreciation? What explains the
resilience of exports?
New GDP methodology has important implications for risk perception and the
economic activity outlook
Domestic demand is pushing economic growth
Interest rates, albeit still high, are converging to unthinkable levels
Fiscal policy: expenditures continue to soar, but the public debt dynamics
remain healthy
Investment grade may be achieved in 2008
1
In spite of the BRL strengthening, trade surpluses are approximately
constant at USD 47bn
12-month trade balance
150.000
130.000
110.000 Exports
90.000 Imports
USD million
Trade balance
70.000
50.000
30.000
10.000
-10.000
90 90 91 92 92 93 94 94 95 96 96 97 98 98 99 00 00 01 02 02 03 04 04 05 06 06
n/ et/ ai/ an/ et/ ai/ an/ et/ ai/ an/ et/ ai/ an/ et/ ai/ an/ et/ ai/ an/ et/ ai/ an/ et/ ai/ an/ et/
ja s m j s m j s m j s m j s m j s m j s m j s m j s
2
Terms of trade gains explain the resilience of exports
EXPORT PRICES
120
Mainly as a result of soaring commodity 115
prices, export prices accumulate an 110
increase of 57% since Dec-02 105
1996 = 100
100
The nominal exchange rate moved from 95
2.13 to 2.03 BRL/USD between Apr-06 and 90
85
Apr-07, but the profitability of exports
80
actually increased 1.0% 75
The increase of export prices has two
3
4
5
6
7
8
9
0
1
2
3
4
5
6
7
9
9
9
9
9
9
9
0
0
0
0
0
0
0
0
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
important implications: Real exchange rate and export profitability index
160
– More Dollars for a given volume of exports
140
– Since the profitability is improving, there are RER
incentives to increase, not reduce, the export volume 120 EPI
100
80
60
40
0
2
4
6
8
0
2
4
6
8
0
2
4
6
8
8
8
8
8
9
9
9
9
9
0
0
0
0
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
de
de
de
de
de
de
de
de
de
de
de
de
de
de
3
26
/8
26 /20
0,8
1,0
1,2
1,4
1,6
1,8
2,0
2,2
2,4
2,6
2,8
/1 02
1/
26 200
/2 2
/
26 200
/5 3
/
26 200
/8 3
26 /20
/1 03
1/
26 200
/2 3
/
26 200
/5 4
/
26 200
/8 4
26 /20
/1 04
1/
26 200
/2 4
/
26 200
/5 5
/
26 200
/8 5
26 /20
/1 05
1/
Embi Brasil / Embi +
26 200
/2 5
/
26 200
/5 6
/
26 200
/8 6
26 /20
/1 06
1/
26 200
/2 6
/2
00
7
The improvement of sovereign risk boosts capital inflows
4
Strong BRL is here to stay
Currency appreciation does not seem to
reflect a bubble
Brazil has largely mitigated its sources of
external vulnerability Real exchange rate
4,30
Exchange rate volatility was structurally 4,05
reduced 3,80
3,55
BRL of May 2007
3,30
We forecast 1.95 BRL/USD in Dec-07 3,05
2,80
2,55 .
2,30
2,05
1,80
1,55
1,30
1,05
ja 80
ja 81
ja 82
ja 83
ja 84
ja 85
ja 86
ja 87
ja 88
ja 89
ja 90
ja 91
ja 92
ja 93
ja 94
ja 95
ja 96
ja 97
ja 98
ja 99
ja 00
ja 01
ja 02
ja 03
ja 04
ja 05
ja 06
07
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
ja
5
New GDP methodology brought two fundamental changes
2006 GDP level (BRL mn) - old vs new methodology
2200 Average GDP growth (2001-2006) - old vs new methodology
3,5%
2150 2,9%
3,0%
2100 2,5% 2,3%
2,0%
2050
1,5%
2000
1,0%
1950 0,5%
1900
0,0%
Old New New Old
The GDP level is 11% higher than we previously thought
Average GDP growth is the last six years was 2.9%, while the previous methodology
indicated 2.3%
6
19
9
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
-3,0%
-2,0%
-1,0%
19 6 -
96 I
19 - III
9
19 7 -
97 I
-
19 III
9
19 8-I
98
19 -III
9
19 9 -
99 I
20 - III
0
20 0 -
00 I
GDP
20 - III
0
Net exports
20 1 -
01 I
Domestic Absorption
20 - III
0
20 2 -
02 I
20 - III
0
20 3 -
03 I
20 - III
0
20 4 -
04 I
20 - III
0
20 5 -
05 I
20 - III
0
GDP growth: contribution of domestic absorption and net exports
20 6 -
06 I
Growth is gaining momentum pushed by domestic demand…
-I
II
7
9,0
12,0
15,0
18,0
21,0
24,0
27,0
30,0
33,0
jan/00
mai/00
set/00
jan/01
mai/01
set/01
jan/02
mai/02
set/02
jan/03
mai/03
set/03
jan/04
mai/04
set/04
jan/05
mai/05
1-year ex ante real interest rate
set/05
jan/06
mai/06
set/06
jan/07
mai/07
…and this process will continue
m
ar
1,0%
3,0%
5,0%
7,0%
9,0%
-9,0%
-7,0%
-5,0%
-3,0%
-1,0%
-11,0%
/0
3
ju
n/
03
se
t/0
3
de
z/
30
m
ar
/0
4
ju
n/
04
se
t/0
4
de
z/
04
m
ar
/0
5
ju
n/
05
se
t/0
5
de
z/
05
m
Real growth of total wages (YoY)
ar
/0
6
ju
n/
06
se
t/0
6
de
z/
06
m
ar
/0
7
8
The good news is that investments are growing…
Annual growth of gross fixed capital formation
25,0%
20,0%
15,0%
10,0%
5,0%
0,0%
-5,0%
-10,0%
Q 92
Q 93
Q 94
Q 95
Q 95
Q 96
Q 97
Q 98
Q 98
Q 99
Q 00
Q 01
Q 01
Q 02
Q 03
Q 04
Q 04
Q 05
06
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
20
20
20
4
3
2
1
4
3
2
1
4
3
2
1
4
3
2
1
4
3
2
Q
9
77%
78%
79%
80%
81%
82%
83%
jan/03
mar/03
mai/03
jul/03
set/03
nov/03
jan/04
mar/04
mai/04
jul/04
set/04
nov/04
jan/05
mar/05
mai/05
jul/05
set/05
nov/05
Industrial capacity utilization
jan/06
mar/06
mai/06
jul/06
set/06
nov/06
jan/07
mar/07
m
ai
9,0%
9,5%
10,0%
10,5%
11,0%
11,5%
12,0%
12,5%
13,0%
/0
ag 2
o/
0
no 2
v/
0
fe 2
v/
0
m 3
ai
/0
ag 3
o/
0
no 3
v/
0
fe 3
v/
0
m 4
ai
/0
ag 4
o/
0
no 4
v/
0
fe 4
v/
05
m
ai
/0
ag 5
o/
0
no 5
Unemployment rate (s.a.)
v/
0
…but the expansion is likely to exceed potential growth in 2007
fe 5
v/
0
m 6
ai
/0
ag 6
o/
0
no 6
v/
0
fe 6
v/
07
10
ja
n/
-1%
4%
9%
14%
19%
9 8
ju
l/9
8
ja
n/
99
ju
l/9
9
ja
n/
00
ju
l/0
Tradables
0
ja
Non-Tradables
n/
01
ju
l/0
1
ja
n/
02
ju
l/0
2
ja
n/
03
ju
l/0
3
ja
n/
04
ju
l/0
4
ja
n/
05
ju
IPCA - tradables and non-tradables
l/0
5
ja
n/
06
ju
l/0
6
ja
n/
07
de
z/
9
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
ju 6
n/
9
de 7
z/
9
and the deceleration of administered prices
ju 7
n/
98
de
z/
9
ju 8
n/
9
de 9
z/
9
ju 9
n/
0
de 0
z/
0
ju 0
n/
01
de
z/
0
ju 1
n/
0
de 2
z/
0
ju 2
n/
0
Regulated prices
de 3
z/
0
ju 3
n/
04
de
z/
0
ju 4
n/
0
de 5
Inflation remains very well behaved, thanks to the BRL appreciation
z/
0
ju 5
n/
0
de 6
z/
06
11
Interest rates, albeit still high, are converging to uncharted territory
Several factors point towards lower rates in upcoming quarters
– A more robust balance of payments implies a lower sovereign risk and a less volatile currency
– Administered prices now represent a positive shock
– The BRL appreciation keeps tradable inflation under control
– Terms of trade gains allow a fast increase of imports without damaging the current account surplus
Even after achieving the investment grade, however, it is not clear that interest
rates will converge to levels observed in other countries such as Chile and
Mexico (3.5%-4.0% in real terms)
The bad quality of fiscal policy implies, in our view a higher level of neutral
interest rates and a lower level of potential growth
We expect nominal rates to stabilize at 11.0-11.25% in nominal terms
If terms of trade gains intensify, however, rates may stay below the equilibrium
for a while
12
Fiscal policy: more of the same
Real annual growth - central government revenues Real annual growth - central government expenditures
12,0%
14,0%
10,0%
12,0%
8,0%
10,0%
6,0%
8,0%
4,0%
6,0%
4,0% 2,0%
2,0% 0,0%
0,0% -2,0%
-2,0% -4,0%
-4,0% -6,0%
ag 0
ag 1
ag 2
ag 3
ag 4
ag 5
ag 6
de 00
de 01
de 02
de 03
de 04
de 05
de 06
ab 9
ab 0
ab 1
ab 2
ab 3
ab 4
ab 5
06
ab 9
ab 0
ab 1
ab 2
ab 3
ab 4
ab 5
06
de 0
de 1
de 2
de 3
de 4
de 5
de 6
ag 0
ag 1
ag 2
ag 3
ag 4
ag 5
ag 6
r/0
r/0
r/0
r/0
r/0
r/0
r/0
9
0
0
0
0
0
0
9
0
0
0
0
0
0
0
0
0
0
0
0
0
r/0
r/0
r/0
r/0
r/0
r/0
r/0
o/
o/
o/
o/
o/
o/
o/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
z/
o/
o/
o/
o/
o/
o/
o/
de
de
Public expenditures continue to grow at an extremely vigorous pace
The tax collection expansion is also outperforming GDP growth
13
The primary surplus will fall, but the nominal deficit is likely to drop as
well, thanks to lower interest rates
12-month nominal deficit as a % of GDP
14,0%
12,0%
10,0%
8,0%
6,0%
4,0%
2,0%
0,0%
ja 7
ja 8
ja 9
ja 0
ja 1
ja 2
ja 3
ja 4
ja 5
ja 6
97
98
99
00
01
02
03
04
05
06
07
l/9
l/9
l/9
l/0
l/0
l/0
l/0
l/0
l/0
l/0
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
ju
ju
ju
ju
ju
ju
ju
ju
ju
ju
ja
14
From a solvency perspective, fiscal policy looks OK, but…
It has as expansionary impact on
domestic demand and negative
implications for potential growth
The bad quality of fiscal policy may imply Net public debt/GDP ratio
57%
higher interest rates in comparison to
52%
investment grade countries
47%
42%
37%
32%
27%
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
n/
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
ja
15
Conclusions
Brazil continues to benefit from terms of trade gains
We think that a stronger (and less volatile) BRL is here to stay
Thanks to the positive shocks, the expansion of domestic demand may
outperform output growth
Due to stronger fundamentals and positive shocks, interest rates are
converging to uncharted territory
Even after the investment grade , however, we think that interest rates will be
above the average of our peers
From a solvency perspective, fiscal policy is OK, but its poor quality has
negative implications for potential growth and interest rates
Thanks to extraordinarily benign external conditions and the new GDP
methodology, the investment grade is likely to be achieved in 2008
16
Macroeconomic forecasts
External accounts (USD bn) 2002 2003 2004 2005 2006 2007
Exports 60,4 73,1 96,5 118,3 137,5 151,0
Imports 47,2 48,3 62,8 73,5 91,4 107,0
Trade balance 13,2 24,8 33,7 44,8 46,1 44,0
Current account -7,6 4,0 11,6 14,3 13,5 11,7
Medium and long term amortizations -29,7 -27,8 -33,3 -32,8 -44,1 -31,0
External sector borrowing requirement -37,3 -23,8 -21,7 -18,5 -30,6 -19,3
Net direct investment 14,1 9,9 8,7 12,6 -8,5 14,0
Economic activity
GDP 2,7% 1,1% 5,7% 2,9% 3,7% 4,3%
Industrial production (IBGE) 2,7% 0,1% 8,3% 3,1% 2,8% 4,8%
Inflation
IPCA 12,5% 9,3% 7,6% 5,7% 3,1% 3,5%
IGP-M 25,3% 8,7% 12,4% 1,2% 3,8% 2,9%
Public sector
Public sector primary surplus (% of GDP) 3,6% 3,9% 4,2% 4,4% 3,9% 3,6%
Public sector nominal deficit (% of GDP) 4,2% 4,7% 2,4% 3,0% 3,0% 1,9%
Debt to GDP ratio 50,5% 52,4% 47,0% 46,5% 44,9% 43,9%
Interest rate and exchange rate
FX (average of period, BRL/USD) 2,92 3,07 2,93 2,43 2,18 1,99
FX (end of period, BRL/USD) 3,53 2,90 2,65 2,34 2,14 1,95
SELIC interest rate (average) 19,5% 23,3% 16,3% 19,0% 15,2% 12,2%
SELIC interest rate (end of period) 25,0% 16,5% 17,8% 18,0% 13,3% 11,25%
17
