Brasil Contry Analysis

8/14/2019 Brasil Contry Analysis

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1

Brazil: Economic Trends

Henrique de Campos Meirelles

Instituto de EmpresaMadrid, October 2005



2

Three Pillars of Economic Policy

Fiscal policy aimed at generating consolidated primary

surpluses, and ultimately a gradual reduction in debt-to-

GDP ratio;

Inflation targeting regime for the conduct of monetary

policy; and

Exchange rate flexibility as a means to consolidateexternal adjustment.



3

Fiscal Policy




4

% o

f G D

P

Consolidated Primary Surplus

-2

-1

0

1

23

4

5

6

7

jan

94

jan

95

jan

96

jan

97

jan

98

jan

99

jan

00

jan

01

jan

02

jan

03

jan

04

aug

05

5.16%Avg. 1994-Jun/95

4.8%

Avg. Jul/95-1998-0.1%

Avg. 1999-20023.2%

Avg. 2003-20054.5%

Source: Bacen



5

Public Debt-to-GDP Ratio

% o

f G D P

28

33

38

43

48

53

58

63

jan

95

oct

95

jul

96

apr

97

jan

98

oct

98

jul

99

apr

00

jan

01

oct

01

jul

02

apr

03

jan

04

oct

04

aug

06

50%

Source: Bacen



6

% o

f G

D P

44

46

48

50

52

54

56

58

2003 2004 2005 2006 2007 2008 2009

Market Consensus 2005/2009

Public Debt-to-GDP Ratio: Trend

Source: Bacen



Consolidated public sector primary surplus will most

likely increase in 2005 for the seventh year in a row,

confirming government commitment with fiscal

responsibility.

Debt-to-GDP is expected to continue falling in the

medium-run.




Inflation



http://slidepdf.com/reader/full/brasil-contry-analysis 9/419Source: IBGE

IPCA Inflation

%

Avg 2002:0.99% Avg 2003:

0.74% Avg 2004:

0.61%Avg 2005:

0.43%

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan

02

May

02

Sep

02

Jan

03

May

03

Sep

03

Jan

04

May

04

Sep

04

Jan

05

May

05

Sep

05


http://slidepdf.com/reader/full/brasil-contry-analysis 10/4110Source: FGV

Wholesale Prices Inflation (IPA)

%

Avg 2003:0.51%

Avg 2004:

1.15%

Avg 2005:-0.21%

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan 03 May 03 Sep 03 Jan 04 May 04 Sep 04 Jan 05 May 05 Sep 05



11

IPCA Inflation in 12 Months

%

4

6

8

10

12

14

16

18

Jan

03

May

03

Sep

03

Jan

04

May

04

Sep

04

Jan

05

May

05

Sep

05

Jan

06

May

06

Market Consensus

Sep 056.0%

Dec 055.3%

Source: Bacen



12

12-Month Ahead IPCA Expectations

Source: Bacen

%

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

6.2

6.4

Jul04

Oct04

Jan05

Apr 05

Jul05

Oct05

4.7%



13

Consumer and wholesale prices inflation have fallen

in 2004/2005.

Inflation expectations have converged to the targetpath.




14

Exchange Rate and External Sector




15

Nominal Exchange Rate

R $ / U

S $

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan98

Jan99

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Out05

Source: Bacen



16

Current Account

U S $ b i l l i o n

Source: Bacen

-40

-30

-20

-10

0

10

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005



17

Current Account vs. Trade Balance

U S $ b i l l i o n

U S $ b i l l i o n

Trade BalanceCurrent Account

-35

-28

-21

-14

-7

0

7

14

21

Jan

96

Jan

97

Jan

98

Jan

99

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Aug

05

-10

0

10

20

30

40

Accumulated in 12 Months

Source: Bacen



18

Trade Balance

Source: Ministry of Development, Industry and Foreign Trade

U S $ b i l l i o n

Exports

Imports

71.7

112.9

45

55

65

75

85

95

105

115

Jan

99

Jul

99

Jan

00

Jul

00

Jan

01

Jul

01

Jan

02

Jul

02

Jan

03

Jul

03

Jan

04

Jul

04

Jan

05

Sep

05




19

Exports Growth

US$ billion

Primary

Semi-Manuf.

Manufactured

Total

Growth in

12 monthsthrough Aug 05

6 8 102 4 12 14 16 18 20 22




20

Exports by Market and by Products:2004/2005

EuropeanUnion

US

25.0%

20.8%

Latin America,excluding Mercosur

15.1%

Mercosur

9.6%

China

4.9%

Others

25.6%

Market

Primary27.8%

Semi-Manufactured

14.3%Manufactured

56.1%

Other 1.8%

Product




21

In the last 6 years, current account balance increased byUS$ 45 billion, or more than 6% of GDP.

External adjustment has been driven by the increase in

exports.

Exports growth led by manufactured goods. Export prices

had a secondary role.

Brazilian exports are diversified in terms of markets andgoods, reducing exports vulnerability.




22

Economic Activity




23

GDP Growth

Quarter-on-Quarter, Seasonally Adjusted Annual Rate

%

5.7

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

1Q

03

2Q

03

3Q

03

4Q

03

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

Source: IBGE

C t ib ti f I t l d E t l



24

Contribution of Internal and ExternalDemand to GDP Growth

%

Internal Demand

External Demand

GDP Growth Decomposition (y-o-y)

1Q03

3Q03

1Q04

2Q04

3Q04

4Q04

-5

-3

-1

1

3

5

7

1Q05

2Q05

2Q03

4Q03

Source: IBGE



25

Industrial Output

s . a . ,

2 0 0 2

= 1 0 0

3-Month Moving Average

Source: IBGE

94

97

100

103

106

109

112

115

Jan

01

Jun

01

Nov

01

Apr

02

Sep

02

Feb

03

Jul

03

Dec

03

May

04

Oct

04

Mar

05

Aug

05



26

Retail Sales

s . a . ,

2 0 0 3

= 1 0 0


97

100

103

106

109

112

115

Jan

01

Jul

01

Jan

02

Jul

02

Jan

03

Jul

03

Jan

04

Jul

04

Jan

05

Aug

05

Source: IBGE



27

Formal Job Creation


Source: Ministry of Labour and Employment

m i l l i o

n

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Jan

99

Nov

99

Sep

00

Jul

01

May

02

Mar

03

Jan

04

Nov

04

Sep

05



28

Average Real Wage and Payrolls

86

88

90

92

94

96

98

100

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

96

98

100

102

104

106

PayrollsAverage Real Wage

M a r 2 0 0 2

= 1 0 0

M a r 2 0 0 2

= 1 0 0


Source: IBGE

Non Durable Retail Sales vs



29

Non-Durable Retail Sales vs.Labor Income

s . a . ,

2 0 0 3 = 1 0 0

s . a . ,

M a r 2 0 0

2 = 1 0 0

Payrolls

Source: IBGE

98

100

102

104

106

108

110

112

Jan

03

Apr

03

Jul

03

Oct

03

Jan

04

Apr

04

Jul

04

Oct

04

Jan

05

Apr

05

Aug

05

96

98

100

102

104

106

Supermarket Sales




30

Credit vs. Retail Sales

R $ b i l l i o n

s . a . ,

2 0 0 3 =

1 0 0

115

Credit to Individuals

Retail Sales

97

99

101

103

105

107

109

111

113

Jun

03

Aug

03

Oct

03

Dec

03

Feb

04

Apr

04

Jun

04

Aug

04

Oct

04

Dec

04

Feb

05

Apr

05

Aug

05

1.20

1.30

1.40

1.50

1.60

1.70

1.80

Sources: IBGE, Bacen




31

-10

-5

0

5

10

15

20

25

1Q95

1Q96

1Q97

1Q98

1Q99

1Q00

1Q01

1Q02

1Q03

1Q04

2Q05

GDP

%

GDP x Fixed Capital Investment

Compared to Same Quarter of Previous Year

Source: IBGE

Fixed Capital Investment



32

Capacity Utilization

Source: CNI

75

76

77

78

7980

81

82

83

84

Jan97

Jan98

Jan99

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

Aug05

%




33

Brazilian economy grew a cumulative 9.2% in the last eightquarters.

Growth supported by domestic demand, with external

demand playing a secondary role.

Domestic demand driven by increase in fixed capital

investment, credit expansion and increase in employment

and real wages.

Investment rebounded since the third quarter of 2003,

enabling a more balanced growth of supply vis-à-vis the

expansion in demand.




34

Strengthening Resistance to Shocks




35

Bacen Acquisitions in the FX Market

-9

-6

-3

0

3

6

9

12

2001 2002 2003 2004 2005*

U S $ b i l l i o n

Source: Bacen

* Year through September



36

International Reserves

15

20

25

30

3540

45

50

55

60

65

Jan

99

Jul

99

Jan

00

Jul

00

Jan

01

Jul

01

Jan

02

Jul

02

Jan

03

Jul

03

Jan

04

Jul

04

Jan

05

Aug

05

Total Reserves

Net Reserves

U S $ b

i l l i o n

Dec

05

44.0

58.7

Source: Bacen, figures for Dec/2005: estimates





38

External Sustainability Indicators

%

10

15

20

25

30

35

40

1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun05

1,0

1,5

2,0

2,5

3,0

3,5

4,0

1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun05

%

12

16

20

24

28

32

36

1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun

05

Net External Debt/GDPNet External Debt/Exports

Interest Payments/Exports

Source: Bacen



39

Market Indicators

Brazil Risk Ibovespa Index in US$

B a s i s P

o i n t s

350

650

950

1,250

1,550

1,850

2,150

2,450

Jan97

Jan98

Jan99

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

2

4

6

8

10

12

14

16

Jan97

Jan98

Jan99

Jan00

Jan01

Jan02

Jan03

Jan04

Jan05

T h o u s a n d P o i n t s

Source: JP Morgan Chase, Bovespa

B il E i T d



40

In 2003-2005, government progressed with the process of international reserve accumulation, and reduction of

public sector’s FX exposure;

External sustainability indicators improved dramatically.

Since 1999, debt service and net debt-to-exports ratio have

fallen by 2/3. In the same period, net debt-to-GDP ratio has

halved.

Brazil risk and Ibovespa index summarize theimprovement in macroeconomic fundamentals and market

confidence.





Henrique de Campos Meirelles

Instituto de Empresa

Madrid, October 2005

Brasil Contry Analysis

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