THE BRAZILIAN ECONOMY The Center for Latin American Issues The George Washington University Washington, February 10, 2006 Otaviano Canuto World Bank - Executive Director for Brazil, Colombia, Dominican Republic, Ecuador, Haiti, Panama, Philippines, Suriname and Trinidad & Tobago
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THE BRAZILIAN ECONOMY
The Center for Latin American IssuesThe George Washington University
Washington, February 10, 2006
Otaviano Canuto
World Bank - Executive Director forBrazil, Colombia, Dominican Republic,Ecuador, Haiti, Panama, Philippines,Suriname and Trinidad & Tobago
Brazil’s economy under President Luiz Inácio Lula da Silva has been more stable than many pundits foresaw when President Lula took office three years ago, even to the point that the country has been able to repay its IMF loan early. To what does the Brazilian economy owe its good fortune?
Macro stability: a remarkable journeyReal Ex-post Interest Rate: a long, prudent transition
Real Ex-post Interest Rate: a long, prudent transition
* Consumer Price Index - IPC (FIPE) Source: IPEA. Until October 2005
25% drop in Real Interest Rates (premium on NTN-C*)
25% drop in Real Interest Rates (premium on NTN-C*)
Source: National Treasury
* Average rate of NTN-C auctions 3
Turning point
Lower real interest rates have a major impact on investment decisions; many more projects are now affordable on a market basis than in the 1990s.
Expected Inflation - CPIExpected Inflation - CPI
Source: Focus/Central Bank.
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
%
Real Interest Rate (Selic x IPC Fipe) Real Interest Rate (Selic x IGP-DI)
4.80
5.75
4.40
5.54
4.00
4.20
4.40
4.60
4.80
5.00
5.20
5.40
5.60
5.80
6.00
2005 2006 2007 2008 2009
% p
.y.
1/31/2005
11/18/2005
5% Line
+1%
-1%
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Nov-
76
Nov-
77
Nov-
78
Nov-
79
Nov-
80
Nov-
81
Nov-
82
Nov-
83
Nov-
84
Nov-
85
Nov-
86
Nov-
87
Nov-
88
Nov-
89
Nov-
90
Nov-
91
Nov-
92
Nov-
93
Nov-
94
Nov-
95
Nov-
96
Nov-
97
Nov-
98
Nov-
99
Nov-
00
Nov-
01
Nov-
02
Nov-
03
Nov-
04
Nov-
05
%
Pré-fixação da correção monetária e
câmbio
Plano Cruzado
Plano Bresser
Plano Verão
Plano Collor I
Plano Collor II
Plano Real
7%
8%
9%
10%
11%
12%
13%
14%
Dec-
00
Apr
-01
Aug
-01
Dec-
01
Apr
-02
Aug
-02
Dec-
02
Apr
-03
Aug
-03
Dec-
03
Apr
-04
Aug
-04
Dec-
04
Apr
-05
Aug
-05
Dec-
05
(% a
.a.)
8.45%
For the first time in 25 years, the external debt is not a concern in BrazilFor the first time in 25 years, the external debt is not a concern in Brazil
-
20,0
40,0
60,0
80,0
100,0
120,0
140,0
1985 1988 1993 1997 2001 2005
Exports Foreign Debt (Public Sector)
US$ billion
Total External Debt/Exports
0%
100%
200%
300%
400%
500%
1985 1988 1993 1997 2001 2005
For most of the last 25 years, the government
external debt was a multiple of exports. Now
the ratio is below one (close to 0,8)
Total external debt/export ratio
dropped by two thirds, from an average of 4 to
historical lows of 1,4
Current indicators are the result of a clear strategy
External Adjustment
Cautious Monetary Stance
Prudent Fiscal Policy
Sustainable Economic Growth Helps Improve Social Conditions Sustainable Economic Growth Helps Improve Social Conditions
the main pillar of the economic policy
macro stability at the core of
economic policies
robust export growth and strong external accounts
Lead to...
Stable inflationary expectations
Lower long-term interest rates
Improved debt dynamics
Greater fiscal flexibility
More credit,more jobs
5
Fiscal Commitment: the main pillar of the economic policy
Federal Revenue Service Receipts as % GDPFederal Revenue Service Receipts as % GDP
Public Sector Nominal Deficit % GDP (in 12 months)
Public Sector Nominal Deficit % GDP (in 12 months)Primary Balance by Government LevelPrimary Balance by Government Level
Source: Central BankSource: Central Bank
Source: Central Bank
Public Sector Primary Balance (in 12 months)Public Sector Primary Balance (in 12 months)
Source: Internal Revenue Service – SRF/MoF
6
11,7%
12,3%
13,9%14,2%
14,8%
16,2%
15,4%
16,1%
10%
11%
12%
13%
14%
15%
16%
17%
1997 1998 1999 2000 2001 2002 2003 2004
0.27
-0.09
-0.95
0.01
3.233.46 3.64
3.894.25
4.614.92
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Dec-
95
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Nov-
05
% G
DP
0.50.4
-0.3
0.6
2.4
1.9 1.8
2.42.5
3.0 3.0
0.1
0.7
1.1
0.6
-0.2
0.6
1.2
0.80.90.7
0.9
-0.4
0.1
-0.1
0.2
0.9 0.8 0.9 1.0
-0.7-0.5
-0.2
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Dec-
95
Dec-
96
Dec-
97
Dec-
98
Dec-
99
Dec-
00
Dec-
01
Dec-
02
Dec-
03
Dec-
04
Nov-
05
% G
DP
Central Government State-owned enterprises States and Municipalities
Source: MDIC/ SECEX1This contribution reflect December 04/ November 05 exports in terms of December 03/ November 04 exports2 Total in December 04/ November 053 Total growth in December 04/ November 05
… leading to a profitable, attractive private sector
Primary and Secondary Issues of StocksPrimary and Secondary Issues of Stocks
Net Foreign Direct Investment (as % of GDP)
Net Foreign Direct Investment (as % of GDP)
Source:CVM
Private Bonds Registers and IssuancesPrivate Bonds Registers and Issuances
2000
2001
2002
2003
2004
2005
0
2.000
4.000
6.000
8.000
10.000
12.000
14.000
Primary
Secundary
-1
0
1
2
3
4
5
6
2000 2001 2002 2003 2004
RussiaIndiaMexicoChinaBRASIL
15.2 14.6
41.5
8.7
5.3
9.6
47
97
47
25
5952
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005
0
20
40
60
80
100
120
Volume R$ bn # of Registers
BRAZIL
Profitability of 500 Top Firms (1981-2004)
Profitability of 500 Top Firms (1981-2004)
Source: Conjuntura Econômica - FGV - August 2005
The construction sector grew by 5.7% in 2004 and 2.1% in 2005H1, after years of contraction;
Financing rates dropped from 12 % p.y. to 9 % p.y. on average;
The flow of new loans grew by 60% in 2005, comparing with 2004. A further 50% increase is projected for 2006
Micro reforms to fully reap the benefits of macroeconomic policies
Reform of the housing & construction marketReform of the housing & construction market
Real Interest Rate with room to decline
Business environment (tax system. regulatory framework. judiciary
reform)
New Products: Mortgages. PIPS. securitization.private
equity insurance...
Fiscal Responsibility (macro stability)
Higher GDP growth and more jobs
Higher transparency
Less vulnerability
Real Estate Credit (Jan-04 = 100)* Real Estate Credit (Jan-04 = 100)*
Source: Central Bank*Note: Private sector real state credit reached R$ 28.5 bn in Nov-05
12
104
115
95
100
105
110
115
Feb-0
4
May-
04
Aug-0
4
Nov-
04
Feb-0
5
May-
05
Aug-0
5
Nov-
05
The number of house loans in 2005 was the
largest since 1994
Real estate is the next major market
for the banking sector
… and complement social policies
13
Proportion of the Income for Income Decil (accumulated)
Proportion of the Income for Income Decil (accumulated)
The National Household Survey PNAD 2004 illustrates the progress in social indicators that can be obtained with a 4% annual GDP growth and targeted social policies that preserve fiscal responsibility
Programs such as Bolsa Família, together with more jobs and greater supply of utilities services, have an important impact on social welfare
Only the very top income level saw their income decreasing between 2002 and 2004
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
< 30 < 40 < 50 <60 < 70 < 80
2002
2004
30.0
35.0
40.0
45.0
50.0
55.0
< 70 < 80 <90
2002
2004
3
Decil of population
% of total income
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Up to 10
Up to 20
Up to 30
Up to 40
Up to 50
Up to 60
Up to 70
Up to 80
Up to 90
Up to100
1993 1995 2002 2004
Social indicators on the move
14
Gini index of the labor incomesGini index of the labor incomes
Yearly Average Minimum Wage in US$/month
Yearly Average Minimum Wage in US$/month
A social safety net that avoids extreme poverty
A social safety net that avoids extreme poverty
Aver. of schooling years of 10 y-old (or more) people
Aver. of schooling years of 10 y-old (or more) people
For the first time, the selic-linked LFT accounts for less than 50% of the domestic public debt DPMFi
(and just above 40% of DPF)
A steady level of public external debt with improved profile
Source: National Treasury
Average Maturity of Bonds at Issue (includes coupons)
Average Maturity of Bonds at Issue (includes coupons)
The outstanding amount between October and December for 2005 is US$ 15 million for
principal and US$ 353 million for interest.
External Public Debt Profile – New Bonds and Bradies
External Public Debt Profile – New Bonds and Bradies
21
-
2,000
4,000
6,000
8,000
10,000
12,000
20
02
*2
00
3*
20
04
*2
00
5*
20
06
20
07
20
08
20
09
20
10
20
112
01
22
01
32
01
42
01
52
01
62
01
72
01
82
01
92
02
02
02
12
02
22
02
32
02
42
02
52
02
62
02
72
02
82
02
92
03
02
03
12
03
22
03
32
03
42
03
52
03
62
03
72
03
82
03
92
04
0
US
$ M
illio
n
Principal Interest
External Debt – National TreasuryExternal Debt – National Treasury
New
Issuances
Source: National Treasury
Restructured Debt (Bradies)
New Bonds
Contractual Debt
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Nov-
97
Mar-
98
Jul-98
Nov-
98
Mar-
99
Jul-99
Nov-
99
Mar-
00
Jul-00
Nov-
00
Mar-
01
Jul-01
Nov-
01
Mar-
02
Jul-02
Nov-
02
Mar-
03
Jul-03
Nov-
03
Mar-
04
Jul-04
Nov-
04
Mar-
05
Jul-05
Nov-
05
US
$ M
illio
n
“Cleaning Up” of the External Debt
Early payment of IMF and Paris Club
Exchange of C-Bond
Issuance in Reais - BRL 2016
Roll-over of 75% of the maturities in 2006-2007
Lengthening of the Maturity (11 years) and greater access to Asia
-
2,0
4,0
6,0
8,0
10,0
12,0
14,0
2001
2002
2003
2004
2005*
Years
11,9
4,18
Yield of New Bonds – Global and EuroYield of New Bonds – Global and Euro
Lower yields and longer term bonds
Source: National Treasury•* Reopening Issuance •** Real Bond
22
2002
Economic and political outlook for 2006 and 2007
Strong international liquidity and accelerated global growth create an environment which
is still very positive for emerging markets and, in particular, for Brazil. Slowdown in export growth, but trade surplus should remain very high. International
reserves grow significantly, further improving Brazil’s external solvency indicators. The
Real depreciates slightly. Favorable balance of risks and continuity of inflation convergence process. There is a
strong probability of inflation coming in below the annual target for the first time since
the introduction of the inflation-targeting regime. Cycle of monetary easing enables significant decline in nominal interest rates, without
jeopardizing the convergence of inflation to its targets. Real interest rates decline
gradually. Monetary easing, lower inflation and a recovery in the confidence of businessmen and
consumers should provide a fresh impetus to economic growth, making the current cycle
the longest in the past 25 years. Maintenance of primary surplus in line with its target allows for a continued decline in
the net debt/GDP ratio. 2006 presidential election should be a straight race between President Lula and the
PSDB candidate. Opinion polls reveal a preference for low inflation, increasing the
incentive to maintain current economic policy intact.
Pro-growth agenda will be a challenge for the next government
Over the longer term, some measures that could raise Brazil’s potential GDP are:
• Reduction in government spending, to reduce the public sector’s share of the economy and to increase the private sector’s contribution.
• More efficient government spending (e.g. in education).
• Tax reform with a lightening of the tax burden (reducing the advantages of the informal sector), mainly for investment and expanding the tax base.
• Greater trade liberalization in the Brazilian market.
• Expansion of negotiations of bilateral agreements, advances at the WTO, and resumption of negotiations under the FTAA and with the European Union.
• Leverage investments in infrastructure that have major positive externalities (e.g. strengthening of regulatory agencies, advances in the Public-Private Partnerships, resumption of the privatization process, including concessions to operate public services).
• Improving Brazil’s income distribution.
• Continuing the process of improving credit and capital markets.