Title: THE BRAZILIAN ECONOMY The Center for Latin American Issues The George Washington University Washington, February 10, 2006
1THE BRAZILIAN ECONOMYThe Center for Latin
American IssuesThe George Washington
UniversityWashington, February 10, 2006
- Otaviano Canuto
- World Bank - Executive Director forBrazil,
Colombia, Dominican Republic,Ecuador, Haiti,
Panama, Philippines,Suriname and Trinidad
Tobago
2-
- Brazils 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?
3Macro stability a remarkable journey
Inflation 1976/2005 - CPI Monthly ()
Real Ex-post Interest Rate a long, prudent
transition
Turning point
Consumer Price Index - IPC (FIPE)
Source IPEA. Until October 2005
25 drop in Real Interest Rates (premium on
NTN-C)
Expected Inflation - CPI
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.
3
Average rate of NTN-C auctions
Source Focus/Central Bank.
Source National Treasury
4For the first time in 25 years, the external debt
is not a concern in Brazil
US billion
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
5Current indicators are the result of a clear
strategy
Prudent Fiscal Policy
the main pillar of the economic policy
- Stable inflationary expectations
- Lower long-term interest rates
- Improved debt dynamics
- Greater fiscal flexibility
- More credit,more jobs
Cautious Monetary Stance
Lead to...
macro stability at the core of economic policies
External Adjustment
robust export growth and strong external accounts
Sustainable Economic Growth Helps Improve Social
Conditions
5
6Fiscal Commitment the main pillar of the
economic policy
Federal Revenue Service Receipts as GDP
Public Sector Primary Balance (in 12 months)
Source Internal Revenue Service SRF/MoF
Source Central Bank
Public Sector Nominal Deficit GDP (in 12
months)
Primary Balance by Government Level
6
Source Central Bank
Source Central Bank
7Robust export growth and strong external accounts
Trade Balance (US billion - 12 months
accumulated)
External Accounts in US billion 20 year
perpective
Source MDIC - SECEX
Net Reserves Excluding IMF
Current Account (12 months accumulated)
Source Central Bank
7
Source Central Bank
8External Sector Evolution - limited downside risk
- Increases in export volume explain a large part
of the trade balance - The improvement in the external performance is
not just a commodity prices play - Current commodities prices, especially
agricultural prices, are close to 1990's levels,
rather than in any historical peak - Also, the volatility of the agricultural prices
is smaller than that of minerals and, especially,
of oil.
Exports Price by Product Class (1996100)
Source Funcex (Ipeadata)
Volume-led growth of exports
Oil and Other Commodities - Price Evolution
Sep 04 Aug 05
Sep 02 Aug 04
70
60
50
40
30
20
10
0
-
10
Prim.
Semi.
Manuf
.
Total
Prim.
Semi.
Manuf
.
Total
Price
Volume
8
SourceFuncex
9Broad-based exports balanced growth across
markets and products
Brazilian exports by destination (as a of total
exports)
Brazilian exports by type (as a of total
exports)
9
10More production, more savings, more credit, more
jobs
GDP level (seasonally adjusted)
Savings Gross Capital Formation ( GDP)
Source IBGE II Quarter 2005
Source IBGE
Job Creation (Net hiring in the formal sector)
Credit to the private sector (Jan 2004100)
10
Source Ministry of Labor Caged 12-months
accumulated until Nov/05.
Source Central Bank
11 leading to a profitable, attractive private
sector
Primary and Secondary Issues of Stocks
Profitability of 500 Top Firms (1981-2004)
Source Conjuntura Econômica - FGV - August 2005
Net Foreign Direct Investment (as of GDP)
Private Bonds Registers and Issuances
BRAZIL
SourceCVM
12Micro reforms to fully reap the benefits of
macroeconomic policies
Reform of the housing construction market
- 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
Real Estate Credit (Jan-04 100)
Source Central Bank Note Private sector real
state credit reached R 28.5 bn in 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
12
13 and complement social policies
Proportion of the Income for Income Decil
(accumulated)
of total income
Decil of population
- 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
13
14Social indicators on the move
Gini index of the labor incomes
A social safety net that avoids extreme poverty
Drop in 1993-1995 reflects the impact of price
stabilization in 1994
Source IBGE
Source IBGE
Yearly Average Minimum Wage in US/month
Aver. of schooling years of 10 y-old (or more)
people
14
Source IBGE
15-
- With Brazil facing presidential elections in
October, does the economy face additional risks?
16Should an election year always be a year of
turbulence?
Economic Indicators in the year preceding
presidential elections
17Three years of reduction in the Debt/GDP ratio
brighten the fiscal outlook
Net Debt/GDP scenarios based on the FOCUS survey
Net Public Sector Debt / GDP
Data of Central Bank IGP-DI (wholesale
price index)modified
Scenarios are consistent with FOCUS Market
Expectations, which project the primary balance
at 4.25 of GDP and GDP growth at the 3.5 -
4.0 range
? 4 - 6 years deficit zero overall public
sector debt at levels close to those of Mexico
17
18International Reserves
19Market Expectations for 2006-2010
20Federal Public Debt DPF composition
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)
20
Source MorganMarkets, Broadcast
21A steady level of public external debt with
improved profile
Average Maturity of Bonds at Issue (includes
coupons)
External Debt National Treasury
Source National Treasury
Source National Treasury
External Public Debt Profile New Bonds and
Bradies
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
21
The outstanding amount between October and
December for 2005 is US 15 million for principal
and US 353 million for interest.
22Lower yields and longer term bonds
Yield of New Bonds Global and Euro
2002
22
- Source National Treasury
- Reopening Issuance
- Real Bond
23Economic 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 Brazils
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.
24Pro-growth agenda will be a challenge for the
next government
- Over the longer term, some measures that could
raise Brazils potential GDP are - Reduction in government spending, to reduce the
public sectors share of the economy and to
increase the private sectors 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 Brazils income distribution.
- Continuing the process of improving credit and
capital markets. -