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Brazil Economic Outlook Alexandre Bassoli

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Brazil Economic Outlook Alexandre Bassoli May, 2007 This presentation What are the drivers of the exchange rate appreciation? What explains the resilience of exports? – PowerPoint PPT presentation

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Title: Brazil Economic Outlook Alexandre Bassoli


1
Brazil Economic Outlook

Alexandre Bassoli
  • May, 2007

2
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

3
In spite of the BRL strengthening, trade
surpluses are approximately constant at USD 47bn
4
Terms of trade gains explain the resilience of
exports
  • Mainly as a result of soaring commodity prices,
    export prices accumulate an increase of 57 since
    Dec-02
  • The nominal exchange rate moved from 2.13 to 2.03
    BRL/USD between Apr-06 and Apr-07, but the
    profitability of exports actually increased 1.0
  • The increase of export prices has two important
    implications
  • More Dollars for a given volume of exports
  • Since the profitability is improving, there are
    incentives to increase, not reduce, the export
    volume

5
The improvement of sovereign risk boosts capital
inflows
6
Strong BRL is here to stay
  • Currency appreciation does not seem to reflect a
    bubble
  • Brazil has largely mitigated its sources of
    external vulnerability
  • Exchange rate volatility was structurally reduced
  • We forecast 1.95 BRL/USD in Dec-07

7
New GDP methodology brought two fundamental
changes
  • 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

8
Growth is gaining momentum pushed by domestic
demand
9
and this process will continue
10
The good news is that investments are growing
11
but the expansion is likely to exceed potential
growth in 2007
12
Inflation remains very well behaved, thanks to
the BRL appreciation and the deceleration of
administered prices
13
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

14
Fiscal policy more of the same
  • Public expenditures continue to grow at an
    extremely vigorous pace
  • The tax collection expansion is also
    outperforming GDP growth

15
The primary surplus will fall, but the nominal
deficit is likely to drop as well, thanks to
lower interest rates
16
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 higher
    interest rates in comparison to investment grade
    countries

17
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

18
Macroeconomic forecasts
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