Deutsche Bank
Research
Brazil Economic Update
José Carlos de Faria
jose faria@db com +55(11)2113
[email protected]
+55(11)2113-5185
5185
April
p 2013
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA (P) 054/04/2013
Overview: the Central Bank reacts with caution
ƒ We continue to forecast 3.3% GDP growth in 2013, following last year’s disappointing 0.9% growth. We expect
consumption to remain buoyant due to low unemployment and aggressive fiscal easing. More importantly, we expect
investment to recover due to low interest rates, ample supply of subsidized credit by official banks, concessions in the
infrastructure sector, and projects related to the 2014 FIFA World Cup. We also expect a significant increase in agricultural
production. The data available so far suggest that GDP grew around 1.0% QoQ in 1Q13, which would be compatible with
our 3.3% forecast for the whole year.
ƒ However, we believe the risk remains tilted to the downside. Consumption has showed some signs of weakness, which
could reflect the deceleration in job creation
creation, slow expansion of consumer credit
credit, and the negative effect of high inflation on
consumer confidence and disposable income. Although private investment seems to be recovering – as attested by the
strong rise in the production of capital goods – it remains to be seen whether it will be able to keep momentum in the next
quarters, given the lack of enthusiasm revealed by the latest business confidence surveys. Furthermore, while the
y tightening
g
g cycle
y
will p
probably
y be q
quite short, it might
g hurt consumption
p
and investment.
monetary
ƒ After President Dilma Rousseff stated, at the end of March, that she “did not believe in policies that aimed to fight inflation
by reducing economic growth,” Central Bank official stepped up their “hawkish” tone, paving the way for an increase in
interest rates that came sooner than we had expected. The Central Bank raised the SELIC rate by 25bps in April, but
g
that they
y would p
proceed with “caution” due to lingering
g
g domestic and external uncertainty.
y We continue to expect
p
signaled
a short tightening cycle of only three 25bp hikes (including April’s move). While the increase in interest rates is positive
because it shows that the government is willing to take unpopular measures to prevent inflation from exceeding the 6.5%
ceiling of the tolerance band, we do not expect enough monetary tightening to bring inflation back to the 4.5% target, as it
would entail a politically unwelcome increase in unemployment ahead of the 2014 elections.
ƒ We are keeping our FX forecasts unchanged for now. In the short-term, we still believe the risk is slightly tilted toward a
stronger BRL, due to lingering concerns about inflation, and aggressive monetary easing in Japan (although we are
assuming that the government will not soften its capital controls in the near term). In the medium term, however, we are
becoming more concerned about the balance of payments. The current account deficit is growing faster than we expected,
mainly due to export weakness. Given limited domestic saving, higher investment ratios will demand more external saving,
and thus a larger current account deficit. Foreign direct investment has been financing the current account deficit so far,
but could become more scarce depending on Brazil’s economic performance and increase in uncertainty arising from high
inflation and steady deterioration in the fiscal accounts.
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
1
Main forecasts, April 2013*
Variable
2013F
2014F
GDP growth
Ù Maintained at 3.3%, as the numbers available
so far confirm expectations of GDP growth
around 1.0% QoQ in 1Q13, with an encouraging
recovery in investment. However, the risk seems
to be on the downside.
Ù Stable at 4.2%, as we expect the government
to continue to stimulate the economy ahead of
the elections in October 2014. Also, the country
will host the FIFA World Cup next year. However,
the risk remains on the downside.
IPCA consumer
price index
Ù Maintained at 5
5.4%
4% despite recent high
numbers, due to the several tax cuts and
expectations of deceleration in food prices.
However, the risk is on the upside, as we are
g no further hikes in fuel p
prices.
assuming
Ù Maintained at 5
5.6%,
6% as we expect inflation to
remain under pressure as growth accelerates
and the authorities remain reluctant to tighten
monetary policy.
SELIC rate
(year end)
Ù Stable at 8.00%, as the Central Bank has
indicated that it will tighten monetary policy with
“caution” due to lingering domestic and external
uncertainty
uncertainty.
Ù Stable at 9.0%, as the Central Bank will likely
have to tighten monetary policy further after the
election to keep inflation below the 6.5% ceiling.
BRL/USD
(year end)
Ù Stable at BRL2.00/USD, as the CB seems to
favor a somewhat stronger BRL to fight inflation,
but the Finance Ministry favors a weaker BRL to
protect the local industry
industry.
Ù Stable at BRL2.10/USD, as a growing current
account deficit and higher international interest
rates do not bode well for the BRL. The risk is
tilted toward a weaker BRL
BRL.
Current
account deficit
× Raised further to USD70bn (2.9% of GDP)
from USD64bn, due to the weak performance of
Brazilian exports.
× Raised further to USD85bn (3.3% of GDP)
from USD72bn, as an increase in domestic
absorption is poised to raise imports.
Primary fiscal
surplus
Ù Stable at 1.8% of GDP, as the government
continues to shift to a more expansionary fiscal
policy. The risk is on the downside, given the
latest changes to the Budget Guideline Law.
Ù Stable at 1.5% of GDP, as the government will
continue to ease fiscal policy to stimulate the
economy during the election year.
Source: DB Global Markets Research, forecasts (*) compared to March 2013.
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
2
We continue to project GDP growth of 3.3% for 2013
ƒ We continue to forecast GDP growth of 3.3% for 2013,
but the risk remains on the downside. Our preliminary
forecast for 1Q13 GDP is +1.1% QoQ.
IBC-Br (monthly GDP proxy)
3-month %
3.0%
ƒ The
Th IBC
IBC-Br
B (GDP proxy)) ffellll 0
0.52%
52% M
MoM
M iin F
February
b
after climbing 1.43% MoM (revised from 1.29%) in
January. The number was not as bad as we had feared,
considering the sharp decline in industrial production and
weak retail sales
sales. Given preliminary data indicating a
rebound in industrial production, we expect the IBC-Br to
recover in March.
2 5%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
ƒ We continue to expect a substantial improvement in the
agricultural
i lt l sector
t thi
this year, especially
i ll d
due tto grain
i
production, which is expected to grow by approximately
13%, led by soybeans.
-0.5%
-1.0%
Source: BCB
ƒ We believe the industrial sector will benefit from the
weaker BRL and lower payroll taxes. We expect services
to continue to thrive on low unemployment and strong
domestic demand.
Quarterly GDP
3%
QoQ
2.5% 2.5%
2%
1.9%
2.0%
1.5%
1%
0.9% 0.9%
1.1%
0.8%
0.6%
0.1% 0.1%
0%
-0.1%
0.3% 0.4%
0.6%
ƒ On the demand side, we believe low unemployment will
continue to support household consumption, which will
probably grow slightly less than GDP. However, given the
deceleration in job creation, lower confidence, and credit
sluggishness, we believe the risk is on the downside.
ƒ We expect a 4% increase in investment, following last
year’s dismal performance, due to low interest rates,
cheap official credit, increasing government spending on
infrastructure, projects linked to the 2014 World Cup, and
concessions in the transportation sector.
-1%
-2% -1.7%
Source: IBGE, Deutsche Bank forecasts
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
3
Industrial production was weaker than expected in February
ƒ Industrial production fell 2.5% MoM in February, more
than expected (our forecast was -1.0% MoM), giving back
the 2.6% MoM gain posted in January.
Industrial production
200
2002=100
ƒ The
Th vehicles
hi l sector,
t which
hi h h
had
db
been mainly
i l responsible
ibl
for the increase in January, was also the main culprit in
February’s strong reversal. Vehicle production fell 9.1%
MoM (after climbing 6.2% MoM in January), leading the
6 8% MoM plunge in durable consumer goods (vs
6.8%
(vs. +2
+2.9%
9%
MoM in January).
178
156
134
ƒ Non-durable consumer goods fell 2.1% MoM, as food
and beverages fell more than 3% MoM, and medicine
production
d ti plunged
l
d 10
10.8%
8% M
MoM.
M IIntermediate
t
di t goods
d (th
(the
largest industrial sector) fell 1.3% MoM (vs. 1.2% MoM in
January), as mining production declined 1.9% MoM.
112
Capital
Durables
Intermediate
Non-durables
90
Source: IBGE
Confidence and capacity utilization in the industry
%
120
88
86
110
84
100
82
90
80
80
Business confidence
78
Capacity utilization (RHS)
70
76
ƒ The silver lining was the 1.6% MoM gain in capital
goods, despite the large 9.2%
% increase posted in January
– which bodes well for the recovery in investment, that
seems to be reacting to the government’s incentives.
ƒ As car production rebounded in March (+39% MoM), we
expect overall industrial production to grow as well, by
approximately 1.0% MoM. In that case, production would
have grown 0.8% QoQ in 1Q13 after staying flat in 4Q12.
p the g
gradual recovery,
y business confidence in the
ƒ Despite
industrial sector remains lukewarm. The FGV index fell
1.5% MoM in March, remaining above its neutral level, but
falling to the lowest level since September 2012. The
expectations index declined 1.6% MoM, maybe due to
high inflation and expectations of higher interest rates.
Source: FGV
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
4
Consumption is showing signs of weakness
ƒ Retail sales fell 0.4% MoM in February, after climbing
0.5% MoM in January. The number was much worse than
our forecast of +2.0% MoM. The main surprise came from
supermarket sales
sales, which fell 1
1.0%
0% MoM
MoM, in contrast with
much stronger data provided by the ABRAS supermarket
association.
Retail sales
125
2011 = 100
115
Supermarket sales
Durables
105
Cars
95
ƒ In the year-on-year comparison, retail sales fell 0.2%.
The “broad
broad retail sales index”
index (which also includes cars
and construction materials) fell 0.7% MoM, worse than our
+0.2% MoM forecast, as car sales fell 1.7% MoM. The
broad index still rose 1.2% YoY.
85
75
65
ƒ The
Th d
deceleration
l ti iin retail
t il sales
l could
ld reflect
fl t slower
l
jjob
b
creation and sluggish credit growth. It could also be a
consequence of lower consumer confidence and erosion in
disposable income caused by high inflation.
55
Source: IBGE
Consumer confidence
150
ƒ The FGV
G index off consumer confidence
f
fell
f 2.0%
% MoM in
March, posting its sixth consecutive decline. The current
conditions index fell 3.4% MoM, while the expectations
index declined 1.5%. Although the current conditions index
remains relatively high due to low unemployment and low
interest rates, consumers appear to be frustrated with the
slow pace of economic growth and persistently high
inflation.
Consumer confidence
Current conditions
140
Expectations
130
120
110
ƒ Business
B i
confidence
fid
iin th
the retail
t il sector
t h
has weakened
k
d
as well, probably reflecting the slowdown in sales and the
removal of some tax rebates. The government reacted by
cancelling the increases in the IPI tax on cars previously
scheduled for April and July
July.
100
90
Source: FGV
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
5
Unemployment remains very low, but risk is on the upside
ƒ The unemployment rate fell slightly to 5.4% in February
from 5.5% in January on a seasonally-adjusted basis,
according to our estimates.
Unemployment
11
%
ƒ After
Aft declining
d li i iin D
December
b and
d JJanuary, average reall
earnings rose a hefty 1.2% MoM in February (2.4% YoY),
reflecting the tight labor market.
10
9
8
ƒ We expect the unemployment rate to average 5.5% this
year, unchanged from 2012. Low unemployment and high
wages have been providing important support for
consumption.
7
Unemployment
6
Seasonally-adjusted
5
ƒ Nevertheless, the risk seems to be tilted toward
somewhat higher unemployment, given the deceleration in
job creation and risks to GDP growth.
4
Source: IBGE, DB seasonal adjustment
Average real earnings
8%
YoY%
YoY% (LHS)
Job creation (CAGED)
BRL, inflation-adjusted
1900
Earnings (RHS)
125
105
7%
1800
5%
1700
85
65
45
4%
1600
Services
Industry
Construction
Agriculture + mining
25
2%
5
1500
1%
-15
-1%
1400
Source: CAGED
Source: IBGE
Deutsche Bank
Brazil Economic Update
4/18/2013
-35
José Carlos de Faria
April 2013
6
Some signs of weakness
ƒ Business confidence in the industrial sector declined in
March, interrupting its gradual recovery.
Index of financial leading indicators
3%
ƒ Our “index of financial leading indicators” has
d
decelerated
l t d again,
i d
due tto llower b
business
i
confidence
fid
and
d
stock market sell-off.
2%
1%
0%
ƒ Business confidence in the construction sector remains
low. In the retail sector, confidence has declined due to the
increase in the IPI tax on cars and home appliances
(although the government’s decision to postpone the tax
hikes could help). Business confidence in the services
sector does not show much enthusiasm either.
-1%
-2%
-3%
-4%
-5%
-6%
6%
ƒ Loan applications to the National Development Bank fell
sharply in 1Q13 after surging in 4Q12, suggesting that a
strong recovery in private investment is not guaranteed.
Source: Deutsche Bank
Business confidence
150
145
BNDES loan applications
Services
50,000
BRLmn
Public sector
Retail
Construction
40,000
140
Private sector
3-month mov avg.
30,000
135
130
20,000
125
10,000
120
0
115
Source: FGV
Deutsche Bank
Brazil Economic Update
4/18/2013
Source: BNDES
José Carlos de Faria
April 2013
7
Reminder: the CB has changed the credit data methodology
Total loan breakdown (53% of GDP)
Households /
free market
29%
Corporates /
free market
29%
ƒ The Central Bank introduced a new methodology to
calculate its credit statistics in January. The new data are
broader and provide more details. The downside is that
some of the series are rather short (beginning in March
2011), which makes the analysis more difficult. The main
changes were:
ƒ Data on interest rates, concessions and NPLs, which
were previously limited to a subset of the data
data, now
include all earmarked (directed) loans (farm loans,
mortgages, and BNDES loans) and leasing.
Households /
directed
17%
Corporates /
directed
25%
ƒ More information, including all administered loans to
households,
h
h ld a llarger b
breakdown
kd
off credit
dit cards
d and
da
larger breakdown of corporate loans.
ƒ Broader data and details on payroll-debit loans.
Source: BCB
Household credit breakdown
BNDES *
3%
Rural loans *
8%
Others*Overdraft
1%
2%
Personal credit
8%
Payroll-debit
loans
18%
Mortgages *
24%
Others (free)
4%
Leasing
1%
Durable goods
19%
Credit cards
12%
ƒ New data,, such as the average
g maturityy of
concessions, in addition to the maturity of outstanding
loans.
ƒ Total bank loans as a percentage of GDP changed very
little and stood at 53
53.2%
2% in January 2013 (including 28
28.8%
8%
in loans to corporate and 24.5% in loans to
households/individuals).
ƒ Some loans that were previously classified as “freemarket” loans (e
market
(e.g.
g farm loans and mortgage loans at
market rates) are now directed loans. Because of the new
classification, the share of earmarked (directed) loans in
the total climbed to 41% from 37%.
Source: BCB; (*) directed loans.
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
8
Credit origination improved somewhat in February
ƒ Total bank loans rose 0.7% to BRL2,384bn in February.
Although “free market” loans increased by only 0.4%,
directed loans climbed 1.2% MoM, as mortgage loans
increased 1
1.9%
9% MoM and BNDES lending rose 0
0.6%
6% MoM
MoM.
Government banks raised their market share to 48.4%
(compared to 43.8% in February 2012).
Credit origination
7.0
BRL/day
6.0
5.0
ƒ Adjusting for working days, new consumer loans in the
free market”
market rose 12
12.6%
6% MoM
MoM, offsetting a 10
10.0%
0% MoM
“free
fall in January (the increase was led by payroll-debit loans,
which offset a sharp decline in vehicle financing).
Corporates
4.0
Households
3.0
ƒ Perhaps the best news was the decline in nonperforming
f
i loans
l
iin th
the consumer segment,
t tto 7.7%
7 7% iin
February from 7.9% in January, moving further away from
the peak of 8.2% recorded in September 2012.
2.0
Source: BCB, DB seasonal adjustment
Consumer debt service burden (% of income)
Non-performing
Non
performing loans
24
9
23
8
7
22
21 7
21.7
21
6
20
5
19
4
18
3
17
2
16
1
Source: BCB
Deutsche Bank
Brazil Economic Update
4/18/2013
%
Households
Corporates
Households (new)
Corporates (new)
Source: BCB
José Carlos de Faria
April 2013
9
Inflation has breached the 6.5% ceiling
IPCA consumer price index
MoM%
0.9%
MoM%
YoY%
YoY%
8.0
0.8%
7.0
0.6%
0.5%
6.0
0.3%
5.0
0.2%
0 0%
0.0%
40
4.0
Source: IBGE
IPCA: headline,
headline core,
core services and food
16%
YoY%
14%
12%
Headline Inflation
Core Inflation
Target
Services
Se
ces
Food
ƒ Core inflation seems to be decelerating slowly as well,
while the “diffusion index” (the proportion of products
whose prices are rising) remains high (69% in March).
Service prices remain under pressure as well (8
(8.4%
4% YoY in
March), reflecting the tight labor market.
ƒ That said, food prices have played an important role in
the inflationary process, jumping 15% in the year to March.
W expectt food
We
f d inflation
i fl ti to
t decelerate
d
l t due
d tto lower
l
agricultural commodity prices and expectations of an
increase in domestic farm production. We also believe the
effect of the tax cuts on food prices has been muffled by
sharp increases in perishable products that are mostly
transitory. We expect food prices to decelerate in April.
8%
6%
4%
2%
Source: IBGE
4/18/2013
ƒ Inflation is decelerating very slowly despite the
government’s massive efforts to curb prices, including a
18% reduction in electricity prices in February (which
shaved approximately 60bps off the IPCA)
IPCA), a
postponement of the increase in public transportation
prices, and the elimination of federal taxes levied on a
basket of 16 essential products in March (with an
estimated effect of 40bps)
40bps).
ƒ We believe the deterioration in expectations arising from
the widespread perception that the Central Bank has
abandoned the 4.5%
4 5% target has affected inflation.
inflation The last
time inflation was lower than 5.5% was in 2009.
10%
Deutsche Bank
Brazil Economic Update
ƒ After climbing a hefty 0.86% MoM in January and 0.60%
in February, the IPCA rose 0.47% in March, taking YoY
inflation to 6.59%, the highest rate since Nov-11. The
inflation target’s
target s tolerance band ceiling is 6
6.50%.
50%
José Carlos de Faria
April 2013
10
The Central Bank has initiated a ‘cautious’ tightening cycle
ƒ Despite very high inflation in 1Q13, we are keeping our
2013 IPCA forecast at 5.4% for now, mainly due to the
several tax cuts introduced to curb prices. Our forecast
assumes a strong deceleration in food price inflation
inflation, and
no further increases in gasoline prices this year.
IPCA consumer price index and inflation targets
9.0
YoY%
80
8.0
7.0
ƒ The Central Bank raised the SELIC rate by 25bps to
7.50% in April. While we expected the first hike to happen
in May
May, inflation above 6
6.5%
5% YoY and the ensuing public
outcry probably hastened the decision. President Dilma
Rousseff’s claiming that she was against policies that
fought inflation by reducing economic activity hurt the CB’s
credibility an probably precipitated the decision as well
well.
6.0
5.0
4.0
3.0
2.0
1.0
Source: IBGE, DB forecasts
Expected inflation and SELIC overnight rate
6.5
%
6.0
E{IPCA}, 12m (LHS)
4.5% target
Selic rate (RHS)
55
5.5
%
20
19
17
16
6
15
5.0
14
4.5
12
11
40
4.0
10
3.5
8
3.0
7
Source: BCB
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
ƒ However, two of the eight COPOM members voted for no
hike at all, and the CB stated that local and external
uncertainty “recommend that monetary policy be managed
with caution
caution,” thus indicating that the next rate hikes will
not exceed 25bps per meeting.
ƒ We believe the next decisions will be data dependent.
However, the CB is unlikely to accelerate the hikes if
inflation continues to surprise on the upside (unless
economic activity picks up strongly), and might even
interrupt the cycle if inflation surprises on the downside.
Raising rates aggressively at this juncture could jeopardize
the incipient economic recovery
recovery, and the authorities are
comfortable with inflation slightly below 6%.
ƒ We continue to forecast only three hikes of 25bp
(including the one in April). We do not expect inflation to
converge to the 4
4.5%
5% target anytime soon
soon, and forecast
another tightening cycle after the October 2014 election.
11
Changes to the LDO allow more fiscal easing
ƒ The central government posted a large primary fiscal
deficit of BRL6.4bn in February, mainly due to larger-thanexpected transfers to local governments and lower-thanexpected federal revenues
revenues, partly due to the tax cuts
implemented to boost economic activity and curb inflation.
Federal spending
7.5%
% of GDP
Social security
7.0%
6.5%
6.0%
Current and capital
spending
5.5%
5.0%
Payroll
4.5%
4.0%
Source: STN
Consolidated primary fiscal balance
4.5%
% of GDP
4.0%
ƒ The primary surplus totaled BRL19.8bn in 2M13, falling
24.5% YoY. While revenues rose 7.4%, federal spending
jumped 13.9%,
13 9% led by a 54% jump in unemployment
benefits, a 27% increase in current spending, and a 28% in
investment. The consolidated primary fiscal surplus over
12 months declined to 2.16% from 2.46% of GDP, and we
expect it to decline further to 1
1.8%
8% by year-end
year end.
ƒ The government will be allowed to deduct up to
BRL65.2bn (1.3% of GDP) in 2013 and BRL67bn (1.2% of
GDP) in 2014 from its primary surplus target of 3.1%. The
deductions include the PAC investment program and tax
cuts introduced to curb inflation and stimulate economic
activity (such as a BRL16bn in payroll tax cuts in 2013).
ƒ Moreover, according to the latest LDO (Budget Guideline
Law) the federal government will no longer have to make
Law),
up for the local governments’ failure to meet their primary
targets (0.95% of GDP). Thus, the effective primary
surplus could fall to 0.85% of GDP in 2013 and 2014.
3.5%
3.0%
2.5%
2.0%
1.5%
Target
1.0%
Primary surplus
0.5%
Primary fiscal surplus (% of GDP)
Federal government
0.0%
2007
2008
2009
2010
2011
2012
2.23%
2.35%
1.31%
2.09%
2.25%
1.95%
Local governments
1.12%
1.01%
0.65%
0.55%
0.80%
0.49%
Total public sector
3.31%
3.42%
2.00%
2.70%
3.11%
2.38%
Source: BCB
Source: BCB
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
12
The current account deficit is rising
Current account and trade balance
50
USDbn, 12 months
40
ƒ The
Th trade
t d statistics
t ti ti have
h
been
b
di
distorted
t t db
by th
the
accounting of approximately USD4.5bn in oil imports that
actually took place in 2012. In July 2012, new rules
abolished a initial declaration and established that
companies had 50 days to report the imports after they
were unloaded. Consequently, oil importers gained more
time to report to the government the data that fed the trade
statistics. (Please refer to the following report more details:
https://gm db com/servlet/ShowContent?ResourceType=S
https://gm.db.com/servlet/ShowContent?ResourceType
S
&ServerLocation=1&ResourceId=1648038 )
30
20
10
0
-10
-20
-30
-40
-50
50
Trade balance
-60
Current account
ƒ However, the trade balance that excludes oil trade also
shows a gradual deterioration, due to an increase in the
demand for imports arising from faster domestic growth
growth,
and stagnation of exports due to sluggish global growth,
trade barriers in Argentina, and a decline in the demand for
oil from the United States.
-70
Source: BCB
Trade balance
45
USDbn, 12 months
35
25
15
5
Trade balance
Oil balance
Ex-oil balance
(5)
Source: SECEX
4/18/2013
ƒ We have lowered our 2013 trade surplus forecast to
USD11bn from USD17bn, and revised our current account
deficit forecast to USD70bn (2.9% of GDP) from USD64bn.
Instead of a USD6bn balance of payments surplus, we
now forecast equilibrium
equilibrium. A crucial assumption is that
foreign direct investment (FDI) will total USD65bn and
finance most of the current account deficit.
ƒ For 2014, we now forecast a current account deficit of
USD85bn (3
(3.3%
3% of GDP) and a balance of payments
deficit of USD7bn.
(15)
Deutsche Bank
Brazil Economic Update
ƒ The trade balance posted a USD5.2bn deficit in 1Q13,
compared to a USD2.4bn surplus in 1Q12, as imports
grew 11.6% and exports fell 3.1% YoY.
José Carlos de Faria
April 2013
13
The balance of payments tends to worsen
Current account components
-40
USDbn, 12m
Profits & dividends
I t
Interest
t
International travel
Leasing
35
-35
-30
-25
-20
-15
-10
-5
0
Source: BCB
FDI and current account deficit
80
Balance of payments (USDbn)
USDbn, 12 months
70
Uses
Current account
C
Trade balance
Services
Interest
Profits and dividends
International travel
Others
Transfers
Long-term amortization
Sources
FDI
Portfolio investment
Long-term disbursements
Brazilian assets abroad
Short-term capital, others
Change in reserves
2010
2011
2012
2013F
2014F
-81.1
-47.3
47 3
20.1
-70.3
-9.6
-30.4
-10.5
-19.8
2.8
-33.8
81.1
48.5
52.3
62.6
-58.9
24.5
-49.5
-90.2
-52.5
52 5
29.8
-85.3
-9.7
-38.2
-14.7
-22.7
3.0
-37.7
90.2
66.7
7.1
83.6
-20.9
10.7
-63.4
-93.9
-54.2
54 2
19.4
-76.5
-11.8
-24.1
-15.6
-25.0
2.8
-39.7
93.9
65.3
10.7
57.8
-29.6
10.5
-26.6
-115.0
-70.0
70 0
11.0
-84.0
-12.0
-30.0
-16.0
-26.0
3.0
-45.0
115.0
65.0
10.0
55.0
-20.0
5.0
0.0
-135.0
-85.0
85 0
3.0
-91.5
-12.0
-34.0
-17.0
-28.5
3.5
-50.0
135.0
70.0
15.0
60.0
-30.0
13.0
7.0
Source: BCB, DB forecasts
FDI
60
Current account deficit
50
40
30
20
ƒ FDI is particularly important because the government
reduced the attractiveness for other types of foreign
investment (especially portfolio) due to capital controls and
aggressive intervention in publicly-traded companies.
ƒ Although FDI flows have been quite resilient so far
far, there
is a risk that Brazil’s disappointing growth rates and rising
risk premium due to high inflation and steady deterioration
of the fiscal accounts could eventually affect FDI.
10
0
-10
-20
Source: BCB
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
14
The medium-term outlook for the BRL is more uncertain
BRL/USD and CB intervention (spot and futures)
2.15
BRL/USD
2.05
1.95
BRL/USD
1.85
CB buys USD
CB sells USD
1.75
1.65
6
Source: Bloomberg Finance LP, DB Global Markets Research
FX flows and CB intervention
13
USDbn
11
NetFX flow
CB intervention
9
7
5
3
-1
1
-3
-5
-7
Source: BCB
4/18/2013
ƒ Concerns about high inflation and the decline in net FX
flows have produced speculation that the government
might remove some capital controls (such as the 6% IOF
tax on foreign purchases of domestic bonds) to support the
BRL.
ƒ Nevertheless,
Nevertheless it is not clear whether the government is
willing to lower capital controls when facing potential
inflows arising from aggressive monetary easing in Japan,
as an excessively strong BRL could impair the
competitiveness of the local industry
industry.
ƒ While the BRL will probably remain relatively stable in the
near future as the Central Bank remains concerned about
inflation (we are keeping our forecasts unchanged), we
believe the medium-term
medium term outlook for the currency is
becoming more uncertain due to the growing current
account deficit.
ƒ Although current account deficits should be normal for a
country that has low domestic saving and relies on
external saving to grow, the deficits will not be sustainable
unless foreign investors remain interested in financing it
under the tight conditions established by the government.
g of q
quantitative easing
g in the developed
p
The unwinding
economies could reduce supply of financing in the future.
1
Deutsche Bank
Brazil Economic Update
ƒ The Central Bank has not intervened in the FX market
since March 27, when it sold FX swaps as the currency
depreciated and hit BRL2.025/USD. While the authorities
claim that they do not intend to keep the currency inside a
band, they probably want to avoid a rapid depreciation due
to its potential effect on inflation.
José Carlos de Faria
April 2013
15
Economic indicators and forecasts
2009
2010
2011
2012
2013F
2014F
-0.3
3,239.4
1,625.6
8,489.8
4.4
-6.7
-7.4
8.1
7.6
3,770.1
2,143.9
11,094.0
6.9
21.3
10.5
6.7
2.7
4,143.0
2,475.1
12,687.1
4.1
4.7
0.3
6.0
0.9
4,402.5
2,252.4
11,446.1
3.1
-4.0
-2.7
5.5
3.3
4,807.4
2,403.3
12,109.8
3.2
4.5
3.5
5.5
4.2
4,402.5
2,552.0
12,754.9
4.2
7.1
3.0
5.3
4.3
-1.7
17
5.9
11 3
11.3
6.5
51
5.1
5.8
78
7.8
5.4
44
4.4
5.6
52
5.2
2.0
-3.3
42.1
2.7
-2.5
39.1
3.1
-2.6
36.4
2.4
-2.5
35.1
1.8
-2.9
35.2
1.5
-2.5
34.7
25.3
-24.3
-1.5
25 9
25.9
239.1
20.2
-47.3
-2.2
48 5
48.5
288.6
29.8
-52.5
-2.1
66 7
66.7
352.0
19.4
-54.2
-2.4
65 3
65.3
378.6
11.0
-70.0
-2.9
65 0
65.0
378.6
3.0
-85.0
-3.3
70 0
70.0
371.6
277.6
17.1
351.9
16.4
404.1
16.3
440.6
19.6
460.6
19.2
480.6
18.8
8.8
1.74
2.00
10.8
1.67
1.76
11.0
1.88
1.67
7.3
2.04
1.95
8.0
2.00
2.00
9.0
2.10
2.07
Economic Activity
Real GDP (%YoY)
GDP (BRLb
(BRLbn))
GDP (USDbn)
GDP per capita (USD)
Household consumption (%YoY)
Investment ((%YoY))
Industrial production(%YoY)
Unemployment Rate (%)
Prices
IPCA (%)
IGP M (%)
IGP-M
Fiscal Accounts
Primary balance (% of )
Nominal balance (% of )
Net government debt (% of ) year end
External Accounts
Trade balance (USDbn)
Current account balance (USDbn)
Current account balance (% of )
Foreign direct investment (USDbn)
Foreign exchange reserves (USDbn)
Debt Indicators
Gross external debt (USDbn)
Gross external debt (% of GDP )
I t
Interest
t and
d exchange
h
rates
t
Overnight interest rate (%, eop)
Exchange rate (/USD, eop)
Exchange rate (/USD, average)
Source: National statistics, DB forecasts
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
16
Long-term forecasts
GDP
Growth (%)
IPCA
Dec/Dec (%)
BRL/USD
year-end
y
SELIC
Average
g (%)
2010
7.5
5.9
1.67
10.0
2011
2.7
6.5
1.88
11.7
2012
1.0
5.7
2.04
8.5
2013F
3.3
5.4
2.00
7.7
2014F
4.2
5.6
2.10
8.2
2015F
3.2
5.2
2.20
9.5
2016F
33
3.3
50
5.0
2 30
2.30
90
9.0
2017F
3.5
5.0
2.35
9.0
2018F
3.7
5.0
2.40
8.5
2019F
3.0
5.0
2.50
8.5
2020F
3.2
5.0
2.55
8.0
2021F
3.4
4.8
2.60
8.0
Source: National statistics, DB forecasts
Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
17
Appendix
pp
1
Important Disclosures
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The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or
view in this report.
p
Jose Carlos Faria
Regulatory Disclosures
1. Important
p
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SOLAR link at http://gm.db.com
Deutsche Bank
Brazil Economic Update
18/04/2013 21:10:56
4/18/2013
José Carlos de Faria
April 2013
2010 DB Blue template
18
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Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
19
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Deutsche Bank
Brazil Economic Update
4/18/2013
José Carlos de Faria
April 2013
20