Brazil Economic Outlook
London School of Economics
Alexandre Tombini
Governor
January 2014
1
Brazil overview
• Brazil is among the largest countries in
terms of territory, population and GDP
• Brazil has vast natural resources,
including recently discovered large
offshore oil fields, a diverse industrial
base, a dynamic and sophisticated
private sector, and a well-structured
public sector
• Brazil is a vigorous democracy, with free
multiparty elections and a stable political
system
• Brazil has good relations with all its
neighbors and has increased its ties with
all regions of the world
• 7th largest GDP: US$ 2,253 billion (2012)
• Continental country:
8,515,767 km2
5th
largest
area
• 5th largest population: 199 million people
(2012)
Source: IBGE / BCB / IMF
2
Demographics
Pyramid
•Population
Sources:
IBGE(2012)
/ UN
90+
80-84
70-74
60-64
50-54
40-44
30-34
20-24
10-14
0-4
Dependency Ratio
100
men
women
75
50
Brazil
• Brazil’s population is highly concentrated
within
the
Economically
Population range
Active
China
India
2050
2040
2030
2020
2010
2000
million people
1990
10
1980
5
1970
0
1960
-5
1950
25
-10
Russia
• Brazil’s dependency ratio is low and
declining
Note: The dependency ratio is the ratio of the sum of the population
aged 0-14 and that aged 65+ to the population aged 15-64
Source: IBGE / UN
3
Social achievements in the past decade
• Reduced poverty: from 27% to 12% of the households
• Reduced inequality
• Grew the middle class: +40 million people
• Created jobs: more than 18 million additional formal jobs
(2003-2012); record low unemployment at present
• Increased access to credit and banking services
Source: IPEA / IBGE / FGV / BCB
4
Main topics
Inflation
− Central bank is acting to bring inflation to
target
Growth
− Moderate economic expansion
− Rebalancing consumption and investment
− Supply-side initiatives to raise potential growth
UMP Exit
− Net positive for emerging markets
− Brazil has flexible policy framework
− BCB has buffers to smooth the adjustment
process
5
Inflation
6
Inflation high but within target band
Ten consecutive years of year-end inflation within target band
18
16
YoY %
14
12
10
8
6
4
2
CPI
Source: IBGE / BCB
Dec 14
Dec 13
Dec 12
Dec 11
Dec 10
Dec 09
Dec 08
Dec 07
Dec 06
Dec 05
Dec 04
Dec 03
Dec 02
Dec 01
Dec 00
Dec 99
0
Inflation Report (Dec 13)
7
ER depreciation pressuring inflation
Central bank acting to limit pass-through to domestic prices
Jul 11
1.56
BRL/USD (inverted scale)
1.5
1.7
1.9
2.1
2.3
2.35
Source: BCB
Dec 13
Jun 13
Dec 12
Jun 12
Dec 11
Jun 11
Dec 10
Jun 10
Dec 09
Jun 09
Dec 08
Jun 08
Dec 07
Jun 07
Dec 06
2.5
8
Labor market remains tight
Labor market continues to tighten, but some signs of
moderation can be observed
Unemployment Rate
Formal Jobs Creation
3.0
14
2.6
2.5
12
2.0
8
1.6 1.5
1.5
1.0
6
5.1
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
4
1.8
1.0
1.7
1.4
1.4
1.1
0.9
0.5
0.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
million
s.a. %
10
2.0
1.9
Up to Nov 13
Source: IBGE / MTE
9
Food price shocks in 2012-2013 hit inflation
Brazil suffered idiosyncratic shocks on top of the global food
commodity shocks
Apr 13
14.0%
15
% YoY
12
9
8.5%
6
1st supply
shock
(commodities)
3
2nd supply
shock (fresh
foods)
Dec 13
Sep 13
Jun 13
Mar 13
Dec 12
Sep 12
Jun 12
Mar 12
Dec 11
Sep 11
Jun 11
Mar 11
Dec 10
0
Food and Beverages
Source: IBGE
10
Central bank acting to bring inflation to target
20
15
18
12
16
9
%
%
14
12
10.5
6
4.8
10
3
8
Policy rate
Swap reference rate - 360-day term
Source: BCB / BM&FBOVESPA
Jan 14
Jan 13
Jan 12
Jan 11
Jan 10
Jan 09
Jan 08
Jan 07
0
Jan 06
Jan 14
Jan 13
Jan 12
Jan 11
Jan 10
Jan 09
Jan 08
Jan 07
Jan 06
6
Real Interest Rate (ex ante)
11
Growth
12
Moderate economic expansion
• Moderate growth to continue in 2014
• Economic growth drivers
− Employment, wages and credit support consumption
− Pent-up demand for infrastructure investment
− More favorable contribution from net exports
• Rebalancing consumption and investment
• Faster growth requires strengthening confidence
13
Growth
Demand
14
Support for domestic demand
14
Unemployment Rate
2.6
2.5
12
2.0
million
25
20
14.6%
15
10
5
7.7%
0
2013
2012
2011
2010
2009
2008
2007
2002
12 months %
30
6
5
4
3
2.8%
2
1.8%
1.0%
1
Total
Households (nonearmarked credit)
Source: IBGE / MTE / BCB
Employment
Real Income
* 12 months up to november
Nov 13
Sep 13
Jul 13
May 13
Mar 13
Jan 13
Nov 12
Sep 12
Jul 12
May 12
Mar 12
Sep 13
Mar 13
Sep 12
Mar 12
Sep 11
Mar 11
Sep 10
Mar 10
Sep 09
Mar 09
Sep 08
Mar 08
0
Jan 12
YoY %
Employment and Labor Income
7
Credit Outstanding
2006
0.0
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
1.1
0.9
40
35
1.4
0.5
4
2002
1.0
2005
6
1.4
1.5
1.0
Nov 13
5.1
1.7
1.6 1.5
2004
8
2.0
1.9
1.8
2003
10
s.a. %
Formal Jobs Creation
3.0
Real Payroll
15
Consumption remains strong
Retail Sales
4.4%
120
(12 months)
110
3.8%
2011 = 100
100
(12 months)
90
80
70
Retail Sales
Source: IBGE
Nov 13
Jul 13
Mar 13
Nov 12
Jul 12
Mar 12
Nov 11
Jul 11
Mar 11
Nov 10
Jul 10
Mar 10
Nov 09
Jul 09
Mar 09
Nov 08
Jul 08
Mar 08
Nov 07
60
Expanded Retail Sales (includes vehicles and building materials)
16
Jan 10
Mar 10
May 10
Jul 10
Sep 10
Nov 10
Jan 11
Mar 11
May 11
Jul 11
Sep 11
Nov 11
Jan 12
Mar 12
May 12
Jul 12
Sep 12
Nov 12
Jan 13
Mar 13
May 13
Jul 13
Sep 13
Nov 13
12-month change (%)
Investment strong in 2013
25
15
Source: IBGE
Capital Goods Output
20
11.5%
10
5
0
-5
-10
-15
-20
-25
17
Confidence key for investment
Industry Confidence
114
Gross Fixed Capital Formation
Annual growth
14%
112
Neutral = 100
110
10%
108
6%
106
3.7%
104
2%
102
100
-2%
Source: FGV / IBGE
4 Q 13
3 Q 13
2 Q 13
1 Q 13
4 Q 12
3 Q 12
2 Q 12
1 Q 12
4 Q 11
3 Q 11
-6%
2 Q 11
Oct 13
Jul 13
Apr 13
Jan 13
Oct 12
Jul 12
Apr 12
Jan 12
Oct 11
Jul 11
Apr 11
Jan 11
96
1 Q 11
98
18
Net exports drivers
Global activity and trade gain traction
14
Global GDP Growth
Source: IMF / BCB
World Trade (RHS)
100
110
Dec 13
Jun 13
Dec 12
Jun 12
120
Dec 11
2015
-14
2014
-1
2013
-10
2012
0
2011
-6
2010
1
96.3
Dec 10
-2
90
Jun 10
2
80
Dec 09
2
%
3
6
Jun 09
2.7
3.0
70
Jun 1994 = 100
4
4.5
3.7
5.2
3.9
Jul 11
71.9
Jun 11
10
%
5
60
Dec 08
6
Real exchange rate has depreciated
Real Effective Exchange Rate
19
Net exports should contribute to growth
12
10.3
10
7.5
5.3
3.3
3.4
4
2
0
-1.7
-2.7
2009
2008
2007
2006
-4
External Sector
-1.0
2014**
-1.4
-0.7
2011
-1.4
0.03
-0.2
-0.1
2010
-2
2.1
0.2
1.0
2013*
6
6.9
2012
percentage points
8
Domestic Demand
* Forecast (Inflation Report Dec 2013)
** Up to 3rd quarter (accumulated over 4 quarters)
Source: IBGE / BCB
20
Growth
Supply
21
Source: IBGE
Nov 13
Sep 13
Jul 13
May 13
Mar 13
Jan 13
Nov 12
Sep 12
Jul 12
May 12
Mar 12
Jan 12
132
Nov 11
Sep 11
Jul 11
May 11
Mar 11
Jan 11
2002 = 100
Industrial sector recovery
Industrial production
(3 month moving average)
131
130
129
128
127
126
125
124
123
22
Improved industrial competitiveness
Real Output Costs and Components
Unit Labor Cost in Industry
140
15.0
130
5.0
2.3
1.4
1.1
0.0
-5.0
-10.0
-11.9
-15.0
3mma s.a., 2008 = 100
120
110
100
98.2
90
80
Output Cost
Intermediate Goods
Source: CNI / IBGE / BCB
Employees
Energy
Nov 13
Jul 13
Mar 13
Nov 12
Jul 12
Mar 12
Nov 11
Jul 11
Mar 11
Nov 10
Jul 10
Mar 10
Nov 09
70
Nov 08
Mar 09
Jul 09
Nov 09
Mar 10
Jul 10
Nov 10
Mar 11
Jul 11
Nov 11
Mar 12
Jul 12
Nov 12
Mar 13
Jul 13
Nov 13
% Change Over 12 Months
10.0
Aug 11
127.2
ULC in USD
23
Source: Markit
52
Dec 13
Sep 13
Jun 13
Mar 13
Dec 12
Sep 12
Jun 12
Mar 12
Dec 11
Sep 11
Jun 11
60
Mar 11
Dec 10
Sep 10
Jun 10
Mar 10
neutral = 50
Service sector shows moderate growth
PMI in service sector
58
56
54
51.7
50
48
46
44
42
40
24
Record grain harvests in 2013 and 2014
million tons
grain production
190
185
180
175
170
165
160
155
150
145
140
135
130
125
120
188.2
189.6
2013*
2014*
World Producer Rank
(FAO 2011)
Soybean: 2º
Corn: 3º
161.9
2007
2008
2009
2010
2011
2012
*December 2013 estimate
Source: IBGE / FAO
25
Supply-side initiatives to boost growth
• Investment in human capital
• Infrastructure (airports, roads, railways and ports):
attracting private sector capital and expertise
• Development of the oil and gas sector
26
Investment in human capital
• Programs aimed at increasing access to
technical schooling and higher education:
o Technical and professional education:
 Pronatec: 5.5 million students in technical and professional
education since 2011 (goal is 8 million by end of 2014)
o Higher education:
 Prouni: almost 250,000 undergraduate scholarships in
private institutions for disadvantaged students in 2013
 Science without frontiers: 100,000 scholarships abroad up
to 2015
 Currently almost four thousand undergraduate and graduate
students in the UK
Source: MEC
27
Education: room for further improvement
Mean years of schooling of adults increased sharply in the last decades,
but Brazil still lags developed and many developing nations
Countries
1990
2000
% Change
2010
% Change
Brazil
3.8
5.6
47.4
7.2
28.6
Chile
8.1
8.8
8.6
9.7
10.2
China
4.9
6.6
34.7
7.5
13.7
India
3.0
3.6
20.0
4.4
22.2
Russian Federation
9.2
11.3
22.8
11.7
3.5
South Africa
6.5
8.2
26.2
8.5
3.7
United States
12.3
13
5.7
13.3
2.3
Average number of years of education received by people ages 25 and older
Source: UN
28
Infrastructure and energy reforms
• Infrastructure (airports, roads, railways and ports) and
energy: attracting private sector capital and expertise
• Concession auctions have proved attractive
o 6 airports: 85 million passengers transported in 2012
o 5 roads: 4,268 km (2,652 miles)
o Oil and gas auctions in 2013:
 11th and 12th rounds of oil and gas concessions
 1st production sharing round (pre-salt layer: Libra) – BRL15 billion
signing bonus
29
UMP Exit
30
Brazil prepared for UMP exit
• Net positive for emerging markets, which will
benefit including through international trade
• Sound financial system
• Strong external indicators
31
Classic policy response
• Exchange rate flexibility
• Policy tightening
• Use of buffers
32
UMP exit prospects led to higher volatility
BRL Volatility
(3-Months At-the-money Implied)
17.5
15.0
12.5
10.0
7.5
Source: Bloomberg
Jan 14
Dec 13
Nov 13
Oct 13
Sep 13
Aug 13
Jul 13
Jun 13
May 13
Apr 13
Mar 13
Feb 13
Jan 13
5.0
33
Sound financial system
( Provisions – NPL) / Capital
Regulatory Capital to
Risk-Weighted Assets
Germany
19.1
Brazil
Brazil
17.1
United Kingdom
Mexico
Brazil
10.6
Mexico
16.4
Liquid Assets to Short Term
Liabilities
Germany
7.7
15.7
South Africa
14.8
Japan
14.7
140.3
Turkey
-3.2
South Korea
South Korea
-3.9
Italy
Canada
-6.0
Russia
82.0
Russia
-10.9
United States
76.4
72.5
16.1
Turkey
160.0
121.4
96.9
Canada
14.4
India
-13.6
Turkey
United States
14.4
United States
-13.6
Japan
49.9
France
14.3
United Kingdom
-14.5
Mexico
46.7
Australia
-14.7
Australia
45.0
Japan
-19.2
Canada
44.9
South Africa
-22.2
United Kingdom
40.0
South Africa
36.1
South Korea
14.0
Italy
13.9
Russia
13.4
India
13.3
Spain
Spain
12.0
Australia
12
India
Italy -86.3
11.6
10
-31.9
14
16
18
20
Source: IMF (FSI – latest available data)
-120
-20
80
26.1
0
50 100 150 200
34
Banks: low reliance on cross-border funding
Origin of Bank Funding
100%
4.1
8.8
11.0
15.1
80%
95.9
91.2
89.0
84.9
60%
Public-owned
Private-owned
Domestic
Foreign-controlled
Total
Cross-border
Sep 13
Source: BCB
35
Brazil is net external creditor
Net External Debt
International Reserves
210
170
300
130
250
90
US$ billion
350
200
150
50
10
2014*
-110
2009
0
2004
-70
1999
50
1994
-30
1989
100
*as of Jan 20th
Source: BCB
-86.8
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013*
375.5
1984
US$ billion
400
*Nov 2013
36
Strong external debt indicators
Short Term External Debt / Total (%)
External Debt / GDP (%)
Turkey
Turkey
49.3
Chile
44.5
South Africa
40.1
Peru
27.5
India
26.1
Indonesia
25.7
Mexico
31.4
24.1
Mexico
30.3
South Africa
Indonesia
29.8
Chile
Brazil
29.6
Peru
13.6
13.6
India
21.8
Colombia
Colombia
21.4
Brazil
0
20
40
60
20.3
15.9
9.4
0
10
20
30
2013 forecasts
Source: IIF
* Brazil data includes intercompany debt transactions and domestic debt in hands of foreign investors
37
Low nonresident public debt share
% of outstanding domestic public debt securities*
France
Germany
Australia
South Africa
Spain
Mexico
Italy
US
UK
Turkey
Canada
Russia
Brazil
South Korea
Japan
India
61.3
59.9
55.2
41.3
37.5
36.9
35.8
33.8
32.7
31.3
24.7
23.6
16.5
13.7
8.4
7.8
0
20
40
60
80
* The latest data reported by the IMF Fiscal Monitor in October 2013. For Brazil, data from November, as reported by Secretaria
do Tesouro Nacional (STN).
Source: IMF / STN
38
Leading destination for FDI
2011
2010
US
197.9
China
114.7
2012
US
226.9
China
Belgium
85.7
Belgium
Hong Kong
82.7
Hong Kong
124.0
103.3
96.1
US
146.7
China
119.7
Hong Kong
72.5
Brazil
65.3
UK
50.6
Brazil
66.7
UK
62.5
Singapore
48.6
Australia
65.8
France
58.9
Brazil
48.5
Singapore
64.0
Singapore
Germany
46.9
Russia
52.9
Australia
48.5
Russia
43.3
UK
51.1
Canada
47.2
Ireland
42.8
Canada
41.4
Russia
44.1
Spain
40.8
France
40.9
Ireland
Australia
35.2
Germany
40.4
India
27.3
Switzerland
32.5
Italy
34.3
Chile
26.4
France
30.6
India
31.6
Luxembourg
22.6
Saudi Arabia
29.2
Spain
29.5
Belgium
19.3
0
50 100 150 200
Milhares
Source: UNCTAD
0
50 100 150 200
Milhares
54.4
39.6
0
50
100
150
Milhares
39
Brazil Economic Outlook
London School of Economics
Alexandre Tombini
Governor
January 2014
40
Glossary
BCB
Banco Central do Brasil
BM&FBOVESPA
Brazilian Securities, Commodities and Futures Exchange
CNI
Confederação Nacional da Indústria
EME
Emerging Market Economy
FAO
Food and Agriculture Organization of the United Nations
FDI
Foreign Direct Investment
FGV
Fundação Getúlio Vargas
IBGE
Instituto Brasileiro de Geografia e Estatística
IIF
Institute of International Finance
IPEA
Instituto de Política Econômica Aplicada
MEC
Ministério da Educação
MTE
Ministério do Trabalho e Emprego
STN
Secretaria do Tesouro Nacional
UMP
Unconventional Monetary Policy
UNCTAD
United Nations Conference on Trade and Development
41