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Brazil Economic Outlook

London

Alexandre Tombini Governor


October 2013

Main topics

Inflation
Growth UMP Exit
2

Inflation adversely affected by supply shocks


15

12

10.5
YoY % 9

6
2nd supply shock (fresh food)

6.1 4.7

1st supply shock (commodities)

0
May 11 Sep 12 Nov 12 Sep 11 Jan 11 Jan 12 Jan 13 May 12

Mar 13

Nov 11

Mar 11

Mar 12

May 13

Jul 11

Jul 12

CPI

Food and Beverages

CPI ex-Food and Beverages


3

Source: IBGE

Jul 13

Monetary policy actions


BCB acted in early 2013 to mitigate second order effects of supply shocks. After tapering signaling, BCB mitigate the ER pass-through risk
20

Jan 13

Nov 12

Dec 12

15 %

10

5 Jul 06 Jul 07 Jul 08 Jul 09 Jul 10 Jul 12

Feb 13

Mar 13

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Policy rate
Source: BCB/BM&F

Swap reference rate - 360-day term


4

Jan 13

Jul 13

Jul 11

Apr 13

Communication Policy rate

8.2 7.8 % 7.4 7.0

Inflation is receding
8 7 6 YoY % 5 4 3 Jun 13 6.7 Aug 13 6.1 Dec 13 5.8

2 Nov 13
Jan 13 Jun 13 Aug 13 Sep 13 May 13 Dec 13 Feb 13 Mar 13 Apr 13 Oct 13 Jul 13

CPI
Source: IBGE / BCB (Focus)

Expected CPI (Focus)


5

Other CPIs also decelerating


7.5 7.0 6.5 YoY % 6.0 5.5 5.0
IPC-M Sep 13 5.37% IPC-C1 Aug 13 5.36% IPC-Fipe Sep 13 4.58%

4.5
4.0 Apr 11 Aug 11 Feb 12 Feb 13 Apr 12 Feb 11 Apr 13

Aug 13

Jun 12

Aug 12

Dec 10

Dec 11

Dec 12

Jun 13

IPC-10, IPC-M and IPC-Br

IPC-C1

IPC-Fipe

Chained series of IPC-10, IPC-M and IPC-Br; Chained series of IPC-Fipe weekly data

Source: FGV / Fipe

Dec 13

Jun 11

Oct 12

Oct 13

Oct 11

Inflation within target bands


18

Ten consecutive years of inflation in target zone in 2013

16
14

12
YoY % 10

8
6 4 2 0

Dec 07

Dec 99

Dec 00

Dec 01

Dec 02

Dec 03

Dec 04

Dec 05

Dec 06

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

CPI
Source: IBGE / BCB

Inflation Report (Sep 13)


7

Dec 14

Growth dynamics in 2013


Real GDP QoQ Growth in 1Q13 China Turkey Japan South Korea Chile Brazil Canada Australia UK Colombia US South Africa Poland Mexico Germany France Euro Area Russia Spain Italy Real GDP QoQ Growth in 2Q13

1.6 1.5
1.0 0.8 0.8 0.6 0.5 0.5 0.3 0.3 0.3 0.2 0.2 0.0 0.0

-0.2 -0.2 -0.3 -0.4 -0.6


-1 0 1
* qoq sa

Colombia Turkey China Brazil South Korea Japan South Africa Germany UK US Australia France Chile Canada Poland Euro Area Spain -0.1 Russia -0.3 Italy -0.3 Mexico -0.7
2 -1 0

2.2 2.1 1.7 1.5 1.1 0.9 0.7 0.7 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3

Source: Bloomberg

Economic growth is expected to gather pace


2013
China India World Australia* Mexico South Korea* Brazil Russia South Africa Japan Canada US UK Germany France Euro Area Spain Italy
* April.

2014
7.8 5.6 China India South Korea* World Australia* Russia Mexico Brazil South Africa US Canada UK Germany Japan Euro Area France Italy Spain 7.7 6.3 3.9 3.8 3.3 3.3 3.2 3.2 2.9 2.7 2.2 1.5 1.3 1.2 0.9 0.8 0.7 0.0 0 5 10
9

3.1 3.0 2.9 2.8 2.5 2.5 2.0 2.0 1.7 1.7 0.9 0.3

-0.2 -0.6 -1.6 -1.8 -5 0 5 10

Source: IMF (WEO forecasts, April and July 2013)

Stronger investment
Gross Fixed Capital Formation
5.0 4.7 3.6

4.0
3.0 QoQ S.A (%) 2.0 1.0 0.0 -1.0 -2.0 -3.0 -1.4 -1.9

1.5

-2.4
1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13

Source: IBGE

10

Support for domestic demand


Retail Sales 115 2007 = 100 95 75 55 Jul 07 Jul 08 Jul 09 Jul 10 Jul 12 Jan 11 Jan 07 Jan 08 Jan 09 Jan 10 Jan 12 Jan 13 Jul 13 Jul 11 YoY % 5.4% (YoY) 40 35 30 25 20 15 10 5 0 Aug 08 Aug 09 Feb 08 Feb 09 Credit Outstanding

16.1 7.7 Aug 10 Aug 11 Feb 11 Aug 12 Aug 13 4.2 2.4 1.8 Nov 12 Aug 12 Aug 13 11 Feb 10 Feb 12 Feb 13

5.8% (YoY)

Retail Sales

Retail Sales (including automobiles and construction materials)

Total 7 6 YoY % 5 4 3 2 1 Feb 12

Households (nonearmarked credit)

14 12 MoM % sa 10 8 6 4

Unemployment Rate

Employment and Labor Income

May 12

Feb 13

Aug 05

Aug 02

Aug 03

Aug 04

Aug 06

Aug 07

Aug 08

Aug 09

Aug 10

Aug 12

Aug 13

Aug 11

Employment

Real Income

Real Payroll

Source: BCB/IBGE

May 13

Record grain harvest expected in 2013


production of grains
190 185 180 175 170 165 160 155 150 145 140 135 130 125 120 2007 2008 2009 2010 187.3 2013/2012 = 15.7%

million tons

160.1

161.9

2011

2012

2013*

Estimated in August 2013

Source: IBGE

12

Reforms to boost growth


Tax reforms to simplify the tax system and reduce costs

Payroll tax cuts


Tax incentives for infrastructure and R&D investment bonds

Measures to increase competitiveness and investments

Building a skilled labor force (Science without Frontiers and


Pronatec Programs)

Concessions program revamped Highways, railroads, ports and airports

Oil & gas


13

Brazil has a sound financial system


Regulatory Capital to Risk-Weighted Assets
Germany Turkey Brazil Mexico United Kingdom South Africa Canada United States France Korea Japan India Russia Italy Australia Spain 10 12 11 12 14 16 18 20 18 17 17 16 16 15 15 14 14 14 14 14 Japan 13 13 South Africa Spain Italy -74 -22 -28 -21 Australia United Kingdom South Africa India 44 38 36 28 0 50 100 150 200 Russian -10 -12 -15 -15 -16

( Provisions NPL) / Capital


Brazil Mexico Korea, Republic of Turkey Canada -3 -3 -6 10 9

Liquid Assets to Short Term Liabilities


Brazil Germany Korea, 183 141 111 88 80 77

Russian
Italy United States Turkey Japan Canada Mexico

India
United States Australia United Kingdom

76
51 48 47

-100

-50

Source: IMF /FSI (latest available data)

14

Banks have a low share of external funding


Origin of Bank Funding 100% 4.3 11.2 17.9 9.4

80%

60% 95.7 40% 88.8 90.6

82.1

20%

0%
Public-owned Private-owned Foreign-controlled Total
Jul 13

Domestic
Source: BCB

External

15

Brazil Net External Creditor


International Reserves 400 350 300
US$ billion
376.0

Net External Creditor 210 170 130


US$ billion

250 200 150 100 50 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013*

90 50 10 -30 -70
-81.8

-110 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013*
*Aug 2013

as of Oct 1st

Source: BCB

16

External Debt of EMEs


External Debt / GDP Turkey Chile South Africa Peru Mexico Brazil Indonesia Colombia India
21.4 21.4 20.9 21.4 25.6 29.6 28.7 27.9 32.7 34.9 29.5 31.4 30.2 29.8 43.9 44.7 48.3 48.8

Short Term External Debt / Total


Turkey Indonesia India Mexico Chile South Africa Colombia Peru
13.5 13.6 13.3 13.6 9.4 9.4 19.4 16.6 16.2 16.1 27.1 27.7 24.1 26.0 25.2 25.9 22.5 23.9

Brazil

*IIF forecast.

15

25
2012

35
2013*

45

55

5
*IIF forecast.

10

15

20

25

30

2012

2013*
17

Source: Datastream / IIF

* Brazil data includes intercompany debt transactions and domestic debt in hands of foreign investors

Low nonresident holdings of Gov. debt


2012 (% of Total Debt) Australia France Germany Italy Mexico US South Africa UK Turkey Spain Canada Russian Brazil South Korea Japan India 0
72.2
63.5 61.3 35.1 33.2 32.1 32.0 31.9 29.6 29.1 23.5 19.4 17.6 14.3 8.9 6.7

20

40

60

80
18

Source: IMF (Fiscal Monitor April 2013)

Brazil is leading recipient of FDI


2010
USA 197.9 114.7 85.7 82.7 50.6 48.6 48.5 46.9 43.3 42.8 40.8 35.2 32.5 USA

2011
226.9 124.0 103.3 96.1 66.7 65.8 64.0 52.9 51.1 41.4 40.9 40.4 34.3 USA

2012
146.7 119.7 72.5 65.3 62.5 58.9 54.4 48.5 47.2 44.1 39.6 27.3 26.4

China
Belgium Hong Kong UK Singapore Brazil Germany Russian Ireland Spain Australia Switzerland France Saudi Arabia 0

China
Belgium Hong Kong Brazil Australia Singapore Russian UK Canada France Germany Italy India Spain

China
Hong Kong Brazil UK France Singapore Australia Canada Russian Ireland India Chile Luxembourg Belgium 0

30.6
29.2 50 100 150 200

31.6
29.5 0 50 100 150 200

22.6
19.3 50 100 150 19

Source: UNCTAD

CAD comfortably financed by FDI


FDI / CAD (in %, 2012) Chile Peru Colombia Brazil Mexico Indonesia India Turkey South Africa 0 27.9 26.3 19.0 100 200 300 400 171.5 138.6 319.3 Mexico Brazil Indonesia CAD (12M Acc., %GDP)*

-1.3 -3.2 -3.3 -3.5 -3.5

120.3
111.0 82.5

Colombia
Peru Chile India South Africa Turkey
* June 2013

-4.0
-5.1 -6.5 -6.6
-8 -6 -4 -2 0
20

Source: UNCTAD

Source: BCB

accum. 12 months (US$ billion) 10 15 20 25

30

35

40

Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13

Capital flows

Flows increased even after tapering talk (May 22 2013)

Equities Fixed Income


21

Timely Central Bank action to mitigate risks


FX interest rate swaps and FX repo program (launched on
Aug 22)
Goal: provide hedge to economic agents, liquidity to domestic FX market
and reduce excessive market volatility

Measures (weekly auctions during 2013): FX interest rate swap auctions: USD2 billion FX Repo: USD1 billion

USD100 billion (equivalent) until the end of 2013,


considering issues before the program announcement

The program succeeded in taming ER volatility and


providing FX hedge and liquidity
22

Efforts to reduce risks are successful


% Change in 1M ATM Implied Volatility* BRL leads appreciation since the FX program* CDS USD SR 5Y Corp - % Change since BCB's Announcement of Regular FX Intervention in 2013*

Russian Ruble South African Rand Turkish Lira Polish Zloty Mexican Peso Czech Koruna Indian Rupee -3.7

Real 8.6 New Zealand Dollar Australian Dollar Sterling pound 6.4 4.2 4.1 3.5 2.6

11.1 Italy Portugal Ireland -3.0 -4.4 -5.2 -5.9 -6.3 -7.4 -7.9 -9.3 5.6 3.8

-5.5
-6.7 -7.5 -7.8 -9.1

Indian Rupee South African Rand Russian Ruble Poland Zloty Swiss Franc Swedish Krona Chilean Peso Canadian Dollar

Colombia
Spain Peru France Japan Belgium Mexico Turkey United Kingdom Chile Russia

2.6
2.5 2.3 2.2 2.2 1.7 1.7 1.6 1.4 1.4 0.0 -0.2 -1.9

-11.4
-11.8 -12.5 -16.9 -18.0 -18.6 -21.9 -24.4 -40 -20 0 20

Euro
Norwegian Krone Colombian peso

Brazilian Real -15.9 Australian Dollar-16.5 Indonesian Rupiah -17.9 -25 -15
* From Aug 22 through Oct 2.

Yen Turkish Lira Mexican Peso Bloomberg USD Index 1/ -5 5 15

Germany
Brazil China South Africa

Indonesian Rupiah -4.2

Source: BCB

1/ The Bloomberg U.S. Dollar Index tracks the performance of a basket of ten leading global currencies versus the U.S. Dollar (JPY, MXN, AUD, GBP, CAD, SGD, CHF, CNH, KRW and EUR).

23

Brazil Economic Outlook


London

Alexandre Tombini Governor


October 2013

24

Glossary
BCB BM&F CAD EME FDI FGV Focus IBGE Central Bank of Brazil Brazilian Exchange Company Current Account Deficit Emerging countries Foreign Direct Investment Getlio Vargas Foundation Brazilian Market Survey sponsored by BCB Brazilian Institute of Geography and Statistics

IMF
UMP UNCTAD

International Monetary Fund


Unconventional Monetary Policy United Nations Conference on Trade and Development

25

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