Brazil: Economic Outlook and Perspectives

Henrique de Campos Meirelles

St. Gallen University September 2010

Brazil in 2002
60% of total sovereign debt denominated in dollars
IMF debtor country High public debt to GDP ratio: 60.6% Policy rate at 25% Rising inflation

High country risk premiums and sovereign debt rated as speculative grade
Unemployment rate at 14%

Minimum wage at US$ 60.00

Changes in Economic Policy

2003: Monetary and fiscal policy stance

Austere monetary policy

Strong fiscal adjustment

Quick disinflation Jan 03: 30% (annual rate)

Jul 03: 0%
Decrease in the public debt As a result: decrease in country risk premiums
3

Changes in Economic Policy

2003:

Costs
6% drop in domestic demand in the first semester 15% of industrial production was redirected to exports

Trade surplus
Current account reversal: from -6% to +2% of GDP

Public Sector Net Debt

60 55
% of GDP 60.6 54.9 50.6 market consensus

50
45 40 35 30 02

48.2

47.0

45.1
42.7 42.8 40.8 39.5

38.4

38.0

37.0

36.5

03 04 05

06 07 Aug 08 08

09 10 11

12 13 14
5

Sources: Central Bank of Brazil

Floating Exchange Rate Regime and Build Up of International Reserves

International reserves allow for a safe fluctuation of the exchange rate
250 200 150 100 50 0 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10
6

Sep 6th 262.0

Aug 08 205.1

USD billion

Source: Central Bank of Brazil

Net External Debt and Risk

200
160 120 BBUSD billion 80 40 0 -40 -80 BBB1T 3T 1T 3T 1T 3T 1T 3T 1T 3T 1T 3T 1T 3T 1T 3T 1T 02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10
Sources: Central Bank of Brazil and S&P

B+ 1Q03 165.2

S&P: Fitch:

BBBBBB()

BB-

Moodys: Baa3

()

4Q04 135.7

BB

BB+ -49.5

Macroeconomic Responsibility
Virtuous Circle:
responsible policies
macroeconomic stability lower risk premiums more credibility stronger growth

greater efficiency

increased credibility lower interest rates higher growth rate

expectations anchored lower interest on public debt decline in public debt to GDP ratio
8

Macroeconomic Policy Framework

Macroeconomic fundamentals of inflation targeting, fiscal responsibility, exchange rate flexibility, combined with Adequate supervision, prudential policy and solid bank

resulted in:
capacity to absorb internal and external shocks macroeconomic and financial stability

sustainable growth
investment growth credit and capital market development
9

Investments x Country Risk

170
160 150 1995 = 100 140 investments GFCF (left) country risk - Brasil t-2 (right) 2Q 10

2000
1810 1620 1240 basis points
10

1430

130
120 110 100 90 1Q 00 1Q 01 1Q 02 1Q 03 1Q 04

1050
860 670 480 290 100

1Q 05

1Q 06

1Q 07

1Q 08

1Q 09

3Q 10

Sources: IBGE and JPMorgan

Credit Outstanding Balances

1,600 1,400 1,200 R$ billion 1,000 800 25.7 600 400 200 0 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jul 10
11

consistent growth throughout the period 45.9

50

45
40

30 25 20 15 10 5

Source: Central Bank of Brazil

% of GDP

35

Capital market primary issues

100
80 60 40 20

R$ billion

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* Stocks Commercial papers Others
12

Source: CVM (Brazilian Securities Comission) * 12 months acc. to July

Net Foreign Direct Investment

50
2007-09 35.2 market consensus 2010-14 38.4

40

USD billion

30 2002-06 15.7

20

10

0 02 03 04 05 06 07 08 09 10 11 12 13 14
13

Source: Central Bank of Brazil (market consensus)

Brazilian External Liabilities

as a percentage of the gross external liabilities 2001 Others 26.4% Others 13.3% 2010

FDI 32.8%

FDI 36.8%

Fixed income 30.9%

Stocks (domestic and foreign) 9.9%

Fixed income 17.4%

Stocks (domestic and foreign) 32.5%

Source: Central Bank of Brazil

14

Exports
2010-14 238.2 250 200 USD billion 150 100

2000-09 111.1 1990-99 42.7

50
0 80

1980-89 25.5

85

90

95

00

05

10

14
15

Source: Central Bank of Brazil (market consensus)

Exports
diversification of trade partners 35 30 25 % 20 15 10.3 22.2 23.3 17.9 1990 2002

26.3

2009

10
5

USA

Europe

Latin America

Asia

other

Source: Central Bank of Brazil

16

Price Stability and Real Payroll Growth

18 16 % change in 12 months 14 12 real payroll stability generates increasing well-being 135 130 Jan 03 = 100
17

125 120 115 110

10
8 6 4 2 IPCA

105 100 95

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jul 10

Source: Central Bank of Brazil

Social Mobility

A/B millions of people

200 13 20

31

150 66
100
+44.1%

95

+19.0%

113

47
50 49 0 2003

44
29 2009

40 16
2014*
18

Source: Finance Ministry; * estimated

Formal Job Creation

1800 1600 1400
thousands from January to July 14 million jobs created since 2003

1564.6

1655.1

1200 1000 800 600 400 200 0 121.1

1155.3

670.4
437.9

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: MTE/CAGED 19

Unemployment in Brazil
seasonally adjusted 13 12

11
%

10
9 8 7 Feb 03 Feb 04 Feb 05 Feb 06 Feb 07 Feb 08 Feb 09 Jul 10
20

6.96

Source: IBGE

Unemployment Rate
Africa do Sul Espanha Litunia Crocia Irlanda Colmbia Grcia Polnia Turquia Hungria ndia Portugal Zona do Euro Frana Estados Unidos Blgica Venezuela Itlia Chile Sucia Canad Argentina Reino Unido Alemanha Brasil
25.3 20.1

18.3
16.4 13.8 13.3 11.7 11.4 11 11 10.7 10.6 10 9.7 9.6 8.9 8.7 8.42 8.3 8 8 7.9 7.8. 7.6 7.0

relatively dynamic labor market

Source: Bloomberg

21

GDP per capita Growth

18.0 17.5 2009 (BRL 1000) 17.0 16.5 16.0 15.5 15.0

2002-09 = 17.5% real growth

forecast

17.45 16.41

14.5
14.0 13.5 13.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Central Bank of Brazil

22

Income Inequality Reduction

0.57 0.56 0.55 0.54 0.53 0.52 0.51 0.566 0.56 0.558 0.553 0.545

Gini Index

0.535

0.532

0.528 0.52 0.514 0.509

0.50
98 99 01 02 03 04 05 06 07 08 09
23

Source: IBGE/PNAD

Middle Class Growth and Poverty Reduction

From 2003 to 2009 35.7 million people have entered the middle class 20.5 million have crossed the poverty line upwards

2010-2014 forecast for the current trend 36.0 million more will enter the middle class 14.5 million more will come out of poverty Family Grant Program (Bolsa Famlia): reduction of people in extreme poverty from 12% to the 4% level
Source: FGV-CPS

24

Poverty
30

28.1 25.4

% of population

25 22.8 20 19.3

18.3 16.0 15.3

15

10
2003
Source: CPS/FGV

2004

2005

2006

2007

2008

2009
25

Homes with computers and access to the internet

40 35 30 personal computer

internet access
26.8 22.3

35.1 31.5 27.7

25
% 20

24.1
20.3 17

15.2
15 10 5 0 03
Source: IBGE/PNAD

16.5 12.3

18.7 13.8

11.4

04

05

06

07

08

09
26

Financial Stability: Basel Index

20
18 16 % 14 12 Brazil (11%) 10

capitalization above international standards

8
6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 (jun) Jun
Source: Central Bank of Brazil

Basel I (8%)

27

Fiscal Deficit for G-20 Countries

10 9 8 % of GDP 7.5 6.8 4.9 3.9 4.8 3.7 2.5 1.7 2.7 3.3

9.4

8.9

7
6 5 4 3

2007 2009 2010 2015

2
1 0

0.9

1.5 0.3
0.7

G-20

Advanced (in G-20)

Emerging (in G-20)

Brazil

Source: IMF (Cross country Fiscal Monitor May, 2010)

28

Performance Before and After the Crisis

compared to other emerging markets
6.1 GDP real growth % 5.2 5.7 3.6 -0.2 4.3 (*) EME ex. Brazil, India and China 7.3 (**) Brazil

-2.2 (*) 2007 2008 2009 2010

29

Sources: FMI (WEO April 2010) and Central Bank of Brazil

Investment prospects - industry

BRL billion 2005-2008 Oil and Gas Mining Steel Petrochemical 160 53 26 20 2010-2013 340 52 51 34 Growth % 112.9 -2.7 99.5 70.9

Automobile
Electric/Electronics Pulp and Paper Total
Source: BNDES

23
15 17 314

32
21 19 549

37.8
39.0 10.6 74.8

30

Investment prospects - infrastructure

BRL billion
2005-2008 Electricity Telecommunication Sanitation 67 66 22 2010-2013 98 67 39

Growth
% 45.2 2.1 76.5

Railways
Highways Ports Total
Source: BNDES

19
21 5 199

56
36 15 310

195.3
73.0 217.9 55.6
31

Availability of Arable Land

400 350 300

current cultivated area

non-cultivated area

millions of hectares

250 200 150 100 50 0

Brazil*

India

Indonesia

Argentina

European Union

Source: FAO

*rain forest not considered

Congo D. R.

Colombia
32

Angola

China

Sudan

Australia

Canada

Nigeria

USA

Russia

Agenda for the Future

Level of Domestic Saving Quality of Public Expenditures Investment Rate and Infra-Structure Education Review and Simplification of the Tax System Legal Environment more favorable to Business Incentive to Long Term Investment
33

GDP Growth
annual real growth rate
7 6 5 4

7.3%

5.1%
(2006-2008)

3
2 1 0 -1

3.3%
(2003-2005)

2.1%
(1999-2002)

-0.2%

99

00

01

02

03

04

05

06

07

08

09

10
34

Sources: IBGE and Central Bank of Brazil

Henrique de Campos Meirelles

September 2010