Brasil Contry Analysis
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Brazil: Economic Trends Henrique de Campos Meirelles Instituto de Empresa Madrid, October 2005
1
Three Pillars of Economic Policy
Fiscal policy aimed at generating consolidated primary surpluses, and ultimately a gradual reduction in debt-toGDP ratio; Inflation targeting regime for the conduct of monetary policy; and Exchange rate flexibility as a means to consolidate external adjustment.
2
Brazil: Economic Trends
Fiscal Policy
3
Consolidated Primary Surplus 7 6 5
Avg. 1994-Jun/95 4.8%
Avg. 2003-2005 4.5%
5.16%
% of GDP
4 3 2
Avg. 1999-2002 3.2%
Avg. Jul/95-1998 -0.1%
1 0 -1 -2 jan 94
jan 95
Source: Bacen
jan 96
jan 97
jan 98
jan 99
jan 00
jan 01
jan 02
jan 03
jan 04
aug 05 4
Public Debt-to-GDP Ratio 63 58 50%
% of GDP
53 48 43 38 33 28 jan oct 95 95
jul 96
Source: Bacen
apr jan oct 97 98 98
jul 99
apr jan 00 01
oct 01
jul 02
apr jan oct 03 04 04
aug 06 5
Public Debt-to-GDP Ratio: Trend 58 Market Consensus 2005/2009
56
% of GDP
54 52 50 48 46 44 2003 Source: Bacen
2004
2005
2006
2007
2008
2009 6
Brazil: Economic Trends
Consolidated public sector primary surplus will most likely increase in 2005 for the seventh year in a row, confirming government commitment with fiscal responsibility. Debt-to-GDP is expected to continue falling in the medium-run.
7
Brazil: Economic Trends
Inflation
8
IPCA Inflation 3.5 3.0 2.5
Avg 2002: 0.99%
%
2.0
Avg 2003: 0.74%
Avg 2004: 0.61%
1.5
Avg 2005: 0.43%
1.0 0.5 0.0 -0.5 Jan
May
Sep
Jan
May
Sep
Jan
May
Sep
Jan
May
Sep
02
02
02
03
03
03
04
04
04
05
05
05
Source: IBGE
9
Wholesale Prices Inflation (IPA) Avg 2004: 1.15%
2.5 2.0 1.5
Avg 2003: 0.51%
%
1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0
Avg 2005: -0.21%
Jan 03 May 03 Sep 03 Jan 04 May 04 Sep 04 Jan 05 May 05 Sep 05 Source: FGV
10
IPCA Inflation in 12 Months 18 16
Market Consensus
14
%
12 Sep 05 6.0%
10
Dec 05 5.3%
8 6 4 Jan 03
May 03
Source: Bacen
Sep 03
Jan 04
May 04
Sep 04
Jan 05
May 05
Sep 05
Jan May 06 06 11
12-Month Ahead IPCA Expectations 6.4 6.2 6.0 5.8 %
5.6 5.4 5.2 5.0 4.7%
4.8 4.6 Jul 04 Source: Bacen
Oct 04
Jan 05
Apr 05
Jul 05
Oct 05 12
Brazil: Economic Trends
Consumer and wholesale prices inflation have fallen in 2004/2005. Inflation expectations have converged to the target path.
13
Brazil: Economic Trends
Exchange Rate and External Sector
14
Nominal Exchange Rate 4.0 3.5
R$/US$
3.0 2.5 2.0 1.5 1.0 Jan 98 Source: Bacen
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Out 05 15
Current Account
10
US$ billion
0 -10 -20 -30 -40
1996
1997
Source: Bacen
1998
1999
2000
2001
2002
2003
2004
2005
16
Current Account vs. Trade Balance Accumulated in 12 Months
21
40
14
30
0 20
-7 -14
Trade Balance
Current Account
10
US$ billion
US$ billion
7
-21 0
-28 -35 Jan 96
Jan 97
Source: Bacen
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
-10 Jan Aug 05 05 17
Trade Balance 115
Accumulated in 12 Months
112.9
105
US$ billion
95
Exports
85 71.7
75 65
Imports
55 45 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 99 99 00 00 01 01 02 02 03 03 04 04 05 Source: Ministry of Development, Industry and Foreign Trade
Sep 05 18
Exports Growth US$ billion 2
4
6
8 10
12
14 16
18 20 22
Total Growth in 12 months through Aug 05
Primary SemiManuf. Manufactured
Source: Ministry of Development, Industry and Foreign Trade
19
Exports by Market and by Products: 2004/2005 Product
Market Others 25.6%
European Union 25.0%
Other 1.8% Primary 27.8%
China 4.9% US 20.8%
Mercosur 9.6% Latin America, excluding Mercosur 15.1%
Manufactured 56.1%
Source: Ministry of Development, Industry and Foreign Trade
SemiManufactured 14.3%
20
Brazil: Economic Trends
In the last 6 years, current account balance increased by US$ 45 billion, or more than 6% of GDP. External adjustment has been driven by the increase in exports. Exports growth led by manufactured goods. Export prices had a secondary role. Brazilian exports are diversified in terms of markets and goods, reducing exports vulnerability.
21
Brazil: Economic Trends
Economic Activity
22
GDP Growth Quarter-on-Quarter, Seasonally Adjusted Annual Rate 8.0 5.7
6.0
%
4.0 2.0 0.0 -2.0 -4.0 1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
03
03
03
03
04
04
04
04
05
05
Source: IBGE
23
Contribution of Internal and External Demand to GDP Growth GDP Growth Decomposition (y-o-y) 7
Internal Demand External Demand
5
%
3 1 -1 -3 -5
1Q 03
Source: IBGE
2Q 03
3Q 03
4Q 03
1Q 04
2Q 04
3Q 04
4Q 04
1Q 05
2Q 05 24
Industrial Output 3-Month Moving Average
115
s.a., 2002 = 100
112 109 106 103 100 97 94 Jan 01
Jun 01
Source: IBGE
Nov 01
Apr 02
Sep 02
Feb 03
Jul 03
Dec May 03 04
Oct 04
Mar 05
Aug 05 25
Retail Sales 3-Month Moving Average 115
s.a., 2003 = 100
112 109 106 103 100 97 Jan 01 Source: IBGE
Jul 01
Jan 02
Jul 02
Jan 03
Jul 03
Jan 04
Jul 04
Jan 05
Aug 05 26
Formal Job Creation Accumulated in 12 Months 2.0
million
1.5 1.0 0.5 0.0 -0.5 -1.0 Jan 99
Nov 99
Sep 00
Jul 01
May 02
Source: Ministry of Labour and Employment
Mar 03
Jan 04
Nov 04
Sep 05 27
Average Real Wage and Payrolls 3-Month Moving Average 100
106 Payrolls
Average Real Wage
104
96 102
94 92
100
90
Mar 2002 = 100
Mar 2002 = 100
98
98
88 86
96 Jan 03
Source: IBGE
Jul 03
Jan 04
Jul 04
Jan 05
Jul 05 28
Non-Durable Retail Sales vs. Labor Income 3-Month Moving Average
110
106 104
Supermarket Sales
s.a., 2003 = 100
108 106
102
104
100
Payrolls
102
98
100 98
s.a., Mar 2002 = 100
112
96 Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Aug
03
03
03
03
04
04
04
04
05
05
05
Source: IBGE
29
Credit vs. Retail Sales 115
3-Month Moving Average
113
1.70
109
1.60
Retail Sales
107
1.50
105 Credit to Individuals
103 101
R$ billion
s.a., 2003 = 100
111
1.40 1.30
99 97
1.80
Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Aug 03 03 03 03 04 04 04 04 04 04 05 05 05
Sources: IBGE, Bacen
1.20
30
GDP x Fixed Capital Investment Compared to Same Quarter of Previous Year
25 20 15
Fixed Capital Investment
%
10 5 GDP 0 -5 -10
1Q 95
1Q 96
Source: IBGE
1Q 97
1Q 98
1Q 99
1Q 00
1Q 01
1Q 02
1Q 03
1Q 04
2Q 05 31
Capacity Utilization 3-Month Moving Average
84 83 82 81 %
80 79 78 77 76 75 Jan 97 Source: CNI
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan Aug 05 05 32
Brazil: Economic Trends Brazilian economy grew a cumulative 9.2% in the last eight quarters. Growth supported by domestic demand, with external demand playing a secondary role. Domestic demand driven by increase in fixed capital investment, credit expansion and increase in employment and real wages. Investment rebounded since the third quarter of 2003, enabling a more balanced growth of supply vis-à-vis the expansion in demand. 33
Brazil: Economic Trends
Strengthening Resistance to Shocks
34
Bacen Acquisitions in the FX Market 12
US$ billion
9 6 3 0 -3 -6 -9
2001
2002
2003
2004
2005*
* Year through September Source: Bacen
35
International Reserves 65
58.7
US$ billion
60 55
Total Reserves
50 45
44.0
40 35 30
Net Reserves
25 20 15
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Aug Dec 99
99
00
00
01
01
02
02
03
Source: Bacen, figures for Dec/2005: estimates
03
04
04
05
05
05 36
FX Debt (Domestic and External)-to-GDP Ratio 35 30
%
25 20 15 10 5 Jan Jun Nov Apr Sep Feb 00 00 00 01 01 02 Source: Bacen
Jul 02
Dec May Oct Mar Aug Jan Aug 02 03 03 04 04 05 05 37
External Sustainability Indicators Interest Payments/Exports 36 32 %
28 24 20 16 12
1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun 05
Net External Debt/Exports
Net External Debt/GDP 40
3,5
35
3,0
30 %
4,0
2,5
25
2,0
20
1,5
15
1,0 1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun 05
Source: Bacen
10
1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun 05
38
Market Indicators Ibovespa Index in US$
2,450
16
2,150
14
1,850 1,550 1,250
Thousand Points
Basis Points
Brazil Risk
12 10 8
950
6
650
4
350 Jan Jan Jan Jan Jan Jan Jan Jan Jan 97 98 99 00 01 02 03 04 05
2
Source: JP Morgan Chase, Bovespa
Jan Jan Jan Jan Jan Jan Jan Jan Jan 97 98 99 00 01 02 03 04 05
39
Brazil: Economic Trends
In 2003-2005, government progressed with the process of international reserve accumulation, and reduction of public sector’s FX exposure; External sustainability indicators improved dramatically. Since 1999, debt service and net debt-to-exports ratio have fallen by 2/3. In the same period, net debt-to-GDP ratio has halved. Brazil risk and Ibovespa index summarize the improvement in macroeconomic fundamentals and market confidence. 40
Brazil: Economic Trends Henrique de Campos Meirelles Instituto de Empresa Madrid, October 2005
41
1
Three Pillars of Economic Policy
Fiscal policy aimed at generating consolidated primary surpluses, and ultimately a gradual reduction in debt-toGDP ratio; Inflation targeting regime for the conduct of monetary policy; and Exchange rate flexibility as a means to consolidate external adjustment.
2
Brazil: Economic Trends
Fiscal Policy
3
Consolidated Primary Surplus 7 6 5
Avg. 1994-Jun/95 4.8%
Avg. 2003-2005 4.5%
5.16%
% of GDP
4 3 2
Avg. 1999-2002 3.2%
Avg. Jul/95-1998 -0.1%
1 0 -1 -2 jan 94
jan 95
Source: Bacen
jan 96
jan 97
jan 98
jan 99
jan 00
jan 01
jan 02
jan 03
jan 04
aug 05 4
Public Debt-to-GDP Ratio 63 58 50%
% of GDP
53 48 43 38 33 28 jan oct 95 95
jul 96
Source: Bacen
apr jan oct 97 98 98
jul 99
apr jan 00 01
oct 01
jul 02
apr jan oct 03 04 04
aug 06 5
Public Debt-to-GDP Ratio: Trend 58 Market Consensus 2005/2009
56
% of GDP
54 52 50 48 46 44 2003 Source: Bacen
2004
2005
2006
2007
2008
2009 6
Brazil: Economic Trends
Consolidated public sector primary surplus will most likely increase in 2005 for the seventh year in a row, confirming government commitment with fiscal responsibility. Debt-to-GDP is expected to continue falling in the medium-run.
7
Brazil: Economic Trends
Inflation
8
IPCA Inflation 3.5 3.0 2.5
Avg 2002: 0.99%
%
2.0
Avg 2003: 0.74%
Avg 2004: 0.61%
1.5
Avg 2005: 0.43%
1.0 0.5 0.0 -0.5 Jan
May
Sep
Jan
May
Sep
Jan
May
Sep
Jan
May
Sep
02
02
02
03
03
03
04
04
04
05
05
05
Source: IBGE
9
Wholesale Prices Inflation (IPA) Avg 2004: 1.15%
2.5 2.0 1.5
Avg 2003: 0.51%
%
1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0
Avg 2005: -0.21%
Jan 03 May 03 Sep 03 Jan 04 May 04 Sep 04 Jan 05 May 05 Sep 05 Source: FGV
10
IPCA Inflation in 12 Months 18 16
Market Consensus
14
%
12 Sep 05 6.0%
10
Dec 05 5.3%
8 6 4 Jan 03
May 03
Source: Bacen
Sep 03
Jan 04
May 04
Sep 04
Jan 05
May 05
Sep 05
Jan May 06 06 11
12-Month Ahead IPCA Expectations 6.4 6.2 6.0 5.8 %
5.6 5.4 5.2 5.0 4.7%
4.8 4.6 Jul 04 Source: Bacen
Oct 04
Jan 05
Apr 05
Jul 05
Oct 05 12
Brazil: Economic Trends
Consumer and wholesale prices inflation have fallen in 2004/2005. Inflation expectations have converged to the target path.
13
Brazil: Economic Trends
Exchange Rate and External Sector
14
Nominal Exchange Rate 4.0 3.5
R$/US$
3.0 2.5 2.0 1.5 1.0 Jan 98 Source: Bacen
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan 05
Out 05 15
Current Account
10
US$ billion
0 -10 -20 -30 -40
1996
1997
Source: Bacen
1998
1999
2000
2001
2002
2003
2004
2005
16
Current Account vs. Trade Balance Accumulated in 12 Months
21
40
14
30
0 20
-7 -14
Trade Balance
Current Account
10
US$ billion
US$ billion
7
-21 0
-28 -35 Jan 96
Jan 97
Source: Bacen
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
-10 Jan Aug 05 05 17
Trade Balance 115
Accumulated in 12 Months
112.9
105
US$ billion
95
Exports
85 71.7
75 65
Imports
55 45 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 99 99 00 00 01 01 02 02 03 03 04 04 05 Source: Ministry of Development, Industry and Foreign Trade
Sep 05 18
Exports Growth US$ billion 2
4
6
8 10
12
14 16
18 20 22
Total Growth in 12 months through Aug 05
Primary SemiManuf. Manufactured
Source: Ministry of Development, Industry and Foreign Trade
19
Exports by Market and by Products: 2004/2005 Product
Market Others 25.6%
European Union 25.0%
Other 1.8% Primary 27.8%
China 4.9% US 20.8%
Mercosur 9.6% Latin America, excluding Mercosur 15.1%
Manufactured 56.1%
Source: Ministry of Development, Industry and Foreign Trade
SemiManufactured 14.3%
20
Brazil: Economic Trends
In the last 6 years, current account balance increased by US$ 45 billion, or more than 6% of GDP. External adjustment has been driven by the increase in exports. Exports growth led by manufactured goods. Export prices had a secondary role. Brazilian exports are diversified in terms of markets and goods, reducing exports vulnerability.
21
Brazil: Economic Trends
Economic Activity
22
GDP Growth Quarter-on-Quarter, Seasonally Adjusted Annual Rate 8.0 5.7
6.0
%
4.0 2.0 0.0 -2.0 -4.0 1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
03
03
03
03
04
04
04
04
05
05
Source: IBGE
23
Contribution of Internal and External Demand to GDP Growth GDP Growth Decomposition (y-o-y) 7
Internal Demand External Demand
5
%
3 1 -1 -3 -5
1Q 03
Source: IBGE
2Q 03
3Q 03
4Q 03
1Q 04
2Q 04
3Q 04
4Q 04
1Q 05
2Q 05 24
Industrial Output 3-Month Moving Average
115
s.a., 2002 = 100
112 109 106 103 100 97 94 Jan 01
Jun 01
Source: IBGE
Nov 01
Apr 02
Sep 02
Feb 03
Jul 03
Dec May 03 04
Oct 04
Mar 05
Aug 05 25
Retail Sales 3-Month Moving Average 115
s.a., 2003 = 100
112 109 106 103 100 97 Jan 01 Source: IBGE
Jul 01
Jan 02
Jul 02
Jan 03
Jul 03
Jan 04
Jul 04
Jan 05
Aug 05 26
Formal Job Creation Accumulated in 12 Months 2.0
million
1.5 1.0 0.5 0.0 -0.5 -1.0 Jan 99
Nov 99
Sep 00
Jul 01
May 02
Source: Ministry of Labour and Employment
Mar 03
Jan 04
Nov 04
Sep 05 27
Average Real Wage and Payrolls 3-Month Moving Average 100
106 Payrolls
Average Real Wage
104
96 102
94 92
100
90
Mar 2002 = 100
Mar 2002 = 100
98
98
88 86
96 Jan 03
Source: IBGE
Jul 03
Jan 04
Jul 04
Jan 05
Jul 05 28
Non-Durable Retail Sales vs. Labor Income 3-Month Moving Average
110
106 104
Supermarket Sales
s.a., 2003 = 100
108 106
102
104
100
Payrolls
102
98
100 98
s.a., Mar 2002 = 100
112
96 Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Aug
03
03
03
03
04
04
04
04
05
05
05
Source: IBGE
29
Credit vs. Retail Sales 115
3-Month Moving Average
113
1.70
109
1.60
Retail Sales
107
1.50
105 Credit to Individuals
103 101
R$ billion
s.a., 2003 = 100
111
1.40 1.30
99 97
1.80
Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Aug 03 03 03 03 04 04 04 04 04 04 05 05 05
Sources: IBGE, Bacen
1.20
30
GDP x Fixed Capital Investment Compared to Same Quarter of Previous Year
25 20 15
Fixed Capital Investment
%
10 5 GDP 0 -5 -10
1Q 95
1Q 96
Source: IBGE
1Q 97
1Q 98
1Q 99
1Q 00
1Q 01
1Q 02
1Q 03
1Q 04
2Q 05 31
Capacity Utilization 3-Month Moving Average
84 83 82 81 %
80 79 78 77 76 75 Jan 97 Source: CNI
Jan 98
Jan 99
Jan 00
Jan 01
Jan 02
Jan 03
Jan 04
Jan Aug 05 05 32
Brazil: Economic Trends Brazilian economy grew a cumulative 9.2% in the last eight quarters. Growth supported by domestic demand, with external demand playing a secondary role. Domestic demand driven by increase in fixed capital investment, credit expansion and increase in employment and real wages. Investment rebounded since the third quarter of 2003, enabling a more balanced growth of supply vis-à-vis the expansion in demand. 33
Brazil: Economic Trends
Strengthening Resistance to Shocks
34
Bacen Acquisitions in the FX Market 12
US$ billion
9 6 3 0 -3 -6 -9
2001
2002
2003
2004
2005*
* Year through September Source: Bacen
35
International Reserves 65
58.7
US$ billion
60 55
Total Reserves
50 45
44.0
40 35 30
Net Reserves
25 20 15
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Aug Dec 99
99
00
00
01
01
02
02
03
Source: Bacen, figures for Dec/2005: estimates
03
04
04
05
05
05 36
FX Debt (Domestic and External)-to-GDP Ratio 35 30
%
25 20 15 10 5 Jan Jun Nov Apr Sep Feb 00 00 00 01 01 02 Source: Bacen
Jul 02
Dec May Oct Mar Aug Jan Aug 02 03 03 04 04 05 05 37
External Sustainability Indicators Interest Payments/Exports 36 32 %
28 24 20 16 12
1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun 05
Net External Debt/Exports
Net External Debt/GDP 40
3,5
35
3,0
30 %
4,0
2,5
25
2,0
20
1,5
15
1,0 1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun 05
Source: Bacen
10
1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun 05
38
Market Indicators Ibovespa Index in US$
2,450
16
2,150
14
1,850 1,550 1,250
Thousand Points
Basis Points
Brazil Risk
12 10 8
950
6
650
4
350 Jan Jan Jan Jan Jan Jan Jan Jan Jan 97 98 99 00 01 02 03 04 05
2
Source: JP Morgan Chase, Bovespa
Jan Jan Jan Jan Jan Jan Jan Jan Jan 97 98 99 00 01 02 03 04 05
39
Brazil: Economic Trends
In 2003-2005, government progressed with the process of international reserve accumulation, and reduction of public sector’s FX exposure; External sustainability indicators improved dramatically. Since 1999, debt service and net debt-to-exports ratio have fallen by 2/3. In the same period, net debt-to-GDP ratio has halved. Brazil risk and Ibovespa index summarize the improvement in macroeconomic fundamentals and market confidence. 40
Brazil: Economic Trends Henrique de Campos Meirelles Instituto de Empresa Madrid, October 2005
41
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