Download Brazil: Recent Macroeconomic and Financial Developments

Brazil: Recent Macroeconomic
and Financial Developments
Henrique Meirelles
January 2009
1

Deleveraging:
- reduction of external debt;
- acquisition of international reserves;
- reduction of foreign denominated domestic debt.:

In consequence, the Brazilian public sector is currently
long in foreign currency. Thus, net public debt drops
whenever the exchange rate depreciates.
2
External Public Debt
Sep/03
138.6
160
US$ billion
140
120
100
Nov/08
82.5
80
60
1Q
03
Source: BCB
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
3
International Reserves
220
Dec/08
206.8
US$ billion
165
110
Apr/03
55 15.9
0
Jan
03
Source: BCB
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
4
International Reserves: Cumulative
Acquisitions Since End-2003
Dec/08
147.2
160
US$ billion
120
80
40
0
Jan
04
Source: BCB
Jan
05
Jan
06
Jan
07
Jan
08
5
Total FX denominated Public Debt
(Domestic + External)
as a share of total debt
Set/02
60 55.5
as a share of GDP
40
Set/02
31.1
40
Nov/08
-39.1
%
20
20
Nov/08
-13.6
0
0
-20
-40
-20
Source: BCB
6
• In Sep/02, a 10% exchange rate depreciation increased
the public debt/GDP ratio by 3.1 percentage points.
• Today, a 10% exchange rate depreciation reduces the
public debt/GDP ratio by 1.3 percentage point.
7
External Shock Feedback Loop: Before
EXTERNAL
SHOCK
DETERIORATION
OF CONFIDENCE
FX DEPRECIATION
PRESSURE ON
PUBLIC DEBT/GDP RATIO
DOMESTIC
FX PUBLIC DEBT
EXTERNAL
8
External Shock Feedback Loop: Now
EXTERNAL
SHOCK
DETERIORATION
OF CONFIDENCE
FX DEPRECIATION
REDUCTION OF
PUBLIC DEBT/GDP RATIO
PUBLIC SECTOR IS LONG IN FX
FX PUBLIC DEBT
9
Net Public Debt/GDP
58
Sep/02
56.0%
54
% GDP
50
Lowest
since May/98
46
42
38
Nov/08
34.9%
34
30
Jan
02
Source: BCB
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
10
Brazilian Banks: Risk-Based
Capital Adequacy
20
16
regulatory
minimum
(11%)
%
12
8
4
0
2004
Source: BCB
2005
2006
2007
Sep
2008
11
Brazilian Banks: Past Due Loans
past due loans (90+ days)/total loans
6
5
%
4
3
2
1
0
2004
Source: BCB
2005
2006
2007
Sep
2008
12
Reserve Requirements
 Total reserve requirements of banking system at
BCB at end of August (before crisis) : R$ 259.4 billion
13
Domestic Demand and Supply
change, year-over-year
9.3
9.0
6.8
7.5
%
6.0
4.5
3.0
1.5
0.0
1Q
04
3Q
04
Source: IBGE
1Q
3Q
1Q
3Q
05
05
06
06
domestic demand
1Q
07
GDP
3Q
07
1Q
08
3Q
08
14
Real Payrolls
change, year-over-year
9
6
6.4
6.3
2006
2007
4.6
3
%
6.9
1.9
0
-3
-6
-9
-8.0
2003
Source: IBGE
2004
2005
Nov 08
Nov 07
15
Inflation and Targets
IPCA (12-month trailing basis)
18
market
consensus
15
2008:
5.9%
%
12
9
2009: 5.0%
6
3
0
jan
jan
jan
jan
jan
jan
jan
jan
03
04
05
06
07
08
09
10
Source: IBGE and BCB
16
Real Interest Rate
360-day swap
40
35
avg. 00/03:
15.0%
30
avg. 98/99:
23.2%
%
25
avg. 06/08:
8.4%
avg. 04/05:
11.5%
20
15
10
6,7
5
jan
98
jan
99
jan
00
jan
01
jan
02
jan
03
Source: BCB e BM&F Bovespa
(January data refers to first week of month)
jan
04
jan
05
jan
06
jan
07
jan
08
jan
09
17
Channels of Transmission of Global
Financial Crises to Brazil
Credit
Foreign Trade
Confidence
18
Domestic Banking Credit
with Foreign Funding
48
46.8
44.8
US$ billion
45
46.8
46.6
45.6
45.3
43.7
42.3
41.7
42
39.8
39.8
39
36
Jan
08
Source: BCB
Feb
08
Mar
08
Apr
08
May
08
Jun
08
Jul
08
Aug Sep
08
08
Oct Nov
08
08
19
Sovereign Risk and Exchange Rate
real effective exchange rate
(BRL per basket of currencies)
[increase  BRL depreciation]
(right scale)
Basis points
2000
180
160
1600
140
1200
120
800
100
400
Brazil sovereign spread
(left scale)
2005 = 100
2400
80
0
60
Jan
00
Jan
01
Jan
02
Jan
03
Source: JPMorgan Chase and BCB
Jan
04
Jan
05
Jan
06
Jan
07
Jan
08
20
Commodity Prices and Exchange Rate
180
commodity prices
(ex oil)
2005 = 100
160
140
120
100
real effective exchange rate
(basket of currencies per BRL)
[increase  BRL appreciation]
80
60
Jan
00
Jan
01
Jan
02
Source: IMF and BCB
Jan
03
Jan
04
Jan
05
Jan
06
Jan
07
Jan Nov
08
08
21
Recent Initiatives to Inject Liquidity
in Foreign Currency Market
• Sales of USD in repurchase agreement auctions;
• Reduction of reserve requirements for banks acquiring
USD with repurchase agreement;
• Sales of currency swap contracts;
• Sales of USD in spot market;
• Collateralized loans, aimed at financing exports;
• Authorization for BCB to engage in currency swap
transactions with other central banks.
22
Recent Initiatives to Inject Liquidity
in Foreign Currency Market
(amounts injected through end-2008)
- Spot market = US$ 11.6 billion
- Repurchase agreement auctions = US$ 8.0 billion
- Loans to foreign trade
= US$ 4.7 billion
total
= US$ 12.7 billion
- Currency swap contracts = US$ 33.3 billion
23
Liquidity in Foreign Currency:
Advances on Export Contracts (ACC)
weekly average since Lehman Brothers collapse
300
US$ million
250
195
200 186
150
228 235 222
229
173
150
144
117
100
165 159
106
78
50
Source: BCB
24
Recent Initiatives to Inject Liquidity
in Foreign Currency Market
 In January, the BCB will start offering loans to
companies, aimed at rolling over their external debts
 Demand for these loans is estimated at more than US$ 20
billion, favoring 4,000 companies.
25
Recent Initiatives to Inject Liquidity
in Domestic Credit Market
 Reduction of R$ 99 billion in reserve requirements;
 Incentives for banks (including public banks) to acquire
portfolios of institutions with liquidity constraints;
 Increase of funding to BNDES (development bank) and
rural credit.
26
Recent Initiatives to Inject Liquidity
in Domestic Credit Market
 Results
• Normalization of liquidity conditions of small and
medium size banks, including banks owned by
carmakers.
• After sharp fall in October, credit concessions
recovered gradually in following weeks;
• Credit rollover rates already surpasses pre-crises levels
for companies (thought still somewhat below August
levels for households);
27
Credit Rollover Rates
daily average rollover rates
change, month-over-month (%)
Nov/
Oct
Nov/
Aug
4.7
2.0
Households
6.0
-2.0
Companies
3.3
3.0
Total
Source: BCB
28
Brazil: Recent Macroeconomic
and Financial Developments
Henrique Meirelles
January 2009
29