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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
2
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
4
Public Sector Net Debt
60.6
60
market
consensus
54.9
55
% of GDP
50.6
50
48.2
47.0
45.1
45
42.8
42.7
40.8
40
38.4
39.5
38.0
37.0
36.5
35
30
02
03 04 05
Sources: Central Bank of Brazil
06 07 Aug 08
08
09 10 11
12 13 14
5
Floating Exchange Rate Regime and
Build Up of International Reserves
International reserves allow for a
safe fluctuation of the exchange rate
USD billion
250
Sep 6th
262.0
Aug 08
205.1
200
150
100
50
0
Jan
02
Jan
03
Jan
04
Source: Central Bank of Brazil
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jan
10
6
Net External Debt and Risk
200
B+
160
USD billion
120 BB80
1Q03
165.2
BB-
S&P:
BBB-
Fitch:
BBB-
(↑)
Moody’s: Baa3
(↑)
4Q04
135.7
BB
40
0
BB+
-49.5
-40
BBB-
-80
1T 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
7
Macroeconomic Responsibility
Virtuous Circle:
responsible
policies
macroeconomic
stability
lower risk premiums
more credibility
stronger growth
greater efficiency
increased credibility
expectations anchored
lower interest rates
lower interest on public debt
higher growth rate
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
country risk - Brasil t-2
(right)
160
2Q 10
1810
1430
investments
GFCF (left)
140
1240
130
1050
120
860
basis points
1620
150
1995 = 100
2000
670
110
480
100
290
90
100
1Q
00
1Q
01
1Q
02
1Q
03
Sources: IBGE and JPMorgan
1Q
04
1Q
05
1Q
06
1Q
07
1Q
08
1Q
09
3Q
10
10
Credit – Outstanding Balances
R$ billion
1,600
45.9
50
1,400
45
1,200
40
35
1,000
30
800 25.7
25
600
% of GDP
consistent growth throughout the period
20
400
15
200
10
0
5
Jan
02
Jan
03
Jan
04
Source: Central Bank of Brazil
Jan
05
Jan
06
Jan
07
Jan
08
Jan
09
Jul
10
11
Capital market – primary issues
100
R$ billion
80
60
40
20
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
Stocks
Commercial papers
Source: CVM (Brazilian Securities Comission) * 12 months acc. to July
Others
12
Net Foreign Direct Investment
market
consensus
2010-14
38.4
50
2007-09
35.2
USD billion
40
30
2002-06
15.7
20
10
0
02
03
04
05
06
07
08
Source: Central Bank of Brazil (market consensus)
09
10
11
12
13
14
13
Brazilian External Liabilities
as a percentage of the gross external liabilities
2001
2010
Others
26.4%
Fixed income
30.9%
FDI
32.8%
Stocks (domestic
and foreign)
9.9%
Source: Central Bank of Brazil
Others
13.3%
Fixed income
17.4%
FDI
36.8%
Stocks (domestic
and foreign)
32.5%
14
Exports
2010-14
238.2
250
USD billion
200
150
2000-09
111.1
100
1990-99
42.7
1980-89
25.5
50
0
80
85
90
95
Source: Central Bank of Brazil (market consensus)
00
05
10
14
15
Exports
diversification of trade partners
35
1990
2002
30
26.3
25
22.2
%
2009
23.3
20
17.9
15
10.3
10
5
USA
Source: Central Bank of Brazil
Europe
Latin America
Asia
other
16
Price Stability and Real Payroll Growth
18
135
16
130
14
125
real
payroll
12
120
10
115
8
Jan 03 = 100
% change in 12 months
stability generates increasing well-being
110
6
IPCA
4
105
2
100
-
95
Jan
03
Jan
04
Jan
05
Source: Central Bank of Brazil
Jan
06
Jan
07
Jan
08
Jan
09
Jul
10
17
Social Mobility
millions of people
A/B
C
D
E
200
31
20
13
150
66
+44.1%
95
100
+19.0%
113
47
44
50
49
40
29
16
2009
2014*
0
2003
Source: Finance Ministry; * estimated
18
Formal Job Creation
from January to July
1800
1600
thousands
1400
1564.6
14 million jobs
created since 2003
1655.1
1155.3
1200
1000
800
670.4
600
437.9
400
200
121.1
0
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
6.96
7
Feb
03
Source: IBGE
Feb
04
Feb
05
Feb
06
Feb
07
Feb
08
Feb
09
Jul
10
20
Unemployment Rate
Africa do Sul
Espanha
Lituânia
Croácia
Irlanda
Colômbia
Grécia
Polônia
Turquia
Hungria
Índia
Portugal
Zona do Euro
França
Estados Unidos
Bélgica
Venezuela
Itália
Chile
Suécia
Canadá
Argentina
Reino Unido
Alemanha
Brasil
Source: Bloomberg
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
21
GDP per capita Growth
2002-09 = 17.5% real growth
forecast
18.0
17.45
2009 (BRL 1000)
17.5
16.41
17.0
16.5
16.0
15.5
15.0
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
Gini Index
0.566
0.56
0.56
0.558
0.553
0.55
0.545
0.54
0.535
0.532
0.528
0.53
0.52
0.52
0.514
0.509
0.51
0.50
98
99
Source: IBGE/PNAD
01
02
03
04
05
06
07
08
09
23
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 Família): reduction of people
in extreme poverty from 12% to the 4% level
Source: FGV-CPS
24
Poverty
30
28.1
% of population
25.4
25
22.8
19.3
20
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
personal computer
35
internet access
35.1
31.5
30
25
24.1
22.3
%
18.7
20
15.2
15
27.7
26.8
11.4
16.5
12.3
20.3
17
13.8
10
5
0
03
Source: IBGE/PNAD
04
05
06
07
08
09
26
Financial Stability: Basel Index
20
capitalization above international standards
18
16
%
14
12
Brazil (11%)
10
Basel I (8%)
8
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
(jun)
Jun
Source: Central Bank of Brazil
27
Fiscal Deficit for G-20 Countries
9.4
10
9
7.5
8
% of GDP
2007
2009
2010
2015
8.9
6.8
7
6
4.9
5
4.8
3.9
4
3.7
2.5
3
2
1
3.3
1.7
2.7
1.5
0.9
0.7
0.3
0
G-20
Advanced
(in G-20)
Emerging
(in G-20)
Source: IMF (Cross country Fiscal Monitor – May, 2010)
Brazil
28
Performance Before and After the Crisis
compared to other emerging markets
7.3 (**) Brazil
GDP real growth %
6.1
5.2
5.7
4.3 (*) EME ex. Brazil,
India and China
3.6
-0.2
-2.2 (*)
2007
2008
2009
Sources: FMI (WEO April 2010) and Central Bank of Brazil
2010
29
Investment prospects - industry
BRL billion
Growth
2005-2008
2010-2013
%
Oil and Gas
160
340
112.9
Mining
53
52
-2.7
Steel
26
51
99.5
Petrochemical
20
34
70.9
Automobile
23
32
37.8
Electric/Electronics
15
21
39.0
Pulp and Paper
17
19
10.6
Total
314
549
74.8
Source: BNDES
30
Investment prospects - infrastructure
BRL billion
Growth
2005-2008
2010-2013
%
Electricity
67
98
45.2
Telecommunication
66
67
2.1
Sanitation
22
39
76.5
Railways
19
56
195.3
Highways
21
36
73.0
Ports
5
15
217.9
Total
199
310
55.6
Source: BNDES
31
Availability of Arable Land
350
current cultivated area
300
non-cultivated area
250
200
150
100
50
Source: FAO
*rain forest not considered
Colombia
Nigeria
Indonesia
Angola
Sudan
Argentina
Canada
Australia
Congo D. R.
China
India
European Union
Russia
USA
0
Brazil*
millions of hectares
400
32
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
7.3%
6
5
5.1%
(2006-2008)
4
3
3.3%
(2003-2005)
2
2.1%
1
(1999-2002)
0
-0.2%
-1
99
00
01
02
03
Sources: IBGE and Central Bank of Brazil
04
05
06
07
08
09
10
34
Henrique de Campos Meirelles
September 2010
Market expectation: a sustainable growing
economy with inflation on target
real growth
market
forecast*
8
7
6
5
% 4
3
2
1
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: Central Bank of Brazil; Focus
* 03/Sept
36