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Brazil – The missing link: Or the challenge of growing without savings
Marcelo Salomon – Chief Brazil Economist
Emerging Markets Research
July 2010
Monetary Policy - Exit strategy is rolling
• Monetary policy is bearing the brunt of the exit strategy, with little help from the fiscal side.
• Global growth anxiety is tempering the effects of the impressive Asian style rebound of
growth in the local yield curve. Growth is moderating to more sustainable levels.
After unwinding reserve requirements…
280
260
240
220
200
180
160
140
120
100
jan-03
jul-04
jan-06
jul-07
jan-09
... it is now time, to lift the Selic rate
15.0
14.0
13.0
12.0
11.0
10.0
9.0
8.0
7.0
6.0
5.0
Jan-07
Jan-08
Jan-09
Brazil Selic
2
Source: BCB, Barclays Capital
Source: BCB, Barclays Capital
Jan-10
Forecast
Fiscal Policy: New regime – Lower Govt. Savings?
• A new regime of low public savings, strong permanent increase in expenditure could lead
to lower potential growth.
• The major challenge for the president elect is to reign on current (non-discretionary)
spending, making space for both private and public investments.
Expense Breakdown (% GDP)
Primary Surplus (% GDP)
4,50
4,00
3,50
3,00
2,50
2,00
1,50
1,00
0,50
0,00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2005
Central Government
Federal Government SOE
Source: BCB, Barclays Capital
3
States and municipalities
2006
2007
Non-discretionary Expenses
2008
2009
Discretionary Expenses
Source: National Treasury, Barclays Capital
Note: Non-discretionary is wage bill, social security and non-investment and mandatory
expenses (% GDP).
Brazil – Structural change in Growth
• There has been a structural change in the level of real GDP growth in Brazil, shifting it up
from 1.4% in the early 1990’s to nearly 4.0% in the second half of the 2000s.
• The recent jump in total factor productivity underpins the positive growth story.
Real GDP Growth (% y/y and 5 Year Averages)
Total Factor Productivity
7.0%
3.5%
6.0%
3.0%
5.0%
2.5%
4.0%
2.0%
3.0%
2.0%
1.5%
1.0%
1.0%
0.0%
0.5%
-1.0%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
0.0%
2004
4
Source: IBGE, Barclays Capital
2005
2006
2007
2008
Source: Pessoa, S. “Características estruturais da economia brasileira”Anbima
Presentation Dec 2009
Brazil – Savings vs Investments
• Domestic savings remain small, specially when compared to fast growing Asian economies. This
ultimately reflects a high tax burden and growing social welfare spending (paternalistic state).
• Large pipeline of long-term investment projects (pres-salt oil extraction, 2014 World Cup and 2016
Olympics games) highlights the growing needs of long-term funding.
• With limited domestic savings and rising fixed investment needs, foreign capital flows should have to
fill the gap. That is, in order to push the investment ratio towards the 23% range, the country should
run larger current account deficits in the years to come.
Total Domestic Savings (% GDP)
25.0%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
5
Fixed Investments (% GDP)
Source: IBGE, Barclays Capital
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: IBGE, Barclays Capital
The missing link – External or Domestic Savings?
• Strong growth is leading to rising CA deficits
• We remain sanguine about the pace of current account deterioration and would not expect
any financing problems. FDI is loosing momentum, but portfolio flows are more than
compensating
Current account and trade balance
Financing External Gaps
80,0
60
50
40
30
20
10
0
-10
-20
-30
-40
-50
60,0
40,0
20,0
0,0
Jan-09
Jan-07
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
-20,0
-40,0
Jan-03
Jan-05
Jan-07
Jan-09
CA+Net FDI (12m)
Portfolio Invest. + Other Finan.Inflows (12m)
CA (USD bn 12m)
Source: BCB,Barclays Capital
6
Trade Balance (USD bn 12m)
Source: BCB, Barclays Capital
Presidential elections: BRL, Selic and fiscal policy?
Were the wild things are:
BNDES as the Treasury’s public credit provider;
Who will finance the infrastructure investments for the 2014 World Cup; the 2016
Olympics and the Pre-Salt oil extraction business;
Working within the existing economic institutions;
Is Keynes really dead or did he just move to Brasilia?
___________________________
7
Source: Datafolha ,Barclays Capital