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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