Brazil: Economic Overview Brazil: Economic Overview Ilan Goldfajn Governor of the Central Bank of Brazil

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  • Brazil: Economic Overview

    Ilan Goldfajn

    Governor of the Central Bank of Brazil

    The Wharton School at the University of Pennsylvania

    January 06, 2019

  • Outline

    I. General overview

    i. General information

    ii. Macroeconomic framework

    II. Macroeconomic outlook

    i. Inflation and expectations around the target

    ii. Interest rates at historical low levels

    iii. Economic recovery

    iv. Global outlook and Brazilian buffers

    III. Final remarks

    2

  • 3

    General information about Brazil

     Large closed economy.

     Vast natural resources, including recently discovered large offshore oil fields.

     Heterogeneous country. See graph.

     Democracy, with several small fragmented parties, hard to advance reforms.

    GDP per capita – 2016 (in US$)

    > 16,000

    > 12,308

    > 8,615

    > 4,923

    > 4,000

    > 3,077Source: IBGE and BCB

  • Macroeconomic policy

    • Main features of the macroeconomic policy:

    - Inflation targeting

    - Fiscal responsibility law

    - Exchange rate flexibility

    4

  • Banco Central do Brasil – Main Goals

    • To ensure price stability and a solid

    and efficient financial system.

    • The mission to ensure price stability is

    accomplished through the inflation-

    targeting framework, the targets are

    defined by the National Monetary

    Council (CMN).

    5

  • Banco Central do Brasil – Main activities

    Monetary policy

    Financial regulation

    Financial supervision

    6

  • Source: FMI (FSI) – latest available data

    Financial soundness indicators

    % %%

    12.2

    14.5

    14.6

    14.6

    14.8

    15.2

    15.3

    15.9

    16.0

    16.3

    16.6

    17.1

    17.2

    18.4

    19.1

    20.2

    0 5 10 15 20 25

    Russia

    Australia

    US

    India

    S. Korea

    Canada

    Spain

    Mexico

    Italy

    Turkey

    S.Africa

    Japan

    Brazil

    France

    Germany

    UK

    Capital Adequacy Ratio

    -36.9

    -18.0

    -17.4

    -14.8

    -8.2

    -7.8

    -7.6

    -5.0

    -4.7

    -4.4

    -2.1

    5.6

    12.9

    -50 -40 -30 -20 -10 0 10 20

    India

    Russia

    S. Africa

    Spain

    UK

    Australia

    Japan

    US

    Canada

    Turkey

    S. Korea

    Mexico

    Brazil

    (Provisions – NPL)/ Capital

    29.3

    35.0

    40.7

    41.2

    43.8

    46.7

    49.9

    63.7

    86.1

    92.5

    102.6

    149.3

    182.2

    212.9

    0 70 140 210 280

    S. Africa

    India

    Australia

    Mexico

    UK

    Canada

    Japan

    Turkey

    Italy

    US

    S. Korea

    Germany

    Russia

    Brazil

    Liquid Assets to Short Term Liabilities

    7

  • 8

    Macroeconomic outlook

  • 2

    3

    4

    5

    6

    7

    8

    9

    10

    11

    2 0

    1 2

    2 0

    1 3

    2 0

    1 4

    2 0

    1 5

    2 0

    1 6

    2 0

    1 7

    2 0

    1 8

    2 0

    1 9

    2 0

    2 0

    expected IPCA (Median Focus) IPCA

    IPCA and Inflation Targets

    9

    Source: IBGE and BCB (Focus)

    Nov 18 (4.05%)

    1 2

    -m o

    n th

    c h

    an ge

    s (%

    )

    Focus: expectations as at December 7th

    Target (4.5%)

    Target in 2020 (4.0%)

    Target in 2019 (4.25%)

    Inflation around the target

  • 5* Expected inflation implicit in inflation indexed treasury bonds (NTN-B). ** Expected inflation implicit in forward inflation coupon contracts (DAP).

    12-months ahead inflation expectations around the target

    8.1

    5.0

    2

    3

    4

    5

    6

    7

    8

    9

    10

    11

    D ec

    -1 3

    D ec

    -1 4

    D ec

    -1 5

    D ec

    -1 6

    D ec

    -1 7

    D ec

    -1 8

    D ec

    -1 9

    %

    Break-even inflation (29/01/2016)* Break-even inflation (29/07/2016)*

    Break-even inflation (19/12/2018)** Actual inflation CPI

    3.66

    3.73

    Well anchored expectations

    10

    Source: BCB/IBGE

  • 11 Note : from Apr/01/1996 to Mar/04/1999 – Selic rate

    from Mar/05/1999 to Dec/31/2018 – Selic rate target

    Historical downward trend (% p.a.)

    dez/18

    6.5 0

    10

    20

    30

    40

    50

    Jan-96 Sep-99 May-03 Jan-07 Sep-10 May-14 Jan-18

    nov/97

    46.4

    Policy rate (Selic) at a historical low

    Source: BCB

  • 7

    Source: Bloomberg

    0

    4

    8

    12

    16

    20

    Sep 02 Nov 05 Jan 09 Mar 12 May 15 Jul 18

    Dec/18

    2.7

    Feb/03

    17.7

    Falling long-run real interest rate

    12 Note: Swap pre-DI 360 days deflated by the median of the 12-months ahead expected consumer price inflation (Focus Survey).

  • 100

    110

    120

    130

    140

    150

    160

    170

    M ar

    -0 0

    M ay

    -0 1

    Ju l-

    0 2

    Se p

    -0 3

    N o

    v- 0

    4

    Ja n

    -0 6

    M ar

    -0 7

    M ay

    -0 8

    Ju l-

    0 9

    Se p

    -1 0

    N o

    v- 1

    1

    Ja n

    -1 3

    M ar

    -1 4

    M ay

    -1 5

    Ju l-

    1 6

    Se p

    -1 7

    N o

    v- 1

    8

    In d

    ex , s

    ea so

    n al

    ly a

    d ju

    st ed

    ( 1

    9 9

    5 =1

    0 0

    ) 2018

    +1.3%

    2019

    +2.4%

    10• Index number, seasonally adjusted (1995=100) • Projections for 2018 and 2019, December 2018

    Inflation Report

    Economic recovery (GDP)

    13

    Source: IBGE and BCB

  • -16

    -12

    -8

    -4

    0

    4

    8

    N o

    v- 1

    4

    Fe b

    -1 5

    M ay

    -1 5

    A u

    g- 1

    5

    N o

    v- 1

    5

    Fe b

    -1 6

    M ay

    -1 6

    A u

    g- 1

    6

    N o

    v- 1

    6

    Fe b

    -1 7

    M ay

    -1 7

    A u

    g- 1

    7

    N o

    v- 1

    7

    Fe b

    -1 8

    M ay

    -1 8

    A u

    g- 1

    8

    N o

    v- 1

    8

    14* - Non-earmarked resources

    Outstanding credit operations* Deflated year-over-year change (%)

    Credit recovery

    Source: BCB

  • 11

    Reforms and adjustments

    • Fiscal reforms

    • Pension system reform etc.

    • Central Bank autonomy

    • Agenda BC+ : structural reforms promoted by the BCB

    • TLP: National Developing Bank (BNDES) funding rate,

    innovation etc.

    • Productivity Reforms

    • Trade openness

    Sustainable recovery

    15

  • 9

    Global economy brings challenges to emerging markets

    • Risk aversion in global financial markets

    • Uncertainties related to trade disputes

    • Normalization of interest rates in some advanced economies

    But Brazil is well positioned to resist shocks

    Challenging global outlook

    16

  • 0%

    5%

    10%

    15%

    20%

    25%

    Ja n

    -0 0

    Se p

    -0 0

    M ay

    -0 1

    Ja n

    -0 2

    Se p

    -0 2

    M ay

    -0 3

    Ja n

    -0 4

    Se p

    -0 4

    M ay

    -0 5

    Ja n

    -0 6

    Se p

    -0 6

    M ay

    -0 7

    Ja n

    -0 8

    Se p

    -0 8

    M ay

    -0 9

    Ja n

    -1 0

    Se p

    -1 0

    M ay

    -1 1

    Ja n

    -1 2

    Se p

    -1 2

    M ay

    -1 3

    Ja n

    -1 4

    Se p

    -1 4

    M ay

    -1 5

    Ja n

    -1 6

    Se p

    -1 6

    M ay

    -1 7

    Ja n

    -1 8

    Se p

    -1 8

    International reserves/GDPSource: BCB

    International reserves

    17

    % o

    f G

    D P

  • -2

    -1

    0

    1

    2

    3

    4

    5

    6

    Ja n

    -0 0

    O ct

    -0 0

    Ju l-

    0 1

    A p

    r- 0

    2

    Ja n

    -0 3

    O ct

    -0 3

    Ju l-

    0 4

    A p

    r- 0

    5

    Ja n

    -0 6

    O ct

    -0 6

    Ju l-

    0 7

    A p

    r- 0

    8

    Ja n

    -0 9

    O ct

    -0 9

    Ju l-

    1 0

    A p

    r- 1

    1

    Ja n

    -1 2

    O ct

    -1 2

    Ju l-

    1 3

    A p

    r- 1

    4