11

The Changing Nature and Geography of

Global Finance

Monetary Policy and challenges ahead: Brazil’s perspective

Fernanda NechioDeputy Governor for International Affairs and Corporate Risk Management

July 18, 2019

2

2

Overview

International context

Some risks have declined but others remain

Domestic outlook

Halt on economic recovery

Inflation under control

Comfortable international position

Challenging fiscal side

Accommodative monetary policy

Upcoming developments

Changes to legislation and regulatory framework

Microeconomic initiatives

33

International context

4

4

Global outlook remains challenging

Some risks dissipating

the normalization of interest rates in some advanced economies

developed world revising to more flexible monetary policies

Others remain

trade tensions

global economic slowdown

risk aversion towards emerging economies

5

Global growth slowdown

3,73,4

3,5

2,9

2,4

1,91,8

1,1

1,4

0,80,70,5

6,66,2

6,0

2,02,2

2,5

5,7 5,45,6

1,5

0,9

1,9

-1

1

2

3

4

5

6

7

8

181920 181920 181920 181920 181920 181920 181920 181920

World USA Euro Japan China Latam* Em. Asia Others

An

nu

al %

ch

ange

GDP Output Growth Projections

*LATAM ex Argentina and Venezuela Source: Bloomberg

-1

0

1

2

3

4

5

6

7

Q12016

Q2 Q3 Q4 Q12017

Q2 Q3 Q4 Q12018

Q2 Q3 Q4 Q12019

Q2 Q3 Q4 Q12020

Q2 Q3 Q4

Y/Y

(%)

Headline Inflation

Japan

USA

Euro

Projections

China

Latam*

6

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

USA Canada Australia UK Germany Japan

% p

.y.

6-month period Last value = Jul 10 01.01.2019Source: Bloomberg

Sovereign bonds (10-year yields)

Central banks revising monetary policies

7

World Trade Uncertainty Index

Ahir, Nicholas Bloom, Davide

Furceri (2019)

Elevated trade uncertainty

8

-1%

0%

1%

2%

3%

4%

5%

6%

Ja

n-1

3

Ma

y-1

3

Se

p-1

3

Ja

n-1

4

Ma

y-1

4

Se

p-1

4

Ja

n-1

5

Ma

y-1

5

Se

p-1

5

Ja

n-1

6

Ma

y-1

6

Se

p-1

6

Ja

n-1

7

Ma

y-1

7

Se

p-1

7

Ja

n-1

8

Ma

y-1

8

Se

p-1

8

Ja

n-1

9

Global Trade

Sources: CPB & IMF Oct WEO

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

USA China World

%,

Ch

an

ge

fro

m b

ase

line

Eletronics Other Manuf. Other Sectors Primary Services

Effects from a 25% Increase in Tariffs Affecting all US-

China Trade

World Real Value Added

Trade tensions affecting global growth

99

Domestic scenario

10

Halt on economic recovery

6

7

8

9

10

11

12

13

14

May

20

13

Au

g 2

013

No

v 2

013

Feb

201

4

May

20

14

Au

g 2

014

No

v 2

014

Feb

201

5

May

20

15

Au

g 2

015

No

v 2

015

Feb

201

6

May

20

16

Au

g 2

016

No

v 2

016

Feb

201

7

May

20

17

Au

g 2

017

No

v 2

017

Feb

201

8

May

20

18

Au

g 2

018

No

v 2

018

Feb

201

9

May

20

19

% o

fla

bo

r fo

rce

**last month of the quarterly moving average

11.9

Unemployment Rate (s.a.**)GDP and IBC-Br (%p.y.*)

-4,5

-4,1

-3,3

-2,0

-1,0

-0,1

1,11,3 1,4 1,4

1,1 0,9

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Ap

r 1

6

Jun

16

Au

g 1

6

Oct

16

Dec

16

Feb

17

Ap

r 1

7

Jun

17

Au

g 1

7

Oct

17

Dec

17

Feb

18

Ap

r 1

8

Jun

18

Au

g 1

8

Oct

18

Dec

18

Feb

19

Ap

r 1

9IBC-Br GDP *average of last 12 months/average of previous 12 months

11

% p

.y.

Measures of underlying inflation running at appropriated levels (includingfor components sensitive to the business cycle and monetary policy)

8

6

43,5

4

5,5

4,5 4,50 4,50 4,50 4,50 4,50 4,50 4,50 4,50 4,50 4,50 4,50 4,50 4,50 4,25 4,00 3,75 3,50

8,94

5,97

7,67

12,53

9,30

7,60

5,69

3,14

4,46

5,90

4,31

5,916,50

5,84 5,916,40

10,67

6,29

2,95 3,75 3.803.91

3,75

0

2

4

6

8

10

12

14199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1**

202

2**

tolerance interval targets IPCA IPCA Expectations*

Inflation within target range

*Market-based median expectations (Focus Jul2019)

12

398.9

-68.9

11.0

-150

-100

-50

0

50

100

150

200

250

300

350

400

450

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

international reserves FX swap position repo lines + FX loan operations

US$

bill

ion

0,3

-0,8

-0,4

1,6

-0,2-0,3

-2,4

-2,8

-3,5

-3,9

-4,3

-3,8

-4,2

-1,6

0,7

1,71,5

1,2

0,0

-1,8-1,6

-3,6

-2,9

-3,4-3,2

-4,1

-3,0

-1,3

-0,4

-0,8-1,0

-120

-100

-80

-60

-40

-20

0

20

-5

-4

-3

-2

-1

0

1

2

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

*

current account/GDP(LHS) current account(RHS)

International reserves and FX swaps Current account

Comfortable international position

13

Public Debt

% o

fG

DP

54,7

78,7

56,8

25

35

45

55

65

75

85

Ma

r

20

12

Se

p

20

12

Ma

r

20

13

Se

p

20

13

Ma

r

20

14

Se

p

20

14

Ma

r

20

15

Se

p

20

15

Ma

r

20

16

Se

p

20

16

Ma

r

20

17

Se

p

20

17

Ma

r

20

18

Se

p

20

18

Ma

r

20

19

public sector net debt

general government gross debt

general government gross debt - international reserves

Challenging fiscal side

14

80

90

100

110

120

130

140

01/2

000

07/2

000

01/2

001

07/2

001

01/2

002

07/2

002

01/2

003

07/2

003

01/2

004

07/2

004

01/2

005

07/2

005

01/2

006

07/2

006

01/2

007

07/2

007

01/2

008

07/2

008

01/2

009

07/2

009

01/2

010

07/2

010

01/2

011

07/2

011

01/2

012

07/2

012

01/2

013

07/2

013

01/2

014

07/2

014

01/2

015

07/2

015

01/2

016

07/2

016

01/2

017

07/2

017

01/2

018

07/2

018

01/2

019

Uncertainty Moving average (6m)

Economic Uncertainty Index

Uncertainty remains elevated

15

6

7

8

9

10

11

12

13

14

15

Jun 2

013

Sep

2013

Dec

2013

Mar

2014

Jun 2

014

Sep

2014

Dec

2014

Mar

2015

Jun 2

015

Sep

2015

Dec

2015

Mar

2016

Jun 2

016

Sep

2016

Dec

2016

Mar

2017

Jun 2

017

Sep

2017

Dec

2017

Mar

2018

Jun 2

018

Sep

2018

Dec

2018

Mar

2019

Jun 2

019

6.5

% p

.y.

Selic Rate

Policy rate at historically low

1616

Upcoming developments

17

Inflation targeting

Fiscal consolidation

Exchange rate

flexibility

Strong prudential

policy

Intensive banking

supervision

International insertion (including Brazil’s convergence to the

OECD)

Central Bank autonomy

Bank resolution

Macroprudential policy coordination

FX modernization

- New laws & regulations- OECD Codes adherence

NEXT STEPS

Consistent policies toolkit

18

Costly pension system

Source: OECD, UN

19

Pension reform to improve fiscal position

Source: Ministério da Economia (Jul 2019)

Primary surplus (%GDP) Public debt (general government (%GDP)

With pension reform

Without pension reform

Realized

With pension reform

Without pension reform

Realized

20

Some key details on proposed legislation:

Governors and deputies under 4 year mandates

Staggered mandates decoupled from election cycle

Central Bank to attend Senate and special committee

hearings

Enhanced transparency and communication

Central bank autonomy

21

“Cadastro positivo”

Reforms to improve productivity (tax, trade openness)

Foreign exchange modernization

Enhancements to macroprudential and supervision measures

Greater international insertion

Microeconomic initiatives to foster growth

22

International scenario and uncertainty holding back recovery

Global growth slowdown and tighter credit conditions

Uncertainty regarding fiscal reforms postponing investment decisions

Some scope to withstand setbacks

Anchored inflation expectations

Exchange rate flexibility

Comfortable level of international reserves

Recovery to resume with decline in uncertainty and implementation of

reforms

Conclusion

2323

Thank you!

Fernanda Nechio

Deputy Governor for International Affairs and Corporate Risk Management