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 recentlydiscovered large offshore oil fields.

Heterogeneous country. See graph.

Democracy, with several small fragmentedparties, 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

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

expected IPCA (Median Focus) IPCA

IPCA and Inflation Targets

9

Source: IBGE and BCB (Focus)

Nov 18(4.05%)

12

-mo

nth

ch

ange

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

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-18

Dec

-19

%

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

11Note : 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

6.50

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

12Note: 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

Mar

-00

May

-01

Jul-

02

Sep

-03

No

v-0

4

Jan

-06

Mar

-07

May

-08

Jul-

09

Sep

-10

No

v-1

1

Jan

-13

Mar

-14

May

-15

Jul-

16

Sep

-17

No

v-1

8

Ind

ex, s

easo

nal

ly a

dju

sted

(1

99

5=1

00

)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

No

v-1

4

Feb

-15

May

-15

Au

g-1

5

No

v-1

5

Feb

-16

May

-16

Au

g-1

6

No

v-1

6

Feb

-17

May

-17

Au

g-1

7

No

v-1

7

Feb

-18

May

-18

Au

g-1

8

No

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%

Jan

-00

Sep

-00

May

-01

Jan

-02

Sep

-02

May

-03

Jan

-04

Sep

-04

May

-05

Jan

-06

Sep

-06

May

-07

Jan

-08

Sep

-08

May

-09

Jan

-10

Sep

-10

May

-11

Jan

-12

Sep

-12

May

-13

Jan

-14

Sep

-14

May

-15

Jan

-16

Sep

-16

May

-17

Jan

-18

Sep

-18

International reserves/GDPSource: BCB

International reserves

17

% o

fG

DP

-2

-1

0

1

2

3

4

5

6

Jan

-00

Oct

-00

Jul-

01

Ap

r-0

2

Jan

-03

Oct

-03

Jul-

04

Ap

r-0

5

Jan

-06

Oct

-06

Jul-

07

Ap

r-0

8

Jan

-09

Oct

-09

Jul-

10

Ap

r-1

1

Jan

-12

Oct

-12

Jul-

13

Ap

r-1

4

Jan

-15

Oct

-15

Jul-

16

Ap

r-1

7

Jan

-18

Oct

-18

Current account deficit/GDP FDI/GDPSource: BCB

Current account and net foreign investment flow%

of

GD

P

18

Nov/184.25%

Nov/180.74%

Accumulated in 12 months

19

• The new direction of economic policy and the firm conduct of monetary policy led to some positive results:

• Inflation around the target and anchored expectations;• Interest rates at historically low levels;• Gradual process of recovery of the economy.

• The global outlook is challenging for EMEs, but Brazil is better prepared to face external shocks.

• Brazil needs to continue on the path of adjustments and reforms, especially the pension system reform, in order to ensure confidence on fiscal sustainability and engender higher growth.

Final remarks

19

Thank you.

Ilan Goldfajn

Governor of the Central Bank of Brazil

The Wharton School at the University of Pennsylvania

January 06, 2019