Presentation "Brazil economic outlook. First quarter 2015"

Brazil: a year of low growth and high inflation ahead

Enestor Dos Santos

BBVA Research │ Principal Economist Emerging Economies Area

Brazil Economic Outlook – First quarter 2015 │ Madrid, 25 February 2015

Brazil Economic Outlook- First quarter 2015

Page 2

World growth will continue to move upwards albeit slowly and very unevenly. Global

growth should increase from 3.3% in 2014 to 3.6% in 2015 and 3.8% in 2016. The developed

economies, led by the US will increase their input into global expansion, whereas the controlled

slowdown in China will persist.

Brazil has a year of low growth and high inflation ahead. As in 2014, GDP growth will be

around zero and inflation will be nudging the 6.5% ceiling of its target range in 2015.

The shift in economic policy and exchange rate weakening are pre-requisites for the

country to return to growth. Nonetheless, together with the impact of the deterioration in the

terms of trade, the Petrobras crisis and the shortage of water and electricity will exert a

detrimental effect in the short term.

Key takeaways

1

2

3


Page 3

Global economy: World growth will continue to move upwards albeit slowly and very unevenly


Contents

1

2


Page 4

Global growth: Moderate and uneven accelaration

EAGLES:

China India Indonesia Rusia Brazil Turkey Mexico

US

Mexico

Brazil

Spain

Eurozone

Eagles China

Emerging Asia LatAm 7 Latam 7:

Argentina Brazil Chile Colombia Mexico Peru

2016

2,8 2,2

2,7

5,2 6,6

6,0

1,8

3,4

2,4

2015

2,9 1,3 5,0 7,0

6,2 1,5

3,5

0,6

2,7

Source: BBVA Research

Global

3,6 3,8

Emerging

Asia:

China Hong Kong India Indonesia Korea Malaysia Philippines Singapour Taiwan Thailand Vietnam


Page 5

The fall in oil prices is positive for the world economy

Uneven impact depending on countries

Direct impact on the overall drop in inflation

BBVA Research price forecasts for Brent oil

(USD/bbl, quarterly averages) Source: BBVA Research

40

50

60

70

80

90

100

110

120

130

2010

2011

2012

2013

2014

2015

2016

2017

2018

Actual Forecast Oct 15

Forecast Feb 16


Page 6

Although the lower oil prices has an uneven impact in LatAam [Box 1]

Positive impact in importing countries and overall drop inflation

Negative effect in Mexico, partially offset by the greater growth in US

Impact on growth of the revised course of oil prices:

forecasts in February 2015 versus October 2014

(pp, 2015-16 average) Source: BBVA Research

0.4

-0.3

0.6

-1.1

-0.2

0.4

-0.3

-1.5

-1.0

-0.5

0.0

0.5

1.0

AR

G

BR

A

CH

I

CO

L

ME

X

PE

R

LatA

m


Page 7

MP divergency between the Fed and the ECB increase financial tensions

Increasing financial tensions in a context of divergency between the Fed and the ECB

monetary policy

Emerging economies will test their strengths to the normalization of monetary policy in the US

BBVA Research Financial Tensions Index Source BBVA Research

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Jan-1

1

Jul-11

Jan-1

2

Jul-12

Jan-1

3

Jul-13

Jan-1

4

Jul-14

Jan-1

5

Developed Emerging


Page 8

What are the risks of the global scenario?

Emerging Response to the

Fed rate hikes


China Sharp adjustment

Europe • Stagnation

• Lack of

consensus on

reforms

• Greece

• Russia-Ukraine

Global Destabilization of

some countries to

lower oil prices


Page 9

Contents

Global economy: World growth will continue to move upwards albeit slowly and very unevenly


1

2


Page 10

The orthodox adjustment of economic policy is now afoot

Fiscal accounts: gross debt and fiscal balance

(% of GDP)* Source: BBVA Research and BCB After increasing distortions and loss of

credibility in recent years, the government has initiated a process of adjustment of economic

policy

Recent announcements show that the adjustment will focus on fiscal and quasi-fiscal

policy, but it will also include changes in monetary policy

Despite recent positive signs, there remains the risk that the adjustment does not count on

sufficient political support

2006

20072008

2009

2010

2011

2012

2013

2014

52

54

56

58

60

62

64

-8 -6 -4 -2 0

Gro

ss D

ebt

(% o

f G

DP

)

Fiscal balance (% of GDP)


Page 11

Tax hikes and cost-cutting will steadily reverse the sharp deterioration in the public finances in 2014

Public sector fiscal balance: primary and total balances, and interest expenditure (% of GDP) Source: BBVA Research and BCB

The use of fiscal policy in support of economic activity proved a body-blow to the public

finances in 2014

Thus the correction required to meet the newly announced target primary surplus (1.2% and

2.0% of GDP in 2015 and 2016) will be greater

the government will have no option but to announce a further round of tax rises and

spending cuts to meet its fiscal targets and drive back the mounting public debt.

-8

-6

-4

-2

0

2

4

2007

2008

2009

2010

2011

2012

2013

2014

2015(f

)

2016(f

)

Interest expenditure Primary balanceFiscal balance


Page 12

The central bank is using more restrictive language in a bid to anchor inflation expectations

Inflation expectations over 12 months of analysts polled by the central bank (% YoY) Source: BBVA Research and BCB

The new cycle of monetary tightening has begun early and will lead to higher-than-

expected interest rates

The Selic rate ended 2014 at 11.75% and should soon rise to at least 12.50%.

The central bank will only be able to trim the Selic rate back again when inflation offers clearer signs of relenting, which we see

happening in mid-2016.

0

1

2

3

4

5

6

7

8

Jan

-05

Se

p-0

5

May-0

6

Jan

-07

Se

p-0

7

Ma

y-0

8

Jan

-09

Se

p-0

9

May-1

0

Jan

-11

Se

p-1

1

Ma

y-1

2

Jan

-13

Se

p-1

3

May-1

4

Jan

-15

average 2005 - 2010: 4.5%


Page 13

GDP will remain at a standstill in 2015

GDP and components (% annual var.) Source: BBVA Research and IBGE

We expect a growth of just 0.6% this year, and the impact of adjustment due to: i) a further

contraction of the terms of trade, ii) moderation in external demand; iii) the fallout from the Petrobras crisis, iv) the obstruction caused by the water and electricity shortage

larger-than-expected impact from any of these factors could tip the economy into recession.

-8

-6

-4

-2

0

2

4

6

GDP GFCF Privatecons.

Publiccons.

Exp. Imp.

2014 2015 2016


Page 14

Determinants of the stagnation of activity: the deterioration of terms of trade.

GDP and terms of trade (% var. YoY) Source: BBVA Research and IBGE

The falling price of commodities has been determining a deterioration of terms of trade.

We expect another downward revision of the terms of trade in 2015

-15

-10

-5

0

5

10

15

20

-1

0

1

2

3

4

5

6

7

8

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016(f

)

GDP annual growth (LHS)

Terms of trade annual variation (RHS)


Page 15

Determinants of the stagnation of activity: barriers to the increase in exports

Exports (12-month export accumulation, % YoY) Source: BBVA Research and MDIC

the slowdown in activity in the economies of major trading partners (China and Argentina)

will impact the Brazilian economy

In addition, the country still has a problem of lack of competitiveness -40

-20

0

20

40

60

80

Jan

-05

Se

p-0

5

May-0

6

Jan

-07

Se

p-0

7

Ma

y-0

8

Jan

-09

Se

p-0

9

Ma

y-1

0

Jan

-11

Se

p-1

1

Ma

y-1

2

Jan

-13

Se

p-1

3

May-1

4

Total exportsExports to ArgentinaExports of manufactured goods


Page 16

Determinants of the stagnation of activity: the Petrobras crisis

Petrobras share-price on the São Paulo exchange Source: BBVA Research and Bloomberg

The Petrobras crisis is the result of several factors: i) corruption scandal; ii) management

problems; iii) falling oil prices

The impact on investment will be important

The loss of investment grade could have a contagion effect on other assets. At last, the political effects are uncertain but potentially

high

0

10

20

30

40

50

60

Jan

-04

Se

p-0

4

Ma

y-0

5

Jan

-06

Se

p-0

6

Ma

y-0

7

Jan

-08

Se

p-0

8

Ma

y-0

9

Jan

-10

Se

p-1

0

May-1

1

Jan

-12

Se

p-1

2

Ma

y-1

3

Jan

-14

Se

p-1

4


Page 17

Determinants of the stagnation of activity: water shortage and energy crisis

Reservoir levels (% of overall storage capacity) Siource: BBVA Research and ONS

The country's reservoirs are at worryingly low levels, resulting from a system of unfavorable rainfall and delayed investments to increase

generating capacity

If the country is forced to adopt a rationing of electricity, GDP growth would be about 1 pp

lower than estimated

0

10

20

30

40

50

60

70

80

90

100

Jan

Feb

Mar

Ap

r

May

Jun

Jul

Au

g

Se

p

Oct

Nov

Dec

months

2014 2001 Average 2000-2014

January 2015


Page 18

The increase in administered prices will keep up inflationary pressure

Contributions of free market and administered prices to annual inflation (pp) Source: BBVA Research and IBGE

There is no fiscal space to continue keeping administered prices at artificially low levels

In addition, inflation will be impacted by increased taxes and the depreciation

5.96.4 6.5

5.5

0

1

2

3

4

5

6

7

2013 2014 2015(f) 2016(f)

Free market prices Administered prices


Page 19

The macroeconomic environment will brighten in 2016

GDP and components (% annual var.) Source: BBVA Research and IBGE The contractionary effect of the economic

policy adjustment and the shocks currently cramping activity show a tendency to focus on

2015 and slacken off in 2016

There will be greater manifestation of the economic policy correction in confidence and

of the currency depreciation in exports in 2016.

We thus expect GDP growth to rise to 1.8% in 2016, while inflation will also let up, as a considerable part of the corrections to

administered prices and the exchange rate will have kicked in by then.

-8

-6

-4

-2

0

2

4

6

GDP GFCF Privatecons.

Publiccons.

Exp. Imp.

2014 2015 2016


Page 20

All the factors suggest a weaker real

Exchange rate: nominal and real

(current prices, USD/BRL) Source: BBVA Research and Bloomberg There is still turmoil in financial and currency

markets. The real has lost 13% in the last three months, and 28% since August 2014

This is a product of the need to restore loss competitiveness, the wider current account deficit, the terms of trade deterioration, the greater sensation of risk and dollar strength

we see the USD/BRL rate ending 2015 and 2016 at around 2.93 and 3.03 respectively

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Jan

-99

Ap

r-00

Jul-

01

Oct-

02

Jan

-04

Ap

r-05

Ju

l-0

6

Oct-

07

Jan

-09

Ap

r-10

Jul-

11

Oct-

12

Jan

-14

Ap

r-15

Jul-

16

Nominal Exchange rate Real exchange rate


Page 21

World growth will continue to move upwards albeit slowly and very unevenly. Global

growth should increase from 3.3% in 2014 to 3.6% in 2015 and 3.8% in 2016. The developed

economies, led by the US will increase their input into global expansion, whereas the controlled

slowdown in China will persist.

Brazil has a year of low growth and high inflation ahead. As in 2014, GDP growth will be

around zero and inflation will be nudging the 6.5% ceiling of its target range in 2015.

The shift in economic policy and exchange rate weakening are pre-requisites for the

country to return to growth. Nonetheless, together with the impact of the deterioration in the

terms of trade, the Petrobras crisis and the shortage of water and electricity will exert a

detrimental effect in the short term.

Key takeways

1

2

3


Page 22

Appendix: Macroeconomic forecasts

Table 6.1

Macro Forecasts

2013 2014 2015 2016

GDP (% YoY) 2.5 0.1 0.6 1.8

Inflation (% YoY, eop) 5.9 6.4 6.5 5.5

Exchange rate (vs. USD, eop) 2.34 2.66 2.93 3.03

Interest rates (%, eop) 10 11.75 12.50 11.50

Private consumption (% YoY) 2.6 0.8 0.3 1.1

Government consumption (% YoY) 2.0 2.0 1.8 1.3

Fixed investment (% YoY) -5.1 -6.5 -0.5 4.6

Exports (% YoY) 2.5 1.9 1.5 2.9

Imports (% YoY) 8.3 0.7 0.3 2.0

Fiscal balance (% GDP) -3.3 -6.7 -4.4 -3.6

Current account (% GDP) -3.6 -4.2 -4.0 -3.4


Economy & Finance

Presentation "Brazil economic outlook. First quarter 2015"