brazil - banco central do brasil€¦ · j.p. morgan investor seminar spring meetings usa,...

Brazil:“Scorecard” on Adjustment Process

Tony Volpon

Deputy Governor

J.P. Morgan Investor Seminar

Spring Meetings

USA, Washington – April 15th, 2016

2

1. At the beginning of 2015 Brazil faced a complex adjustmentprocess along three dimensions: external, monetary, fiscal;

2. Adjustments depend on endogenous (i.e. market based) and exogenous (i.e.policy) factors;

3. Each adjustment dimension depends differently on endogenous and exogenousfactors: external mostly dependent on market factors; monetary a mix of market andpolicy; fiscal mostly dependent on policy factors;

4. Due to nominal, or “Keynesian” rigidities (such as price and wage indexation)and real, or “Austrian” rigidities (transaction costs in reallocating resources acrosssectors, liquidation of malinvestments), adjustment process will cause a period ofrecession.

Thesis

3

1. At the beginning of 2015 Brazil faced a complex adjustment process along threedimensions: external, monetary, fiscal;

2. Adjustments depend on endogenous (i.e. market based)and exogenous (i.e. policy) factors;



Thesis

4



3. Each adjustment dimension depends differently onendogenous and exogenous factors: external mostly dependenton market factors; monetary a mix of market and policy; fiscalmostly dependent on policy factors;


Thesis

5




4. Due to nominal, or “Keynesian” rigidities (such as price andwage indexation) and real, or “Austrian” rigidities (transactioncosts in reallocating resources across sectors, liquidation ofmalinvestments*), adjustment process will cause a period ofrecession.

Thesis

* In an Austrian school's perspective.

6Source: Funcex

External Adjustment

Terms of Trade

7Source: BCB

External Adjustment

Real Effective Exchange Rate - IPCA

8Source: BCB

External Adjustment

Unit Labour Cost (US$)

9Sources: Funcex and BCB

Jun/09 = 100 Jun/09 = 100

Exports Volume – 12mma Imports Volume – 12mma

+11.3% in

12 months

-17.8% in

12 months

External Adjustment

91

96

101

106

111

116

121

feb

09

jun

09

oct

09

feb

10

jun

10

oct

10

feb

11

jun

11

oct

11

feb

12

jun

12

oct

12

feb

13

jun

13

oct

13

feb

14

jun

14

oct

14

feb

15

jun

15

oct

15

feb

16

85

95

105

115

125

135

145

155

feb

09

jun

09

oct

09

feb

10

jun

10

oct

10

feb

11

jun

11

oct

11

feb

12

jun

12

oct

12

feb

13

jun

13

oct

13

feb

14

jun

14

oct

14

feb

15

jun

15

oct

15

feb

16

10Source: Funcex

20

06

=10

0, 1

2m

ma

20

06

=10

0, 1

2m

ma

20

06

=10

0, 1

2m

ma

20

06

=10

0, 1

2m

ma

Primary

Manufactured

Semi-Manufactured

Total

External Adjustment: Export Quantum – Sector Decomposition

110

120

130

140

150

160

170fe

b 0

9

feb

10

feb

11

feb

12

feb

13

feb

14

feb

15

feb

16

12m/previous 12m growth (Feb/16): 15.4%

70

75

80

85

90

95

feb

09

feb

10

feb

11

feb

12

feb

13

feb

14

feb

15

feb

16

90

95

100

105

110

115

120

feb

09

feb

10

feb

11

feb

12

feb

13

feb

14

feb

15

feb

16

12m/previous12m growth (Feb/16): 6.8% 12m/previous 12m growth (Feb/16): 11.3%

90

95

100

105

110

115

120

feb

09

feb

10

feb

11

feb

12

feb

13

feb 1

4

feb

15

feb

16

12m/previous 12m growth (Feb/16): 11.2%

11Source: Funcex

20

06

=10

0, 1

2m

ma

20

06

=10

0, 1

2m

ma

20

06

=10

0, 1

2m

ma

20

06

=10

0, 1

2m

ma

Total

Capital Goods

Intermediate

Durable Consumer Goods

20

06

=10

0, 1

2m

ma

20

06

=10

0, 1

2m

ma

Non-Durable Consumer Goods

Fuels

External Adjustment: Import Quantum – Sector Decomposition

120

130

140

150

160

170

180

190

200

210

220

feb 0

9

feb 1

0

feb 1

1

feb 1

2

feb 1

3

feb 1

4

feb 1

5

feb 1

6

100

110

120

130

140

150

160

170

180

feb 0

9

feb 1

0

feb 1

1

feb 1

2

feb 1

3

feb 1

4

feb 1

5

feb 1

6

110

120

130

140

150

160

170

180

190

200

feb 0

9

feb 1

0

feb 1

1

feb 1

2

feb 1

3

feb 1

4

feb 1

5

feb 1

6

12m/previous 12m growth (Feb/16): -17.8%


12m/previous 12m growth(Feb/16): -4.8%

150

160

170

180

190

200

210

220

230

240

250

260

feb

09

feb

10

feb

11

feb

12

feb

13

feb

14

feb

15

feb

16 170

190210230250270290310330350370390410

feb

09

feb

10

feb

11

feb

12

feb

13

feb

14

feb

15

feb

16

12m/previous12m growth(Feb/16): -19.8%

12m/previous 12m growth(Feb/16): -31.2%

100

110

120

130

140

150

160

170

feb

09

feb

10

feb

11

feb

12

feb

13

feb

14

feb

15

feb

16


12Sources: MDIC and BCB (Focus)

US$

bill

ion

** BCB projection; *** medians as of Mar 24th (balance calculated by difference)BCB projection for the 2016 trade balance: US$ 40 billion

External Adjustment

Trade Balance – Exports and Imports

2020:US$ 48

2015:US$ 190,1 2020:

US$ 245.8

2015:US$ 172,4

2020:US$ 197.8

-30

0

30

60

90

120

150

180

210

240

270

200

0

200

1

200

2

20

03

200

4

200

5

200

6

200

7

200

8

200

9

201

0

20

11

201

2

201

3

201

4

201

5

201

6**

201

7

201

8

201

9

202

0

balanceexportsimports

***market expectations

from 2017 to 2020

2015:

US$ 17.7

13Source: BCB

% o

fG

DP

new methodology as of 1995

*forecast

US

$ b

illi

on

External Adjustment

Current Account

-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

-3,4

-3,0 -3,0 -3,0

-4,3

-3,3

-2,6

-120

-100

-80

-60

-40

-20

0

20

-5

-4

-3

-2

-1

0

1

2

19

96

19

98

200

0

20

02

20

04

200

6

20

08

20

10

201

2

20

14

20

16

*

current account/GDP(lhs) current account(rhs)

2014:

US$ -104,2

2015:

US$ -58,9

2016*:

US$ -25

14Sources: Funcex and BCB

Current Account Balance Foreign Direct Investment (FDI)

External Adjustment

-104,2-99,7

-92,7

-84,7

-74,3

-58,9

-46,3

-25,0

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

de

c 1

4

feb

15

ap

r 15

jun

15

au

g 1

5

oct

15

de

c 1

5

feb

16

ap

r 1

6

jun

16

au

g 1

6

oct

16

de

c 1

6

77,6

60,0

0

20

40

60

80

100

de

c 1

3

jun

14

de

c 1

4

jun

15

de

c 1

5

jun

16

de

c 1

6

US$ billion, accum. in 12 mUS$ billion, accum. in 12 m

15Source: BCB

US

$ b

illio

nin

12 m

onth

sExternal Adjustment

FDI + Fixed Income + Equities and Investiment Funds vs. Current Account

Capital Inflows (-) Current Account Feb 16: US$ 27.7

Capital Inflows Feb 16: US$ 73.9

Current Account Feb 16:US$ -46.3

-150

-100

-50

0

50

100

150

200

jan 0

6

apr

06

jul 06

oct 0

6

jan

07

apr

07

jul 07

oct 0

7

jan 0

8

apr

08

jul 08

oct 0

8

jan 0

9

apr

09

jul 09

oct 0

9

jan 1

0

apr

10

jul 10

oct 1

0

jan 1

1

apr

11

jul 11

oct 1

1

jan 1

2

apr

12

jul 12

oct 1

2

jan

13

apr

13

jul 13

oct 1

3

jan 1

4

apr

14

jul 14

oct 1

4

jan 1

5

apr

15

jul 15

oct 1

5

jan 1

6

Capital inflows minus CA direct investment liabilities + fixed income + equities and investment funds (Capital Inflows) Current Account

16Sources: BCB and IBGE

Contribution for the GDP Growth (in 4 quarters)

* BCB projections

perc

enta

ge

poin

ts

Contribution of the External Sector for the GDP

External Adjustment

2,7 2,9

-6,5 -6,4-8

-6

-4

-2

0

2

4

6

8

10

12

4Q

09

4Q

10

4Q

11

4Q

12

4Q

13

4Q

14

4Q

15

4Q

16

*

domestic absorption

net exports

17Sources: BCB (Focus) and IBGE

% in

12

mo

nth

s

*expectations as onApr 8th

Monetary Adjustment

Market and Regulated Prices

10.8%

0

2

4

6

8

10

12

14

16

18D

ec 1

0

Ju

n 1

1

De

c 1

1

Ju

n 1

2

De

c 1

2

Ju

n 1

3

De

c 1

3

Ju

n 1

4

De

c 1

4

Ju

n 1

5

Ma

r 1

6

De

c 1

6

De

c 1

7

regulated pricesmarket prices

IPCA regulated prices (%)

2014 5.32

2015 18.07

Expectations: 2016* 7.20

2017* 5.70

IPCA market prices (%)

2014 6.72

2015 8.51

Expectations: 2016* 7.12

2017* 6.05

9.0%

7.1%*

7.2%*

6.0%*

5.7%*

18Sources: BCB and IBGE

Monetary Adjustment

Market Prices Vs. Regulated Prices Ratio

0,98

1,00

1,02

1,04

1,06

1,08

1,10

1,12

1,14

1,16

2009 2010 2011 2012 2013 2014 2015 2016

Rat

io

Relative Mkt: Regulated ratio

19Source: IBGE (PME)

% g

row

thm

/m-1

2

% s

.a.

Monetary Adjustment

Real Wages and Unemployment

-7.5%

8%

4,5

5,0

5,5

6,0

6,5

7,0

7,5

8,0

8,5

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

jun

13

ou

t 13

fev 1

4

jun

14

ou

t 14

fev 1

5

jun

15

ou

t 15

fev 1

6

real wages % (lhs) unemployment (rhs)

oct

oct14

oct15

feb

14

feb

15

feb

16

20Source: IBGE

% in

12

mo

nth

s

Services Inflation - IPCA

Monetary Adjustment

8.0%

7.5%

9.2%

7.5%

7.7% 7.5%

6

7

8

9

10

11fe

b 1

3

may 1

3

aug

13

nov 1

3

feb 1

4

may 1

4

aug

14

nov 1

4

feb 1

5

may 1

5

aug

15

nov 1

5

feb 1

6

Mar 15

Mar 16

totallabor intensiveother services

21Source: BCB – Inflation Report – Mar 2016

% in

12

mo

nth

s

Baseline Scenario(interest rate constant at 14.25% p.y.)

Market Scenario

Monetary Adjustment: Inflation Projections

0

2

4

6

8

10

12

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

0

2

4

6

8

10

121Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

22Source: BCB

% o

fG

DP

(ac

cum

ula

ted

in 1

2 m

on

ths)

Fiscal Adjustment

Fiscal Results – PSBR*

10.7%

8.6%

2.1%

-4

-2

0

2

4

6

8

10

12

oct

08

jun 0

9

feb 1

0

oct

10

jun 1

1

feb 1

2

oct

12

jun 1

3

feb 1

4

oct

14

jun

15

feb 1

6

nominal result

nominal interests

primary result

(-) = surplus; (+) = deficit

*Public Sector Borrowing Requirement (PSBR) - ’below the line’ concept, which corresponds to the change in the total net debt (domestic or

external) of the public sector

23Source: National Treasury Secretariat (STN)

Fiscal Adjustment

Domestic Debt held by Non-Resident / Overall Public Debt

24Source: IMF .

Public Debt Held by Non-Residents – International Comparison% of outstanding domestic public debt securities*

% * The latest data reported by the IMF Fiscal Monitor in Apr 16

Fiscal Adjustment

6,3

9,3

12,8

13,8

13,9

22,4

29,3

30,0

31,8

32,5

35,8

40,0

46,7

50,9

62,0

64,8

0 10 20 30 40 50 60 70

India

Japan

Korea

Russia

Brazil

Canada

S. Africa

UK

Mexico

US

Turkey

Italy

Australia

Spain

Germany

France

25Source: BCB

Fiscal Adjustment

Brazil’s International Investment Position

USD bn 551.5

USD bn 671.3

USD bn 774.2

0

200

400

600

800

1000

1200

1400

0

200

400

600

800

1000

1200

1400

Assets Liabilities

Feb 2016

USD

Bill

ion

Total: USD bn 1,222.8

Liabilities denominated in

BRL

Liabilities denominated in

other currencies

Assets

26Source: BCB

Gross Debt Minus International Reserves

Fiscal Adjustment

Feb 2016: US$ 650 bi

500

600

700

800

900

1.000

1.100

Jan

200

8

Ap

r 2

00

8

Ju

l 2

00

8

Oc

t 2

00

8

Jan

200

9

Ap

r 2

00

9

Ju

l 2

00

9

Oct

2009

Jan

2010

Ap

r 2

01

0

Ju

l 2

01

0

Oc

t 2

01

0

Jan

201

1

Ap

r 2

01

1

Ju

l 2

01

1

Oc

t 2

01

1

Jan

201

2

Ap

r 2

01

2

Ju

l 2

01

2

Oc

t 2

01

2

Jan

201

3

Ap

r 2

01

3

Ju

l 2

01

3

Oc

t 2

01

3

Jan

201

4

Ap

r 2

01

4

Ju

l 2

01

4

Oc

t 2

01

4

Jan

201

5

Ap

r 2

01

5

Ju

l 2

01

5

Oc

t 2

01

5

Jan

201

6

US

$ b

illio

n

Gross General Government Debt minus International Reserves

Polynomial, second degree (smooth and continuous)

Feb

2016

27

1. External adjustment largely accomplished – Changes in relativeprices (REER, ULC) guarantee a changing composition of aggregatedemand (more net exports and eventually investments, lessconsumption) and smaller CA deficits – and so need for less capitalinflows (adjustment to lower terms of trade and more hostileglobal financing environment for EM);

2. Monetary adjustment “on the way” – Lower impact of relative price adjustments(regulated prices + FX in 2016); disinflationary output gap; policy rate aboveneutral: inflation will fall this year. BCB committed to maintain policy stance untilprobability of achieving guidance for 2016 and 2017 is sufficiently high.

Conclusions

28

1. External adjustment largely accomplished – Changes in relative prices (REER, ULC)guarantee a changing composition of aggregate demand (more net exports andeventually investments, less consumption) and smaller CA deficits – and so need forless capital inflows (adjustment to lower terms of trade and more hostile globalfinancing environment for EM);

2. Monetary adjustment “on the way” – Lower impact of relativeprice adjustments (regulated prices + FX in 2016); disinflationaryoutput gap; policy rate above neutral: inflation will fall this year.BCB committed to maintain policy stance until probability ofachieving guidance for 2016 and 2017 is sufficiently high.

Conclusions

29

3. Fiscal adjustment: Some progress, but much more needed…

• But: Success of external adjustment, controlled levels of inflation (nominal stabilitydespite fears of fiscal dominance/debt monetization), deep and local debt markets(small % of foreign investors), and strong “balance sheet” position (size andcomposition) lengthens time/space before fiscal limits “bind”;

• Despite all of this, without convincing fiscal consolidation, these limits will likelybegin to manifest themselves at some point, and the risk of a fiscally-inducedfinancial crisis grows with time.

Conclusions

30


• But: Success of external adjustment, controlled levels of inflation(nominal stability despite fears of fiscal dominance/debtmonetization), deep and local debt markets (small % of foreigninvestors), and strong “balance sheet” position (size andcomposition) lengthens time/space before fiscal limits “bind”;

• Despite all of this, without convincing fiscal consolidation, these limits will likelybegin to manifest themselves at some point, and the risk of a fiscally-inducedfinancial crisis grows with time.

Conclusions

31


• But: Success of external adjustment, controlled levels of inflation (nominal stabilitydespite fears of fiscal dominance/debt monetization), deep and local debt markets(small % of foreign investors), and strong “balance sheet” position (size andcomposition) lengthens time/space before fiscal limits “bind”;

• Despite all of this, without convincing fiscal consolidation, theselimits will likely begin to manifest themselves at some point, andthe risk of a fiscally-induced financial crisis grows with time.

Conclusions

32

And: Progress in adjustment process means that continued cause of economic stress is due to uncertainty (a third cause of recession) due to non-economic reasons;

Decrease in uncertainty could imply a surprisingly rapid growth recovery;

The reverse is also true: if the level of uncertainty does not normalize, there is little chance of a sustained economic recovery.

Conclusions

33




Conclusions

34




Conclusions

Brazil: “Scorecard” on Adjustment Process

Thank you for your time

J.P. Morgan Investor Seminar

Spring Meetings

USA, Washington – April 15th, 2016

brazil - banco central do brasil€¦ · j.p. morgan investor seminar spring meetings usa,...

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