Post on 24-Jun-2020
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;
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
4
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;
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;
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
5
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;
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 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): -18.3%
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
12m/previous 12m growth (Feb/16): -16.6%
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
3. Fiscal adjustment: Some progress, but much more needed…
• 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
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, 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
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
34
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
Brazil: “Scorecard” on Adjustment Process
Thank you for your time
J.P. Morgan Investor Seminar
Spring Meetings
USA, Washington – April 15th, 2016