Brasil Contry Analysis
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Brazil: Economic Trends
Henrique de Campos Meirelles
Instituto de EmpresaMadrid, October 2005
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Three Pillars of Economic Policy
Fiscal policy aimed at generating consolidated primary
surpluses, and ultimately a gradual reduction in debt-to-
GDP ratio;
Inflation targeting regime for the conduct of monetary
policy; and
Exchange rate flexibility as a means to consolidateexternal adjustment.
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Fiscal Policy
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% o
f G D
P
Consolidated Primary Surplus
-2
-1
0
1
23
4
5
6
7
jan
94
jan
95
jan
96
jan
97
jan
98
jan
99
jan
00
jan
01
jan
02
jan
03
jan
04
aug
05
5.16%Avg. 1994-Jun/95
4.8%
Avg. Jul/95-1998-0.1%
Avg. 1999-20023.2%
Avg. 2003-20054.5%
Source: Bacen
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Public Debt-to-GDP Ratio
% o
f G D P
28
33
38
43
48
53
58
63
jan
95
oct
95
jul
96
apr
97
jan
98
oct
98
jul
99
apr
00
jan
01
oct
01
jul
02
apr
03
jan
04
oct
04
aug
06
50%
Source: Bacen
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% o
f G
D P
44
46
48
50
52
54
56
58
2003 2004 2005 2006 2007 2008 2009
Market Consensus 2005/2009
Public Debt-to-GDP Ratio: Trend
Source: Bacen
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Consolidated public sector primary surplus will most
likely increase in 2005 for the seventh year in a row,
confirming government commitment with fiscal
responsibility.
Debt-to-GDP is expected to continue falling in the
medium-run.
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Inflation
Brazil: Economic Trends
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http://slidepdf.com/reader/full/brasil-contry-analysis 9/419Source: IBGE
IPCA Inflation
%
Avg 2002:0.99% Avg 2003:
0.74% Avg 2004:
0.61%Avg 2005:
0.43%
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan
02
May
02
Sep
02
Jan
03
May
03
Sep
03
Jan
04
May
04
Sep
04
Jan
05
May
05
Sep
05
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Wholesale Prices Inflation (IPA)
%
Avg 2003:0.51%
Avg 2004:
1.15%
Avg 2005:-0.21%
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Jan 03 May 03 Sep 03 Jan 04 May 04 Sep 04 Jan 05 May 05 Sep 05
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IPCA Inflation in 12 Months
%
4
6
8
10
12
14
16
18
Jan
03
May
03
Sep
03
Jan
04
May
04
Sep
04
Jan
05
May
05
Sep
05
Jan
06
May
06
Market Consensus
Sep 056.0%
Dec 055.3%
Source: Bacen
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12-Month Ahead IPCA Expectations
Source: Bacen
%
4.6
4.8
5.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4
Jul04
Oct04
Jan05
Apr 05
Jul05
Oct05
4.7%
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Consumer and wholesale prices inflation have fallen
in 2004/2005.
Inflation expectations have converged to the targetpath.
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Exchange Rate and External Sector
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Nominal Exchange Rate
R $ / U
S $
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Out05
Source: Bacen
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Current Account
U S $ b i l l i o n
Source: Bacen
-40
-30
-20
-10
0
10
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
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Current Account vs. Trade Balance
U S $ b i l l i o n
U S $ b i l l i o n
Trade BalanceCurrent Account
-35
-28
-21
-14
-7
0
7
14
21
Jan
96
Jan
97
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
Aug
05
-10
0
10
20
30
40
Accumulated in 12 Months
Source: Bacen
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Trade Balance
Source: Ministry of Development, Industry and Foreign Trade
U S $ b i l l i o n
Exports
Imports
71.7
112.9
45
55
65
75
85
95
105
115
Jan
99
Jul
99
Jan
00
Jul
00
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Jan
05
Sep
05
Accumulated in 12 Months
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Exports Growth
US$ billion
Primary
Semi-Manuf.
Manufactured
Total
Growth in
12 monthsthrough Aug 05
6 8 102 4 12 14 16 18 20 22
Source: Ministry of Development, Industry and Foreign Trade
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Exports by Market and by Products:2004/2005
EuropeanUnion
US
25.0%
20.8%
Latin America,excluding Mercosur
15.1%
Mercosur
9.6%
China
4.9%
Others
25.6%
Market
Primary27.8%
Semi-Manufactured
14.3%Manufactured
56.1%
Other 1.8%
Product
Source: Ministry of Development, Industry and Foreign Trade
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In the last 6 years, current account balance increased byUS$ 45 billion, or more than 6% of GDP.
External adjustment has been driven by the increase in
exports.
Exports growth led by manufactured goods. Export prices
had a secondary role.
Brazilian exports are diversified in terms of markets andgoods, reducing exports vulnerability.
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Economic Activity
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GDP Growth
Quarter-on-Quarter, Seasonally Adjusted Annual Rate
%
5.7
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
1Q
03
2Q
03
3Q
03
4Q
03
1Q
04
2Q
04
3Q
04
4Q
04
1Q
05
2Q
05
Source: IBGE
C t ib ti f I t l d E t l
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Contribution of Internal and ExternalDemand to GDP Growth
%
Internal Demand
External Demand
GDP Growth Decomposition (y-o-y)
1Q03
3Q03
1Q04
2Q04
3Q04
4Q04
-5
-3
-1
1
3
5
7
1Q05
2Q05
2Q03
4Q03
Source: IBGE
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Industrial Output
s . a . ,
2 0 0 2
= 1 0 0
3-Month Moving Average
Source: IBGE
94
97
100
103
106
109
112
115
Jan
01
Jun
01
Nov
01
Apr
02
Sep
02
Feb
03
Jul
03
Dec
03
May
04
Oct
04
Mar
05
Aug
05
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Retail Sales
s . a . ,
2 0 0 3
= 1 0 0
3-Month Moving Average
97
100
103
106
109
112
115
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Jan
05
Aug
05
Source: IBGE
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Formal Job Creation
Accumulated in 12 Months
Source: Ministry of Labour and Employment
m i l l i o
n
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Jan
99
Nov
99
Sep
00
Jul
01
May
02
Mar
03
Jan
04
Nov
04
Sep
05
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Average Real Wage and Payrolls
86
88
90
92
94
96
98
100
Jan03
Jul03
Jan04
Jul04
Jan05
Jul05
96
98
100
102
104
106
PayrollsAverage Real Wage
M a r 2 0 0 2
= 1 0 0
M a r 2 0 0 2
= 1 0 0
3-Month Moving Average
Source: IBGE
Non Durable Retail Sales vs
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Non-Durable Retail Sales vs.Labor Income
s . a . ,
2 0 0 3 = 1 0 0
s . a . ,
M a r 2 0 0
2 = 1 0 0
Payrolls
Source: IBGE
98
100
102
104
106
108
110
112
Jan
03
Apr
03
Jul
03
Oct
03
Jan
04
Apr
04
Jul
04
Oct
04
Jan
05
Apr
05
Aug
05
96
98
100
102
104
106
Supermarket Sales
3-Month Moving Average
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Credit vs. Retail Sales
R $ b i l l i o n
s . a . ,
2 0 0 3 =
1 0 0
115
Credit to Individuals
Retail Sales
97
99
101
103
105
107
109
111
113
Jun
03
Aug
03
Oct
03
Dec
03
Feb
04
Apr
04
Jun
04
Aug
04
Oct
04
Dec
04
Feb
05
Apr
05
Aug
05
1.20
1.30
1.40
1.50
1.60
1.70
1.80
Sources: IBGE, Bacen
3-Month Moving Average
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-10
-5
0
5
10
15
20
25
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
2Q05
GDP
%
GDP x Fixed Capital Investment
Compared to Same Quarter of Previous Year
Source: IBGE
Fixed Capital Investment
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Capacity Utilization
Source: CNI
75
76
77
78
7980
81
82
83
84
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
Aug05
%
3-Month Moving Average
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Brazilian economy grew a cumulative 9.2% in the last eightquarters.
Growth supported by domestic demand, with external
demand playing a secondary role.
Domestic demand driven by increase in fixed capital
investment, credit expansion and increase in employment
and real wages.
Investment rebounded since the third quarter of 2003,
enabling a more balanced growth of supply vis-à-vis the
expansion in demand.
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Strengthening Resistance to Shocks
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Bacen Acquisitions in the FX Market
-9
-6
-3
0
3
6
9
12
2001 2002 2003 2004 2005*
U S $ b i l l i o n
Source: Bacen
* Year through September
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International Reserves
15
20
25
30
3540
45
50
55
60
65
Jan
99
Jul
99
Jan
00
Jul
00
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Jan
05
Aug
05
Total Reserves
Net Reserves
U S $ b
i l l i o n
Dec
05
44.0
58.7
Source: Bacen, figures for Dec/2005: estimates
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External Sustainability Indicators
%
10
15
20
25
30
35
40
1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun05
1,0
1,5
2,0
2,5
3,0
3,5
4,0
1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun05
%
12
16
20
24
28
32
36
1996 1997 1998 1999 2000 2001 2002 2003 2004 Jun
05
Net External Debt/GDPNet External Debt/Exports
Interest Payments/Exports
Source: Bacen
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Market Indicators
Brazil Risk Ibovespa Index in US$
B a s i s P
o i n t s
350
650
950
1,250
1,550
1,850
2,150
2,450
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
2
4
6
8
10
12
14
16
Jan97
Jan98
Jan99
Jan00
Jan01
Jan02
Jan03
Jan04
Jan05
T h o u s a n d P o i n t s
Source: JP Morgan Chase, Bovespa
B il E i T d
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In 2003-2005, government progressed with the process of international reserve accumulation, and reduction of
public sector’s FX exposure;
External sustainability indicators improved dramatically.
Since 1999, debt service and net debt-to-exports ratio have
fallen by 2/3. In the same period, net debt-to-GDP ratio has
halved.
Brazil risk and Ibovespa index summarize theimprovement in macroeconomic fundamentals and market
confidence.
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Brazil: Economic Trends
Henrique de Campos Meirelles
Instituto de Empresa
Madrid, October 2005