1

October, 2019

IMF ANNUAL MEETINGS

2019

ROBERTO CAMPOS NETO

CENTRAL BANK OF BRAZIL

2

International

ECONOMY

Increase of uncertainty in world trade

Source: Refinivit / Datastream

3

Some of the key dates in the US – China trade negotiations

World trade uncertainty index

The US and China agree to resume trade talks

Uncertainty related to US-China trade tensions

Tariff increase on US$200 billion of imports from China is scheduled to go into effect on March 1. But a delay is announced on February 24

A series of tariffs by the US and China

A tariff truce between the US and China is announced

A series of tariffs by the US and China goes into effect. The US also ends tariff exemptions for EU, Mexico and Canada. EU and Canada impose tariffs on the US

The US imposes Safeguard Tariffs as well as steel and aluminum tariffs

110

100

90

80

70

60

50

40

30

20

10

01995 1998 2001 2004 2007 2010 2013 2016 2019

Source: World Uncertainty Index – Ahir, Bloom and Furceri (2018)

US – China dispute Trade tensions polarize voters

Consumer Comfort

Uncertainty related to US-China trade tensions

Republicans Democrats

US election

Trade tensionTrade tension

escalation

Tax package

Index

Sep-16 Sep-17 Sep-18 Sep-19Mar-16 Mar-17 Mar-18 Mar-19

Sell Off S&P

Trade uncertainty effect on global activity

Source: Caldara, D., M. Iacoviello, P. Molligo, A. Prestipino, and A. Raffo(2019)*

▪ - 0.8 p.p. on global activity in 2019. ▪ - 1 p.p. accumulated from 2019 to 2020.

18Q1 18Q3 19Q1 19Q3 20Q1 20Q3

0.2

0

-0.2

-0.4

-0.6

-0.8

-1.0

-1.2

-1,4

-1.6

Advanced Economies Emerging Economies US

Effe

ct o

n G

DP

leve

l sin

ce 2

01

8 (

pp

)

Total effect Effect of the first wave only

* "The Economic Effects of Trade Policy Uncertainty." IFDP 2019-1256.Board of Governors of the Federal Reserve System.4

18Q1 18Q3 19Q1 19Q3 20Q1 20Q3 18Q1 18Q3 19Q1 19Q3 20Q1 20Q3

US Economy

Source: Refinivit / Datastream

5

Government popularity follows the economic activityProbability of recession - US

Oct/2019

35%

Source: NY Fed

Index Trade tension

US electionPowell SpeechTax package

Index

Presidential popularity

Tariff on China

Escalation

China retaliates

Trump ponders

Mar-17Sep-16 Sep-17 Sep-18 Sep-19Mar-18 Mar-19

S&P

Fed Dovish statement

%

6

Industrial Production: fall among commercial partners

Ind

ust

rial

pro

du

ctio

n(Y

oY

-th

ree

mo

nth

s av

era

ge)

Source: Bloomberg, BCB computation

6* Commercial partners’ industrial production

(average weighted by exports of manufacture)

Commercial partners (right)

Brazil

Global slowdown

Source: Bloomberg

Expected slowdown of the global economy

7

Global Growth

Mar/183.6%

Mar/183.7%

Sep/193.2%

Sep/193.1%

High monetary stimulus in advanced economies

Source: DB Global research, Bloomberg

8

Holders of negative return assets (%)

Central Banks

Mutual Funds

ETFs

Asset Managers

Insurance Companies and Pension Funds

Others

18

16

14

12

10

8

6

4

2

0

35

30

25

20

15

10

5

0

11 12 13 14 15 16 17 18 19

Bonds with negative returns in the world: US$ 15 trillions

27% of world bond market has negative return

US$

Tri

lio

n

%

Outflows from emerging economies – August/19

Source: Bloomberg

9

Emerging currency index –MSCI(% change in August)

Outflows from emerging economies

Source: IIF

10

Accumulated in 12 months – US$ billion

China (right)

De

bt

Sto

cks

Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19 Ago-19

Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 May-18 Oct-18 Mar-19 Ago-19

India Korea Brazil Mexico TurkeyTaiwan

Brazilian Net FX Position

Source: BCB.

11 * In October, 4th 2019

US$

Bill

ion

Oct/19*

330

Source: Bloomberg.

12

5 year CDS (bps) versus credit rating**

* 1 year ex-ante real rates, 1 year Brazilian securities CDS.** Standard & Poor’s (S&P) rating for long term sovereign debt in foreign currency

Credibility increase of the Brazilian economy

Reduction of perceived excess risk*

13

Domestic

ECONOMY

Inflation Control and expectation anchorage

Source: BCB / IBGE

14** Breakeven inflation at NTN-B

***Breakeven inflation at CPI derivatives (DAP)

Credibility on long term targets

Source: BCB.

19

Fast convergence of expectations after definition of new targets

2021 Inflation Target 2022 Inflation Target

20

Monetary Policy

• In its last meeting, Copom unanimously decided to lower the Selic rate to 5.5% p.y.

• The economic conditions prescribe stimulative monetary policy, i.e., interest rates below the

structural level.

21

Monetary Policy – Risks to the baseline inflation scenario

• Risk of inflation reduction:

i. The high level of economic slack may continue to produce lower-than-expected prospective inflation

trajectory.

• Risks of inflation increase:

ii. A possible frustration of expectations regarding the continuation of reforms and the perseverance in

the necessary adjustments in the Brazilian economy may affect risk premia and increase the path for

inflation over the relevant horizon for the conduct of monetary policy.

• Risk (ii) intensifies in case of:

iii. The outlook for emerging economies deteriorates.

22

Monetary Policy – Next steps

• The consolidation of the benign scenario for prospective inflation should permit additional

adjustment of the degree of stimulus.

• The next steps in the conduct of monetary policy will continue to depend on the evolution of

economic activity, on the balance of risks, and on inflation projections and expectations.

Monetary PolicyFinancial Stability

PolicyFX Policy

Macroeconomic Stability

Interest Rate MacroprudentialMeasures

FX Interventions

Macro Stability: different policies, different instruments

21

24

GDP growth: Brazil and abroad

GD

P g

row

th(%

)(a

vera

ge)

1995-1998 1999-2002 2003-2006 2007-2010 2017-2018 2019-2020

* Public sector capital formation (excluded subnational government corporations)24

-4

-2

0

2

4

6

8

0

2

4

FHC I FHC II Lula I Lula II Dilma I Dilma II Temer Bolsonaro

2011-2014

Inve

stim

en

t(%

of

GD

P)

(ave

rage

)

Brazil

EME

Wolrd

Forecast

Public investment*

Fonte: FMI – World Outlook, FGV

2015-2016

Expectation on economic recovery

Source: BCB.

1.6 % of GDP Growth in the second quarter

GDP and demand side components(seasonally adjusted, 2014 = 100)

25

IBC-Br*(seasonally adjusted, 2014 = 100)

IBC-Br shows recent improvement

2019**+0,9%

2020**+2,0%

* IBC-Br is an indicator calculated by BCB which takes into account PIM, PMC, PMS, LSPA, PNAD-C and other short-term activity information.** Actual (continuous line) and market expectation - median Focus 10/11/2019 (dashed line)

26

Available labor income

Fonte: IBGE, BCB

Dec2016

Dec2017

Dec2018

Dec2019

104

102

100

98

96

94

92

Source: IBGE, BCB

extra income programs (FGTS and PIS/PASEP)

Seas

on

ally

ad

just

ed

In

de

x(A

ug

/19

= 10

0)

27

Brazilian growth affected by important shocks in 2019

Source: BCB

0.87

0.18

0.29

0.20

1.54

Capital and credit market expansion

Source: BCB / IBGE / FGV.

Credit growth remains robust

23

-6

-4

-2

0

2

4

6

8

10

12

14

2016 2017 2018 2019 2020

5.1

Dec 20

11.4

8.1

5.7

Aug 19

12.0Dec 19

12.0

Total creditNon earmarked credit

Ou

tsta

nd

ing

cre

dit

gro

wth

1

2 m

on

ths

(%)

Credit/GDP gap – there is room to keep growing

Source: BCB, B3, CVM and IBGE.

29

Credit/GDP gap, disregarding FX effects

p.p. of GDP

15.0

10.0

5.0

0.0

-5.0

-10.0

Corporate, earmarked Corporate, non-earmarked

Capital market

Households

Foreign market

Total

Securitization

Home equity

Reverse mortgage

Legal environment and risk

FX Hedge

Sanitation

Annual growth and volume

Gro

wth

in la

st 1

2 m

onth

s(p

.p. o

f GD

P)

1.2

0.6

0.0

-0.6

-1.2

-1.8

1.2 2.4-1.2 0.0-2.4-3.6

Working Capital

Operations with receivables

Investment

Credit card

Real estate

Foreign trade

Rural, households

Agribusiness, Corp.

Others, Corp.

Real estate, Corp.

Others, households

Infrastructure

Payroll-deducted personal loans

Excluding payroll-deducted

Banking credit/GDP gap

Cars

29

31

33

35

37

39

41

4

8

12

16

564 557 564620

813

1334

0

500

1000

1500

2014 2015 2016 2017 2018 2019

Capital markets democratization

Fonte: BCB / IBGE / FGV.

People trading in the stock market*

Source: B3 / BCB.

30

* - in thousands

Selic

Debentures

Accumulated issuing in 12 months

16

12

8

45,5

Actual Forecast

Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020

R$ billions

31

Changes already underway

Source: BCB.

Covered bonds* stock keeps

growing:

• R$ 1 billion stock increase

in Aug/2019

R$ million

* - Letra Imobiliária Garantida

Fintech growth

32

• In 2018 the BCB regulated 2 kinds of credit fintechs:

• Direct credit (SCD)• Peer-to-peer (SEP)

• The segment is blossoming:

• 13 firms already in the market:• 9 SCDs• 4 SEPs

• 20 waiting for the BCB authorization

• Outstanding credit is growing by 300% on a yearly basis.*

• The segment is already responsible for near US$ 250 millions in credit operations.

• A major aport in 2019 increased the capital of credit fintech by US$ 231 millions.

* - According to the Associação Brasileira de Crédito Digital (ABCD)

33

Changes already underway

Source: BCB.

• Investment funds have to redefine their business

Administration feeFixed income, retail

Fixed income funds vs. savings accountAfter income tax

* Hypothesis:1) Selic rate: 5,50% p.y. and2) Returns of 100% of CDI

Initial investment

(R$)

Adminstration fee

(% p.y.)

up to 1,000 2.3

from 1,000 to 25,000 1.0

from 25,000 to 100,000 0.9

more than 100,000 0.5

Average 1.0

Income tax

(%)

Breakeven Adm. Fee

(% p.y.)

22.5 0.51

20.0 0.66

17.5 0.80

15.0 0.93

34

Fall of the banking credit cost

Source: BCB.

29

31

33

35

37

39

41

4

6

8

10

12

14

16

Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19

% p

.y.

% p

.y.

Selic ICC - Nonearmarked Resources (right)

Spread decomposition

35

Source: BCB/REB.

Emerging Countries * Brazil

Funding cost ** 4.0% 6.5%

Inflation** 3.1% 3.7%

Default*** 3.4% 3.6%

Banking Spread ** 3.8% 18.4%

Loan Recovery** 52.7% 14.6%

Recovery Time** 1.7 year 4.0 years*Average among Chi le, China, Colombia, Indoneés ia , Meéxico, Ruúss ia , South Africa and Thai land.

**2018.

***2016.

Source: IFS/IMF, WEO/IMF, Doing Bus iness/World Bank, GFDD/World Bankl , BCB and IBGE.

Source: BCB/REB “Cheque Especial: Estatísticas adicionais sobre sua utilização”, BCB Special Studies nº 60/2019.

67

44

44

8,8

7

19,5

16,8

12

50

0 10 20 30 40 50 60 70 80

até o ensino médio

até 2 s.m.

de 34 a 54 anos

Inadimplentes( - no cheque especial)

maior dívida no cheque especial( - total da dívida)

6 meses ou mais no ano( - ano todo)

participação na amostra (%)

Perfil do usuário

6 meses ou mais no ano( - ano todo)

maior dívida no cheque especial( - total da dívida)

Inadimplentes( - no cheque especial)

Emergency credit lines are regressive

BCeducation

Overdraft

36

User Profile The larger the borrower´s income, the lessthe compromised income

6 months or more per year

( - all year)

Age: from 34 to 54 years old

In default( - in the overdraft)

Overdraft is the biggest debt( - overdraft is the only debt)

Income: less than 2 minimum wages

Education: high school or less

Median Top 10% indebted

Up to 2 m.w.* 2.75% 21.10%

From 2 to 5 m.w* 1.62% 10.80%

From 5 to 10 m.w* 1.21% 9.20%

Above 10 m.w.* 0.79% 7.50%*m.w. - minimum wage

Part of the income compromised with

overdraft interestsBorrower´s

income

Overdraft, financial education is the answer

BCeducação

Room for improvement with users:

• Understanding how the instrument operates

• Developing skills to choose the more appropriate instrument to their needs

Dimension: Financial Education

37

Source: BCB/REB.

Improvements in card market

38

Source: BCB.

Credit Card Machine AccrediterMarket share (2015)

Credit Card Machine AccrediterMarket share (2018)

Improvements in card market

39

Source: BCB.

39

Agenda BC

REFORMS

40

41

Structural reforms: current situation*

gap

Why a reform agenda?

Source: FMI – Brazil: boom, bust, and the road to recovery.

.* - Standardized for 1 to be the maximum level

42

Low growth and halted productivity

Why a reform agenda?

China

India

Indonesia

Turkey

Mexico

Brazil

GD

P (l

og

scal

e)

With human capital

Without human capital

Tota

l fac

tor p

rodu

ctiv

ity

Source: FMI – Brazil: boom, bust, and the road to recovery

43

Filling the gap: productivity impact

Why the Agenda BC ?

Source: FMI – Brazil: boom, bust, and the road to recovery

44

Source: FMI – Brazil: boom, bust, and the road to recovery

Financial sector reforms have popular support and high productivity impact

Why the Agenda BC ?

Banking sector

Labor market

Legal system

Trade openness

Products market

Easier to legislateMore difficult to legislate

Pop

ula

tion

su

ppo

rt to

the

refo

rms

(%)

Impact on productivity (%)

INCLUSION COMPETITIVINESS

TRANSPARENCY EDUCATION

45

• Credit Union

• Microcredit

• Currency

Convertibility

• Initiatives for Capital

Market (IMK)

• Innovation

• Market Efficiency

• International

Reserves

• Financial Education at

Schools

• Over-indebted

• Low Income

Population

• Economy Museum

• Joint Actions with the

Financial System

• Rural Credit

• Housing Credit

• Relationship

▪ Foreign Investors

▪ Congress

• Communication of

BCB actions

• Transparency of

Monetary Policy

46

INCLUSÃO COMPETITIVIDADE TRANSPARÊNCIA EDUCAÇÃOBCeducationBCtransparencyBCcompetitivinessBCinclusion

Progress level, from 0 to 4

47

• Electronic Invoice Law

• Positive Credit Bureau Law

o Both will improve competitiveness in the credit market and the banking spread.

• New funding instruments for Credit Unions

• Capital Markets Initiatives: actions to facilitate investor´s access and to promote competitiveness of

fund offering.

• Use of CPI in real estate financing contracts

o Flexibility in housing market, fostering its integration to the capital market, via securitization.

Agenda BC – Recent actions

48

Fonte: Abrainc (Brazilian Association of Real Estate Developers) and Secovi/SP

3

5

7

9

11

Mar2014

Jul2015

Jul2016

Jul2017

Jul2018

Jul2019

Vendas líquidas Brasil Lançamentos Brasil

Brazil1.000 un SA 3MA

0

1

2

3

4

5

6

7

8

9

Mar2004

Ago2005

Ago2007

Ago2009

Ago2011

Ago2013

Ago2015

Ago2017

Ago2019

Vendas RMSP Lançamentos RMSP

Metropolitan Region of São Paulo – RMSP1.000 un SA 3MA

Investments – new properties

Net sales BrazilNew properties offering

BrazilSales RMSP

New properties offering RMSP

Accumulated in 2018 88,050 100,405 38,941 40,327

Accumulated in the last 12 months 93,245 103,678 48,982 57,667

Variation 6% 3% 26% 43%

Net sales New properties offering Sales New properties offering

Aug Aug Aug Aug Aug Aug Aug Aug

49

Agenda BC – Home Equity: high potentialIn a conservative scenario, around R$ 500 billions can be injected in the credit market, almost the total current real estate credit stock.

(R$ billions)

Gross residential housing stock1

Irregular legal status or unsettled debt2

Not available for collateralization3

Net residential housing stock

Adhesion 10% 30%

Available guarantee 916 2.748

Average LTV

300 900

50% 150%

Scenario (prob.) 67% 33%

Credit to be offered (expected)

1 - IBGE (number of residences) and BCB (average value of residences)

2 - IBGE (residences w ith unsettled debt) and UN-Habitat (residences under irregular legal status)

500

3 - Assumption: Part of the total value of residences w ith unsettled debt or under irregular legar status that is

not available for collateralization

12.065

48%

50%

9.160

33%

Increase of stock (first draft)

Maximum Value

(R$)R$300 thousands R$50 thousands

Nº of instalments 120 months Up to 48 months

Interest rate (% p.y.) TR + 15% 153.63% p.y.

Actual Total Cost**

(% p.y.)TR + 18% 160 % p.y.

R$6,490.60 R$4,123.49

(with insurance) (without insurance)* - Market average

** - LTV of 60%

Parameters Home Equity CDC *

1st

payment

Main Goals

Modernization Simplification

Legal Security

50

Agenda BC – FX Simplification

Alignment to international best practices

Single and embracing Law

• Consolidation and revocation(more than 40 instrumentscreated after 1920)

Rationalized and principle oriented

regulation

Flexibility to incorporate

technological innovations

• End of antiquatedrequirements, searching formore efficiency

• Possibility of incorporatingnew business models andagents

51

Agenda BC – LFA

• ER • Diagnostic

• Operational model proposals

• LFA • Policy proposals (assets

and counterparty eligibility)

• Risk and price methodologies

Ordinary Situations: Extraordinary Situations

Legally and regulatory foreseen operations

Liquidity Financial Assistance (LFA)

Last Resort Operations Rediscount

Specific Law required (LRF)

Need of Regulation BCB Rediscount

FGC Financial Assistance

FGC Resources Allocation Program

Lendings: Foreign currency

Operation: Regular 15 working days 90 consecutive days

Lending supported by Law (Law 4,959/64 and

11,882/08)

Modality: repo, or rediscount

Operation: Standing Facility (intraday and one working day)

Operation: Special Up to 359 consecutive days

Type: repo

Modality: repo

52

Agenda BC – LFA

• Compliance with FSAP recommendation (2012)

• Incentive to liquidity in markets

• Promotion of asset registering

• Facility to perform a classic central bank function

• Structural reduction compulsory deposits needs

53

Agenda BC – LFAR

$ b

illio

n

Apr Apr Apr Apr AprOct Oct Oct Oct Oct

441.1(100.0%)

238,5(54.1%)

165.1(37.4%)

37.4(8.5%)

* In October, 14th 2019

54

▪ Countries with more autonomous CBs have lower inflation level and volatility

Source: Alesina A. e L. Summers (JMCB, 1993), Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence

Agenda BC – BCB Autonomy

Conclusions

55

• Selic rate renewed its historical minimum at Copom last meeting.

▪ External outlook is still uncertain and risks of a deeper slowdown of the global economy remain.

▪ Reforms and adjustments of the Brazilian economy are progressing;

▪ The continuity of this process is essential for the structural interest rate reduction and the sustainable

recovery of the economy.

▪ The next steps of the Monetary Policy will continue to depend on the evolution of economic activity,

on the balance of risks, and on inflation projections and expectation, and the consolidation of the

benign scenario for prospective inflation should permit additional adjustment of the degree of

stimulus.

Conclusions

56

• Another important issue has been the BCB renewed credibility, built on a cautious conduct of

the Monetary Policy.

▪ An additional step toward more credibility will come from the approval of BCB Autonomy Bill.

• Moreover, to contribute to productivity growth in our economy, the Agenda BC# acts to remove

existing barriers that prevent the financial system to fulfill its role of promoting an efficient

resource allocation among the economic activities.

57

October, 2019

THANK YOU

ROBERTO CAMPOS NETOGovernor of Central Bank of Brazil