International Capital Flows Brazilian Experience · 2013-06-02 · Banks: Low Share of External...
27
1 Alexandre Tombini Governor Banco Central do Brasil June 2013 International Capital Flows Istanbul School of Central Banking Brazilian Experience
Transcript of International Capital Flows Brazilian Experience · 2013-06-02 · Banks: Low Share of External...
1
Alexandre Tombini
Governor
Banco Central do Brasil
June 2013
International Capital Flows
Istanbul School of Central Banking
Brazilian Experience
2
• Capital inflows to Brazil before and after 2009 crisis:
different drivers, features and policy strategies
Initial Remarks
• Brazil introduced macroprudential measures to handle
intense and volatile capital inflows, mitigating stability
risks • The exit from unconventional monetary policies in
Advanced Economies (AE) – if disorderly – involves
potential risks (such as sudden stops and disruptive
capital flows) to the global economy
• Brazil is better prepared with sound economic
fundamentals, rigorous prudential regulation and a solid
financial sector
3 Source: FUNCEX / BCB
Favorable Terms of Trade Shock
0.2
0.3
0.4
0.5
0.6
0.7
0.8
80
90
100
110
120
130
140 Jan 0
0
Jan 0
1
Jan 0
2
Jan 0
3
Jan 0
4
Jan 0
5
Jan 0
6
Jan 0
7
Jan 0
8
Jan 0
9
Jan 1
0
Jan 1
1
Jan 1
2
Jan 1
3
US
$ / B
RL
A
vera
ge 2
006 =
100
Terms of Trade (LHS) US$ / R$ (RHS)
4 Source: BCB
Floating FX Regime Led to a REER Appreciation
60
80
100
120
140
160
180 Jan 0
2
Jan 0
3
Jan 0
4
Jan 0
5
Jan 0
6
Jan 0
7
Jan 0
8
Jan 0
9
Jan 1
0
Jan 1
1
Ja
n 1
2
Jan 1
3
BR
L /
US
$
5 Source: BCB
FX Interventions and Exchange Rate
US
$ b
illio
n
BR
L/U
S$
1.5
2.0
2.5
3.0
3.5
-10
-5
0
5
10
15
De
c 0
3
De
c 0
4
De
c 0
5
De
c 0
6
De
c 0
7
De
c 0
8
De
c 0
9
interventions (LHS) exchange rate (RHS)
Central Bank (sterilized) interventions aimed to cope with excessive volatility of exchange
rate, without changing its trend.
CB Interventions to Smooth ER Volatility
6
Inflation – Convergence to Target
Source: BCB and IBGE
Monetary policy has not been affected by the sterilization process.
0
2
4
6
8
10
12
Dec 0
3
Dec 0
4
Dec 0
5
Dec 0
6
Dec 0
7
Dec 0
8
Dec 0
9
Dec 1
0
Dec 1
1
Dec 1
2
Dec 1
3
% Y
oY
*Inflation Report (Mar 13)
7
Capital Inflows
After 2009
8 Source: BCB
BoP Flows Boosted by High Liquidity U
S$ b
illio
n (
12 m
on
ths*)
-60
-40
-20
0
20
40
60
80
100
Jan 0
1
Jan 0
2
Jan 0
3
Jan 0
4
Jan 0
5
Jan 0
6
Jan 0
7
Jan 0
8
Jan 0
9
Jan 1
0
Jan 1
1
Jan 1
2
Jan 1
3
trade in goods and services financial total
High liquidity in global markets and unprecedented low levels of interest rates in
AEs led to excessive capital flows into Emerging Economies (EMEs)
*Through May 24
9
Risks of Intense and Volatile Capital Inflows
• Intense and volatile capital inflows had the
potential to threaten economic and financial
stability
- Excessive expansion of domestic credit
- Asset price distortions (excessive FX appreciation)
- Inflationary pressures
- Broaden bank exposure to FX risk
10
• Brazil introduced measures to safeguard stability
Capital Flows Management Measures
- Capital requirements on consumer loans with longer
maturities and higher LTV ratios
- Financial transaction tax on certain types of capital
inflows and on short dollar positions held in futures
markets
- Reserve requirement on banks’ short FX position in the
spot market
- FX intervention, including through FX swaps
• These measures were successful in moderating
consumer credit expansion, inhibiting riskier types
of inflows and reducing short term borrowing
11
0.8
0.9
1.0
1.1
1.2
1.3
1.4
Dec 0
9
Jun 1
0
Dec 1
0
Ju
n 1
1
Dec 1
1
Ju
n 1
2
Dec 1
2
Daily
avera
ge (
R$
bill
ion)
New Credit Operations
Source: BCB
Credit Supply
December 2010 - Increased capital requirements for
specific consumer loan operations (car loans) with
longer maturities and higher LTV ratios
15
16
17
18
19
20
21
22
Dec 0
9
Apr
10
Aug 1
0
Dec 1
0
Apr
11
Aug 1
1
Dec 1
1
Ap
r 1
2
Aug 1
2
Dec 1
2
Apr
13
% Y
oY
Outstanding Credit Rate of Growth
12
-30
-20
-10
0
10
20
30
40
50
60
Dec 0
8
Jun 0
9
Dec 0
9
Jun 1
0
Dec 1
0
Jun 1
1
De
c 1
1
Jun 1
2
Dec 1
2
US
D b
illio
n (
12 m
onth
s)
Foreign Bonds and Loans
Short Term Long Term
March 2011 – Financial
transaction tax on FX
loans and bonds up to
one year
Source: BCB
FX Flows Rebalance
-20
0
20
40
60
80
100
De
c 0
8
Jun 0
9
De
c 0
9
Jun 1
0
De
c 1
0
Jun 1
1
Dec 1
1
Jun 1
2
De
c 1
2
US
D b
illio
n (
12 m
onth
s )
FDI and Portfolio Flows
12M FDI 12M Portfolio
13 Source: BM&F / Bloomberg
Net Foreign Investors Exposure in USD*
*International Investors Positioning (DDI Coupon + USD Future)
**Through May 2nd, 2013
-30
-20
-10
0
10
20 Ja
n 0
8
Ju
l 0
8
Ja
n 0
9
Ju
l 0
9
Ja
n 1
0
Ju
l 1
0
Ja
n 1
1
Ju
l 11
Ja
n 1
2
Ju
l 1
2
Ja
n 1
3
US
$ b
illio
n
-USD24.6 billion.
All time record high NET
SHORT USD Position
July / 2011 - Financial transaction
tax on short dollar positions held
in the futures market
14 Source: BCB
Banks’ FX Spot Position
-20
-16
-12
-8
-4
0
4
8
12
16 Jan 0
3
Jan 0
4
Jan 0
5
Jan 0
6
Jan 0
7
Jan 0
8
Jan 0
9
Jan 1
0
Jan 1
1
Jan 1
2
Ja
n 1
3
US
$ b
illio
n
Bank's FX Spot Position*
Net Long US$
Net Short US$
July 2011 - Reserve requirement on
Banks´ short FX spot position
* Through May 20, 2013
15 Source: BCB
FX Flows Composition
US$176 billion Aug 2011
US$108 billion Apr 2013
-50
0
50
100
150
200
Ap
r 0
7
Au
g 0
7
Dec
07
Ap
r 0
8
Au
g 0
8
Dec
08
Ap
r 0
9
Au
g 0
9
Dec
09
Ap
r 1
0
Au
g 1
0
Dec
10
Ap
r 1
1
Au
g 1
1
Dec
11
Ap
r 1
2
Au
g 1
2
Dec
12
Ap
r 1
3
US
$ b
illio
n (
12 m
onth
s)
Foreign Direct Investment Equities Others Total
16
• Brazil maintained long-term investors’ interest
Current Setting
- One of the leading recipients of FDI
• Brazil has learned from experience how to manage
such capital surges
- Policy measures resulted in reduced short-term capital
flows (volatile)
17 Source: UNCTAD
Brazil is Leading Recipient of FDI
197.9
114.7
85.7
82.7
50.6
48.6
48.5
46.9
43.3
42.8
40.8
35.2
32.5
30.6
29.2
0 50 100 150 200
USA
China
Belgium
Hong Kong
UK
Singapore
Brazil
Germany
Russian …
Ireland
Spain
Australia
Switzerland
France
Saudi Arabia
2010
226.9
124.0
103.3
96.1
66.7
65.8
64.0
52.9
51.1
41.4
40.9
40.4
34.3
31.6
29.5
0 50 100 150 200
USA
China
Belgium
Hong Kong
Brazil
Australia
Singapore
Russian …
UK
Canada
France
Germany
Italy
India
Spain
2011
146.7
119.7
72.5
65.3
62.5
58.9
54.4
48.5
47.2
44.1
39.6
27.3
26.4
22.6
19.3
0 50 100 150
USA
China
Hong Kong
Brazil
UK
France
Singapore
Australia
Canada
Russian …
Ireland
India
Chile
Luxembourg
Belgium
2012
18
0
10
20
30
40
50
60
70
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
2011
20
12
US
$ b
illio
n
bonds issued (in USD) bonds issued (in BRL)
Source: Bloomberg
Brazilian Companies External Bond Sales
Bonds issued abroad by Brazilian companies excluding bonds issued by subsidiaries in other countries
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• Brazil is better prepared
Unconventional Monetary Policies
- Strong international reserves position
- Rigorous prudential regulation
• Exit involves potential risks to the global economy
- Changing expectations may lead to sudden and
disruptive capital flows across financial markets and
countries (if disorderly)
- Solid financial sector, with low exposure to market
risks (interest rates and exchange rate)
20
190.3
-76.9 -100
-50
0
50
100
150
200
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
US
$ b
illio
n
60.1
33.0
375.6
0
50
100
150
200
250
300
350
400
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
US
$ b
illio
n
Source: BCB
International Reserves Net External Creditor
*May 21st, 2013 **April 2013
Solid Macroeconomic Fundamentals
21 Source: IMF (Fiscal Monitor April, 2013)
Low Share of Gov. Debt Holdings by Nonresidents
6.7
8.9
14.3
17.6
19.4
23.5
29.1
29.6
31.9
32.0
32.1
33.2
35.1
61.3
63.5
72.2
0 20 40 60 80
India
Japan
South Korea
Brazil
Russian Federation
Canada
Spain
Turkey
UK
South Africa
US
Mexico
Italy
Germany
France
Australia
2012 (% of Total Debt)
22 Source: IMF (Financial Soundness Indicators, April 2013)
Sound Financial System
27
33
38
44
47
51
56
74
76
80
83
107
109
144
0 100 200
India
South Africa
United Kingdom
Australia
Mexico
Japan
Canada
United States
Turkey
Italy
Russian Federation
Brazil
Republic of Korea
Germany
Liquid Assets to Short Term
Liabilities
-74
-34
-24
-21
-16
-16
-16
-12
-10
-6
-3
-3
9
9
-100 -60 -20 20
Italy
Spain
South Africa
Japan
United Kingdom
Australia
United States
India
Russian Federation
Canada
Turkey
Republic of Korea
Brazil
Mexico
( Provisions – NPL) / Capital
11
12
13
14
14
14
14
14
15
16
16
16
16
17
18
18
10 15 20
Spain
Australia
Italy
India
Russia
Korea
Japan
France
United States
United Kingdom
South Africa
Mexico
Canada
Brazil
Germany
Turkey
Regulatory Capital to Risk-Weighted
Assets
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Banks: Rigorous FX Exposure Regulation
• Maximum leverage ratio on FX limited to 30% of
regulatory capital (second line of defense)
• More stringent FX capital adequacy ratio (CAR)
• Reserve requirements applied to excessive short
spot FX position (discouraging excessive risk
taking)
- CAR on net open positions (100%)
- CAR on cross-border netting
24 Source: BCB
Banks: Low Share of External Funding
Mar 13
95.6 89.5
81.0 90.5
4.4 10.5
19.0 9.5
0%
20%
40%
60%
80%
100%
Public-owned Private-owned Foreign-controlled Total
Domestic External
Origin of Funds Borrowed by Banks
25 Source: BCB (Financial Stability Report, March 2013)
Banks: Low Sensitivity to FX Risk
0
2
4
6
0.75 1.15 1.55 1.95 2.35 2.75 3.15 3.55 3.95
Assets
(%
)
Exchange Rate (R$/US$)
Relevance of Banks in insolvency Relevance of Noncompliant Banks
Largest variation in 21 days (since 1999)
R$/US$ in Feb 28, 2013
Sensitivity Analysis - Exchange Rate Risk
- Depreciation Appreciation
No bank turns insolvent. Above R$/US$ 3.55, banks which correspond to less than 2% of total
assets become noncompliant.
26
Concluding Remarks
• Intense and volatile capital flows have the potential
to threaten economic and financial stability
• An orderly UMP exit is needed to mitigate potential
risks to the global economy
• Well-design macroprudential policies and sound
microprudential regulation help safeguard stability
27
Alexandre Tombini
Banco Central do Brasil
Governor
June 2013
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