Ministério da Fazenda 1 1 The International Crisis and The Challenges for Brazil Guido Mantega...

1Ministério da Fazenda

1

The International Crisis and The

Challenges for Brazil

Guido Mantega

October - 2008


2

The strongest crisis since 1929.

This crisis is deeper than those which occurred in nineties (bil. crises).

The epicenter was in developed countries (tril. crisis).

A systemic crisis– local turmoil is transmitted to all markets and all countries.

THE DEPTH OF THE CRISIS


3

CRISIS ARE WORSE IN DEVELOPED COUNTRIES

Slower growth.

Potential growth of domestic markets is negligible.

Less solid macroeconomic fundamentals.

Financial institutions are too leveraged and have junk assets .


4

THE CRISIS HARMS LESS THE EMERGING COUNTRIES

Faster growth.

Potential growth of domestic markets is significant.

Solid macroeconomic fundamentals and higher level of international reserves.

Financial institutions are less leveraged and have less junk assets.


5

FIRST STAGE(From August/2007 to August/2008)

The crisis begin in USA and in Europe. The impact in Brazilian economy is negligible.

Brazilian government is concerned about shocks on commodities prices and about the inflation behavior.

Reduction of International credit and more expensive funding for emerging countries.

Deterioration of the Brazilian current account in emerging countries due to the increase of oil price and to the increase of capital outflows.


6

SECOND STAGE(September/2008 and October/2008)

Financial institutions reveal their weakness in balance sheets and the assets devalue strongly.

The solvency crisis becomes a confidence crisis.

Problems in USA:Fannie Mae, Freddie Mac, Lehman Brothers,

Problem in Europe: Fortis, Dexia, HBOS, Bradford and Bingley

Credit Crunch over the world for short-term operations.

Commodities prices decrease and almost all currencies devaluates with respect to the dollar.


7

SOLUTIONS AND PROJECTIONS

The states must come up with solutions to the problem. All the weapons must be used Bailout programs in USA and in Europe.

New stage in 2009: Credit constrained, less leverage and higher

interest rates. World economy will grow slower.


8

SHORT-TERM IMPACTS ON BRAZIL

Credit crunch in the export sector. More Liquidity constraints to Brazilian firms. Domestic credit becomes more expensive. Losses in equity and derivatives. Increase of uncertainty about the economy

performance in 2009.


9

What Does the Brazilian Government Make to Mitigate the Harms of Liquidity

Constraints?

The Government issues short-term loans to the bank system (public offers).

Spend international reserves in order to offer funding to the export sector.

Relaxes the reserve requirements for the banking system.

Increases financial resources of BNDES to be used in exports financing.

Anticipate the disbursement for the harvest of 2008/09


10

Clearinghouses –guarantee the settlement of all registered transactions.

They compulsory register all derivatives operations with the identification of the clearing agent, of the broker and, also of the final beneficial owner.

Risk calculation in real time (based on stress testing) and mark-to-market.

Collateral pledged in the Clearinghouse’s custody account, with segregation between the different clients.

Legal Protection of Pledged Collateral

Financial Regulation in Brazil (Risk Management)


11

BRAZIL – sustainable growth

Variation (%)2nd

Quarter

2007

3rd

Quarter 2007

4th

Quarter 2007

1st

Quarter 2008

2nd

Quarter 2008

Year to Date – Annualized Basis 4.9 5.1 5.4 5.9 6.0

Trailing 4 Quarters – Annualized Basis

4.8 5.1 5.4 5.8 6.0

Year over Year basis 5.4 5.6 6.2 5.9 6.1

Quarter on Quarter

(seasonally adjusted)1.3 1.9 1.8 0.8 1.6

Source: IBGE Elaborated by: MF/SPE


12

6.7

16.2

(10)

(5)

-

5

10

15

20I.

03

III.

03

I.0

4

III.

04

I.0

5

III.

05

I.0

6

III.

06

I.0

7

III.

07

I.0

8

Household Consumption

Investments

BIGGET INVESTMENT CYCLE AND MASS CONSUMPTION MARKETYear over Year – Quarterly Basis (% Variation)

Source: IBGE Elaborated by: MF/SPE


13

CPI - accum. 12 months - (IPCA)

4,9%

6,3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

J an04

Apr04

J ul04

Oct04

J an05

Apr05

J ul05

Oct05

J an06

Apr06

J ul06

Oct06

J an07

Apr07

J ul07

Oct07

J an08

Apr08

J ul08

Oct08

J an09

Apr09

J ul09

Oct09

Sep/08

Dec/09

FOCUS - Market Expectations (10/03/2008)

DOWNWARD INFLATION TREND

Source: BCB Elaborated by: MF/SPE.


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2002

62%

38%

Developed

Developing

2007

50% 50%

Developed

Developing

BRAZILIAN EXPORT DESTINATION COUNTRIES

Source: MDIC. Elaborated by: MF/SPE


15

14.1 9.9 8.3 12.5

-9.4

27.5

-7.6

4.2 11.714.0

13.630.035.0

-34.0-29.0

1.7

2002 2003 2004 2005 2006 2007 2008* 2009*

FDI (net) Current Account

MARKET EXPECTATIONS 2008/09

FOREIGN DIRECT INVESTMENT (NET) XCURRENT ACCOUNT

(US$ billions)

*/ FOCUS Readout - Market Expectations (10/03/2008). Source: BCB Elaborated by: MF/SPE


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FOREIGN EXCHANGE TRANSACTIONS (US$ billions)

2.0

5.97.3

3.3 4.22.7

6.78.4

2.94.7

2.64.1

7.0

(2.0)

0.8

(2.0)

2.1

(6.5)

0.6

1.4

(1.7)(2.8)

(5.6) (5.1)

(2.1)-4.2

-8

-6

-4

-2

0

2

4

6

8

10

Sep07

Oct07

Nov07

Dec07

Jan08

Feb08

Mar08

Apr08

May08

Jun08

Jul 08 Aug08

Sep08

FinancialCommercial

Source: BCB Elaborated by: MF/SPE


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206.5

59.8

30507090

110130150170190210230

Sep05

Dec05

Mar06

Jun06

Sep06

Dec06

Mar07

Jun07

Sep07

Dec07

Mar08

Jun08

Sep08

Variation: Mar/06 and Sep/08146.7 billions

IMF International Settlement

Mar/06

Sep/08

INTERNATIONAL RESERVES(US$ billions)

Source: BCB. Elaborated by: MF/SPE.


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41.838.8

30.3

19.216.1 14.7 14.0

(1.1)(0.9)

7.0

11.5

20.4

27.3

32.7

-5

0

5

10

15

20

25

30

35

40

452

00

2

20

03

20

04

20

05

20

06

20

07

20

08

*

Total External Debt/GDP

Total Net External Debt/GDP

EXTERNAL SOLVENCY INCREASE

*/ Estimation - August/08.Source: BCB. Elaborated by: MF/SPE


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PUBLIC SECTOR BORROWIG REQUIREMENTS(% of GDP)

3.89 4.18 4.35 3.86 3.97 4.42

-4.65

-2.43 -2.96 -3.00-2.26 -1.90

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008*

PRIMARY NOMINAL

Jan–Aug/08: 5.78%

Jan-Aug/08: -

0.58%

*/ Trailing 12 months ending August/08Source: BCB. Elaborated by: MF/SPE.


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*/ Forecast – September/08.Source: BCB Elaborated by: MF/SPE

47.0 46.544.7

42.7

38.9

52.450.548.4

45.544.5

38.9

20

25

30

35

40

45

50

55

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*

PUBLIC SECTOR NET DEBT (% of GDP)


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17.28%18.13%

17.92%

14.91%

17.13%17.38%

17.04%

18.36%

8%

11%

14%

17%

20%

Jun06

Aug06

Oct06

Dec06

Feb07

Apr07

Jun07

Aug07

Oct07

Dec07

Feb08

Apr08

Jun08

Basel Index in Brazil

Index Recommended Internationally

BASEL INDEX (MINIMAL CAPITAL REQUIREMENTS) (Average Index of the Top 10 banks in Brazil*)

*/ Weighted Average Index Based on the Total Asset Values.Source: BCB. Elaborated by: MF/SPE


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Retorno sobre Ativos (em %)

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

BR AS IL C O LÔ M B IA C HILE AR G EN TIN A EU A R EIN O U NIDO

*/ Weighted Average Based on the Top 10 Private Banks in BrazilSource: The Bankers - Top 1000 Biggest Banks Ranking in 2008. Elaborated by: MF/SPE

PROFITABILITY OF BRAZILIAN BANKS*Return On Assets – ROA (%)


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PROFITABILITY RECORDS - PRIVATE SECTOR

Source: Conjuntura Econômica (August/08). Elaborated by: MF/SPE

Shareholders' EquityMedian of the Top 500 (%)

3.4

4.84.4 4.6

1.2

6.3 6.6

2.8

11.3

14.1

12.513.0

13.4

0

2

4

6

8

10

12

14

16

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


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SUSTAINABLE ECONOMIC GROWTH CYCLE

Brazil has the right economic instruments to maintain its current vigorous cycle despite the international financial crisis:

PAC (Growth Acceleration Program) Continuance and Investment Increase

Productivity Gains

Investments in Infrastructure

Even though with a Moderate Reduction of GDP Growth for 2009.


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GDP GROWTH

2.7

1.1

5.75.0

4.5

5.05.4

3.2

3.8

-

1

2

3

4

5

6

7

2002 2003 2004 2005 2006 2007 2008 2009 2010

PAC Projections

GDP Growth

Projections

Source: IBGE (up to 2007). MF/SPE (projections 2008-10). Elaborated by: MF/SPE


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Ministério da Fazenda 1 1 The International Crisis and The Challenges for Brazil Guido Mantega...

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