Otaviano Canuto BRAZIL – Ministry of Finance BRAZIL DAY 2003 New York, November 17, 2003 From the...

Otaviano Canuto BRAZIL – Ministry of Finance

BRAZIL DAY 2003

New York, November 17, 2003

From the Confidence Crisis Towards Sustainable Growth


II. The 2002 Confidence Crisis. The 2002 Confidence Crisis

II. Challenges and Accomplishments: II. Challenges and Accomplishments:

a. External Adjustment a. External Adjustment

b. Disinflation b. Disinflation

c. Fiscal Sustainability c. Fiscal Sustainability

d. Reduction of FX Exposure of Public Sector d. Reduction of FX Exposure of Public Sector

III. Recovering Economic ActivityIII. Recovering Economic Activity

IV. Sustainable GrowthIV. Sustainable Growth


I. The 2002 Confidence CrisisI. The 2002 Confidence Crisis


Sudden Stop

Capital Inflows(*)Capital Inflows(*)(US$ billion)(US$ billion)

(*) FDI , medium and long term loans (excluding loans to the Central Bank)(*) FDI , medium and long term loans (excluding loans to the Central Bank)

61.7

52.8

24.8

2000 2001 2002

US$ 8.9 billion GAP

US$ 28.0 billion GAP


Bas

is P

oin

tsB

asis

Po

ints

11/Nov11/Nov572572

500500

1,0001,000

1,5001,500

2,0002,000

2,5002,500

Jan 02Jan 02 Apr 02Apr 02 Jul 02Jul 02 Oct 02Oct 02 Jan 03Jan 03 Apr 03Apr 03 Jul 03Jul 03 Oct 03Oct 03

Brazil Risk (Embi+)

Spread Over TreasurySpread Over Treasury


Nominal Exchange Rate (R$/US$)R

$/U

S$

R$/

US

$

11/Nov11/Nov2.902.90

2.22.2

2.52.5

2.82.8

3.13.1

3.43.4

3.73.7

4.04.0

Jan 02Jan 02 Apr 02Apr 02 Jul 02Jul 02 Oct 02Oct 02 Jan 03Jan 03 Apr 03Apr 03 Jul 03Jul 03 Nov 03Nov 03


GDP x Confidence Shocks

GDP Change After Large Exchange Rate Crises (%)

Brazil (2002/03*)

Argentina (2002)

Uruguay (2002)

Thayland (1998)

Malasya (1998)

South Korea (1998)

* BC Projection for 2003: 0.6%

1,0

-11,0-11,0

-10,8-10,8

-10,5-10,5

-7,4-7,4

-6,7-6,7

-4,9-4,9 Russia (1998)



a. External Adjustmenta. External Adjustment


Current Account DeficitU

S$

bil

lio

nU

S$

bil

lio

n

33,4

25,3 24,2 23,2

7,7

-3,9

0

5

10

15

20

25

30

35

40

1998 1999 2000 2001 2002

Jan-Sep2003


Private External Debt: Rollover Rate

6-Month Moving Average 6-Month Moving Average

20

40

60

80

100

120

140

160

Jun 01 Oct 01 Feb 02 Jun 02 Oct 02 Feb 03 Jun 03

Sep 03158.3

%%


Trade Balance

-10-10

-5-5

00

55

1010

1515

2020

2525

Jan 99Jan 99 Jul 99Jul 99 Jan 00Jan 00 Jul 00Jul 00 Jan 01Jan 01 Jul 01Jul 01 Jan 02Jan 02 Jul 02Jul 02 Jan 03Jan 03 Sep 03Sep 03

US

$ b

illi

on

US

$ b

illi

on

Sep Sep 23.123.1

12-Month, Accumulated 12-Month, Accumulated


Trade BalanceU

S$

bil

lio

nU

S$

bil

lio

n


45

50

55

60

65

70

Jan 96 Feb 97 Mar 98 Apr 99 May 00 Jun 01 Jul 02 Sep 03

Imports

Exports

69.6

46.6


Terms of Trade

Export Prices / Import PricesExport Prices / Import Prices

1996

= 1

0019

96 =

100

85

90

95

100

105

110

Jun 94 May 95 Apr 96 Mar 97 Feb 98 Jan 99 Dec 99 Nov 00 Oct 01 Sep 02 Sep 03

91.4


* BC forecast* BC forecast

Net Foreign Direct InvestmentU

S$

bil

lio

nU

S$

bil

lio

n

28.928.9 28.628.6

32.832.8

22.522.5

16.616.6

10.010.0

00

55

1010

1515

2020

2525

3030

3535

19981998 19991999 20002000 20012001 20022002 2003*2003*


Current Account + Debt AmortizationsU

S$

bil

lio

nU

S$

bil

lio

n

-10-10

00

1010

2020

3030

4040

5050

6060

7070

8080

9090

Jan 98Jan 98 Jul 98Jul 98 Jan 99Jan 99 Jul 99Jul 99 Jan 00Jan 00 Jul 00Jul 00 Jan 01Jan 01 Jul 01Jul 01 Jan 02Jan 02 Jul 02Jul 02 Jan 03Jan 03 Sep 03Sep 03

Current Account DeficitCurrent Account Deficit Curr Acc Def + M/L Term AmortizationsCurr Acc Def + M/L Term Amortizations

Medium and Long Term AmortizationsMedium and Long Term Amortizations


27.627.6

24.024.0

-3.6-3.6


Exports/Total External Debt

22.922.921.321.3

25.425.427.727.7 28.628.6

31.831.8

00

55

1010

1515

2020

2525

3030

3535

19981998 19991999 20002000 20012001 20022002 1H20031H2003

%%


Exchange Rate Volatility

21-day volatility21-day volatility

55

1010

1515

2020

2525

Jan 03Jan 03 Feb 03Feb 03 Mar 03Mar 03 Apr 03Apr 03 May 03May 03 Jun 03Jun 03 Jul 03Jul 03 Aug 03Aug 03 Oct 03Oct 03

% p

.a.

% p

.a.

Oct 6:

5.79

Oct 6:

5.79


BoP - Uses and Sources

US$ billionUS$ billion

20012001 20022002 20032003

YearYear YearYear Jan-SepJan-Sep

UsesUses -58.4-58.4 -38.8-38.8 -15.6-15.6Current accountCurrent account -23.2-23.2 -7.7-7.7 3.93.9Medium and long term amortizations Medium and long term amortizations -35.2-35.2 -31.1-31.1 -19.5-19.5

SourcesSources 58.458.4 38.838.8 15.615.6

Foreign Direct InvestmentForeign Direct Investment 22.522.5 16.616.6 6.56.5Portfolio investmentsPortfolio investments 2.22.2 1.81.8 1.51.5Medium and long-term disbursementsMedium and long-term disbursements 34.634.6 18.618.6 16.516.5

Bonds, notes and commercial papersBonds, notes and commercial papers 17.017.0 6.26.2 8.28.2Trade creditTrade credit 3.33.3 1.31.3 0.80.8LoansLoans 14.314.3 11.111.1 7.57.5

Brazilian investments abroadBrazilian investments abroad -4.6-4.6 -5.1-5.1 -2.8-2.8

Loans to the Monetary authority (IMF)Loans to the Monetary authority (IMF) 6.66.6 11.511.5 11.111.1Short-term and otherShort-term and other 0.30.3 -4.6-4.6 -4.3-4.3

Reserve assetsReserve assets -3.3-3.3 -0.3-0.3 -13.2-13.2Of which: bank depositsOf which: bank deposits 0.00.0 4.34.3 -1.6-1.6

Capital accountCapital account 0.00.0 0.40.4 0.30.3

YearYear

-28.4-28.4-1.2-1.2

-27.1-27.128.428.4

10.010.02.12.1

24.024.011.411.4

1.81.810.810.8

-5.5-5.5

5.25.22.02.0

-9.4-9.4-0.8-0.8

0.00.0



b. Disinflationb. Disinflation


Selic and Swap Rates

15

17

19

21

23

25

27

29

31

33

Jan 00 Oct 00 Jul 01 Apr 02 Jan 03 Oct 03

%%

SelicSelic

Swap 360Swap 360

17.7%17.7%

18.9%18.9%

Over-Selic Rate Swap 360


Real Interest Rates

8

9

10

11

12

13

14

15

16

17

18

Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03

% p

.a.

% p

.a.

10

12

14

16

18

20

22

24


Real Selic RateReal Selic Rate Real 360-day RateReal 360-day Rate


-0.4-0.40.00.00.40.40.80.81.21.21.61.62.02.02.42.42.82.83.23.2

%%IPCA and IPCA-15 Inflation

IPCA-15IPCA-15 IPCAIPCA

JanJan

0202

MarMar

0202

MayMay

0202

JulJul

0202

SepSep

0202

NovNov

0202

JanJan

0303

MarMar

0303

MayMay

0303

JulJul

0303

SepSep

0303

OctOct

0303


IPCA, Tradable, Non-tradable and Regulated Prices

4

6

8

10

12

14

16

18

20

22

24

Jan 02Jan 02 May 02May 02 Sep 02Sep 02 Jan 03Jan 03 May 03May 03 Oct 03Oct 03

IPCAIPCA TradablesTradables Non TradablesNon Tradables RegulatedRegulated

%%

14.0%14.0%

18.9%18.9%

8.1%8.1%

15.4%15.4%

12-month, accumulated change12-month, accumulated change


IPCA, Tradable, Non-tradable and Regulated Prices

0

5

10

15

20

25

30

35

40

45

50

Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 May 03 Sep 03

IPCA Tradable Non-Tradable Regulated

3-month Moving Average, Annual3-month Moving Average, Annual

%%

Jul 03 Oct 03


IPCA: % of Items with Price Increases

SepSep63.5%63.5%

Average Average 63.4%63.4%

Jan Jan 85.9%85.9%

%%

5050

5555

6060

6565

7070

7575

8080

8585

9090

JanJan

9999

JulJul

9999

JanJan

0000

JulJul

0000

JanJan

0101

JulJul

0101

JanJan

0202

JulJul

0202

JanJan

0303

JulJul

0303


IPCA: Market Expectations - 2003

9.57%9.57%

9.59.5

10.010.0

10.510.5

11.011.0

11.511.5

12.012.0

12.512.5

Jan 03Jan 03 Feb 03Feb 03 Mar 03Mar 03 Apr 03Apr 03 May 03May 03 Jun 03Jun 03 Jul 03Jul 03 Jul 03Jul 03 Aug 03Aug 03 Sep 03Sep 03

%%

Nov 03Nov 03


Inflation Expectations

12 Months Ahead IPCA 12 Months Ahead IPCA

44

66

88

1010

1212

1414


%%

6.01%


IPCA: Market Expectations – 2004

6.0%6.0%

MedianMedian

6.06.0

6.56.5

7.07.0

7.57.5

8.08.0

Jan 03Jan 03 Feb 03Feb 03 Mar 03Mar 03 Apr 03Apr 03 May 03May 03 Jun 03Jun 03 Jul 03Jul 03 Jul 03Jul 03 Aug 03Aug 03 Sep 03Sep 03

%%

Nov 03Nov 03



c. Fiscal Sustainabilityc. Fiscal Sustainability


Primary Surplus


% o

f G

DP

% o

f G

DP

Target for 2003: 4.25% Target for 2003: 4.25%

-2

-1

0

1

2

3

4

5

6

7

Jul 94 Oct 95 Jan 97 Apr 98 Jul 99 Oct 00 Jan 02 Apr 03

Sep 03 Sep 03

4.43% 4.43%


Net Public Sector Debt - % of GDP

Sep 02Sep 0262.5%62.5%

% o

f G

DP

% o

f G

DP

45

50

55

60

65

Oct 00 Mar 01 Aug 01 Jan 02 Jun 02 Nov 02 Apr 03 Oct 03

57.7%


Net Public Sector Debt Dynamics

% o

f G

DP

% o

f G

DP

40.0%40.0%

2020

2525

3030

3535

4040

4545

5050

5555

6060

19911991 19931993 19951995 19971997 19991999 20012001 20032003 20052005 20072007 20092009 20112011

Baseline Scenario Baseline Scenario


III. Challenges and Accomplishments: III. Challenges and Accomplishments:

d. d. Reduction of FX Exposure of Public SectorReduction of FX Exposure of Public Sector


Domestic Public Debt

FX Debt/Total Debt

28

30

32

34

36

38

40

42

1

2

3

4

5

6

7

8

9

10Fixed Rate Debt/Total Debt

sep 0326,5%

Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03

sep 039,0%

Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03

%

26


FX Debt Rollover Rate

00

1010

2020

3030

4040

5050

6060

7070

8080

9090

100100

Jan 03Jan 03 Feb 03Feb 03 Mar 03Mar 03 Apr 03Apr 03 May 03May 03 Jun 03Jun 03 Jul 03Jul 03 Aug 03Aug 03 Sep 03Sep 03 Oct 03Oct 03

%%

% of FX Debt Rollover Rate (including swap)% of FX Debt Rollover Rate (including swap)Principal + final coupon Principal + final coupon


FX Indexed Debt

61.261.2

6060

6262

6464

6666

6868

7070

7272

7474

7676

7878


US

$ b

illi

on

US

$ b

illi

on

FX Debt (Including Swaps) Outstanding – US$ billion FX Debt (Including Swaps) Outstanding – US$ billion


III. Recovering Economic ActivityIII. Recovering Economic Activity


Real Wage in Manufacturing

98

99

100

101

102

103

104

105

106

107

108

Jan 02Jan 02 Mar 02Mar 02 Mai 02Mai 02 Jul 02Jul 02 Sep 02Sep 02 Nov 02Nov 02 Jan 03Jan 03 Mar 03Mar 03 May 03May 03 Jul 03Jul 03

1992

=10

0

Seasonally Adjusted

Sep 03Sep 03


Interest RateHousehold Loans

68

72

76

80

84

88

Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Sep 03

% p

.a.

87.3%

70.7%


360-days Swap Rate and Car-loan Rate

3737

3939

4141

4343

4545

4747

4949

5151

5353

5555

5757

Jan 02 Mar 02 May 02 Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 May 03 Jul 03 Sep 03

1818

2020

2222

2424

2626

2828

3030

3232

360-days Swap rate

Car-loan Rate

% p

.a.

% p

.a.

% p

.a.

% p

.a.


Durable Goods Output19

92=

100

Seasonally Adjusted, 3-month Moving Average

150

155

160

165

170

175

180

185

Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03


Car Sales

100

110

120

130

140

150

160

170


Sea

son

ally

Ad

just

ed 1

993=

100

Domestic Sales

Source: Anfavea


IV. Sustainable GrowthIV. Sustainable Growth


Investment/GDP and Growth (1970-2002)

GDP growth Investment/GDP

Investment/GDP has beenlower than 20% in the last 20 years


Structural Reforms: Social Structural Reforms: Social Security; Tax Reform; New Security; Tax Reform; New Bankruptcy Law & other Bankruptcy Law & other microeconomic reformsmicroeconomic reforms

MicrofinanceMicrofinance

Regulatory FrameworkRegulatory Framework

Public-Private PartnershipsPublic-Private Partnerships

Lifting Investment to GDP

Otaviano Canuto BRAZIL – Ministry of Finance BRAZIL DAY 2003 New York, November 17, 2003 From the...

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