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Apresentação do Diretor de Assuntos Internacionais e Gestão de Riscos Corporativos do Banco Central do Brasil, Tiago Couto Berriel, no evento
Investor Seminar, organizado pelo J.P. Morgan, na cidade de Washington, Estados Unidos.
Washington, 7 de outubro de 2016.
Challenges for Monetary Policy
Tiago Berriel Deputy Governor for International Affairs
and Corporate Risk Management
Investor Seminar – JP Morgan Washington DC
October 7th 2016
2
Overview
1. Brazilian Context: Regaining confidence in a virtuous transition
2. Monetary Policy: Inflation Convergence and Risks
3. Resilience Factors in the recovery
3
Starting Point
4
Starting Point
Improving scenario after economic and political turmoil
Recent changes in the economic policy agenda and a recover in
confidence are changing the outlook
5
Gross Debt Jan/14: 52,8%
Gross Debt:
Ago/16: 70,1%
2530354045505560657075
jan 1
4
abr
14
jul 1
4
out 1
4
jan 1
5
abr
15
jul 1
5
out 1
5
jan 1
6
abr
16
jul 1
6
Public Debt
general government gross debt
general government gross debt (less international reserves)
Gross Debt (-) Intern. Reserves
Jan-14: 36,5% Ago -16: 50,5%
% o
f G
DP
% o
f G
DP
(a
cc
um
ula
ted
in
12
mo
nth
s)
Source: BCB
Fiscal Problem since 2014
Nominal Ago-16: 9,6%
Primary Ago-16: 2,7%
-5
-1
3
7
11
jan
14
ab
r 1
4
jul 1
4
ou
t 14
jan 1
5
ab
r 1
5
jul 1
5
ou
t 15
jan
16
ab
r 1
6
jul 1
6
Nominal and Primary Deficit
nominal fiscal deficit primary deficit
6
3,91
1,9
3,0
0,1
-3,8 -3,3
-5
-4
-3
-2
-1
0
1
2
3
4
5
201
1
201
2
201
3
201
4
201
5
201
6*
%
Annual Growth
Sources: BCB / IBGE %
GDP Growth - %
3,0 3,0 3,0 3,1
1,9
0,9
0,1
-1,2
-1,7
-2,5
-3,8
-4,7
-4,9
-6
-5
-4
-3
-2
-1
0
1
2
3
4
ma
i 1
3
jul 13
se
t 1
3
nov 1
3
jan 1
4
ma
r 14
ma
i 1
4
jul 14
se
t 1
4
nov 1
4
jan 1
5
ma
r 15
ma
i 1
5
jul 15
se
t 1
5
nov 1
5
jan 1
6
ma
r 16
ma
i 1
6
jul 16
IBC-Br GDP
*average of 12 months/average of the previous 12 months
Economic Activity has been Decreasing
7
New Economic and Political Outlook
The announcement of a new Economic Policy Agenda and the
reduction of uncertainty changed expectations for 2016 and
2017.
8
60
70
80
90
100
110a
br
13
ago
13
dez 1
3
abr
14
ago
14
dez 1
4
abr
15
ago
15
dez 1
5
abr
16
ago
16
services
industry
Source: FGV
Regaining Confidence: Businessmen Expectations
Obs.: proportion of favorable answers – proportion of unfavorable answers + 100 (100=neutral)
3m
ma,
s.a
.
3m
ma,
s.a
.
70
80
90
100
110
abr
13
ago
13
dez 1
3
abr
14
ago
14
dez 1
4
abr
15
ago
15
dez 1
5
abr
16
ago
16
construction
commerce
9
basis
poin
ts
Source: Bloomberg
5Y CDS
Feb-11-2016: 500,5
Sep 30: 273
100
150
200
250
300
350
400
450
500
5501
/1/1
5
31
/1/1
5
2/3
/15
1/4
/15
1/5
/15
31
/5/1
5
30/6
/15
30/7
/15
29/8
/15
28/9
/15
28/1
0/1
5
27/1
1/1
5
27/1
2/1
5
26/1
/16
25/2
/16
26/3
/16
25/4
/16
25/5
/16
24/6
/16
24/7
/16
23/8
/16
22/9
/16
Brazil average BBs average BBBs
Regaining Confidence: Lower Risk Premmia
10
Nominal Interest Rates have been falling
Sources: BM&FBovespa; BCB.
11
12
13
14
15
16
3M
6M 1Y
2Y
3Y
4Y
5Y
7Y
10
Y
% a
.a.
Yield Curve
jan-16
mar-16
jun-16
set-16
out-16
11 Source: BCB (Focus)
Regaining Confidence: Market Expectations for 2016/17 GDP %
of
gro
wth
through Sep 30th
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
1,6
-4,0
-3,9
-3,8
-3,7
-3,6
-3,5
-3,4
-3,3
-3,2
-3,1
-3,0
14/04/2016 06/05/2016 30/05/2016 20/06/2016 11/07/2016 01/08/2016 22/08/2016 13/09/2016
2016
2017
April Expectations: 2016: -3,79% 2017: 0,30%
Sep-30 Expectations: 2016: -3,14% 2017: 1,30%
(rhs)
(lhs)
20
16
20
17
12
5,07
4
5
5
6
6
7
7
8
8
01/02/2016 01/03/2016 01/04/2016 01/05/2016 01/06/2016 01/07/2016 01/08/2016 01/09/2016 01/10/2016
2016
2017
2018
2019
2020
7.25
Source: BCB (Focus)
IPCA Market Expectations are Being (Re)Anchored
%
4.50 4.50
through Sep 23rd
4.50
13
Falling Real Interest Rates after 1Q-2016 peak
5,0
5,5
6,0
6,5
7,0
7,5
8,0
8,5
5 anos (1260)
10 anos (2520)
30 anos(7560)
Sources: Bloomberg; BCB.
14
Price adjustments favors external competitiveness recovery
External adjustment evolves even facing unfavorable terms of trade
deterioration
Comfortable current account financing
External Accounts: Fast Adjustment despite Global Scenario
15
External Adjustment: Unit Labour Cost Decreasing
Source: BCB.
90
100
110
120
130
140
150
160
170
180
Brazilian Unit Labour Cost J
un
19
94
= 1
00
16
External Adjustment: Terms of Trade
Source: Funcex.
90
100
110
120
130
140
ag
o 0
7
ag
o 0
8
ag
o 0
9
ag
o 1
0
ag
o 1
1
ag
o 1
2
ag
o 1
3
ag
o 1
4
ag
o 1
5
ag
o 1
6
20
06
=1
00
17
External Adjustment: Current Account x FDI
Source: BCB.
US
$ B
I
- 76 - 77 - 74 - 75
- 104
- 59
- 17 *
88 101
87 69
97
75 65*
2 010 2 011 2 012 2 013 2 014 2 015 2 016
CA FDI
* Focus (median of projections) as of Sep-30th.
18
Comprehensive New Economic Policy Agenda: Structural Fiscal Reform
Structural Fiscal Reform: Spending Ceiling - Constitutional Amendment
sent to Congress as of Jun-16
Social Security Reform is a Priority
Review in Government Programs
19
Fiscal Reforms: Main Initiatives
Source: National Treasury.
1. Spending Ceiling – Constitutional Amendment sent to Congress as of Jun-16
- 2007-2015: net revenues decreased from 19.0% to 17.7% GDP, while primary spending
increased from 16,9% to 19.6 % GDP (in the Federal Gov’t level)
- 2008-2015: revenues decreased 7.8%, while spending grew 51% in real terms
- Curbing discretionary spending is insufficient
2. Social Security Reform is a Priority
- Increase minimum retirement age
- Shrink the gap between gender and public vs private sector workers
3. Review in Government Programs
- Since 1988 Constitution every administration have been creating Programs – Need to reassess
them
- Crucial item in the spending review agenda
20
New Fiscal Regime Proposal: set a limit for spending growth over time
New Fiscal Regime Proposal: Amendment to Constitution to limit public spending increases for the
next 20 years to strengthen the public finances.
Concepts
Total Primary Expenses: real growth will not be allowed from 2017 on;
All Government Expenses readjustments (including Legislative and Judicial) will be limited by 12 month CPI of last year (IPCAt-1).
Duration
20 years. Possibility of reviewing the correction criteria from the 10th year ahead.
General
On the first year (2017), the expenses limit will be equal to the last year expenses corrected by the last year inflation;
Minimum health and education expenses will be readjusted by variation of last year inflation, and no more by revenues, protecting the expenses from falling revenues.
* All information are available on https://www.fazenda.gov.br/novo-regime-fiscal
and https://www.fazenda.gov.br/novo-regime-fiscal/pec-241/perguntas-e-respostas#o-que-e-o-novo-regime-fiscal
Source: Ministry of Finance / BCB.
21
Ongoing Fiscal Reforms: Initiatives are already under consideration or
being prepared for discussion and presentation to society
Simulations show that implementation of these policies can bring fiscal
equilibrium and assure debt sustainability
When reforms are delivered a virtuous cycle will be reinforced
Structural Fiscal Reform Agenda
22
Spending on the long run with and without Limits
Source: National Treasury
* National Treasury Model’s Projections
23 Source: National Treasury
(Gross) Debt Dynamics with and without Spending Cap
» A significant part of the GG Gross Debt responds to: 1. Loans to Public Banks → This policy has been reversed as of Jan-2015 → which represents 9.6% GDP 2. REPO Operations → Collateral for sterilization → Increase in FX-reserves → which represents 20.8% GDP
The projections are made based in a real GDP growth of -3.1%, 1.2%, 2.5% and 2.5% in 2016 , 2017, 2018 and 2019, respectively. *Market projection (FOCUS) takes into account market macroeconomic parameters and the National Treasury’s model.
General Government Gross Debt
77,6%
80,1% 81,6%
76,6% 77,9%
79,2%
48%
53%
58%
63%
68%
73%
78%
83%
88%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016*
2017*
2018*
2019*
GGGD Market GGGD with Spending Cap
Market*
Budget with
Spending Cap
24
Primary Balance on on the long run: with and without Limits
Source: National Treasury / Ministry of Finance / Ministry of Planning
-588
404
-800
-600
-400
-200
0
200
400
600
2011 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020** 2021** 2022** 2023** 2024** 2025** 2026**
Primary Balance without spending cap
Primary Balance with spending cap
R$ Billion
* LDO 2016 Data and PLDO 2017. ** From 2020 data Simulator (SEPLAN / MP: Real GDP + 2.5% and Primary Expenditure + 6.0%)
25
Revenues/Expenses on the long run: with and without Limits
Source: National Treasury / Ministry of Finance / Ministry of Planning
2.375
2.963
1.971
0
500
1.000
1.500
2.000
2.500
3.000
3.500
2011 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020** 2021** 2022** 2023** 2024** 2025** 2026**
Net Primary Revenues
Net Primary Expenses without the cap
Net Primary Expenses with Spending Cap
R$ Billion
* LDO 2016 Data and PLDO 2017. ** From 2020 data Simulator (SEPLAN / MP: Real GDP + 2.5% and Primary Expenditure + 6.0%)
26
Asset Sales and Privatization Agenda
Improving Business Environment
Concessions to the Private Sector: Logistics Investment Program (PIL)
with regulatory stability
Comprehensive New Economic Policy Agenda: Productivity and Growth
27
Focus on addressing Constraints to productivity and growth
Asset Sales and Privatization Agenda
• Encompasses Federal and Local Gov’t
• Local Gov’t are encouraged to reach BNDES to seek technical support
Improving Business Environment
• Tax reform
• Reinforce regulatory framework
• Diminishing red tape constraints
• Increasing productivity
Source: National Treasury
28
Brazil launched the second stage of infrastructure investment program: estimated investment of about R$200 billion.
Regulatory stability
Logistics Investment Program (PIL)
Source: Ministry of Planning, Development and Management
29
Transparency and Clear Objectives in Monetary Policy
Floating Exchange Rate Regime
Comprehensive New Economic Policy Agenda: Monetary Policy
30
Focus on Monetary Policy: Inflation Convergence and Factors Monitored
31
2
3
4
5
6
7
8
9
10
11
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
Focus
Lower LimitAug 16
8.97%
Sources: BCB and IBGE
Regaining Confidence – CPI (IPCA) converging to the target %
in 1
2 m
on
ths
target (4.5%)
32
Central Bank is monitoring the following factors for Monetary Policy
Food Prices evolution and secondary effects
Inflation persistence and sensitivity to monetary policy and output gap
Clear progress in implementing fiscal reforms
33 Source: IBGE
Consumer Inflation (IPCA) and Food Prices
Food weight: 26.1%
y-o
-y c
hange
(%
)
13,9
7,3
9,0
3
5
7
9
11
13
15ago
11
fev 1
2
ago
12
fev 1
3
ago
13
fev 1
4
ago
14
fev 1
5
ago
15
fev 1
6
ago
16
food IPCA ex-food IPCA
34 Source: IBGE
Services Inflation %
in
12
mo
nth
s
7.4%
7.8%
7.3%
6
7
8
9
10
11ago
13
nov 1
3
fev 1
4
mai 14
ago
14
nov 1
4
fev 1
5
mai 15
ago
15
nov 1
5
fev 1
6
mai 16
ago
16
total
labor intensive
other services
35 35
% o
f la
bor
forc
e
% (
q/q
-4)
last month of the quarterly moving average
-4
-3
-2
-1
0
1
2
3
4
5
6,0
6,5
7,0
7,5
8,0
8,5
9,0
9,5
10,0
10,5
11,0
11,5
12,0
12,5abr
12
jun 1
2
ago
12
out 1
2
dez 1
2
fev 1
3
abr
13
jun 1
3
ago
13
out 1
3
dez 1
3
fev 1
4
abr
14
jun 1
4
ago
14
out 1
4
dez 1
4
fev 1
5
abr
15
jun 1
5
ago
15
out 1
5
dez 1
5
fev 1
6
abr
16
jun 1
6
ago
16
real earnings (rhs)
Real Wages and Unemployment
Source: IBGE (Continuous PNAD)
36
Resilience factors
37 37 Source: BCB
US
$ b
illio
n
377.7
-33.3
-150
-100
-50
0
50
100
150
200
250
300
350
400
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
international reserves FX swap position
*data until September 29th
Reduced CB Vulnerability: FX Repos and Reserves Cushion
38 38 Source: IMF (FSI) *latest available data
12,4
12,7
13,8
13,8
13,9
14,1
14,2
14,3
14,5
14,8
15,5
15,6
16,2
17,1
17,9
18,0
0 5 10 15 20
Russia
India
Australia
Canada
South Africa
USA
Korea
Spain
Mexico
Italy
Japan
Turkey
Brazil
France
UK
Germany
Capital Adequacy Ratio
-32,3
-24,0
-18,0
-8,3
-7,2
-5,8
-4,5
-3,9
-3,8
4,6
12,0
14,3
17,0
-50 -40 -30 -20 -10 0 10 20
Spain
Japan
South Africa
Australia
USA
Canada
UK
Turkey
Korea
Mexico
Brazil
Russia
India
(Provisions – NPL) / Capital
24,6
33,4
36,8
38,7
39,3
44,5
47,7
69,6
91,2
93,1
118,4
121,8
153,1
195,2
0 70 140 210
India
South Africa
UK
Japan
Australia
Mexico
Canada
Turkey
USA
Italy
Korea
Russia
Germany
Brazil
Liquid Assets to Short Term Liabilities
% % %
Brazil: Comparative Financial Soundness Indicators*
39
EM and Brazil: Banking sector in an stronger position
Source: IMF (FSI).
0,0
5,0
10,0
15,0
20,0
25,0
Regulatory Capital to Risk Weighted Assets (RWA)
2016
2010
0,0
2,0
4,0
6,0
8,0
10,0
12,0
Non-performing Loans (NPL) to Total Gross Loans
2016
2010
40
Outlook: Resilience Factors amid a Virtuous Transition
Low exposure to forex liabilities and sound current account financing
assure resilience to (negative) headwinds from the international
economy and limit contagion from external volatility
Financial system with solid capital structure and limited leverage open
room for consumer, investment and housing financing
41
Outlook: Conclusions
Brazil can withstand external headwinds
There is a firm commitment to new comprehensive policy agenda.
Despite transitional risks, Brazil can show gradual but firm progress
addressing domestic challenges
Final goal is to recover sound fiscal dynamics, converge to inflation
target and achieve sustainable growth
Thank You!
Tiago Berriel Deputy Governor for International Affairs
and Corporate Risk Management
Investor Seminar – JP Morgan Washington DC
October 7th 2016