brazil: a year of low growth and high inflation ahead has a year of low growth and high inflation...
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Brazil: a year of low growth and high inflation ahead
Enestor Dos Santos
BBVA Research │ Principal Economist Emerging Economies Area
Brazil Economic Outlook – First quarter 2015 │ Madrid, 25 February 2015
Brazil Economic Outlook- First quarter 2015
Page 2
World growth will continue to move upwards albeit slowly and very unevenly. Global
growth should increase from 3.3% in 2014 to 3.6% in 2015 and 3.8% in 2016. The developed
economies, led by the US will increase their input into global expansion, whereas the controlled
slowdown in China will persist.
Brazil has a year of low growth and high inflation ahead. As in 2014, GDP growth will be
around zero and inflation will be nudging the 6.5% ceiling of its target range in 2015.
The shift in economic policy and exchange rate weakening are pre-requisites for the
country to return to growth. Nonetheless, together with the impact of the deterioration in the
terms of trade, the Petrobras crisis and the shortage of water and electricity will exert a
detrimental effect in the short term.
Key takeaways
1
2
3
Brazil Economic Outlook- First quarter 2015
Page 3
Global economy: World growth will continue to move upwards albeit slowly and very unevenly
Brazil: a year of low growth and high inflation ahead
Contents
1
2
Brazil Economic Outlook- First quarter 2015
Page 4
Global growth: Moderate and uneven accelaration
EAGLES:
China India Indonesia Rusia Brazil Turkey Mexico
US
Mexico
Brazil
Spain
Eurozone
Eagles China
Emerging Asia LatAm 7 Latam 7:
Argentina Brazil Chile Colombia Mexico Peru
2016
2,8 2,2
2,7
5,2 6,6
6,0
1,8
3,4
2,4
2015
2,9 1,3 5,0 7,0
6,2 1,5
3,5
0,6
2,7
Source: BBVA Research
Global
3,6 3,8
Emerging
Asia:
China Hong Kong India Indonesia Korea Malaysia Philippines Singapour Taiwan Thailand Vietnam
Brazil Economic Outlook- First quarter 2015
Page 5
The fall in oil prices is positive for the world economy
Uneven impact depending on countries
Direct impact on the overall drop in inflation
BBVA Research price forecasts for Brent oil
(USD/bbl, quarterly averages) Source: BBVA Research
40
50
60
70
80
90
100
110
120
130
2010
2011
2012
2013
2014
2015
2016
2017
2018
Actual Forecast Oct 15
Forecast Feb 16
Brazil Economic Outlook- First quarter 2015
Page 6
Although the lower oil prices has an uneven impact in LatAam [Box 1]
Positive impact in importing countries and overall drop inflation
Negative effect in Mexico, partially offset by the greater growth in US
Impact on growth of the revised course of oil prices:
forecasts in February 2015 versus October 2014
(pp, 2015-16 average) Source: BBVA Research
0.4
-0.3
0.6
-1.1
-0.2
0.4
-0.3
-1.5
-1.0
-0.5
0.0
0.5
1.0
AR
G
BR
A
CH
I
CO
L
ME
X
PE
R
LatA
m
Brazil Economic Outlook- First quarter 2015
Page 7
MP divergency between the Fed and the ECB increase financial tensions
Increasing financial tensions in a context of divergency between the Fed and the ECB
monetary policy
Emerging economies will test their strengths to the normalization of monetary policy in the US
BBVA Research Financial Tensions Index Source BBVA Research
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Jan-1
1
Jul-11
Jan-1
2
Jul-12
Jan-1
3
Jul-13
Jan-1
4
Jul-14
Jan-1
5
Developed Emerging
Brazil Economic Outlook- First quarter 2015
Page 8
What are the risks of the global scenario?
Emerging Response to the
Fed rate hikes
Source: BBVA Research
China Sharp adjustment
Europe • Stagnation
• Lack of
consensus on
reforms
• Greece
• Russia-Ukraine
Global Destabilization of
some countries to
lower oil prices
Brazil Economic Outlook- First quarter 2015
Page 9
Contents
Global economy: World growth will continue to move upwards albeit slowly and very unevenly
Brazil: a year of low growth and high inflation ahead
1
2
Brazil Economic Outlook- First quarter 2015
Page 10
The orthodox adjustment of economic policy is now afoot
Fiscal accounts: gross debt and fiscal balance
(% of GDP)* Source: BBVA Research and BCB After increasing distortions and loss of
credibility in recent years, the government has initiated a process of adjustment of economic
policy
Recent announcements show that the adjustment will focus on fiscal and quasi-fiscal
policy, but it will also include changes in monetary policy
Despite recent positive signs, there remains the risk that the adjustment does not count on
sufficient political support
2006
20072008
2009
2010
2011
2012
2013
2014
52
54
56
58
60
62
64
-8 -6 -4 -2 0
Gro
ss D
ebt
(% o
f G
DP
)
Fiscal balance (% of GDP)
Brazil Economic Outlook- First quarter 2015
Page 11
Tax hikes and cost-cutting will steadily reverse the sharp deterioration in the public finances in 2014
Public sector fiscal balance: primary and total balances, and interest expenditure (% of GDP) Source: BBVA Research and BCB
The use of fiscal policy in support of economic activity proved a body-blow to the public
finances in 2014
Thus the correction required to meet the newly announced target primary surplus (1.2% and
2.0% of GDP in 2015 and 2016) will be greater
the government will have no option but to announce a further round of tax rises and
spending cuts to meet its fiscal targets and drive back the mounting public debt.
-8
-6
-4
-2
0
2
4
2007
2008
2009
2010
2011
2012
2013
2014
2015(f
)
2016(f
)
Interest expenditure Primary balanceFiscal balance
Brazil Economic Outlook- First quarter 2015
Page 12
The central bank is using more restrictive language in a bid to anchor inflation expectations
Inflation expectations over 12 months of analysts polled by the central bank (% YoY) Source: BBVA Research and BCB
The new cycle of monetary tightening has begun early and will lead to higher-than-
expected interest rates
The Selic rate ended 2014 at 11.75% and should soon rise to at least 12.50%.
The central bank will only be able to trim the Selic rate back again when inflation offers clearer signs of relenting, which we see
happening in mid-2016.
0
1
2
3
4
5
6
7
8
Jan
-05
Se
p-0
5
May-0
6
Jan
-07
Se
p-0
7
Ma
y-0
8
Jan
-09
Se
p-0
9
May-1
0
Jan
-11
Se
p-1
1
Ma
y-1
2
Jan
-13
Se
p-1
3
May-1
4
Jan
-15
average 2005 - 2010: 4.5%
Brazil Economic Outlook- First quarter 2015
Page 13
GDP will remain at a standstill in 2015
GDP and components (% annual var.) Source: BBVA Research and IBGE
We expect a growth of just 0.6% this year, and the impact of adjustment due to: i) a further
contraction of the terms of trade, ii) moderation in external demand; iii) the fallout from the Petrobras crisis, iv) the obstruction caused by the water and electricity shortage
larger-than-expected impact from any of these factors could tip the economy into recession.
-8
-6
-4
-2
0
2
4
6
GDP GFCF Privatecons.
Publiccons.
Exp. Imp.
2014 2015 2016
Brazil Economic Outlook- First quarter 2015
Page 14
Determinants of the stagnation of activity: the deterioration of terms of trade.
GDP and terms of trade (% var. YoY) Source: BBVA Research and IBGE
The falling price of commodities has been determining a deterioration of terms of trade.
We expect another downward revision of the terms of trade in 2015
-15
-10
-5
0
5
10
15
20
-1
0
1
2
3
4
5
6
7
8
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016(f
)
GDP annual growth (LHS)
Terms of trade annual variation (RHS)
Brazil Economic Outlook- First quarter 2015
Page 15
Determinants of the stagnation of activity: barriers to the increase in exports
Exports (12-month export accumulation, % YoY) Source: BBVA Research and MDIC
the slowdown in activity in the economies of major trading partners (China and Argentina)
will impact the Brazilian economy
In addition, the country still has a problem of lack of competitiveness -40
-20
0
20
40
60
80
Jan
-05
Se
p-0
5
May-0
6
Jan
-07
Se
p-0
7
Ma
y-0
8
Jan
-09
Se
p-0
9
Ma
y-1
0
Jan
-11
Se
p-1
1
Ma
y-1
2
Jan
-13
Se
p-1
3
May-1
4
Total exportsExports to ArgentinaExports of manufactured goods
Brazil Economic Outlook- First quarter 2015
Page 16
Determinants of the stagnation of activity: the Petrobras crisis
Petrobras share-price on the São Paulo exchange Source: BBVA Research and Bloomberg
The Petrobras crisis is the result of several factors: i) corruption scandal; ii) management
problems; iii) falling oil prices
The impact on investment will be important
The loss of investment grade could have a contagion effect on other assets. At last, the political effects are uncertain but potentially
high
0
10
20
30
40
50
60
Jan
-04
Se
p-0
4
Ma
y-0
5
Jan
-06
Se
p-0
6
Ma
y-0
7
Jan
-08
Se
p-0
8
Ma
y-0
9
Jan
-10
Se
p-1
0
May-1
1
Jan
-12
Se
p-1
2
Ma
y-1
3
Jan
-14
Se
p-1
4
Brazil Economic Outlook- First quarter 2015
Page 17
Determinants of the stagnation of activity: water shortage and energy crisis
Reservoir levels (% of overall storage capacity) Siource: BBVA Research and ONS
The country's reservoirs are at worryingly low levels, resulting from a system of unfavorable rainfall and delayed investments to increase
generating capacity
If the country is forced to adopt a rationing of electricity, GDP growth would be about 1 pp
lower than estimated
0
10
20
30
40
50
60
70
80
90
100
Jan
Feb
Mar
Ap
r
May
Jun
Jul
Au
g
Se
p
Oct
Nov
Dec
months
2014 2001 Average 2000-2014
January 2015
Brazil Economic Outlook- First quarter 2015
Page 18
The increase in administered prices will keep up inflationary pressure
Contributions of free market and administered prices to annual inflation (pp) Source: BBVA Research and IBGE
There is no fiscal space to continue keeping administered prices at artificially low levels
In addition, inflation will be impacted by increased taxes and the depreciation
5.96.4 6.5
5.5
0
1
2
3
4
5
6
7
2013 2014 2015(f) 2016(f)
Free market prices Administered prices
Brazil Economic Outlook- First quarter 2015
Page 19
The macroeconomic environment will brighten in 2016
GDP and components (% annual var.) Source: BBVA Research and IBGE The contractionary effect of the economic
policy adjustment and the shocks currently cramping activity show a tendency to focus on
2015 and slacken off in 2016
There will be greater manifestation of the economic policy correction in confidence and
of the currency depreciation in exports in 2016.
We thus expect GDP growth to rise to 1.8% in 2016, while inflation will also let up, as a considerable part of the corrections to
administered prices and the exchange rate will have kicked in by then.
-8
-6
-4
-2
0
2
4
6
GDP GFCF Privatecons.
Publiccons.
Exp. Imp.
2014 2015 2016
Brazil Economic Outlook- First quarter 2015
Page 20
All the factors suggest a weaker real
Exchange rate: nominal and real
(current prices, USD/BRL) Source: BBVA Research and Bloomberg There is still turmoil in financial and currency
markets. The real has lost 13% in the last three months, and 28% since August 2014
This is a product of the need to restore loss competitiveness, the wider current account deficit, the terms of trade deterioration, the greater sensation of risk and dollar strength
we see the USD/BRL rate ending 2015 and 2016 at around 2.93 and 3.03 respectively
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Jan
-99
Ap
r-00
Jul-
01
Oct-
02
Jan
-04
Ap
r-05
Ju
l-0
6
Oct-
07
Jan
-09
Ap
r-10
Jul-
11
Oct-
12
Jan
-14
Ap
r-15
Jul-
16
Nominal Exchange rate Real exchange rate
Brazil Economic Outlook- First quarter 2015
Page 21
World growth will continue to move upwards albeit slowly and very unevenly. Global
growth should increase from 3.3% in 2014 to 3.6% in 2015 and 3.8% in 2016. The developed
economies, led by the US will increase their input into global expansion, whereas the controlled
slowdown in China will persist.
Brazil has a year of low growth and high inflation ahead. As in 2014, GDP growth will be
around zero and inflation will be nudging the 6.5% ceiling of its target range in 2015.
The shift in economic policy and exchange rate weakening are pre-requisites for the
country to return to growth. Nonetheless, together with the impact of the deterioration in the
terms of trade, the Petrobras crisis and the shortage of water and electricity will exert a
detrimental effect in the short term.
Key takeways
1
2
3
Brazil Economic Outlook- First quarter 2015
Page 22
Appendix: Macroeconomic forecasts
Table 6.1
Macro Forecasts
2013 2014 2015 2016
GDP (% YoY) 2.5 0.1 0.6 1.8
Inflation (% YoY, eop) 5.9 6.4 6.5 5.5
Exchange rate (vs. USD, eop) 2.34 2.66 2.93 3.03
Interest rates (%, eop) 10 11.75 12.50 11.50
Private consumption (% YoY) 2.6 0.8 0.3 1.1
Government consumption (% YoY) 2.0 2.0 1.8 1.3
Fixed investment (% YoY) -5.1 -6.5 -0.5 4.6
Exports (% YoY) 2.5 1.9 1.5 2.9
Imports (% YoY) 8.3 0.7 0.3 2.0
Fiscal balance (% GDP) -3.3 -6.7 -4.4 -3.6
Current account (% GDP) -3.6 -4.2 -4.0 -3.4
Source: BBVA Research