BrazilEconomic Prospects

May 2017

Apresentação do presidente Ilan Goldfajn sobre economia brasileira promovida pela Embaixada do Brasil em Tóquio em 09 de maio de 2017.

Outline

• The economic policy in the right direction

• Inflation on target and lower interest rates

• Resilience to external shocks

• Economic recovery

• The BC+ Agenda

The economic policy in the right direction

• Reforms and adjustments

• Brazilian CDS fell from around 500 bps to below half of

that level

• Increased confidence:

• implementation of reforms

• Inflation on target, and

• recovery of the economic activity.

• Fiscal reforms will be pivotal to the future performance of

the Brazilian economy:

• spending ceiling constitutional amendment

• pension system reform

Outline

• The economic policy in the right direction

• Inflation on target and lower interest rates

• Resilience to external shocks

• Economic recovery

• The BC+ Agenda

% p

.a.

8,9

6,0

7,7

12,5

9,3

7,6

5,7

3,1

4,5

5,9

4,3

5,96,5

5,8 5,96,4

10,7

6,3

4,0 4,3

0

3

6

9

12

151

99

9

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

tolerance intervals targets IPCA IPCA expectations **medians of Market expectations as of April 28th

Sources: BCB / IBGE

Inflation Targeting

Anchoring Inflation Expectation

3

4

5

6

7

8

9

10

11

Jan 13 Sep 13 May 14 Jan 15 Sep 15 May 16 Jan 17 Sep 17 May 18 Jan 19 Sep 19

YoY

(%

)

Market-based measure (January 29, 2016) Market-based measure (July 29, 2016)

Market-based measure (April 26, 2017) IPCA

Source: IBGE

IPCA Diffusion IndexThe disinflation process is widespread

%

50

55

60

65

70

75

80m

ar 1

3

set

13

mar

14

set

14

mar

15

set

15

mar

16

set

16

mar

17

monthly 12-month average

9/23/20159,6

4/27/20174,5

3,5

4,5

5,5

6,5

7,5

8,5

9,5

10,5

Jan 1

5

Ma

r 15

Ma

y 1

5

Jul 15

Sep 1

5

No

v 1

5

Jan 1

6

Ma

r 16

Ma

y 1

6

Jul 16

Sep 1

6

No

v 1

6

Jan 1

7

Ma

r 17

Annual in

tere

st

rate

CDS and real interest rate are falling

Falling interest rates...

CDS ex-ante real interest rate12/22/2015

507

4/27/2017220

150

200

250

300

350

400

450

500

550

Jan 1

5

Ma

r 15

Ma

y 1

5

Jul 15

Sep 1

5

No

v 1

5

Jan 1

6

Ma

r 16

Ma

y 1

6

Jul 16

Sep 1

6

No

v 1

6

Jan 1

7

Ma

r 17

basis

poin

ts

• Source: Bloomberg / BCB

Source: BCB / Focus Survey

Selic Rate%

p.a

.

11,25

8,50

7

8

9

10

11

12

13

14

15o

ut

11

abr

12

out

12

abr

13

out

13

abr

14

out

14

abr

15

out

15

abr

16

out

16

abr

17

out

17

abr

18

out

18

Focus Survey

market expectations

Outline

• The economic policy in the right direction

• Inflation on target and lower interest rates

• Resilience to external shocks

• Economic recovery

• The BC+ Agenda

Resilience to External Shocks

• Floating FX regime

• Comfortable balance of payment position*

• Current account deficit in twelve months reached 1.1% of GDP

• Direct investment reached 4.6% of GDP

• Trade balance surplus of US$ 7 billion in April**

• International reserves stock exceeds US$370billion• around 20% of the GDP

• Reduction in the stock of FX swaps:• From US$108 billion to a current level of US$18 billion

* - March 2017** - Preliminary data: Ministry of Industry

Source: BCB

Current Account%

of

GD

P

US$

bill

ion

From 1995 on, methodology according to BPM6

* BCB forecast

-0,5

1,4

0,3

-0,8

-0,4

1,6

-0,2-0,3

-2,4

-2,8

-3,5

-3,9

-4,3

-3,8

-4,2

-1,6

0,7

1,71,5

1,2

0,0

-1,8-1,6

-3,4

-3,0 -3,0 -3,0

-4,3

-3,3

-1,3-1,5

-120

-100

-80

-60

-40

-20

0

20

-5

-4

-3

-2

-1

0

1

21

98

7

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

20

13

20

15

20

17

*

current account/GDP(LHS) current account(RHS)

Source: BCB

Foreign Direct Investment U

S$ b

illio

n

From 1995 on, methodology according to BPM6

* BCB forecast

78,975,0

-10

0

10

20

30

40

50

60

70

80

90

100

1101

98

7

198

8

198

9

199

0

199

1

199

2

199

3

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

20

12

201

3

201

4

201

5

201

6

201

7*

Sources: MDIC / BCB (Focus)

Trade Balance – Exports and ImportsU

S$ b

illio

n

*12 months until Mar 17; **as of April 28th (refers to BPM6)

BCB forecast for 2017 trade balance: US$ 51.0 billion

2017:

203.0

2017:

149.1

0

30

60

90

120

150

180

210

240

2702

00

0

200

1

200

2

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

201

7*

201

7**

201

8**

201

9**

202

0**

202

1**

exports imports

**market expectations2017 to 2021

Source: BCB

International Reserves and FX SwapU

S$ b

illio

n

376.1

-17.8

-150

-100

-50

0

50

100

150

200

250

300

350

4002

00

3

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

international reserves FX swap position

*through April 27th

Outline

• The economic policy in the right direction

• Inflation on target and lower interest rates

• Resilience to external shocks

• Economic recovery

• The BC+ Agenda

Economic Recovery

• Economic activity: stabilization in the short run

• Gradual recovery during the course of 2017

• Last quarter: growth of 2.5% over the same quarter of 2016

• Monetary policy will contribute to the economic

recovery

• Favorable inflation developments, allowing for the current pace of

easing

• Economic growth depends on increasing levels of

productivity

Economic Recovery (cont.)

• Macroeconomic reforms are essential

• Fiscal reforms

• Microeconomic reforms related to efficiency gains

• Higher flexibility of the economy

• Improvement of the business environment

• Tax reform and labor reform

• Investments in infrastructure through concessions

and other mechanisms

Source: FGV

FGV Confidence IndicesFe

b/1

3=1

00

, s.

a.

Apr 17:

79,7

86,7

82,6

75,4

87,3

55

60

65

70

75

80

85

90

95

100

105ab

r 1

4

ou

t 1

4

abr

15

ou

t 1

5

abr

16

ou

t 1

6

abr

17

ICC (consumer)

ICI (manufacturing)

ICS (services)

ICST (construction)

ICOM (commerce)

Source: IBGE

Retail Sales2

00

8 =

10

0

seasonally adjusted

*observed data

90

100

110

120

130

140

150fe

v

09

fev

10

fev

11

fev

12

fev

13

fev

14

fev

15

fev

16

fev

17

retail sales broad retail sales (incl. vehicles and building materials)

Feb 17 / Jan 17

-0.2%

Feb 17 / Jan 17

1.4%

Retail sales -5.4%

Broad retail sales -7.4%

12 months through Feb 17 /12 months through Feb 16*

Source: IBGE

Industrial Production2

01

2 =

10

0

*observed data

seasonally adjusted

50

60

70

80

90

100

110

120ag

o 1

0

fev

11

ago

1

1

fev

12

ago

1

2

fev

13

ago

1

3

fev

14

ago

1

4

fev

15

ago

1

5

fev

16

ago

1

6

fev

17

industrial production capital goods

Feb 17/Jan 17

0.1%

Feb 17/Jan 17

6.5%

Industrial Production -4.7%

Capital Goods -5.2%

12 months through Feb 17 / 12 months through Feb 16*

Sources: BCB / IBGE

GDP Real Growth%

*BCB forecasts (Inflation Report – Mar 17)

-0,5

4,9

5,9

4,2

2,2

3,4

0,3 0,5

4,4

1,4

3,1

1,1

5,8

3,24,0

6,1

5,1

-0,1

7,5

4,0

1,9

3,0

0,5

-3,8 -3,6

0,5

2,5

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

*

20

18

*

Outline

• The economic policy in the right direction

• Inflation on target and lower interest rates

• Resilience to external shocks

• Economic recovery

• The BC+ Agenda

BC+ AgendaMicroeconomic reforms

More Financial Citizenship More Modern Legislation

More Efficient SFN More inexpensive credit

The BC+ agenda

• Sustainable Reduction of Credit Cost

• encouraging good payment performances and

provision of guarantees

• reducing administrative costs increasing competition in

the financial system, and

• reducing subsidized lending

Brazil

Economic Prospects

May 2017