brazil – the missing link: or the challenge of growing without savings marcelo salomon – chief...

Brazil – The missing link: Or the challenge of growing without savings Marcelo Salomon – Chief Brazil Economist

Emerging Markets Research

July 2010

2

Monetary Policy - Exit strategy is rolling

Source: BCB, Barclays Capital

• Monetary policy is bearing the brunt of the exit strategy, with little help from the fiscal side.

• Global growth anxiety is tempering the effects of the impressive Asian style rebound of growth in the local yield curve. Growth is moderating to more sustainable levels.

After unwinding reserve requirements… ... it is now time, to lift the Selic rate


5.0

6.07.0

8.09.0

10.0

11.012.0

13.014.0

15.0

Jan-07 Jan-08 Jan-09 Jan-10

Brazil Selic Forecast

100

120

140

160

180

200

220

240

260

280

jan-03 jul-04 jan-06 jul-07 jan-09

3

Fiscal Policy: New regime – Lower Govt. Savings?

Source: National Treasury, Barclays CapitalNote: Non-discretionary is wage bill, social security and non-investment and mandatory expenses (% GDP).

• A new regime of low public savings, strong permanent increase in expenditure could lead to lower potential growth.

• The major challenge for the president elect is to reign on current (non-discretionary) spending, making space for both private and public investments.

Primary Surplus (% GDP) Expense Breakdown (% GDP)


0,000,501,001,502,002,503,00

3,504,004,50

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Central Government States and municipalities

Federal Government SOE

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

2005 2006 2007 2008 2009

Non-discretionary Expenses Discretionary Expenses

4

Brazil – Structural change in Growth

• There has been a structural change in the level of real GDP growth in Brazil, shifting it up from 1.4% in the early 1990’s to nearly 4.0% in the second half of the 2000s.

• The recent jump in total factor productivity underpins the positive growth story.

Source: IBGE, Barclays Capital Source: Pessoa, S. “Características estruturais da economia brasileira”Anbima Presentation Dec 2009

Real GDP Growth (% y/y and 5 Year Averages)

Total Factor Productivity

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2004 2005 2006 2007 2008

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

5

Brazil – Savings vs Investments

• Domestic savings remain small, specially when compared to fast growing Asian economies. This ultimately reflects a high tax burden and growing social welfare spending (paternalistic state).

• Large pipeline of long-term investment projects (pres-salt oil extraction, 2014 World Cup and 2016 Olympics games) highlights the growing needs of long-term funding.

• With limited domestic savings and rising fixed investment needs, foreign capital flows should have to fill the gap. That is, in order to push the investment ratio towards the 23% range, the country should run larger current account deficits in the years to come.

Source: IBGE, Barclays Capital Source: IBGE, Barclays Capital

Total Domestic Savings (% GDP) Fixed Investments (% GDP)

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

6

The missing link – External or Domestic Savings?


• Strong growth is leading to rising CA deficits

• We remain sanguine about the pace of current account deterioration and would not expect any financing problems. FDI is loosing momentum, but portfolio flows are more than compensating

Current account and trade balance Financing External Gaps

Source: BCB,Barclays Capital

-50-40-30-20-10

0102030405060

Jan-

95

Jan-

97

Jan-

99

Jan-

01

Jan-

03

Jan-

05

Jan-

07

Jan-

09

CA (USD bn 12m) Trade Balance (USD bn 12m)

-40,0

-20,0

0,0

20,0

40,0

60,0

80,0

Jan-03 Jan-05 Jan-07 Jan-09

CA+Net FDI (12m)

Portfolio Invest. + Other Finan.Inflows (12m)

7

Presidential elections: BRL, Selic and fiscal policy?

___________________________Source: Datafolha ,Barclays Capital

Were the wild things are:

BNDES as the Treasury’s public credit provider;

Who will finance the infrastructure investments for the 2014 World Cup; the 2016 Olympics and the Pre-Salt oil extraction business;

Working within the existing economic institutions;

Is Keynes really dead or did he just move to Brasilia?

brazil – the missing link: or the challenge of growing without savings marcelo salomon – chief...

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