brazilian economic outlook what's next after the pension...

Fernando Honorato Barbosa Chief Economist, Director [email protected]

August 2019

Brazilian economic outlook What's next after the pension reform?

Brazil ins undergoing its most important economic

transition in decades…

2

6.13%

-0.20%

-7%

-2%

3%

8%

13%

18%

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Despesa real, %CENTRAL GOVERNMENT REAL EXPENDITURE % annual

3

Source: STN, Bradesco

FEDERAL DEBT/GDP Alternative scenarios

4

59

52

66

83

60

66

82

71

53

50

55

60

65

70

75

80

85

90

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

GDP 3 / Interest Rate 4 GDP 2,5 / Interest Rate 3,5

GDP 2 / Interest Rate 3 GDP 3 / Interest Rate 3

Source: BCB, Bradesco

NOMINAL INTEREST RATES – 10 YEARS Selected emerging markets

5

Source: Bloomberg, Bradesco

2008 2010 2015 2017 2018 2019 CPItarget

Brazil 12.5 12.3 13.7 10.3 10.6 7.2 3.8

South Africa 9.1 8.5 8.2 8.7 8.7 8.7 4.5

Russia 7.9 7.8 11.3 7.8 7.9 7.4 4.0

Chile 6.7 4.8 4.5 4.2 4.6 3.3 3.0

Colombia 10.8 7.9 7.5 6.6 6.7 6.0 3.0

Peru 7.3 5.9 6.4 5.6 5.4 4.5 2.0

Mexico 8.4 7.0 6.0 7.2 7.9 7.6 3.0

Average (ex-Brazil) 8.9 7.7 8.2 7.2 7.4 6.4 3.3


REAL INTEREST RATE 2050 % Annual

6

3.7%3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19

Título do Gráfico

CREDIT – INTERNATIONAL COMPARISON Dec-18, % of GDP

Source: BIS, BCB, Bradesco

7

135.4

65.2

95.5

40.0

70.5

47.842.2

27.0

0

20

40

60

80

100

120

140

Credit to the private sector Credit to the government Credit to non-financialcompanies

Credit to households

Emerging markets

Brazil

The economy is gradually improving…

8

EMPLOYMENT AND LABOR FORCE Seasonally adjusted, millions, includes non-formal workers

Source: IBGE, Bradesco

9

93,5

106,1

88,0

90,0

92,0

94,0

96,0

98,0

100,0

102,0

104,0

106,0

108,0

12 13 14 15 16 17 18 19

Título do Gráfico

Labor force

Employment

UNEMPLOYMENT RATE Annual average


10

6,8%

11,5% 12,7% 12,3% 12,7%

8,2%

9,4%

11,1% 12,0% 12,5%15,1%

20,9%

23,9% 24,3%25,2%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

pre crisis 2016 2017 2018 2019

Título do Gráfico

Unemployment rate

Discouraged Workers

NON-PERFORMING LOANS Seasonally adjusted


11

2.6

4.8

3.8

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

10 11 12 13 14 15 16 17 18 19

Inadimplência PF e PJ livres - dessaz

Corporate credit Household credit Total credit

Retrofitted series

Fonte: BCB, Bradesco

12

CREDIT TO HOUSEHOLDS AND COMPANIES YoY, % 3 month-moving average

13,9%

15,5%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

14 15 16 17 18 19

Título do Gráfico

Household credit Total corporate credit (ex-BNDES)


BRAZILIAN REAL RETAIL SALES Credit and income-related retail sales, level

80

100

120

140

160

180

200

90

110

130

150

170

190

210

230

250

270

03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Título do Gráfico

Credit-linked retail (left axis, 51%)

Income-linked retail (right axis, 49%)

13

SAO PAULO HOUSING MARKET Housing starts and sales

Source: Secovi, Bradesco

Housing Starts and New Home Sales (units in 12 months) Supply runoff time (months of sales)

14

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

May-05 May-07 May-09 May-11 May-13 May-15 May-17 May-19

Lançamentos

Vendas

Housing Starts

Sales

8.7

16.3 16.4

15.4

7.7 7.5

mai/14 mai/15 mai/16 mai/17 mai/18 mai/19 May-14 May-15 May-16 May-17 May-18 May-19

Markets are pricing-in this positive

outlook...

15

BRAZILIAN RISK: 5 YEAR CDS b.p.


16

109,7

138,5

321,2

234,3

140,7

0

50

100

150

200

250

300

350

One year beforeinvestment-grade

Investment-gradeperiod (excluding

global crisis)

Global crisis One year beforedowngrade to junk

Today

Título do Gráfico

Source: S&P, Bradesco

BRAZIL: EXTERNAL FUNDAMENTALS External indicators

17

Sample

mean

AAA to A-

mean

BBB+ to BBB-

mean

Speculative

grade meanBrazil

Total external debt / GDP 52% 68% 46% 48% 27%

Net external liabilities / GDP 15% -27% 31% 59% 32%

International Reserves (US$ bi) 149 245 100 45 383

International Reserves (months of import) 8.6 8.1 7.8 9.0 24.8

Current account / GDP (*) -2.3% -1.1% -2.5% -2.8% -0.7%

External financing needs / (Reserves + Exports) (**) 147% 193% 115% 126% 61%

Sample: 81 countries

* Mean of deficit countries

** Current account + Debt servicing maturing in 12 months

Investment grade Speculative grade

BRAZILIAN RATINGS Rating agencies

Fonte: Bradesco

18

GLOBAL STOCK MARKETS 12-month, %, local currency


19

31,4%

18,6%

7,8%0,1%

-5,2% -8,3%-19,6%-25%

-5%

15%

35%

55%

Bra

zil

Ru

ssia

Arg

enti

na

Gre

ece

Ind

on

esi

a

Swit

zerl

and

Turk

ey

Au

stra

lia

Do

w J

on

es I

nd

Ave

rage

S&P

50

0

Nas

daq

Ch

ina

Ca

nad

a

De

nm

ark

Bra

de

sco

Wo

rld

Ind

ex

Fran

ce

Euro

pe

50

Ital

y

Taiw

an

Ne

ther

lan

ds

Po

lan

d

Un

ite

d K

ingd

om

Swe

de

n

Sou

th A

fric

a

Ger

man

y

Po

rtu

gal

Ind

ia

No

rway

Egyp

t

Ho

ng

Ko

ng

Bel

giu

m

Spai

n

Fin

lan

d

Mal

ays

ia

Jap

an

Au

stri

a

Ire

lan

d

Sou

th K

ore

a

Me

xico

Última atualização:

14/08/2019

EXCHANGE RATE: BRL vs EMERGING MARKETS BRL accumulated variation versus median and percentiles of 22 emerging

20


3,60

4,00

3,00

3,20

3,40

3,60

3,80

4,00

4,20

4,40

jan/2018 abr/2018 jul/2018 out/2018 jan/2019 abr/2019 jul/2019 out/2019

Título do Gráfico

90% 75% 25% 10% mediana BRL

To strengthen growth, however, the private sector must be the protagonist of

the economy...

21

POST-PENSION REFORM AGENDA Summary

Source: Bradesco

22

Topics Reforms

Business environmentTax reform, Economic Freedom Bill, Law of Gas and Sanitation, Regulatory Mark of Regulatory Agencies, BC+

Outlook

Privatization and concessions BRL 204 billions in projects

Openness of economy Mercosul-EU Deal, unilateral reduction of CET, new deals

Demand boost FGTS, Bolsa Família Programme Christmas Bonus, monetary policy

Macro and fiscal reformsTransfer of Rights (Petrobras), Central Bank Independence, aid to states and municipalities, administrative

reform

Implemented reformsSpending cap bill, TLP, labor reform, public credit downsizing, social security and anti-fraud, reduction of

inflation target, home equity credit, positive credit bureau, LIG, eletronic bonds

CORE CPI Seasonally adjusted, 12 months


23

0%

2%

4%

6%

8%

10%

12%

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Título do Gráfico

SELIC POLICY RATE Selic, %

12,75%

8,75%

12,50%

10,50%

7,25%

11,00%

14,25%

11,25%

7,50%

6,50% 6,00%

5,00%

3,0%

5,0%

7,0%

9,0%

11,0%

13,0%

15,0%

09 10 11 12 13 14 15 16 17 18 19 20


24

(*) voluntary membership of states

Goods and Services

Federal VAT

(IPI, Cofins, PIS)

or

Dual VAT*

(ICMS, ISS)

Income and Profits

Reduce corporate tax (IRPJ and CSLL)

Reduce personal income tax (IRPF)

Remove/limit tax deductions

Tax dividends

Payroll

Reduce payroll tax

Create financial transactions tax

BRAZILIAN TAX REFORM Summary

25

Aviation (41 airports)10,3 Waterway (12 ports)

4,2

Roads (16 mil km)131,0

Railroads (15 mil km)58,9

CONCESSIONS AND PRIVATIZATION PROGRAMS Details

R$ 204 billions by 2022

Source: Min. Infraestrutura, Bradesco

R$ 10 billion of investment: + 0,15 p.p. GDP

26

27,4

26,5

8,0

14,8

12,7

20,3

6,0

0 5 10 15 20 25 30

2021 3ºQ

2020 4ºQ

2020 3ºQ

2020 2ºQ

2020 1ºQ

2019 4ºQ

2019 3ºQ

TRADE OPENNESS Exports + imports % of GDP, 2017

Source: EIU, Bradesco

27

117.1%

114.9%

65.7%

54.3%

46.6%

40.5%

40.4%

39.0%

37.3%

27.3%

23.1%

0% 20% 40% 60% 80% 100% 120% 140%

Asia

Europe

Canada

South Africa

Russia

Latam

Australia

India

China

USA

Brazil

1,4

3,0

4,1

0,4

1,0

2,3

0,00

0,50

1,00

1,50

2,00

2,50

3,00

3,50

4,00

4,50

1980s crisis (1981-1992)

"Real Plan" and FHCII Ajustment

Micro Reforms,Commodities, Lula

(2003-2010)

New economicmatrix and 2010s

excess. Dilma (2011-2016)

Resumption of macroequilibrium (2017-

2019)

2019-2022*

BRAZILIAN GROWTH Good economic policies enhance growth

28

Source: Bradesco

Medium-term challenges and risks…

29

RISKS Main risks

Fonte: Bradesco

o Global environment

o Drop in public investment not being compensated by private investments

o Fiscal solvency of subnational governments

o Political volatility

o Education, productivity and absorption of new technologies

Main risks / negative drivers

30

DOING BUSINESS AND EDUCATION Ease of doing business and mathematics performance PISA Test

Source: OECD, World Bank, Bradesco

31

556538 534

493

401

378 376

332

300

350

400

450

500

550

600

1 Singapore 2 Canada 3 Hong Kong OECD 63 Brazil 68 Algeria 69 Lebanon 70 Kosovo

Título do Gráfico

Country #

New Zealand 1

Singapura 2

Denmark 3

United Kingdom 9

Turkey 43

China 46

Mexico 54

Brazil 109

Argentina 119

Venezuela 188

Eritrea 189

Somalia 190

Doing Business 2019 PISA Mathematics 2015

Source: IFR, Bradesco

32

ROBOTS STOCK BY COUNTRY Thousand units

473.429

297.215 273.101 262.104

200.634

64.356 35.204

12.373

-

50.000

100.000

150.000

200.000

250.000

300.000

350.000

400.000

450.000

500.000

China (1º) Japan (2º) Korea (3º) USA (4º) Germany(5º)

Italy (6º) France (7º) Brazil (18º)

Título do Gráfico

Source: Bradesco

OUR FORECASTS...

33

Bradesco economic forecasts are revised at the beginning of each month. During moments of greater volatility, the level of uncertainty and error margins naturally rise, especially between revisions. Our forecasts are based on the assumption that the adjustments necessary to ensure the sustainability of Brazil’s macroeconomic framework will be implemented over the next few years. If these adjustments do not materialize or are better than expected, the forecast could be altered significantly. Last revised on August 08, 2019.

2017 2018 2019 2020

Consumer inflation - IPCA (%) 2,95 3,75 3,50 3,9

GDP growth (%) 1,1 1,1 0,8 2,2

Industrial Production (%) 2,5 1,1 0,6 2,5

Retail Sales (%) 4,0 5,0 4,5 4,5

Job Creation (in thousands) 264 1316 368 1016

Unemployment Rate (% of labor force, avg) 12,7 12,3 12,9 12,8

Outstanding Credit Growth (%) -0,5 5,0 7,5 9,4

Trade Balance (USD bn) 64,0 53,6 51,7 47,4

Current Account (USD bn) -7,2 -14,5 -22,1 -38,6

Exchange Rate (BRL/USD, eop) 3,31 3,87 3,80 3,80

Selic Rate (%, eop) 7,00 6,50 5,00 5,00

Primary Balance (BRL bn) -111 -108,3 -130 -89,4

Gross Debt (% of GDP) 74,1 76,7 77,8 79,4

International Reserves (USD bn) 382,0 388,1 388,1 388,1

Economics: DEPEC – BRADESCO is not responsible for any acts/decisions made based on the information disclosed in its publications and projections. All data or opinions contained in the information herein is carefully checked and prepared by fully qualified professionals, but should not be taken, under any circumstances, as a basis, support, guidance or standard for any document, assessment, judgment or decision-making, of a formal or informal nature. Thus, we emphasize that all consequences and responsibility for the use of any data or analysis of this publication are assumed solely by the user, exempting BRADESCO from all actions resulting from the use of this material. We also point out that access to this information implies acceptance of this term of responsibility and usage. Full or partial reproduction of this publication is strictly prohibited, except with authorization from Banco BRADESCO or full citation of the source (naming the authors, the publication and Banco BRADESCO). Politics: The opinions expressed or shared by the political consultants do not necessarily reflect BANCO BRADESCO’s view on the scenario, people, legislators, ministers, facts or companies mentioned by them. BANCO BRADESCO disclaims all responsibility for the opinions expressed by these consultants as well as for any decisions made based on such opinions. The consultants are solely responsible for their political opinions.

DISCLAIMER...

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brazilian economic outlook what's next after the pension...

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