brazilian ministry of finance 1 stimulating growth, what should be done? the brazilian case bernard...

Brazilian Ministry of Finance

1

Stimulating Growth, What

Should Be Done?

THE BRAZILIAN CASE

BERNARD APPY

XXV Meeting of the Latin American Network of Central Banks and Finance

Ministries

WASHINGTON, MAY 2007


2

MACROECONOMIC ADJUSTMENT

Sources: IBGE, BCB and MDIC. Elaborated by: MF/SPE

2002 2003 2004 2005 2006

GDP - annual growth rate (%) 2.7 1.1 5.7 2.9 3.7

Inflation - CPI (%) 12.5 9.3 7.6 5.7 3.1

Public Sector's Net Debt (% of GDP) 50.5 52.4 47.0 46.5 44.9

Public Sector's Primary Surplus (% of GDP) 3.7 3.9 4.2 4.4 3.9

Trade Surplus (US$ billions) 13.1 24.8 33.6 44.9 46.2

Current Account (% of GDP) (1.5) 0.8 1.8 1.6 1.2

International Reserves (US$ billions) 37.8 49.1 59.0 53.8 85.8


3

IMPACT ON ECONOMIC GROWTH

Better macroeconomic underpinnings set the stage for higher and sustainable growth:

External solvency creates conditions for expansion of domestic demand.

Economic stability allows consistent reduction of interest rates and expansion of credit.

Brazil’s financial structure is undergoing important changes.

The limits for potential output growth of the Brazilian economy are still uncertain today.


4

CHALLENGES TO EXPAND POTENTIAL GROWTH

Expand the volume of investment in a sustainable way.

Special attention to infrastructure.

Increase economic efficiency and productivity. Education. Institutional Reforms.

Ensure increased participation in the international economy without harming future growth.


5

INVESTMENT AND SAVINGS


6

GROWTH ACCELERATING PROGRAM (PAC)

Brazil has recently announced an infrastructure investment program for 2007-2010.

Reduction of the public sector’s primary surplus targets (0.45% of GDP).

R$ billions as % of GDP

Total 503.9 4.36% Federal Budget 67.8 0.59% Private Sector, including state-owned companies 436.1 3.77%


7

CHALLENGE: Control Current Expenditures

The Brazilian fiscal structure makes it very difficult to control the public sector’s current expenditures which have been increasing in the last years.

Economic stability and growth of formal employment have contributed positively to the expansion of tax collection despite tax exemption measures.

Recent measures: Cap on Civil Servant expenditure growth Social Security Forum


8

ECONOMIC EFFICIENCY


9

EDUCATION Even tough Brazilian educational inclusion policy is

satisfactory, the quality of education is far from ideal.

Recent measures have a positive impact: FUNDEB (National Fund for Basic Education):

• Extension of previous model (FUNDEF) in order to expand the range of beneficiaries (students from pre-school to high school).

• Increasing of Federal disbursements.

Educational Development Program (PED):• Several measures to increase education quality

in all its aspects, especially at the basic level.


10

INSTITUTIONAL REFORMS

Brazil is advancing in the implementation of reforms that increase economic efficiency.

Tax Reform. The reduction of distortions regarding the indirect

tax system has positive impacts on investment and productivity.

There are still many issues on the agenda to be settled.


11

INTERNATIONAL POSITIONING


12

INDUSTRIAL POLICY ISSUES

The challenge for Brazil and Latin American countries is to take part in the global economy in a way as to encourage innovation and reduce dependency on volatile commodities’ exports.

Even tough the current status is not clear, the “Dutch disease” is a risk that needs to be considered.

The risk of an ill posed industrial policy is the reduction of economic efficiency and the deepening of economic inequality.


13


14

INTEREST RATES

Sources: BCB, MF/STN and BM&F. Elaborated by: MF/SPE.

10

11

12

13

14

15

16

17

18

19

20

Jan04

Mar04

May04

Jul04

Sep04

Nov04

Jan05

Mar05

May05

Jul05

Sep05

Nov05

Jan06

Mar06

May06

Jul06

Sep06

Nov06

Jan07

Mar07

May07

Basic rate 360 days Public bonds (2012)

%py


15

CAPITAL MARKET Primary and Secondary Issues

(US$ Billions)

*/ Includes promissory notes, CRIs (real estate receivables certificates), and quotas of credit rights investment funds, among others.**/ Accumulated in 12 months up to April/07.Source: CVM. Elaborated by: MF/SPE.

0

10

20

30

40

50

60

70

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007**

Other*

Debenture

Equity


16

INVESTMENT (% of GDP)

Source:IBGE. Elaborated by: MF/SPE.

16.8%17.0%

16.4%

15.3%

16.1%16.3%

16.8%

12%

13%

14%

15%

16%

17%

18%

2000 2001 2002 2003 2004 2005 2006


17

FEDERAL REVENUES AND CURRENT EXPENDITURES (% of GDP)

Source: MF/STN. Elaborated by: MF/SPE.

12

13

14

15

16

17

18

19

20

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Expenditures (R)

Revenues (L)

brazilian ministry of finance 1 stimulating growth, what should be done? the brazilian case bernard...

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