economic research - brazil | september 2017 highway to ... · car wash operation car wash operation...

Highway To Hell or Stairway To Heaven?

Tatiana Pinheiro ([email protected])

Economic Research - Brazil | September 2017

2

1) Politics – 2018 elections

2) Reform Agenda

3) Economic Recovery Path

3

1) Politics – still, Temer will likely finish his mandate

Although very weak popularity

Presidential PopularitySource: Datafolha.

Net Approval rateSource: Datafolha.

913

28 30

8 50

10

20

30

40

50

60

70

80

90

1-m

ar-

90

1-d

ez-9

2

1-n

ov-9

3

23-m

ar-

95

20-jun-9

7

14-a

go-9

8

20-jun-0

0

21-f

ev-0

2

30-a

go-0

2

1-m

ar-

03

1-jun-0

5

17-m

ar-

06

12-s

et-06

12-d

ez-0

6

28-m

ai-09

23-jul-

10

26-o

ut-

10

21-M

ar-

13

8-M

ay-1

4

19-S

ep-1

4

7-F

ev-1

4

18-M

ar-

16

Excelent/Good

Collor Impeachmen

Currency devaluation (Jan/99)

Voting bying scheme (Apr-July/05)

Street protest (Jul/13)

Dilma Impeachment (May/16)

-59

-43

-1

5

-63 -68-80

-60

-40

-20

0

20

40

60

80

100

1-m

ar-

90

1-s

et-

92

1-jun-9

31-s

et-

94

25-jun-9

611-m

ar-

98

11-d

ez-9

810-o

ut-

00

21-f

ev-0

216-a

go-0

215-d

ez-0

21-m

ar-

04

21-o

ut-

05

18-jul-06

22-s

et-06

20-m

ar-

07

28-m

ai-09

1-jul-

10

15-o

ut-

10

19-A

pr-

12

11-O

ct-13

16-J

ul-14

30-S

ep-1

417-M

ar-

15

18-M

ar-

16

Don't know Net approval rate (excelent/good minus bad/very bad)

Collor Impeachment (Set/92)

Currency devaluation (Jan/99)

Voting bying scheme (Apr-July/05)

Street protest (Jul/13)

Dilma Impeachment (May/16)

4

4

Lower House (#political parties and

representatives)Source: Câmara dos Deputados.

Senate (#political parties and representatives)

Source: Senado.

1) Politics – Fractured party system

147

258

308

10

15

20

25

30

35

-

102

204

306

408

510

19

95 (

FH

C 1

te

rm)

19

99 (

FH

C 2

te

rm)

20

03 (

Lula

1 t

erm

)

20

07 (

Lula

2 t

erm

)

20

11 (

Dilm

a 1

term

)

1H

201

4

20

15 (

Dilm

a 2

term

)

Septe

mb

er

16,

201

5

Octo

be

r 8, 2

015

De

ce

mbe

r 8, 2

015

Feb

ruary

4, 2

016

Ma

rch

21,

201

6

Ma

rch

24,

201

6

April 7,

201

6

Number of parties (rhs) Top 3 (numbers of representatives)

Simple Majority PEC required votes (3/5 of total)

257

33

42

48

10111213141516171819

-

16

32

48

64

80

19

95 (

FH

C 1

te

rm)

19

99 (

FH

C 2

te

rm)

20

03 (

Lu

la 1

te

rm)

20

07 (

Lu

la 2

te

rm)

20

11

(D

ilma

1 t

erm

)

1H

201

4

20

15

(D

ilma

2 t

erm

)

Se

pte

mb

er

16

, 2

01

5

Octo

be

r 8

, 2

015

De

ce

mbe

r 8

, 2

015

Fe

bru

ary

4, 2

016

Ap

ril 7

, 2

01

6

Number of parties (rhs) Top 3 (numbers of representatives)

Simple Majority PEC required votes (3/5 of total)

49

5

Topic Legal instrument Current status

Expected

conclusion

date

Reduction in revenue earmarking

(DRU)

Constitutional

AmendmentApproved by the Lower House and the Senate

Concluded in

Aug 2016

Investment Partnership Program

(PPI)

Provisional

MeasureApproved by the Lower House and the Senate

Concluded in

Sep 2016

Change in oil field auction rules Ordinary Law Approved by the Lower House and the SenateConcluded in

Nov 2016

New Fiscal Regime (freeze of gov’t

expenditures in real terms)

Constitutional

AmendmentApproved by the Lower House and the Senate

Concluded in

Dec 2016

Budget Law (PLOA) 2017 Budget Law Approved by the Lower House and the SenateConcluded in

Dec 2016

Labor ReformComplementary

LawApproved by the Lower House and the Senate

Concluded in

Jul 2017

Still to be sent to Congress 2018

2019

Still to be sent to Congress

Creation of TLP (long term rate for

BNDES loans)

Provisional

MeasureUnder Lower House appreciation

Concluded in

Sep 2017

Tax ReformDifferent pieces of

legislation2018/2019

Social Security ReformConstitutional

AmendmentApproved at the Commission-level by the Lower House

States’ debt renegotiationComplementary

Law

Basic framework approved by Congress, and partially

enacted by the President

Change in Eletrobras law to allow

privatization

Provisional Measure

or Ordinary Law

Concluded in

Dec 2016

2) Fiscal Reform Agenda

6

6

Lower House Source: Câmara dos Deputados.

SenateSource: Senado.

1) Politics – Congress profile

113

51

175

86

87

129

46

171

84

82

Right Centre Right Centre Centre Left Left

2014election

2017 breakdown

15

3

34

14

15

17

2

42

8

111

Right Centre Right Centre Centre Left Left Independent

2014election

2017 breakdown

7

7

Share of aggregate valid votes for mayor in

Brazil’s largest cities and state capitals, %

Source: Brazil Electoral Court.

Number of elected mayors in Brazil’s largest

cities and state capitals

Source: Brazil Electoral Court.

1) Politics – Voters’ profile

2016

8


President&Congressnon-reformists

President (non-ref) & Congress

(ref)

President (ref) & Congress

(non-ref)

President&Congressreformists

Google searches for Car Wash operationUp to Sep 20. Source: Google trends.

0 20 40 60 80 100

Distrito FederalPiaui

TocantinsPara

BahiaRio de Janeiro

CearaMaranhao

Minas GeraisSanta Catarina

AlagoasParana

Mato GrossoPernambuco

Mato Grosso do SulRio Grande do Norte

São PauloAmazonas

Rio Grande do SulEspirito Santo

RondoniaSergipe

Goiais

Google searches for Car Wash operationUp to Sep 20. Source: Google trends.

0

10

20

30

40

50

60

70

80

90

100

1/5

/2014

3/5

/2014

5/5

/2014

7/5

/2014

9/5

/2014

11/5

/2014

1/5

/2015

3/5

/2015

5/5

/2015

7/5

/2015

9/5

/2015

11/5

/2015

1/5

/2016

3/5

/2016

5/5

/2016

7/5

/2016

9/5

/2016

11/5

/2016

1/5

/2017

3/5

/2017

5/5

/2017

7/5

/2017

9/5

/2017

Car Wash Operation Car wash operation (news search)

Car Wash operation list

elections

expectationsfor Janot's list

Impeachment

Lula became a defendant JBS

bullish

9

9

Societal priorities & Vote Intention by Income Bracket

Societal prioritiesSource: Datafolha.

Vote Intention by Income BracketSource: Datafolha.


45%

40%

11% 4%

% of Population

Up to 2 m.w. 2 a 5 5 a 10 More than 10

0

5

10

15

20

25

30

Corr

uptio

n

Hea

lth

Une

mplo

ym

ent

Vio

len

ce

Ed

uca

tion

Sep 2017

Up to 2 w.m.2-55-10More than 10

0

10

20

30

40

50

Une

mplo

ym

ent

Po

ve

rty

Vio

lence

He

alth

Infla

tion

Co

rru

ptio

n

Mar-03 Dec-06 Nov-10

Dec-14 Nov-15 Jul-16

Jul-17 Sep-17

0

5

10

15

20

25

30

35

40

45

Up to 2 m.w. 2 a 5 5 a 10 More than 10

Lula (PT) Marina (Rede) Alckmin (PSDB)

João Doria (PSDB) Bolsonaro (PSC)

10

10

Brazilian voter profile

Brazilians ideology profile Source: Datafolha.


0

5

10

15

20

25

30

35

Right Centre Right Centre Centre Left Left

Nov-13 Sep-14 Jul-17

11

11

Good news: economy will help

Misery index (Inflation + unemployment) Sources: IBGE and Santander.


10

13

16

19

22Ja

n-0

4

Oct-

04

Jul-

05

Apr-

06

Jan

-07

Oct-

07

Jul-

08

Apr-

09

Jan

-10

Oct-

10

Jul-

11

Apr-

12

Jan

-13

Oct-

13

Jul-

14

Apr-

15

Jan

-16

Oct-

16

Jul-

17

Apr-

18

12

12

What people look for in a president …

Desirable aspects of a presidential candidate, % Source: Datafolha.


87

79

65

59

33

31

24

5

12

17

21

18

27

20

6

7

16

17

47

39

53

Never involved incorruption scandals

Administrativeexperience

Political background

Corporate experience

Religious

New to politics

From the military

Very important Somewhat important Not important Don't know

13

13

Approval/rejection of potential candidatesSource: Ipsos Barômetro Político, June, 2017.

Potential approval, % Source: Ipsos Barômetro Político, June, 2017.


0% 20% 40% 60% 80% 100%

Michel TemerAécio Neves

Eduardo CunhaRenan Calheiros

José SerraDilma Rousseff

FHCGeraldo Alckmin

Rodrigo MaiaLula

Marina SilvaHenrique Meirelles

Ciro GomesJair Bolsonaro

João DoriaCarmen LúciaLuciano Huck

Disapproves Approves Doesn't know

0 20 40 60 80

Michel Temer

Aécio Neves

José Serra

Geraldo Alckmin

Lula

Marina Silva

Ciro Gomes

Henrique Meirelles

Jair Bolsonaro

João Doria

Carmen Lúcia

Luciano Huck

Approves Doesn't know

14

141) Politics – 2018 elections (key dates)

• April 6, 2018: deadline for candidates to join/change political parties. Deadline to register political address. Candidates holding cabinet positions or seating mayors/governors not running for reelection must step down by this date.

• July 5, 2018: pre-candidates can begin intraparty advertisement for nomination

• July 20 – August 5, 2018: period for parties to promote conventions and define

candidates (conventions are not mandatory)

• August 15, 2018: deadline for parties to register candidates

• August 16, 2018: official beginning of campaigns

• August 25 – September 29, 2018: period of propaganda broadcast on radio and

television

• October 7, 2018: first round of voting

• October 28, 2018: second round of voting

15

Mismatch between tax collection and spending

15

Public debt% of GDP. Source: BCB.

Central government: revenue/expenditure% of GDP. Source: STN.

2) Fiscal Reform Agenda - Stalled

50

74

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

Dec-0

6A

pr-

07

Aug

-07

Dec-0

7A

pr-

08

Aug

-08

Dec-0

8A

pr-

09

Aug

-09

Dec-0

9A

pr-

10

Aug

-10

Dec-1

0A

pr-

11

Aug

-11

Dec-1

1A

pr-

12

Aug

-12

Dec-1

2A

pr-

13

Aug

-13

Dec-1

3A

pr-

14

Aug

-14

Dec-1

4A

pr-

15

Aug

-15

Dec-1

5A

pr-

16

Aug

-16

Dec-1

6A

pr-

17

Net Public debt-ratio-to-GDP Gross Public debt-ratio-to-GDP

Investment GradeInvestment Grade

Up grade

Junk bond

14%

15%

16%

17%

18%

19%

20%

Nov-

02

Aug-0

3

May-0

4

Feb-0

5

Nov-

05

Aug-0

6

May-0

7

Feb-0

8

Nov-

08

Aug-0

9

May-1

0

Feb-1

1

Nov-

11

Aug-1

2

May-1

3

Feb-1

4

Nov-

14

Aug-1

5

May-1

6

Feb-1

7

Federal Net Revenues (of GDP)

Federal Spending (% of GDP)

16

As a result, a worsening dynamic in the gross public debt-GDP ratio

16

Gross and Net Government Debt (% of GDP)Sources: MinFin and Santander estimate.

69.9%

78.2%

84.0%

88.9%92.1%

94.2% 95.7% 96.3% 96.2% 96.1%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Gross Debt Ratio to GDP


Primary Balance (% of GDP)Sources: MinFin and Santander estimate.

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2017 2018 2019 2020 2021 2022 2023 2024 2025

Primary balance (% of GDP)

17

However, international capital does not seem to care about public debt level

17

Gross Government Debt (% of GDP) vs

Sovereign rateSources: Bloomberg and S&P.


AUS

AUTBRA

BGR

CHL

CHN COLCRI

HRV

DNK

EGY

SLVFIN

FRA

DEU

GRC

GTM

HUN

ISL

IND

IDN

IRL

ISR

ITA

JPN

MYS MEX

NLD

NGA

NOR

PAK

PAN

PER

PHL

POL

PRT

ROU

RUS

SRB

SVK

SVN

ZAF

KOR

ESP

SWE THA

TUR

GBR

USA

URY VNM

0

100

200

300

AAA BBB+ BB BAA-

5-year CDS spreads (bp)

Source: Bloomberg and S&P.

0

100

200

300

400

Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17

Spread Brazil/BB countries Spread Brazil/BBB countries Spread Brazil/BBB- countries

18

18

Social Security

Currently, social security benefits represents ~ 40% of total spending, in 2024 will consume about 60% of total spending (despite still young population) .

Federal Spending Breakdown- % Of Spending

CeilingSources: Min. da Fazenda and Santander estimates.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

2017 2018 2019 2020 2021 2022 2023 2024

Payroll Other Mandatory Spending Health

Education Other current expenditures Capital expenditures (PAC)

Social Security benefits


19

19

Social Security Reform (proposal), crucial points of the reform:

Simulation of Social Assistance

spending ratio of GDPSources: FinMin and Santander estimate.

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

200

1

200

3

200

5

200

7

200

9

201

1

201

3

201

5

201

7

201

9

202

1

202

3

202

5

202

7

202

9

203

1

203

3

203

5

203

7

203

9

Social spending ratio to GDP (minimum wage policy unchanged)

Social spending ratio to GDP (new policy)

Contribution (% of GDP)

Sources: FinMin and Santander estimate.

Benefits (% of GDP)

Sources: FinMin and Santander estimate.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2001 2003 2005 2007 2009 2011 2013 2015

Urbana Rural

15.00% 5.00% 5.00% 15.00%

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

Ag

e (

ye

ars

)

2014

Men Women

85%

15%

15.00% 5.00% 5.00% 15.00%

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

Ag

e (

ye

ars

)

2050

Men Women

66%

34%

Age Pyramid 2014Source: IBGE.

Age Pyramid 2050Source: IBGE.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2001 2003 2005 2007 2009 2011 2013 2015

Urbana Rural

2) Social Security Reform

20

20

Social Security Reform (proposal), crucial points of the reform:

Eligibility criteria (minimum age for retirement at 65 years old for men and 62 for women, but without unification of social security regime),

Stricter criteria for survivals benefits,

Not allowing accumulating benefits higher than 2 minimum wages,

Transition rules : Additional of 1/3 to the number of years remaining for retirement under the current rule (30 years of contribution for women and 35 years for men), given the minimum age for retirement is 55 years old for men and 53 years old for women

Expected Survival by age (number of years)

Source: IBGE.

Social Security deficit ratio of GDP simulation.

Sources: IBGE, Social Security Minister and Santander

estimate.

15.2

22.1

25.2

12

18.4

21.2

9.2

15

17.5

5

8

11

14

17

20

23

26

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

20

20

20

25

20

30

20

35

20

40

20

45

20

50

20

55

20

60

60 years old 65 years old 70 years old

2) Social Security Reform

21

21

2) Privatization Calendar

Gov't

expectation

(BRL bn)

Eletrobras* 13.0

Cemig ** 11.0

Congonhas (SP Airport) 6.0

* secondary offer / ** 4 Power plants

BRL 58.5bn

3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Gov't

expectation

(BRL bn)

Airports 12.0

Highways 8.5

Ports 12.0

Eletric Energy Co 24.0

Oil (pre-salt)

Others

Brazilian Mint

Instant Lottery 2.0

Tender Offer

Auction

22

The end of tax exemptions

22

Fiscal SlippageSource: MinFin.

BRL %GDP

Simplified tax regime for SME 82.9 1.3%

Tax free industry zone 25.6 0.4%

Non profit entities 24.5 0.4%

Tax Exemption of consumer staples 23.8 0.4%

Reduction in payroll taxation 17.0 0.3%

Income tax deduction 16.9 0.3%

Worker benefits 11.4 0.2%

Tax exemption for saving account 8.4 0.1%

Tax exemption for medicines 7.4 0.1%

Tax exemption for Regional development 6.6 0.1%

Total 224.5 3.6%

2) Ending of Fiscal Slippage

23

23

Monetary Policy is effective!


Household Consumption y/y vs DI 1-y (2

quarters lagged)Sources: IBGE, BCB and Santander.

Industrial and Investments y/y vs DI 1-y (2

quarters lagged)Sources: IBGE, BCB and Santander.

0

5

10

15

20

25

30

35-8

-6

-4

-2

0

2

4

6

8

10

2002

.III

2003

.II

2004

.I

2004

.IV

2005

.III

2006

.II

2007

.I

2007

.IV

2008

.III

2009

.II

2010

.I

2010

.IV

2011

.III

2012

.II

2013

.I

2013

.IV

2014

.III

2015

.II

2016

.I

2016

.IV

Household Consumption DI 1-year (rhs)

0

5

10

15

20

25

30

35-20-15-10-505

1015202530

2002

.III

2003

.II

2004

.I

2004

.IV

2005

.III

2006

.II

2007

.I

2007

.IV

2008

.III

2009

.II

2010

.I

2010

.IV

2011

.III

2012

.II

2013

.I

2013

.IV

2014

.III

2015

.II

2016

.I

2016

.IV

Industrial Investment DI 1-year (rhs)

24

24

ForecastSource: Santander estimates.

GDP growth q/q Source: Santander estimate

So far the economic recovery was based on Agriculture and Consumption,

looking ahead the risks are on the upside (if there is strong Investment recovery).


0.30.5

0.91.2

1.00.8

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

4Q17

1Q18

2Q18

3Q18

4Q18

Components Weights (%) 2014 2015 2016 2017F 2018F

Total GDP 100.0 0.5 -3.8 -3.6 0.8 3.2

Agriculture & Livestock 5.6 2.7 3.2 -6.6 11.6 3.7

Industry 21.4 -1.5 -6.3 -3.8 0.2 3.5

Services 73.0 1.0 -2.7 -2.7 0.1 2.8

Household Consumption 63.5 2.3 -3.9 -4.2 0.9 3.4

Government Consumption 20.3 0.8 -1.1 -0.6 -1.5 0.3

Investments 15.7 -4.2 -13.9 -10.2 -2.2 6.0

Exports 12.2 -0.9 6.2 1.9 4.2 2.8

Imports (-) 11.7 -1.9 -14.1 -10.3 3.7 3.6

GDP Breakdown - Annual Change (%)

25

25

Actual GDP vs. Potential GDPSource: : IBGE, FGV, IPEA and Santander estimates /

(level series - basis: 2013:1=100) .

Output Gap (Actual GDP - Potential GDP) - %

Sources: IBGE, FGV, IPEA and Santander estimates

Output gap will likely close st the end of 2019, therefore the CB has room to

maintain its expansionary monetary policy.


end-2019

64

68

72

76

80

84

88

92

96

100

104

108

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

3Q

06

2Q

07

1Q

08

4Q

08

3Q

09

2Q

10

1Q

11

4Q

11

3Q

12

2Q

13

1Q

14

4Q

14

3Q

15

2Q

16

1Q

17

4Q

17

3Q

18

2Q

19

1Q

20

4Q

20

Potential GDP

Actual GDP

-6.5

-5.5

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

3Q

06

2Q

07

1Q

08

4Q

08

3Q

09

2Q

10

1Q

11

4Q

11

3Q

12

2Q

13

1Q

14

4Q

14

3Q

15

2Q

16

1Q

17

4Q

17

3Q

18

2Q

19

1Q

20

4Q

20

end-2019

26

Labour market and retail sales should keep improving

26

Household Consumption GDP x Broad Retail

SalesSource: IBGE

Unemployment rate

Source: IBGE.

-14

-8

-2

4

10

16

-8

-4

0

4

8

12

2Q

04

4Q

04

2Q

05

4Q

05

2Q

06

4Q

06

2Q

07

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

2Q

11

4Q

11

2Q

12

4Q

12

2Q

13

4Q

13

2Q

14

4Q

14

2Q

15

4Q

15

2Q

16

4Q

16

2Q

17

Household Consumption GDP (left axis)

Broad Retail Sales (right axis)


11.5

10.1

8.3

7.26.7

9.6

12.7

12.3

11.0

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

13.5

dez-0

2ju

n-0

3d

ez-0

3ju

n-0

4d

ez-0

4ju

n-0

5d

ez-0

5ju

n-0

6d

ez-0

6ju

n-0

7d

ez-0

7ju

n-0

8d

ez-0

8ju

n-0

9d

ez-0

9ju

n-1

0d

ez-1

0ju

n-1

1d

ez-1

1ju

n-1

2d

ez-1

2ju

n-1

3d

ez-1

3ju

n-1

4d

ez-1

4ju

n-1

5d

ez-1

5ju

n-1

6d

ez-1

6ju

n-1

7d

ez-1

7ju

n-1

8d

ez-1

8

ProjeçõesForecasts

27

Some positive signals are emerging in the labour market

27

Income and Total Incomey/y.Source: PNAD (IBGE)

Formal Jobs net creationy/y%. Sources: IBGE and Santander.

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

jun

/06

dez/0

6

jun

/07

dez/0

7

jun

/08

dez/0

8

jun

/09

dez/0

9

jun

/10

dez/1

0

jun

/11

dez/1

1

jun

/12

dez/1

2

jun

/13

dez/1

3

jun

/14

dez/1

4

jun

/15

dez/1

5

jun

/16

dez/1

6

jun

/17

3.0

2.3

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

abr-

13

jun

-13

ago

-13

out-

13

dez-1

3

fev-1

4

abr-

14

jun

-14

ago

-14

out-

14

dez-1

4

fev-1

5

abr-

15

jun

-15

ago

-15

out-

15

dez-1

5

fev-1

6

abr-

16

jun

-16

ago

-16

out-

16

dez-1

6

fev-1

7

abr-

17

jun

-17

Salário Real Médio

Massa Salarial Real

3) Labour Market

28

28

Investment vs Business Confidencey/y. Sources: IBGE and FGV.

Business Confidence vs Brazil CDS 5-ySources: IPEA and Santander

… however, still timid effect on the confidence indices

-40

-20

0

20

40

60

1Q

00

4Q

00

3Q

01

2Q

02

1Q

03

4Q

03

3Q

04

2Q

05

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

4Q

09

3Q

10

2Q

11

1Q

12

4Q

12

3Q

13

2Q

14

1Q

15

4Q

15

3Q

16

2Q

17

Investments Business Confidence

0

100

200

300

400

50070

80

90

100

110

120

Apr-

10

Sep-1

0

Feb-1

1

Jul-

11

Dec-1

1

May-1

2

Oct-

12

Mar-

13

Aug-1

3

Jan

-14

Jun

-14

Nov-1

4

Apr-

15

Sep-1

5

Feb-1

6

Jul-

16

Dec-1

6

May-1

7

Business Confidence 5y BZ CDS (reversed scale)

3) Confidence and Investments

29

Inflation

… all the way down, which helps the economic recovery

Regulated prices vs Market

prices inflationIndex 2013 Base 100. Sources: IBGE

and Santander.

Service prices vs Industrial

prices inflation

%yoy. Sources: IBGE and Santander.

5.05.56.06.57.07.58.08.59.09.510.0

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

Aug-1

3

Nov-1

3

Feb-1

4

May-1

4

Aug-1

4

Nov-1

4

Feb-1

5

May-1

5

Aug-1

5

Nov-1

5

Feb-1

6

May-1

6

Aug-1

6

Nov-1

6

Feb-1

7

Industrial Goods prices inflation (lhs)

Service prices inflation

90

95

100

105

110

115

120

125

130

135

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Dec-1

4

Mar-

15

Jun-1

5

Sep-1

5

Dec-1

5

Mar-

16

Jun-1

6

Regulated prices inflation Market prices inflation

95100105110115120125130135140

Dec-1

2

Mar-

13

Jun

-13

Sep-1

3

Dec-1

3

Mar-

14

Jun

-14

Sep-1

4

Dec-1

4

Mar-

15

Jun

-15

Sep-1

5

Dec-1

5

Mar-

16

Jun

-16

Sep-1

6

Dec-1

6

Mar-

17

Preços Administrados Preços Livres

-10

-5

0

5

10

15

20

Aug

-07

Dec-0

7A

pr-

08

Aug

-08

Dec-0

8A

pr-

09

Aug

-09

Dec-0

9A

pr-

10

Aug

-10

Dec-1

0A

pr-

11

Aug

-11

Dec-1

1A

pr-

12

Aug

-12

Dec-1

2A

pr-

13

Aug

-13

Dec-1

3A

pr-

14

Aug

-14

Dec-1

4A

pr-

15

Aug

-15

Dec-1

5A

pr-

16

Aug

-16

Dec-1

6A

pr-

17

Aug

-17

Dec-1

7A

pr-

18

Aug

-18

Dec-1

8

Food at home

Food at home

%yoy. Sources: IBGE and Santander.

30

Inflation

Inflation Forecasts%. Source: Santander.

Regulated inflation Forecasts%. Source: Santander.

2015 2016 2017 (f) 2018 (f) 2019 (f)

Regulated 18.1 5.5 7.0 5.5 5.0

Water and Sewage 14.8 20.1 10.6 5.2 4.0

Electric energy 51.0 -10.7 10.6 5.0 4.0

Urban transportation 9.2 7.8 5.5 6.3 4.0

Gasoline 20.1 2.5 5.9 4.9 4.0

Medicines 6.9 12.5 4.6 3.1 3.5

Healthcare plan 12.2 13.6 13.6 12.0 12.0

Market 8.5 6.6 2.0 3.7 3.9

IPCA 10.7 6.3 3.2 4.2 4.2

2015 2016 2017 (f) 2018 (f) 2019 (f)

IPCA 10.7 6.3 3.2 4.2 4.2

Regulated Prices 18.1 5.5 7.0 5.5 5.0

Market Prices 8.5 6.5 2.0 3.7 3.9

Industrial Ex Foodstuff 6.2 4.8 1.4 3.0 3.1

Non-durables Ex Foodstuff10.9 9.3 2.1 4.3 4.8

Food at home 12.9 9.4 -3.5 9.0 5.3

Semi-durables 5.3 4.1 3.0 4.0 4.0

Durables 3.3 1.4 -0.8 0.5 0.5

Services 8.1 6.5 4.9 3.3 3.8

31

Monetary policy

Inflation Expectations behavior

Source: BCB.

Inflation expectations are anchored in the long term, and the output gap is very negative

4.0

4.5

5.0

5.5

6.0

6.5

13/1

1/20

1424

/12/

2014

05/0

2/20

1520

/03/

2015

05/0

5/20

1516

/06/

2015

27/0

7/20

1504

/09/

2015

19/1

0/20

1530

/11/

2015

12/0

1/20

1624

/02/

2016

06/0

4/20

1618

/05/

2016

29/0

6/20

1609

/08/

2016

20/0

9/20

1601

/11/

2016

14/1

2/20

1622

/01/

2017

07/0

3/20

1718

/04/

2017

2018;2019e 2020

2017

Output Gap (Actual GDP - Potential GDP) - %

Sources: IBGE, FGV, IPEA and Santander estimates

-6.5

-5.5

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

3Q

06

2Q

07

1Q

08

4Q

08

3Q

09

2Q

10

1Q

11

4Q

11

3Q

12

2Q

13

1Q

14

4Q

14

3Q

15

2Q

16

1Q

17

4Q

17

3Q

18

2Q

19

1Q

20

4Q

20

end-2019

32

Monetary policy

Therefore, there is still room for further interest rate cuts

Real interest rate ex-ante (DI 1-y minus

inflation expectation)Sources: BCB and Santander.

Real Neutral Rate

Sources: Santander estimate.

1234567891011121314

7

9

11

13

15

17

19

11/2

1/2

003

5/2

1/2

004

11/2

1/2

004

5/2

1/2

005

11/2

1/2

005

5/2

1/2

006

11/2

1/2

006

5/2

1/2

007

11/2

1/2

007

5/2

1/2

008

11/2

1/2

008

5/2

1/2

009

11/2

1/2

009

5/2

1/2

010

11/2

1/2

010

5/2

1/2

011

11/2

1/2

011

5/2

1/2

012

11/2

1/2

012

5/2

1/2

013

11/2

1/2

013

5/2

1/2

014

11/2

1/2

014

5/2

1/2

015

11/2

1/2

015

5/2

1/2

016

11/2

1/2

016

5/2

1/2

017

Selic (target) lhs DI 1-yr minus CPI 12 months ahead

MethodLast

Value

Lower

Bound*Avg*

Upper

Bound*

HP statistical filter 5.9 3.6 5.2 6.6

Yield curve 5.7 2.4 6.2 9.5

Taylor rule (10-year window) 5.7 5.7 7.3 8.1

Fundamentals-based long term 5.2 2.9 5.3 8.0

Taylor rule (8-year window) 3.4 2.8 5.8 7.3

Fundamentals-based short term 4.1 2.9 5.4 12.2

33

Credit Market / Monetary policy

BNDES credit portfolio: outstanding loans Source: BCB.

Selic and TJLP differentialSources: BCB and Santander estimate.

0

150

300

450

600

750

0%

5%

10%

15%

20%

25%

jan/0

7

jul/0

7

jan/0

8

jul/0

8

jan/0

9

jul/0

9

jan/1

0

jul/1

0

jan/1

1

jul/1

1

jan/1

2

jul/1

2

jan/1

3

jul/1

3

jan/1

4

jul/1

4

jan/1

5

jul/1

5

jan/1

6

jul/1

6

jan/1

7

jul/1

7

BRL billion (rhs) % of GDP % of total credit

8.25%

7.0%

0%

5%

10%

15%

20%

25%

30%

jan/0

0ju

l/00

jan/0

1ju

l/01

jan/0

2ju

l/02

jan/0

3ju

l/03

jan/0

4ju

l/04

jan/0

5ju

l/05

jan/0

6ju

l/06

jan/0

7ju

l/07

jan/0

8ju

l/08

jan/0

9ju

l/09

jan/1

0ju

l/10

jan/1

1ju

l/11

jan/1

2ju

l/12

jan/1

3ju

l/13

jan/1

4ju

l/14

jan/1

5ju

l/15

jan/1

6ju

l/16

jan/1

7ju

l/17

Selic-TJLP gap Selic TJLP

34

Credit Market

Debt Burden and Household DebtSources: BCB and Santander.

15

20

25

30

35

40

45

50

15

16

17

18

19

20

21

22

23

24

Fe

b-0

5

Au

g-0

5

Fe

b-0

6

Au

g-0

6

Fe

b-0

7

Au

g-0

7

Fe

b-0

8

Au

g-0

8

Fe

b-0

9

Au

g-0

9

Fe

b-1

0

Au

g-1

0

Fe

b-1

1

Au

g-1

1

Fe

b-1

2

Au

g-1

2

Fe

b-1

3

Au

g-1

3

Fe

b-1

4

Au

g-1

4

Fe

b-1

5

Au

g-1

5

Fe

b-1

6

Au

g-1

6

Fe

b-1

7

Au

g-1

7

Fe

b-1

8

Debt Burden (lhs) Household Debt (rhs)

The debt burden is declining

35

Credit Market

…so the credit channel will work

Credit Outstanding Sources: BCB and Santander.

NPL (individuals and corporates)Sources: BCB and Santander.

10.8%

4.1%

5.0%

9.0%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

jan

/09

jul/

09

jan

/10

jul/

10

jan

/11

jul/

11

jan

/12

jul/

12

jan

/13

jul/

13

jan

/14

jul/

14

jan

/15

jul/

15

jan

/16

jul/

16

jan

/17

jul/

17

jan

/18

jul/

18

BNDES Direto

Private banks

State-owned banks(ex BNDES)

Total5.2

6.0

6.2

5.7

3.3

5.5

4.2

3.0

3.5

4.0

4.5

5.0

5.5

6.0

5.0

5.5

6.0

6.5

7.0

7.5

ma

r/1

1

se

t/1

1

mar/

12

se

t/1

2

ma

r/1

3

se

t/1

3

ma

r/1

4

se

t/1

4

ma

r/1

5

se

t/1

5

ma

r/1

6

se

t/1

6

ma

r/1

7

set/1

7

ma

r/1

8

se

t/1

8

Individuals Corporate

Forec

36

CompetitivenessCompetitiveness improvement of 2015 has lagged effect in labor cost and trade balance

Unit Labor Costs (USD)Up to Jul16. Sources: IBGE, CNI and Santander.

Real Effective Exchange Rate1988-2016=100. Sources: BCB and Santander.

0

20

40

60

80

100

120

140

160

180

200

jan

/88

jan

/89

jan

/90

jan

/91

jan

/92

jan

/93

jan

/94

jan

/95

jan

/96

jan

/97

jan

/98

jan

/99

jan

/00

jan

/01

jan

/02

jan

/03

jan

/04

jan

/05

jan

/06

jan

/07

jan

/08

jan

/09

jan

/10

jan

/11

jan

/12

jan

/13

jan

/14

jan

/15

jan

/16

jan

/17

REER - IPCA(Purchase power)

45

60

75

90

105

120

135

150

165

180

jan-0

4

jul-0

4

jan-0

5

jul-0

5

jan-0

6

jul-0

6

jan-0

7

jul-0

7

jan-0

8

jul-0

8

jan-0

9

jul-0

9

jan-1

0

jul-10

jan-1

1

jul-1

1

jan-1

2

jul-1

2

jan-1

3

jul-1

3

jan-1

4

jul-1

4

jan-1

5

jul-1

5

jan-1

6

jul-1

6

jan-1

7

Avg 2004-2014

37

Balance of Payments

External solvency: External financing is sufficient for declining needs. Therefore, the room for BRL depreciation is limited

Public sector: net FCY exposure (USD billion)USD bn, 12-month flows. Source: BCB.

Current account deficitUSD bn, 12-month flows , % GDP Source: BCB

-300

-200

-100

0

100

200

300

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

de

z 2

017

Net outstanding swaps

FX-linked public domestic bonds

Public external debt

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

-120

-100

-80

-60

-40

-20

0

20

40

60

jan/9

6ju

l/96

jan/9

7ju

l/97

jan/9

8ju

l/98

jan/9

9ju

l/99

jan/0

0ju

l/00

jan/0

1ju

l/01

jan/0

2ju

l/02

jan/0

3ju

l/03

jan/0

4ju

l/04

jan/0

5ju

l/05

jan/0

6ju

l/06

jan/0

7ju

l/07

jan/0

8ju

l/08

jan/0

9ju

l/09

jan/1

0ju

l/10

jan/1

1ju

l/11

jan/1

2ju

l/12

jan/1

3ju

l/13

jan/1

4ju

l/14

jan/1

5ju

l/15

jan/1

6ju

l/16

jan/1

7ju

l/17

USD billion

% GDP

38

Balance of Payments

Foreign Direct Investment

FDI (USD billion)USD bn, 12-month flows. Source: BCB.

-20

0

20

40

60

80

100

120

140

jan/9

6ju

l/96

jan/9

7ju

l/97

jan/9

8ju

l/98

jan/9

9ju

l/99

jan/0

0ju

l/00

jan/0

1ju

l/01

jan/0

2ju

l/02

jan/0

3ju

l/03

jan/0

4ju

l/04

jan/0

5ju

l/05

jan/0

6ju

l/06

jan/0

7ju

l/07

jan/0

8ju

l/08

jan/0

9ju

l/09

jan/1

0ju

l/10

jan/1

1ju

l/11

jan/1

2ju

l/12

jan/1

3ju

l/13

jan/1

4ju

l/14

jan/1

5ju

l/15

jan/1

6ju

l/16

jan/1

7ju

l/17

Equity Intercompany loans

39

Santander forecasts2014 2015 2016 2017 2018 2019

GDP (%)

GDP Growth 0.5 -3.8 -3.6 0.8 3.2 3.0

Inflation (%)

IPCA-IBGE 6.4 10.7 6.3 3.2 4.2 4.0

IGP-M 3.7 10.5 7.2 -0.4 4.5 4.0

FX Rate

BRL/USD - end of period 2.66 3.90 3.26 3.20 3.50 3.57

BRL/USD - average 2.35 3.33 3.49 3.18 3.37 3.53

Interest Rates (%)

SELIC - end of period 11.75 14.25 13.75 7.00 6.75 8.50

Labor Market

Unemployment rate (average) 6.8 8.5 11.5 12.9 11.4 10.2

Balance of Payments

Exports (USD bi) 225.1 191.1 185.3 207.8 226.1 251.0

Imports (USD bi) 229.1 171.5 137.6 150.9 166.3 185.3

Trade Balance (USD bi) -4.0 19.7 47.7 56.9 59.9 65.8

Current Account (USD bi) -104.2 -58.9 -23.5 -23.8 -23.5 -20.7

Current Account (% of GDP) -4.2 -3.3 -1.3 -1.1 -1.1 -1.1

Fiscal Accounts

Primary Balance (% of GDP) -0.6 -1.9 -2.5 -2.5 -2.3 -1.8

Net Public Sector Debt (% GDP) 32.6 35.6 45.9 50.0 57.9 62.8

Gross Public Sector Debt (% GDP) 56.3 65.5 69.5 77.2 84.0 88.9

Thank you!

economic research - brazil | september 2017 highway to ... · car wash operation car wash operation...

Documents