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1
Alexandre Tombini
Governor
January 2014
Brazil Economic Outlook
London School of Economics
2
• Brazil is among the largest countries in
terms of territory, population and GDP
• Brazil has vast natural resources,
including recently discovered large
offshore oil fields, a diverse industrial
base, a dynamic and sophisticated
private sector, and a well-structured
public sector
• Brazil is a vigorous democracy, with free
multiparty elections and a stable political
system
• Brazil has good relations with all its
neighbors and has increased its ties with
all regions of the world
Source: IBGE / BCB / IMF
Brazil overview
• 7th largest GDP: US$ 2,253 billion (2012)
• Continental country: 5th largest area
8,515,767 km2
• 5th largest population: 199 million people
(2012)
3
• Sources: IBGE / UN
Source: IBGE / UN
Demographics
Dependency Ratio Population Pyramid (2012)
Note: The dependency ratio is the ratio of the sum of the population
aged 0-14 and that aged 65+ to the population aged 15-64
• Brazil’s dependency ratio is low and
declining
• Brazil’s population is highly concentrated
within the Economically Active
Population range
25
50
75
100
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
20
40
20
50
Brazil China India Russia
million people
men women
-10 -5 0 5 10
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90+
4
• Reduced inequality
• Reduced poverty: from 27% to 12% of the households
• Created jobs: more than 18 million additional formal jobs (2003-2012); record low unemployment at present
• Grew the middle class: +40 million people
• Increased access to credit and banking services
Source: IPEA / IBGE / FGV / BCB
Social achievements in the past decade
5
Main topics
Inflation − Central bank is acting to bring inflation to
target
Growth − Moderate economic expansion
− Rebalancing consumption and investment
− Supply-side initiatives to raise potential growth
UMP Exit − Net positive for emerging markets
− Brazil has flexible policy framework
− BCB has buffers to smooth the adjustment
process
6
Inflation
7
0
2
4
6
8
10
12
14
16
18 D
ec 9
9
Dec 0
0
Dec 0
1
Dec 0
2
Dec 0
3
Dec 0
4
Dec 0
5
Dec 0
6
De
c 0
7
Dec 0
8
Dec 0
9
Dec 1
0
Dec 1
1
Dec 1
2
Dec 1
3
Dec 1
4
YoY
%
CPI Inflation Report (Dec 13)
Source: IBGE / BCB
Inflation high but within target band
Ten consecutive years of year-end inflation within target band
8 Source: BCB
ER depreciation pressuring inflation
Jul 11 1.56
2.35
1.5
1.7
1.9
2.1
2.3
2.5
Dec 0
6
Jun 0
7
Dec 0
7
Jun 0
8
Dec 0
8
Jun 0
9
Dec 0
9
Ju
n 1
0
Dec 1
0
Jun 1
1
De
c 1
1
Jun 1
2
Dec 1
2
Jun 1
3
Dec 1
3
BR
L/U
SD
(in
vert
ed s
cale
) Central bank acting to limit pass-through to domestic prices
9 Source: IBGE / MTE
Labor market remains tight
Unemployment Rate
Labor market continues to tighten, but some signs of
moderation can be observed
Formal Jobs Creation
5.1
4
6
8
10
12
14
20
02
20
03
20
04
20
05
20
06
2007
20
08
20
09
20
10
2011
20
12
20
13
s.a
. %
Up to Nov 13
1.0 0.9
1.8
1.6 1.5
1.9
1.7
1.4
2.6
2.0
1.4
1.1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
2011
20
12
20
13
mill
ion
10
0
3
6
9
12
15
De
c 1
0
Mar
11
Jun 1
1
Se
p 1
1
Dec 1
1
Mar
12
Jun 1
2
Sep 1
2
De
c 1
2
Mar
13
Jun 1
3
Sep 1
3
De
c 1
3
% Y
oY
Food and Beverages
Source: IBGE
Food price shocks in 2012-2013 hit inflation
8.5%
Apr 13
14.0%
2nd supply
shock (fresh
foods)
1st supply
shock
(commodities)
Brazil suffered idiosyncratic shocks on top of the global food
commodity shocks
11
6
8
10
12
14
16
18
20
Jan 0
6
Ja
n 0
7
Ja
n 0
8
Ja
n 0
9
Ja
n 1
0
Ja
n 1
1
Ja
n 1
2
Ja
n 1
3
Ja
n 1
4
%
Policy rate Swap reference rate - 360-day term
Source: BCB / BM&FBOVESPA
Central bank acting to bring inflation to target
4.8
0
3
6
9
12
15
Ja
n 0
6
Jan 0
7
Ja
n 0
8
Ja
n 0
9
Ja
n 1
0
Ja
n 1
1
Ja
n 1
2
Ja
n 1
3
Ja
n 1
4
%
Real Interest Rate (ex ante)
10.5
12
Growth
13
Moderate economic expansion
− More favorable contribution from net exports
− Employment, wages and credit support consumption
• Economic growth drivers
• Rebalancing consumption and investment
• Moderate growth to continue in 2014
• Faster growth requires strengthening confidence
− Pent-up demand for infrastructure investment
14
Growth
Demand
15 Source: IBGE / MTE / BCB
Support for domestic demand Unemployment Rate Formal Jobs Creation
* 12 months up to november
Nov 13 5.1
4
6
8
10
12
14
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
s.a
. %
Credit Outstanding
14.6%
7.7% 0
5
10
15
20
25
30
35
40
Ma
r 0
8
Se
p 0
8
Ma
r 0
9
Se
p 0
9
Ma
r 1
0
Se
p 1
0
Ma
r 11
Se
p 1
1
Ma
r 1
2
Se
p 1
2
Ma
r 1
3
Se
p 1
3
Yo
Y %
Total Households (nonearmarked credit)
Employment and Labor Income
1.0%
1.8%
2.8%
0
1
2
3
4
5
6
7
Ja
n 1
2
Ma
r 1
2
Ma
y 1
2
Ju
l 1
2
Se
p 1
2
No
v 1
2
Ja
n 1
3
Ma
r 1
3
Ma
y 1
3
Ju
l 1
3
Se
p 1
3
Nov 1
3
12
mo
nth
s %
Employment Real Income Real Payroll
1.0 0.9
1.8 1.6 1.5
1.9 1.7
1.4
2.6
2.0
1.4
1.1
0.0
0.5
1.0
1.5
2.0
2.5
3.0
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
mill
ion
16 Source: IBGE
Consumption remains strong
60
70
80
90
100
110
120
Nov 0
7
Mar
08
Jul 08
Nov 0
8
Mar
09
Jul 09
Nov 0
9
Mar
10
Jul 10
Nov 1
0
Mar
11
Jul 11
Nov 1
1
Mar
12
Jul 12
Nov 1
2
Mar
13
Jul 13
Nov 1
3
Retail Sales Expanded Retail Sales (includes vehicles and building materials)
20
11
= 1
00
4.4% (12 months)
3.8% (12 months)
Retail Sales
17
-25
-20
-15
-10
-5
0
5
10
15
20
25 Jan 1
0
Mar
10
May 1
0
Jul 10
Sep 1
0
Nov 1
0
Jan
11
Mar
11
May 1
1
Jul 11
Se
p 1
1
Nov 1
1
Jan 1
2
Mar
12
May 1
2
Jul 12
Sep 1
2
Nov 1
2
Jan 1
3
Mar
13
May 1
3
Ju
l 1
3
Sep 1
3
Nov 1
3
12
-mon
th c
ha
ng
e (
%)
Source: IBGE
Investment strong in 2013
Capital Goods Output
11.5%
18
96
98
100
102
104
106
108
110
112
114
Jan 1
1
Apr
11
Jul 11
Oct 11
Jan 1
2
Ap
r 1
2
Jul 12
Oct 12
Jan 1
3
Apr
13
Jul 13
Oct 13
Neutr
al =
100
Confidence key for investment
Source: FGV / IBGE
Gross Fixed Capital Formation
Annual growth
Industry Confidence
3.7%
-6%
-2%
2%
6%
10%
14%
1 Q
11
2 Q
11
3 Q
11
4 Q
11
1 Q
12
2 Q
12
3 Q
12
4 Q
12
1 Q
13
2 Q
13
3 Q
13
4 Q
13
19 Source: IMF / BCB
Jul 11 71.9
96.3
60
70
80
90
100
110
120
De
c 0
8
Ju
n 0
9
De
c 0
9
Ju
n 1
0
De
c 1
0
Ju
n 1
1
De
c 1
1
Ju
n 1
2
De
c 1
2
Ju
n 1
3
De
c 1
3
Jun 1
994 =
100
Real Effective Exchange Rate
Real exchange rate has depreciated
3.0
3.7 3.9
2.7
4.5 5.2
-14
-10
-6
-2
2
6
10
14
-1
0
1
2
3
4
5
6
2010
20
11
2012
2013
2014
2015
%
%
Global GDP Growth World Trade (RHS)
Global activity and trade gain traction
Net exports drivers
20 Source: IBGE / BCB
Net exports should contribute to growth
-1.4 -1.4 -1.7
-0.2
-2.7
-0.7 0.03
-1.0
0.2
5.3
7.5 6.9
-0.1
10.3
3.4
1.0
3.3 2.1
-4
-2
0
2
4
6
8
10
12
2006
2007
2008
2009
2010
20
11
2012
20
13
*
20
14
**
pe
rce
nta
ge
po
ints
External Sector Domestic Demand
* Forecast (Inflation Report Dec 2013)
** Up to 3rd quarter (accumulated over 4 quarters)
21
Growth
Supply
22 Source: IBGE
Industrial sector recovery
123
124
125
126
127
128
129
130
131
132
Jan 1
1
Mar
11
May 1
1
Jul 11
Sep 1
1
Nov 1
1
Jan 1
2
Mar
12
May 1
2
Jul 12
Sep 1
2
No
v 1
2
Jan 1
3
Mar
13
Ma
y 1
3
Jul 13
Sep 1
3
No
v 1
3
2002 =
100
Industrial production (3 month moving average)
23
1.4
2.3
1.1
-11.9
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
No
v 0
9
Ma
r 1
0
Ju
l 1
0
No
v 1
0
Ma
r 11
Ju
l 11
No
v 1
1
Ma
r 1
2
Ju
l 1
2
No
v 1
2
Mar
13
Ju
l 1
3
No
v 1
3
% C
ha
ng
e O
ve
r 1
2 M
on
ths
Real Output Costs and Components
Output Cost Employees Intermediate Goods Energy
Source: CNI / IBGE / BCB
Improved industrial competitiveness
Aug 11 127.2
98.2
70
80
90
100
110
120
130
140
No
v 0
8
Ma
r 0
9
Ju
l 0
9
No
v 0
9
Ma
r 1
0
Ju
l 1
0
No
v 1
0
Ma
r 11
Ju
l 11
N
ov 1
1
Ma
r 1
2
Ju
l 1
2
No
v 1
2
Ma
r 1
3
Ju
l 1
3
No
v 1
3
3m
ma
s.a
., 2
00
8 =
10
0
Unit Labor Cost in Industry
ULC in USD
24
51.7
40
42
44
46
48
50
52
54
56
58
60
Mar
10
Jun 1
0
Sep 1
0
Dec 1
0
Mar
11
Ju
n 1
1
Se
p 1
1
Dec 1
1
Mar
12
Jun 1
2
Sep 1
2
Dec 1
2
Mar
13
Jun 1
3
Sep 1
3
Dec 1
3
neutr
al =
50
Source: Markit
Service sector shows moderate growth
PMI in service sector
25
161.9
188.2 189.6
120
125
130
135
140
145
150
155
160
165
170
175
180
185
190
2007 2008 2009 2010 2011 2012 2013* 2014*
mill
ion
ton
s
grain production
Source: IBGE / FAO
*December 2013 estimate
Record grain harvests in 2013 and 2014
World Producer Rank
(FAO 2011)
Soybean: 2º
Corn: 3º
26
• Investment in human capital
• Development of the oil and gas sector
• Infrastructure (airports, roads, railways and ports):
attracting private sector capital and expertise
Supply-side initiatives to boost growth
27 Source: MEC
Investment in human capital
• Programs aimed at increasing access to
technical schooling and higher education:
o Technical and professional education:
Pronatec: 5.5 million students in technical and professional
education since 2011 (goal is 8 million by end of 2014)
o Higher education:
Prouni: almost 250,000 undergraduate scholarships in
private institutions for disadvantaged students in 2013
Science without frontiers: 100,000 scholarships abroad up
to 2015 Currently almost four thousand undergraduate and graduate
students in the UK
28
Countries 1990 2000 % Change 2010 % Change
Brazil 3.8 5.6 47.4 7.2 28.6
Chile 8.1 8.8 8.6 9.7 10.2
China 4.9 6.6 34.7 7.5 13.7
India 3.0 3.6 20.0 4.4 22.2
Russian Federation 9.2 11.3 22.8 11.7 3.5
South Africa 6.5 8.2 26.2 8.5 3.7
United States 12.3 13 5.7 13.3 2.3
Source: UN
Education: room for further improvement
Average number of years of education received by people ages 25 and older
Mean years of schooling of adults increased sharply in the last decades,
but Brazil still lags developed and many developing nations
29
Infrastructure and energy reforms
• Concession auctions have proved attractive
• Infrastructure (airports, roads, railways and ports) and energy: attracting private sector capital and expertise
11th and 12th rounds of oil and gas concessions
o 6 airports: 85 million passengers transported in 2012
o 5 roads: 4,268 km (2,652 miles)
o Oil and gas auctions in 2013:
1st production sharing round (pre-salt layer: Libra) – BRL15 billion signing bonus
30
UMP Exit
31
• Strong external indicators
Brazil prepared for UMP exit
• Net positive for emerging markets, which will
benefit including through international trade
• Sound financial system
32
• Use of buffers
Classic policy response
• Exchange rate flexibility
• Policy tightening
33 Source: Bloomberg
UMP exit prospects led to higher volatility
5.0
7.5
10.0
12.5
15.0
17.5
Ja
n 1
3
Feb 1
3
Mar
13
Ap
r 1
3
May 1
3
Jun 1
3
Jul 13
Aug 1
3
Sep 1
3
Oct 13
Nov 1
3
De
c 1
3
Jan 1
4
BRL Volatility (3-Months At-the-money Implied)
34
Liquid Assets to Short Term
Liabilities
11.6
12.0
13.3
13.4
13.9
14.0
14.3
14.4
14.4
14.7
14.8
15.7
16.1
16.4
17.1
19.1
10 12 14 16 18 20
Australia
Spain
India
Russia
Italy
South Korea
France
United States
Canada
Japan
South Africa
Turkey
Mexico
United Kingdom
Brazil
Germany
26.1
36.1
40.0
44.9
45.0
46.7
49.9
72.5
76.4
82.0
96.9
121.4
140.3
160.0
0 50 100 150 200
India
South Africa
United Kingdom
Canada
Australia
Mexico
Japan
Turkey
United States
Russia
Italy
South Korea
Germany
Brazil
-86.3
-31.9
-22.2
-19.2
-14.7
-14.5
-13.6
-13.6
-10.9
-6.0
-3.9
-3.2
7.7
10.6
-120 -20 80
Italy
Spain
South Africa
Japan
Australia
United Kingdom
United States
India
Russia
Canada
South Korea
Turkey
Mexico
Brazil
Source: IMF (FSI – latest available data)
Sound financial system Regulatory Capital to
Risk-Weighted Assets ( Provisions – NPL) / Capital
35
95.9
89.0 84.9
91.2
4.1
11.0 15.1
8.8
60%
80%
100%
Public-owned Private-owned Foreign-controlled Total
Domestic Cross-border
Source: BCB
Banks: low reliance on cross-border funding
Sep 13
Origin of Bank Funding
36
-86.8 -110
-70
-30
10
50
90
130
170
210
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
20
10
20
13
*
US
$ b
illio
n
375.5
0
50
100
150
200
250
300
350
400 1
98
4
19
89
19
94
19
99
20
04
20
09
20
14
*
US
$ b
illio
n
Source: BCB
International Reserves Net External Debt
*Nov 2013
Brazil is net external creditor
*as of Jan 20th
37
21.4
21.8
29.6
29.8
30.3
31.4
40.1
44.5
49.3
0 20 40 60
Colombia
India
Brazil
Indonesia
Mexico
Peru
South Africa
Chile
Turkey
External Debt / GDP (%)
Source: IIF
* Brazil data includes intercompany debt transactions and domestic debt in hands of foreign investors
9.4
13.6
13.6
15.9
20.3
24.1
25.7
26.1
27.5
0 10 20 30
Brazil
Colombia
Peru
Chile
South Africa
Mexico
Indonesia
India
Turkey
Short Term External Debt / Total (%)
Strong external debt indicators
2013 forecasts
38 Source: IMF / STN
Low nonresident public debt share
7.8
8.4
13.7
16.5
23.6
24.7
31.3
32.7
33.8
35.8
36.9
37.5
41.3
55.2
59.9
61.3
0 20 40 60 80
India
Japan
South Korea
Brazil
Russia
Canada
Turkey
UK
US
Italy
Mexico
Spain
South Africa
Australia
Germany
France
% of outstanding domestic public debt securities*
* The latest data reported by the IMF Fiscal Monitor in October 2013. For Brazil, data from November, as reported by Secretaria
do Tesouro Nacional (STN).
39 Source: UNCTAD
Leading destination for FDI
197.9
114.7
85.7
82.7
50.6
48.6
48.5
46.9
43.3
42.8
40.8
35.2
32.5
30.6
29.2
0 50 100 150 200
US
China
Belgium
Hong Kong
UK
Singapore
Brazil
Germany
Russia
Ireland
Spain
Australia
Switzerland
France
Saudi Arabia
Milhares
2010
226.9
124.0
103.3
96.1
66.7
65.8
64.0
52.9
51.1
41.4
40.9
40.4
34.3
31.6
29.5
0 50 100 150 200
US
China
Belgium
Hong Kong
Brazil
Australia
Singapore
Russia
UK
Canada
France
Germany
Italy
India
Spain
Milhares
2011
146.7
119.7
72.5
65.3
62.5
58.9
54.4
48.5
47.2
44.1
39.6
27.3
26.4
22.6
19.3
0 50 100 150
US
China
Hong Kong
Brazil
UK
France
Singapore
Australia
Canada
Russia
Ireland
India
Chile
Luxembourg
Belgium
Milhares
2012
40
Alexandre Tombini
Governor
January 2014
Brazil Economic Outlook
London School of Economics
41
Glossary
BCB Banco Central do Brasil
BM&FBOVESPA Brazilian Securities, Commodities and Futures Exchange
EME Emerging Market Economy
FDI Foreign Direct Investment
IIF Institute of International Finance
IBGE Instituto Brasileiro de Geografia e Estatística
UMP Unconventional Monetary Policy
UNCTAD United Nations Conference on Trade and Development
FGV Fundação Getúlio Vargas
STN Secretaria do Tesouro Nacional
IPEA Instituto de Política Econômica Aplicada
FAO Food and Agriculture Organization of the United Nations
MTE Ministério do Trabalho e Emprego
CNI Confederação Nacional da Indústria
MEC Ministério da Educação
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