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Brazil Economic Outlook and Investment Opportunities

Jorge ArbacheUniversity of Brasilia

BUSBC Meeting, Brasilia, April 28, 2015

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1. Overview

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Recent economic performanceGDP per capita growth (%)

Source: Central Bank

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-2

-1

0

1

2

3

4

5

6

7

-0.1

1.7

-0.1

4.3

1.9

2.8

4.8

3.9

-1.3

6.5

2.9

0.8

1.8

-0.7

-1.5

-1.0

-0.2

0.0

Note: 2015-2018: our own estimates based on macroeconometric modelling and CGE analyses

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• End of the low hanging fruit growth model: consumption, easy credit, international liquidity, government spending and commodity boom

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Short term challenges

• Restore the market confidence• Resume growth• Fight inflation: ~ 8.25% in the last 12 months• Keep fiscal accounts under control: significant deterioration in recent

years• Keep BoP deficit under control: -4.5% of GDP in the last 12 months

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Current account balance - % GDPSource: Central Bank

CPI (%) – monthlySource: Central Bank

20012002

20032004

20052006

20072008

20092010

20112012

20132014

-5

-4

-3

-2

-1

0

1

2

3

Jan-10

May-1

0

Sep-10

Jan-11

May-1

1

Sep-11

Jan-12

May-1

2

Sep-12

Jan-13

May-1

3

Sep-13

Jan-14

May-1

4

Sep-14

Jan-150

0.2

0.4

0.6

0.8

1

1.2

1.4

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2. What the government is doing?

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Pillars of Mr Levy`s policy

• Focus on gross public debt• Accelerate concessions and PPPs opportunities• Increase technical and college-level training• Foster increase in labor supply• Changes in Federal and State VAT• Expansion of the SIMPLES and ‘doing business’ initiatives• Focus on international trade

Source: MoF

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Non financial public sector primary and nominal balance - % GDP

Source: MoF

Government goal

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3. Challenges ahead

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• Brazil -- combination of a still low unemployment rate (4.9% in the last 12 months) with recession, rising inflation and current account deterioration: trap

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How to explain the trap?

• Low unemployment is partly explained by the decelerating working age population, low labor productivity and service sector boom, which is highly labor intensive

• Exchange rate pass-through

• Falling savings and investment ratios

• Poor international competitiveness

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Medium term challenges

• Output gap has decreased: 2.3% from 3.4% in the last 15 years (our own estimates Jan/2015); IMF estimates (Apr/2015): 2.5%

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How to explain the falling potential output?

• Premature aging and rapid deceleration of the working age population• Premature servicification (70% of GDP), which is highly uncompetitive• Premature deindustrialization (manufacturing sector 13% of GDP from

35% in the 1980s)• Re-primarization of exports• Low and falling savings and investment ratios

• All combined with low and stagnated labor productivity, poor international competitiveness, and secular stagnation in developed countries

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4. Are there business opportunities?

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• Despite the poor environment and growth prospects in Brazil, there are plenty of opportunities out there in the short and medium terms

• Demographic changes are creating great opportunities

• The desperate need to increase efficiency and productivity favors smart initiatives and smart businesses

• Expansion of concessions, PPPs and privatizations

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• Huge potential for industrialization of comparative advantages e.g. agribusiness, pre-salt, minerals, renewable energy, biodiversity, etc

• New frontiers of development in the countryside and in fringe states

• Smart cities projects

• Regional markets and the still rising middle class

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Case study: heath sector

• Brazil has a free, universal health service• Public service is widely perceived

as poor• It is unlikely that public

investment in healthcare will improve significantly in the foreseeable future

• Low and stable supply of beds and large regional infrastructure disparities• Hospital sector is highly

fragmented limited capacity to invest• Recent legislation change will

favor new entrants

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Japan

Korea

Russian

Fed.

German

y

Austria

Hungary

Czech Rep

ublic

PolandFra

nce

Belgium

Slova

k Rep

ublic

Finlan

d

Luxe

mbourg

Estonia

OECD25

Switz

erlan

d

Greece

Netherl

ands

Slove

nia

Australi

a

Denmark Ita

ly

Portuga

l

Icelan

d

Norway

Israe

lSp

ain

United St

ates

Irelan

d

United Kingd

om

New Ze

aland

Canad

aChina

Swed

en

Turke

yBraz

il

South Afri

caChile

Mexico

Indonesia

India

2.3

4.9

Note: Total of beds per 100 000 habitants. Source: WHO 2013 and OECD 2013.

Supply of beds: Brazil vs. OECD

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• Demographic changes are already impacting the healthcare demand strongly in terms of level, composition and type of care

• 19% of population above 60 years old in 2030 – it was 11% in 2013

• 2000 • 2030

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-89

90+

0-45-9

10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-8485-89

90+

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• As a result of the growing income and demographic changes, the coverage of private health insurance has increased from 34 to 51 million people between 2004 and 2014

• Only 1/4 of total population is covered by private health insurance

2004 2006 2008 2010 2012 2014

33.8437.25

41.4745.18

48.2850.93

Mill

ion

of P

eopl

eSource: ANS

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• A substantial share of additional supply of healthcare will have to be provided by the private sector

• Large room for new investments in infrastructure and market consolidation• Hospitals• Diagnosis services• Retail health clinics

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4. Risks

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• Limited margin for fiscal maneuver in the short term

• Pursuing a fiscal adjustment will be politically challenging, but emerging awareness on the need to go forward with the reforms proposed by government

• Loss of investment grade and access to credit markets

• Economic slack and political uncertainties globally

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• China`s slowdown and commodity prices

• FED’s policy move

• Protectionism and trade policies

• Exchange rate uncertainties

• Environmental changes

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Thank You!jarbache@gmail.com