challenges to monetary policy in the emes -...

Challenges to monetary policy in the EMEsA view into the Brazilian Case

November 18th, 2017

Governor of the Banco Central do Brasil

Ilan Goldfajn

Outline

• Benign international conditions and Emerging

Markets Economies (EMEs)

• The current economic situation in Brazil

• Issues for discussion

• Final Remarks

2

Outline


Markets Economies (EMEs)



• Final Remarks

3

Benign conditions for EMEs – How long?

Source: Thomson Datastream

4

80

130

180

230

280

No

v 1

6

Dec

16

Jan

17

Feb

17

Mar

17

Ap

r 1

7

May

17

Jun

17

Jul 1

7

Au

g 1

7

Sep

17

Oct

17

No

v 1

7

bas

isp

oin

ts

CDS (5-Year, Sovereign)

Brazil Turkey Russia South Africa Mexico

Outline


Markets Economies



• Final Remarks

5

Brazil: Risk has fallen

12/22/2015507

11/16/2017180

100

150

200

250

300

350

400

450

500

550Ju

n 1

4

Au

g 1

4

Oct

14

Dec

14

Feb

15

Ap

r 1

5

Jun

15

Au

g 1

5

Oct

15

Dec

15

Feb

16

Ap

r 1

6

Jun

16

Au

g 1

6

Oct

16

Dec

16

Feb

17

Ap

r 1

7

Jun

17

Au

g 1

7

Oct

17

bas

isp

oin

ts

Brazil: CDS (5-Year, Sovereign)

Source: BCB / Bloomberg

6

Jul 142.22

Jan 164.05

Oct 173.19

2

3

4

Jun

14

Au

g 1

4

Oct

14

Dec

14

Feb

15

Ap

r 1

5

Jun

15

Au

g 1

5

Oct

15

Dec

15

Feb

16

Ap

r 1

6

Jun

16

Au

g 1

6

Oct

16

Dec

16

Feb

17

Ap

r 1

7

Jun

17

Au

g 1

7

Oct

17

Brazilian exchange rate - R$/US$

7

Source: BCB / IBGE

Brazilian Real has stabilized

Asset prices have improved

1/26/201637,497

11/16/201772,512

30,000

40,000

50,000

60,000

70,000

80,000

Jan

15

Ap

r 1

5

Jul 1

5

Oct

15

Jan

16

Ap

r 1

6

Jul 1

6

Oct

16

Jan

17

Ap

r 1

7

Jul 1

7

Oct

17

ind

ex p

oin

ts

Brazil: Stock Exchange Index (Ibovespa)

*5-year inflation-indexed bond (NTN-B) interest rate. Source: BCB / Bloomberg

8

9/23/20157.99

11/10/20174.87

4

5

6

7

8

Jan

15

Ap

r 1

5

Jul 1

5

Oct

15

Jan

16

Ap

r 1

6

Jul 1

6

Oct

16

Jan

17

Ap

r 1

7

Jul 1

7

Oct

17

% p

.a.

Brazil: 5-year real interest rate*

6.40

10.67

6.29

3.094.04

4.25 4.00

0

2

4

6

8

10

122

01

4

20

15

20

16

20

17

20

18

20

19

20

20

%

CPI (IPCA), Annual Percent Change

IPCA targets

* Medians of Market expectations as of November 10thSource: BCB / IBGE

Inflation expectations anchored

9

11/16/20173.0

2

3

4

5

6

7

8

9

Dec

15

Feb

16

Ap

r 1

6

Jun

16

Au

g 1

6

Oct

16

Dec

16

Feb

17

Ap

r 1

7

Jun

17

Au

g 1

7

Oct

17

% p

.a.

Real ex ante interest rate*

As a consequence, interest rates declined

7.50

6

7

8

9

10

11

12

13

14

15

Mar

12

Sep

12

Mar

13

Sep

13

Mar

14

Sep

14

Mar

15

Sep

15

Mar

16

Sep

16

Mar

17

Sep

17

% p

.a.

Monetary Policy Interest Rate (Selic Rate)

* 12-month pre-fixed interest rate (from the Swap DI market) minus 12-month expected inflation (Focus survey)Source: BCB / Bloomberg

10

160

165

170

175Se

p 1

4

Dec

14

Mar

15

Jun

15

Sep

15

Dec

15

Mar

16

Jun

16

Sep

16

Dec

16

Mar

17

Jun

17

Sep

17

Dec

17

Mar

18

Jun

18

Sep

18

Dec

18

Ind

ex n

um

ber

, s.a

.

Real GDP*

Recession ended and the recovery is underway

*In red, market forecast (Focus report, 11/10/2017).Source: BCB / IBGE

11

Comfortable balance of payments Position

• Current account deficit: 0.6% of the GDP in September

• FDI: 4.2% of the GDP in September (seven times the deficit)

• Trade balance surplus: US$ 59 billion this year until October

• International reserves: more than US$ 380 bi, 20% of the GDP

12

Outline


Markets Economies



• Final Remarks

13

Issues for Discussion

• Why the recession was so severe?

• Why did disinflation lagged so much and, once in

place, was so fast?

• Why is the neutral interest rate so high in Brazil?

• Why are banks interest spreads so wide?

14




place, was so fast?



15

-5

0

5

10

15

%

Annual real GDP growth

Severe recession

16

21 3 4

*In red, medians of market expectations as of November 10thSource: IBGE / Ipeadata

Real GDPReal GDP

per capita

accumulated

growth

(%)

accumulated

growth

(%)

1 1930-31 -5,3 -7,8

2 1981-83 -6,3 -12,4

3 1990-92 -3,8 -7,7

4 2015-16 -7,2 -8,7

Why the recession was so severe?

1) Reversal of previous excessive stimulative policies

2) Investigations, political instability and impact on

corporates

3) Deleveraging process

17

Source: BCB




place, was so fast?



18

Dec 1510.7

Aug 169.0

Oct 172.7

Dec 173.2

Dec 184.3

0

2

4

6

8

10

12

Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18 Sep 18

%

CPI (IPCA), 12-Month Percent Change

Inflation resisted and then fell sharply

Conditional Forecast*

* Scenario with Focus Selic and Exchange RatesSource: BCB / IBGE

19

Why the disinflation take so long?

2) Defensive behavior by price setters in an environment of uncertainty and

high expected inflation

20

Source: BCB / IBGE

2

4

6

8

10

Jan 13 Sep 13 May 14 Jan 15 Sep 15 May 16 Jan 17 Sep 17 May 18 Jan 19 Sep 19

%

CPI (IPCA), 12-Month Percent Change

Breakeven inflation rate (01/29/2016) Breakeven inflation rate (07/29/2016) CPI (observed)




place, was so fast?



21

1) Fiscal pressure

Why is the neutral interest rate so high?

22

Source: STN

8.6

1.4

4.5

8.5

5.8

-3.9

10.18.8 9.3 9.6

3.6

9.9

16.1

-2.9

5.46.6 6.3

1.9

-0.6

Mean5.6

-5

0

5

10

15

20

%

Central Government primary expenditure – real annual growth

2) Half of Credit in Brazil is at subsidized rates


23

Source: BCB

58% Payroll loans

Housing + Credit card

69% BNDES 61% Working capital

+ Foreign trade

Non earmarked loansEarmarked loans

71%

Individuals26%

Corporate; 24%

Corporate26%

Individuals24%

Portfolio by source of fundsDec/2016


24

Source: BCB

7.50

7.005

10

15

20

25

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16

% p

.a.

Selic rate versus TJLP

Selic TJLP

TJLP (old): discretionary

TLP (new): market basedNational Development Bank




place, was so fast?



25

Why is the bank interest spread so wide?

26

Bank interest spread decomposition: 2011-2016 average*

*Total credit - multiple and commercial banks.Source: BCB

Profits and others

23.3%4.0 bps

Direct taxation

15.6%2.7 bps

Reserve Requirements +tax charges and FGC

1.7%0.3 bps

Administrative costs

3.8%0.7 bps

Delinquency

55.7%9.6 bps

Reforms and BC+ agenda

1. Labor reform

2. Education reform

3. Constitutional spending ceiling

4. Changes in the oil and gas sector

5. Privatization program

6. New market-oriented interest rate (TLP) for National Development Bank (BNDES)

operations

7. Law approving the electronic registration of collateral and guarantees

8. Positive credit bureau: New piece of legislation

27

Outline


Markets Economies



• Final Remarks

28

• Recession was deep due to deleveraging, non economic factors,

and reversal of excessive stimulative policies.

• Inflation remained high during the recession and receded fast

when expectations clearly improved.

• Reforms and adjustments: essential to sustainable growth and

low inflation

Final remarks

29

Challenges to monetary policy in the EMEsA view into the Brazilian Case

November 18th, 2017

Governor of the Banco Central do Brasil

Ilan Goldfajn

challenges to monetary policy in the emes -...

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