BRAZIL ECONOMIC OUTLOOK
4th QUARTER 2016
2
Some recent advances
make the adoption of a
ceiling for public
expenditure more likely. Its
approval by the Congress
would limit fiscal risks and
further spur growth from
2017 on. However, in order
to implement this ceiling
effectively, the government
will need to approve a
social security reform.
We continue to expect the
Brazilian economy to
contract by 3.0% in 2016.
Most recent activity data
suggest the risks to this
forecast are tilted to
downside.
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
We are also maintaining
our 0.9% GDP growth
forecast for 2017.
Recovery will be favored by
factors such as reduced
political uncertainty, lower
inflation and the easing of
monetary conditions.
GLOBAL 4th QUARTER 2016
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
GLOBAL GROWTH
Global GDP growth
will accelerate slightly
in 2H16
4
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
Source: BBVA Research
GLOBAL
• The slowdown in goods exports
seems to be bottoming out and
showing signs of improvement
• Retail sales indicate that
consumption continues to show
strength
• Mixed signals on confidence
indicators, although with signs of
recovery in many countries
0.4
0.6
0,8
1,0
Dec-1
1
Jun-1
2
De
c-1
2
Jun-1
3
Dec-1
3
Jun-1
4
Dec-1
4
Jun-1
5
Dec-1
5
Jun-1
6
Dec-1
6
IC 20%
IC 40%
IC 60%
Point estimate
Average for period
GLOBAL GDP GROWTH
Forecasts based on BBVA-GAIN (%, QoQ)
GLOBAL FACTORS
Positive data, but risks still high
5
GLOBAL
Improving activity in
China and emerging countries
Global
trade is
recovering
Relative calm in
financial markets and capital
inflows in emerging ones
Central banks are
supporting growth
Brexit and other
risks in Europe
Political risk in
the USA
Systemic risk
in China
Geopolitics:
Middle East,
Russia
POSITIVE
FACTORS
BUT THE
RISKS ARE
HIGH
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
GLOBAL SCENARIO
Slight downward revision of growth in Latin America in 2016-17
6
Steady
Down
Up
Source: BBVA Research. Latin America includes: Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay and Venezuela
WORLD 2016 2017
US 2016 2017
LATIN AMERICA 2016 2017
-1.2
SPAIN 2016 2017
EUROZONE 2016 2017
CHINA 2016 2017
GLOBAL
3.0 3.2
1.6 2.1
3,2 2.3
1.6 1.5
6.6 5,8 1.5
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
7
GLOBAL
WORLD GROWTH
Factors that affect the recovery
Low interest rates are here to
stay, because of cyclical and
structural problems, but not at
such low levels as those of today
Monetary policies are
approaching their limits and are
beginning to outweigh the costs
Fiscal and structural policies
should complement monetary ones
The USA and Germany have room
for expansionary measures, which
are more likely in the US
Other countries have scope to modify
the composition of public
expenditure
The slowdown in global
growth affects trade
The elasticity of trade to GDP
growth is lower than before
the crisis
Central banks
and low interest rates
Coordination of
different policies Global trade
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
CHINA
Slight upward revision of growth in 2016
8 Source: BBVA Research and IMF
GLOBAL
• Domestic demand strengthened by
new monetary and fiscal stimulus
• The authorities have postponed any
additional monetary measures with a
view to curbing the real estate bubble,
while continuing to move ahead with
macroprudential measures
• Risks remain over the medium term:
‒ Indebtedness of private companies and
lack of reforms in public ones
‒ Real estate market
‒ Capital outflows and exchange rate
‒ Shadow banking
GDP GROWTH
(YoY, %)
7,8
7,36,9 6,6
5,8
3
4
5
6
7
8
9
2013 2014 2015 2016(p) 2017(p)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
EURO ZONE
Unchanged forecasts for 2016 and 2017
9
GLOBAL
GDP GROWTH
(YoY, %) • Support of domestic demand,
despite the uncertainty
• End of year downward bias:
uncertainty regarding politics, the
banking system and Brexit, despite
the support of monetary policy
• The ECB has little room for
manoeuvre: QE will most likely be
extended and adjusted
Source: BBVA Research and Eurostat
- 0 . 2
1 . 1
1 . 9
1 . 6 1 . 5
- 0 . 5
0 . 0
0 . 5
1 . 0
1 . 5
2 . 0
2 . 5
2 0 13 2 0 14 2 0 15 2 0 16 (p) 2 0 17 (p)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
UNITED STATES
Growth for 2016 revised downwards
10
GLOBAL
GDP GROWTH (%)
(YoY, %) • Reasons:
‒ The indicators suggest insufficiently
strong growth in 2H16 following the
weak first half
‒ Persistently low productivity
• Fed: we expect a rate increase in
December 2016 and two in 2017 up
to 1.25%
• Political risk following the
presidential election
Source: BBVA Research, BEA
0 . 0
0 . 5
1 . 0
1 . 5
2 . 0
2 . 5
3 . 0
3 . 5
1 . 7
2 . 4 2 . 6
1 . 6
2 . 1
2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6 (p) 2 0 1 7 (p)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
BRAZIL 4TH QUARTER 2016
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
12
BRAZIL
GROWTH PROSPECTS
Unchanged forecasts, but with downside risks for 2016 and upside
risks for 2017
2015 2017 2016
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
-3.0% -3.8%
0.9%
SHARP GDP CONTRACTION IN 2016
Further growth
deterioration in 1H16
13 Source: BBVA Research and IBGE
BRAZIL
GDP AND PRIVATE CONSUMPTION GROWTH
(% QoQ)
• GDP continued to contract in the first
half of the year, but at a slower pace
than it did during 2015
• The main contributor to GDP
contractions in 1H16 was private
consumption, which offset the
positive contribution to growth of
fixed investment (in 2Q16 but not in
1Q16, thanks to somewhat lower
uncertainty) and mainly of net
exports (thanks to a weaker
currency)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16
GDP PRIVATE CONSUMPTION
SHARP GDP CONTRACTION IN 2016
Negative consumption dynamics: mainly driven by labor market
14 Source: BBVA Research, IBGE and IPEADATA
BRAZIL
LABOR MARKET: UNEMPLOYMENT RATE AND REAL WAGE GROWTH
• Other drivers:
‒ Credit markets slowdown
‒ Relatively high indebtedness
‒ High inflation (although lower than a
few months ago)
‒ Tight monetary policy
‒ Cuts in public expenditure
‒ Low confidence (although higher than a
few months ago)
‒ High uncertainty (although lower than a
few months ago)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
-6
-4
-2
0
2
4
6
8
10
12
Ma
r-1
2
Ma
y-1
2
Jul-1
2
Sep-1
2
No
v-1
2
Jan-1
3
Ma
r-1
3
Ma
y-1
3
Jul-1
3
Sep-1
3
No
v-1
3
Jan-1
4
Ma
r-1
4
Ma
y-1
4
Jul-1
4
Sep-1
4
No
v-1
4
Jan-1
5
Ma
r-1
5
Ma
y-1
5
Jul-1
5
Sep-1
5
No
v-1
5
Jan-1
6
Ma
r-1
6
Ma
y-1
6
Jul-1
6
Sep-1
6
Unemployment rate (%) Real wage growth (% YoY)
SHARP GDP CONTRACTION IN 2016
GDP to fall again in
3Q16, stabilize in 4Q16
15
* Data until September in the case of industrial
production and until August in the other two cases.
Source: BBVA Research and IBGE
BRAZIL
ECONOMIC ACTIVITY INDICATORS: GROWTH IN 3Q16*
(% QoQ)
• Available data suggest that
economic activity contracted
again in quarterly terms (QoQ) in
3Q16 and that no robust recovery
should be expected in 4Q16
• In fact, recently released indicators
show that 2H16 growth could be
weaker than we are forecasting.
Thus, risks to our -3.0% GDP
forecast for 2016 are tilted to the
downside
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
Economic activity index (IBC-Br)
Industrial production Broad retail sales
POSITIVE GDP GROWTH IN 2017
2017 growth: better than in the three previous years, but still modest
16 (f): forecast
Source: BBVA Research and IBGE
BRAZIL
GDP GROWTH
(%)
BRAZIL ECONOMIC OUTLOOK│ 4Q2016
0.9
4.6
- 0.3 - 0.1
4.3 3.0
-15,0
-12,5
-10,0
-7,5
-5,0
-2,5
0,0
2,5
5,0
7,5
GDP Investment in Fixed Capital
Private Consumption Public Consumption Exports Imports
2014 2015 2016 (f) 2017 (f)
POSITIVE GDP GROWTH IN 2017
Activity to benefit from lower political uncertainty, higher confidence
17
* Seasonally-adjusted index built on the interest about the term “crise” (crisis in
Portuguese) in Brazil.
Source: BBVA Research and IBGE
BRAZIL
BRAZIL’S CRISIS INDEX
(based on web searches)*
BRAZIL ECONOMIC OUTLOOK│ 4Q2016
CONFIDENCE INDEXES
Source: BBVA Research, FECOMERCIO and CNI
30
40
50
60
70
80
90
Ja
n-1
1
Ma
y-1
1
Sep-1
1
Ja
n-1
2
Ma
y-1
2
Se
p-1
2
Ja
n-1
3
Ma
y-1
3
Se
p-1
3
Ja
n-1
4
Ma
y-1
4
Se
p-1
4
Ja
n-1
5
Ma
y-1
5
Se
p-1
5
Jan-1
6
Ma
y-1
6
Se
p-1
6
30
40
50
60
70
80
90
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
Jan-1
4
Apr-
14
Jul-14
Oct-
14
Jan-1
5
Apr-
15
Jul-15
Oct-
15
Jan-1
6
Apr-
16
Jul-16
Oct-
16
Business confidence index Consumer confidence index
POSITIVE GDP GROWTH IN 2017
Financial markets’ rebound also supports recovery view
18 * Data until November 3, 2016. Positive variations represent exchange rate depreciations.
Source: BBVA Research and HAVER Analytics
BRAZIL
BRAZILIAN FINANCIAL ASSETS
(% changes)*
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
• Financial markets continued to recover
from previous losses in the last three
months
• On the one hand, these gains are related
to external factors: lower concerns on
China, higher commodity prices and
mainly the gradualism in the
normalization of monetary conditions
in the US
• On the other hand, the ongoing rebound
in asset prices is related to the
reduction of the “political noise” (which
remains high) and the generalized
perception that the worst of the
domestic crisis is behind us Last three months Since the end of 2015
-40
-30
-20
-10
0
10
20
30
40
50
Exchange rate (BRL/USD)
Sovereign spread (EMBI)
Sao Paulo Stock Exchange Index
19
BRAZIL
POSITIVE GDP GROWTH IN 2017
The approval of the fiscal reform should help to pave the way for
activity recovery in 2017
Fiscal reform to be
approved soon
It should reduce fiscal risks
and spur growth However…
Somewhat surprisingly, the
government has been able to get
the Congress to support the bill
that imposes a cap on fiscal
expenditure for 20 years (by
ensuring that it will remain constant
in real terms)
It was approved by the Chamber
of Deputies and will likely be
approved by the Senate soon
Getting the fiscal reform approved
would be an important step
towards ensuring the
stabilization and eventual
reduction of public debt in the
long term
In fact, the approval of the fiscal
reform could prompt a faster-
than-expected recovery of
activity from 2017 on
To be able to implement the new
fiscal rule, the government will
need to approve a social security
reform. A bill will likely be sent to
Congress in the next few months
Even if fiscal and social security
reforms are approved, fiscal
accounts will continue to worsen
significantly in the short-term (see
the forecast table at the end of this
report)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
POSITIVE GDP GROWTH IN 2017
Inflation will continue to trend downwards moving forward
20 Source: BBVA Research and IBGE
BRAZIL
INFLATION (IPCA)
(% YoY)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
• We expect inflation to reach 7.0% at the end of
2016 and converge to the 4.5% target in 2017
(our previous forecasts were 6.8% and 4.5%,
respectively)
• Main drivers of the slowdown:
‒ Recent currency appreciation
‒ Lack of demand pressures
‒ Smaller adjustments in regulated prices
• The reduction of inflation will have a positive
impact on disposable income. Moreover, it will
create room for an easing of monetary
conditions which should further push economic
activity next year
0,0
2,0
4,0
6,0
8,0
10,0
12,0
Ja
n-1
5
Ma
r-1
5
Ma
y-1
5
Ju
l-1
5
Se
p-1
5
No
v-1
5
Ja
n-1
6
Ma
r-1
6
Ma
y-1
6
Ju
l-1
6
Se
p-1
6
No
v-1
6
Ja
n-1
7
Ma
r-1
7
Ma
y-1
7
Ju
l-1
7
Se
p-1
7
No
v-1
7
target range
POSITIVE GDP GROWTH IN 2017
A moderate monetary
easing cycle ahead
21
Source: BBVA Research and BCB
BRAZIL
SELIC RATE
(%)
• The BCB cut the Selic by 25 bps to
14.0% in Oct/16, after maintaining it
unchanged since Jul/15. The decision,
which occurred somewhat earlier than we
expected, followed the inflation slowdown
and the anchoring of expectations (now
around 5.0% for 2017 and 4.5% for the
following years)
• We expect a 50 bp cut in Nov/16 (but
another 25bp cut should not be ruled out)
and the Selic to reach 11.50% in 1H17
• The BCB commitment to keep inflation
around 4.5% and the tightening of the US
monetary conditions should help to
prevent a more sizable easing cycle
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
6
7
8
9
10
11
12
13
14
15
Mar-
13
Jun-1
3
Sep-1
3
Dec-1
3
Mar-
14
Jun-1
4
Sep-1
4
De
c-1
4
Mar-
15
Jun-1
5
Sep-1
5
Dec-1
5
Mar-
16
Jun-1
6
Sep-1
6
Dec-1
6
Mar-
17
Jun-1
7
Sep-1
7
Dec-1
7
POSITIVE GDP GROWTH IN 2017
The external adjustment
is mostly over
22 (f): forecast
Source: BBVA Research and BCB
BRAZIL
CURRENT ACCOUNT
(% GDP)
• We expect the current account to
remain relatively stable from now
on, after the sharp adjustment it
went through (from -4.4% of GDP in
Dic/14 to -1.3% of GDP in Sep/16)
• That would contribute to the
stabilization of the Brazilian real
(BRL), which however we expect to
depreciate somewhat going forward
(thus favoring exports) as the spread
between domestic and foreign
interest rates will decrease
• More precisely, we expect the BRL
to close 2016 at 3.34 and average
3.43 in 2017 (vs. 3.49 in 2016)
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
-5,0
-4,5
-4,0
-3,5
-3,0
-2,5
-2,0
-1,5
-1,0
-0,5
0,0
2010 2011 2012 2013 2014 2015 2016 (f) 2017 (f)
23
Forecasts Table
BRAZIL
2014 2015 2016 (f) 2017 (f)
GDP (%) 0.1 -3.8 -3.0 0.9
Private consumption (%) 1.3 -4.0 -4.3 -0.3
Public consumption (%) 1.2 -1.0 -1.4 -0.1
Fixed capital investment (%) -4.5 -14.1 -7.8 4.6
Exports (%) -1.1 6.1 7.3 4.3
Imports (%) -1.0 -14.3 -8.9 3.0
Unemployment rate (average) 6.8 8.3 11.3 11.7
Inflation (eop, YoY %) 6.4 10.7 7.0 4.5
Selic interest rate (eop, %) 11.75 14.25 13.50 11.50
Exchange rate (eop) 2.66 3.80 3.34 3.49
Fiscal result (% of GDP) -6.1 -10.2 -9.7 -8.7
Gross public debt (% of GDP) 57.2 66.2 72.1 76.9
Current account (% of GDP) -4.3 -3.3 -1.1 -1.0
BRAZIL ECONOMIC OUTLOOK │ 4Q2016
(f): forecast; (eop): end of period
Source: BBVA Research