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Brazil and the

International Crisis

Henrique de Campos Meirelles

June 2009

1
Brazil at the Outset of the Crisis

 Declining public debt-to-GDP ratio;


 Public sector long in foreign currency, so that FX
depreciation reduces debt-to-GDP;
 Fast, domestic demand-led growth;
 Low leveraged, fully provisioned banking system;
 Banking reserve requirements at BCB: R$ 260 billion
(approximately US$ 160 billion);
 International reserves: US$ 205 billion;
 BCB's long position in FX futures market: US$ 22 billion.

2
Primary Fiscal Result

3
% of GPD

-1

Jan Jan Jan Jan Jan Jan Apr


97 99 01 03 05 07 09

Source: Banco Central do Brasil 3


Public Net Debt

54

49
% of GDP

44

39

34
Jan Jan Jan Jan Jan Jan Jan Aug
02 03 04 05 06 07 08 08

Source: Banco Central do Brasil 4


International Reserves
Aug 2008 June 18th
205.1 206.0
200

150
US$ billion

100

50

0
Jan Jan Jan Jan Jan Jan Jan Jun
02 03 04 05 06 07 08 09
Source: Banco Central do Brasil 5
External Public Net Debt

20

15

10

5
% of GDP

-5

-10
-13,1
-15

-20
Jan Jan Jan Jan Jan Jan Jan Apr
02 03 04 05 06 07 08 09

Source: Banco Central do Brasil 6


Gross Domestic Product (GDP)

Average 03-06 Average 07-08


6 3.5% 5.4%

5 Average 99-02
annual growth %

2.1%
4

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: IBGE 7
Gross Domestic Product (GDP)

Agriculture
6.7%

Services
65.3%
Industry
28.0%

Source: IBGE 8
Income Distribution: Inequality

0,60

0,59
Gini coefficient

0,58

0,57

0,56

0,55
2001 2002 2003 2004 2005 2006 2007

Source: FGV (CPS) 9


Income Distribution: Middle-Class

55

50
% of population

45

40

35
2001 2002 2003 2004 2005 2006 2007 2008

Source: FGV (CPS) 10


Domestic Demand and Supply
change, year-over-year
9.3

9.0
6.8
7.5
6.0
4.5
%

3.0
1.5
0,0
-1.5
-3.0
-4.5
1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q
03 03 04 04 05 05 06 06 07 07 08 08
domestic demand GDP

Source: IBGE 11
Fixed-Capital Investment
change, year-over-year
19.7
20

16

12

8
%

-4

-8

1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q 1Q 3Q
03 03 04 04 05 05 06 06 07 07 08 08

Source: IBGE 12
Inflation
IPCA (accumulated in 12 months)
18
16
market
14 consensus
12
10
%

8
6
target
4 range
2
0
Jan Jan Jan Jan Jan Jan Jan Jan
03 04 05 06 07 08 09 10

Source: IBGE and Banco Central do Brasil 13


External Shock Feedback Loop: Before

External Deterioration
Shock of Confidence

Currency
Depreciation

Pressure on
Public Debt/GDP ratio

Domestic
FX Public Debt
External

14
External Shock Feedback Loop: Now

External Deterioration
Shock of Confidence

Currency
Depreciation

Reduction of
Public Debt/GDP ratio

Public Debt
Public Sector is Long in FX in FX

15
Public Net Debt

51.3

54
average 2003-2006
47.9
49
% of GDP

average 2007-2009
44 40.5

39 38.4

34
Jan Jan Jan Jan Jan Jan Jan Apr
02 03 04 05 06 07 08 09

Source: Banco Central do Brasil 16


Channels of Transmission of Global
Financial Crisis to Brazil

External

Credit

Domestic

Foreign Trade

Confidence

17
Total Credit

(estimated, beginning of September/2008)

External (US$ 97 billion)


Domestic with external funding (US$ 47 billion)

Domestic (US$ 620 billion)

Source: BCB 18
Domestic Credit Outstanding
Growth Apr 09/Sep 08

12 11.0
20 19.5
8
18
4
16 -5.0
0
14
-4
12
-8 small and
%

10 large
8.3 medium
8
6
4 3.2
2.2
2
0
total public foreign domestic
banks banks private banks
Source: BCB 19
Initiatives to Inject Liquidity
in Domestic Credit Market

Recent measures:

 Non-earmarked FX auctions;
 Extension of deposit insurance on time deposits
from R$ 60,000 to R$ 20 million;

 Increase in credit supply, especially to small


and medium-sized banks.

20
Real Payroll and Earnings
3 month moving average
135

125 real payroll


Apr 09/Apr 08: +4.0%
2003 = 100

115

105
Real earnings
Apr 09/Apr 08: +3.7%

95
Jan Jan Jan Jan Jan Jan Apr
03 04 05 06 07 08 09

Source: IBGE and BCB 21


Unemployment Rate

13

12

11

10
%

2004
2009
9 8.9
2005
8 2006
2007
7 2008
6
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: IBGE 22
Auto Sales
seasonally adjusted
300
271
261
242 247
250 234
thousands

200 178

150

100

50

0
Jan Apr Jul Oct Jan May
08 08 08 08 09 09

Source: Fenabrave 23
Auto Production
seasonally adjusted
350
303 294
300 273 270
253
250
thousands

198 203
200 185

150
97
100

50

0
Jan Abr Jul Out Jan May
08 08 08 08 09 09

Source: Anfavea 24
Auto Production

180 163.7
Apr 09/ Apr 08
150 Apr 09/ Dec 08
120

90
%

60 40.2
36.6
26.3
30 13.9
0
-8.4
-30 -18.2 -15.8
-33.1
-34.1
-60 -47.1 -44.6 -46.6
-56.5
United Japan United Germany Mexico China Brazil
Kingdom States

Source: Anfavea and national associations 25


Foreign Direct Investment

4.0 3.8
average per month 3.4
3.5
3.0 2.9
US$ billion

2.5
1.9 2.0
2.0
1.5 1.6 1.4
1.4 1.3
1.5
1.0 0.8

0.5
0.0
02 03 04 05 06 07 08 Jan Feb Mar Apr
09

Source: Banco Central do Brasil 26


Public Net Debt

140

120
114.8 Japan
103.6
% of GDP

100
80.4
80 78.0 Germany
70.4 United States
57.0 61.7
60 66.9 United
43.2 Kingdom

40 38.0 Brazil
42.0 39.1
38.3
20
03 04 05 06 07 08 09 10

Source: IMF and Focus (BCB) 27


Brazil and the
International Crisis

Henrique de Campos Meirelles

June 2009

28