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1
Brazilian Agency for Industrial Development - ABDI
The Brazilian Economy:Recent Performance and
New Challenges
Alessandro Teixeira
September, 2006
2
Brazilian Agency for Industrial Development - ABDI
The progress in 2003-2006In the last four years the Brazilian economy improved substantially:
Trade surpluses and reduction of the vulnerability to external shocks
Reduction in inflation
Overall improvement in public finance
Reduction of the country risk premium
Gradual growth acceleration, with high job creation
Continuity of institutional reforms
3
Brazilian Agency for Industrial Development - ABDI
Trade Balance
Source: MDIC Prepared by: MF/SPE.
Since Jul/04 the trade surplus has stabilized at 5.5% of GDP
Exports and Imports in Goods (FOB)(US$ billion, 12-month cumulative basis)
10
30
50
70
90
110
130
ago95
ago96
ago97
ago98
ago99
ago00
ago01
ago02
ago03
ago04
ago05
ago06
Exports
Imports
84,4
130,4
Balance46,0
4
Brazilian Agency for Industrial Development - ABDI
Source: MDIC/SECEX, IMF and BCB (Focus -14.07.2006) Prepared by: MF/SPE.
(*) Brazil: preliminary data by MF/SPE; World: IMF (World Economic Outlook, april 06).
World Trade and Brazilian Exports (Growth rate acummulated in 12 months – in dollars)
-8,6
0,7
13,2
7,7
12,9
6,8
2,7
11,0
-6,1
5,73,7
21,1
32,0
14,0
3,10,1
19,4
4,4
-1,7
3,6
13,2
-3,8
12,59,9
22,6
14,7
-3,5
8,7
13,9
7,1 9,2
21,0
16,2
4,7
-10
-5
0
5
10
15
20
25
30
3519
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
*
Brazilian Exports World Exports
5
Brazilian Agency for Industrial Development - ABDI
Net external debt / exports
Source: BCB. Prepared by: MF/SPE
External solvency started to improve after the 1999 devaluation.
1,9
3,2
3,6
3,12,8 2,7
2,1
1,4
0,90,6
2,32,0
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6 *
(*) forecast : July
6
Brazilian Agency for Industrial Development - ABDI
Consumer Inflation (IPCA) and Inflation Targets(12-month cum.)
Sources: IBGE and BCB. Prepared by: MF/SPE.
Market expectations for 2006 (3.32%) and 2007 (4.4%) are even lower than the inflation targets set by the Government (4.5%).
Dec/055.69
Dec/047.60
Dec/039.30
%
02468
101214161820
dez02
abr03
ago03
dez03
abr04
ago04
dez04
abr05
ago05
dez05
abr06
ago06
dez06
Aug/063.84
Market forecast:Dec/06=3,32 Dec/02
12.53
7
Brazilian Agency for Industrial Development - ABDI
Increase in the Public-Sector Primary Surplus(as % of GDP)
Source: BCB Prepared by: MF/SPE
Average of 1999-2002: 3.5% of GDP
Average of 2003-2006: 4.5% of GDP
+ 1.0% of GDP
4,834,594,253,89
3,643,19
4,33
3,46
0,0
1,0
2,0
3,0
4,0
5,0
6,0
99 00 01 02 03 04 05 06
(*) 12 -months (July/06)*
8
Brazilian Agency for Industrial Development - ABDI
Net Debt of the Public Sector(as % of GDP)
Note: 2006 – up to JulySources: BCB. Prepared by: MF/SPE.
After 9 years of growth the debt/GDP ratio started to fall in 2004.
30,633,3 34,4
41,7
48,7 48,8
52,655,5
57,250,351,551,7
20
25
30
35
40
45
50
55
60
95 96 97 98 99 00 01 02 03 04 05 06
9
Brazilian Agency for Industrial Development - ABDI
Sustainable Growth: Employment
Formal Employment: job creation– 12 months accumulated
(Thousand jobs)
Source: MTE/CAGED Prepared by: MF/SPE.
Total job creation will reach 4.6 million in 2003-06
1,2481,254
1,523
645762
0
250
500
750
1,000
1,250
1,500
1,750
2002 2003 2004 2005 2006*
(*) 12-months (July/06)
10
Brazilian Agency for Industrial Development - ABDI
Source: MF/SPE.
Total Payroll in Real Terms The total wage bill has been growing, in real terms, since 2004. Additionally, Government transfers have contributed to an increase in the personal disposable income.
R$ Millions Var. % R$ Millions Var. % R$ Millions Var. %
2002 491.072 143.905 634.977
2003 474.256 -3,4% 148.056 2,9% 622.312 -2,0%
2004 509.964 7,5% 163.361 10,3% 673.325 8,2%
2005 534.094 4,7% 176.517 8,1% 710.611 5,5%
2006 559.007 4,7% 191.237 8,3% 750.244 5,6%
(1) PME (amplification on PNAD's basis)
(2) INSS pensions, unemployment benefit, bolsa-família, FGTS etc.
Work Real Revenue 1 Government Transfers 2 Total
11
Brazilian Agency for Industrial Development - ABDI
Income InequalityReduziu-se a concentração de renda no País
Source:: PNAD / IBGE/IPEADATA Prepared by: MF/SPE
Income inequality, as measured by the Gini index, is falling. Recent market surveys showed an expansion of the middle
class.
Gini Index0,601
0,594
0,6020,600
0,596
0,589
0,572
0,581
0,57
0,58
0,59
0,60
0,61
1995 1996 1997 1998 1999 2001 2002 2003 2004
12
Brazilian Agency for Industrial Development - ABDI
GDP GrowthReduziu-se a concentração de renda no País
Source:: IBGE/IPEADATA Prepared by: MF/SPE
After the disinflation of the past months, GDP growth is accelerating again. The final rate for 2006 should be between 3.5 and 4.0%. For 2007, the Government expectation is an annual growth rate between 4.5 and 5.5%.
dinsinflation of 2003
dinsinflation of 2005-06
GDP growth ratein the past 12 months
3,5%
4,0%
0%
1%
2%
3%
4%
5%
6%
2002-1 2003-1 2004-1 2005-1 2006-1
Forecast for 2006: GDP growth between 3.5% and 4.0%
13
Brazilian Agency for Industrial Development - ABDI
Institutional Reforms Approved
Constitutional Amendments:
Social Security Reform (EC 41 / 2003)
Tax Reform (EC 42 / 2003)
Judicial Reform (EC 45 / 2004)
14
Brazilian Agency for Industrial Development - ABDI
Institutional Reforms Approved
Main Laws Approved
Payroll Credit (Law 10.820) Rural Insurance (Law 10.823) Housing sector (Law 10.931) Innovation (Law 10.973) Agricultural Bonds (Law 11.076) Public-Private Partnerships (Law 11.079) Bankruptcy (Law 11.101)
15
Brazilian Agency for Industrial Development - ABDI
Main Institutional Reforms under analysis(in the Congress or in the Federal Government)
Tax Reform (PEC 285 e 293)
Micro and Small Enterprises (PLC 123)
Credit Report (PL 5870/05)
Opening up of the Reinsurance Market (PLC 249)
Public Sector Pension Fund (Federal Government employees)
Simplified Registration of New Businesses – REDESIM (PL 6529)
16
Brazilian Agency for Industrial Development - ABDI
New Challenges – What are the Goals?
1) Consolidating the new development cycle initiated in 2004: macroeconomic stability with social inclusion
2) Raising the annual GDP growth rate above 5%, while maintaining high job creation
3) Reducing regional inequalities in the country
4) Increasing the openness and the international competitiveness of the Brazilian economy
17
Brazilian Agency for Industrial Development - ABDI
New Challenges – What are the instruments?
1) Macroeconomic Stability
• Inflation targeting;• Fiscal responsibility; and • Floating exchange rates
2) Higher investment
Tax and credit incentives to reach an investment-GDP ratio of 25% in 2010
3) Infrastructure
Reducing costs and stimulating the implementation of new projects in the energy and transportation & logistics sectors
18
Brazilian Agency for Industrial Development - ABDI
New Challenges – What are the instruments?
4) Credit and interest rates
• Reducing the base interest rate• Reducing interest-rate spreads; and• Increasing credit to GDP ratio to 50% by 2010
5) Fiscal Policy
Reducing taxes and Government current expenditures, in terms of GDP, while keeping the primary-surplus target at 4.25% of GDP
6) Institutional Reforms
Carrying tax reform initiatives further
19
Brazilian Agency for Industrial Development - ABDI
The Investment Challenge
Entering a new phase: Moving from modernization of the
existing capacity of production to the increase in the capacity of production
Removing the main barriers to investment: High real interest rates; Cumulative taxes; and Imperfect regulation
20
Brazilian Agency for Industrial Development - ABDI
Gross Fixed Capital Formation(1990 = 100, seasonally adjusted)
Source: IBGE. Prepared by: MF/SPE
Mexican crisis
East Asia, Russian and
Brazilian crisis
Argentine crisis
2002 elections
Expansion initiated in the 3rd quarter of 2006
80
90
100
110
120
130
140
2º T91
2º T92
2º T93
2º T94
2º T95
2º T96
2º T97
2º T98
2º T99
2º T00
2º T01
2º T02
2º T03
2º T04
2º T05
2º T06
21
Brazilian Agency for Industrial Development - ABDI
The Credit Challenge Reducing the base real interest rate to 5% p.a. Reducing interest-rate spreads Increasing the credit-GDP ratio to 50%, with
special emphasis on Long-term investment Consumer credit Agriculture Housing
Accelerating the growth and development of the domestic capital market
22
Brazilian Agency for Industrial Development - ABDI
Credit Operations (as % of GDP)
Source: BCB. Prepared by: MF/SPE
Credit operations have been growing markedly, led by the expansion in personal credit.
Jul/0632.6
22
24
26
28
30
32
34
jan02
abr02
jul02
out02
jan03
abr03
jul03
out03
jan04
abr04
jul04
out04
jan05
abr05
jul05
out05
jan06
abr06
jul06
Jan/0323,9
+ 8.7% of GDP
23
Brazilian Agency for Industrial Development - ABDI
Capital Markets – Primary Issue (R$ million – current values)
(*) Includes promissory notes, CRIs (real estate receivables certificates), and quotas of credit rights investment funds, among others.(**) Up to AugustSource: CVM. Prepared by: MF/SPE.
The value for Jan/Aug 2006 is already higher than the total for 2005.
0
10.000
20.000
30.000
40.000
50.000
60.000
70.000
80.00019
96
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
**
Shares Debentures Other*
24
Brazilian Agency for Industrial Development - ABDI
The New Leading SectorsEnergy:
Oil, Gas, Electric Power, Ethanol and other renewable energy resources
Transport Equipment:Automotive, Rail, Naval, and Aeronautical
Civil Construction:Infrastructure, Housing and Basic Inputs
Innovation and technology:Semiconductors, Software, Pharmaceuticalproducts, Biotechnology, Nanotechnology
and Capital Goods
25
Brazilian Agency for Industrial Development - ABDI