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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
• Benign international conditions and Emerging
Markets Economies (EMEs)
• The current economic situation in Brazil
• Issues for discussion
• 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
• Benign international conditions and Emerging
Markets Economies
• The current economic situation in Brazil
• Issues for discussion
• 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
• Benign international conditions and Emerging
Markets Economies
• The current economic situation in Brazil
• Issues for discussion
• 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
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?
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
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?
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)
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?
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
Why is the neutral interest rate so high?
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
Why is the neutral interest rate so high?
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
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?
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
• Benign international conditions and Emerging
Markets Economies
• The current economic situation in Brazil
• Issues for discussion
• 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