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Highway To Hell or Stairway To Heaven?
Tatiana Pinheiro ([email protected])
Economic Research - Brazil | September 2017
2
1) Politics – 2018 elections
2) Reform Agenda
3) Economic Recovery Path
3
1) Politics – still, Temer will likely finish his mandate
Although very weak popularity
Presidential PopularitySource: Datafolha.
Net Approval rateSource: Datafolha.
913
28 30
8 50
10
20
30
40
50
60
70
80
90
1-m
ar-
90
1-d
ez-9
2
1-n
ov-9
3
23-m
ar-
95
20-jun-9
7
14-a
go-9
8
20-jun-0
0
21-f
ev-0
2
30-a
go-0
2
1-m
ar-
03
1-jun-0
5
17-m
ar-
06
12-s
et-06
12-d
ez-0
6
28-m
ai-09
23-jul-
10
26-o
ut-
10
21-M
ar-
13
8-M
ay-1
4
19-S
ep-1
4
7-F
ev-1
4
18-M
ar-
16
Excelent/Good
Collor Impeachmen
Currency devaluation (Jan/99)
Voting bying scheme (Apr-July/05)
Street protest (Jul/13)
Dilma Impeachment (May/16)
-59
-43
-1
5
-63 -68-80
-60
-40
-20
0
20
40
60
80
100
1-m
ar-
90
1-s
et-
92
1-jun-9
31-s
et-
94
25-jun-9
611-m
ar-
98
11-d
ez-9
810-o
ut-
00
21-f
ev-0
216-a
go-0
215-d
ez-0
21-m
ar-
04
21-o
ut-
05
18-jul-06
22-s
et-06
20-m
ar-
07
28-m
ai-09
1-jul-
10
15-o
ut-
10
19-A
pr-
12
11-O
ct-13
16-J
ul-14
30-S
ep-1
417-M
ar-
15
18-M
ar-
16
Don't know Net approval rate (excelent/good minus bad/very bad)
Collor Impeachment (Set/92)
Currency devaluation (Jan/99)
Voting bying scheme (Apr-July/05)
Street protest (Jul/13)
Dilma Impeachment (May/16)
4
4
Lower House (#political parties and
representatives)Source: Câmara dos Deputados.
Senate (#political parties and representatives)
Source: Senado.
1) Politics – Fractured party system
147
258
308
10
15
20
25
30
35
-
102
204
306
408
510
19
95 (
FH
C 1
te
rm)
19
99 (
FH
C 2
te
rm)
20
03 (
Lula
1 t
erm
)
20
07 (
Lula
2 t
erm
)
20
11 (
Dilm
a 1
term
)
1H
201
4
20
15 (
Dilm
a 2
term
)
Septe
mb
er
16,
201
5
Octo
be
r 8, 2
015
De
ce
mbe
r 8, 2
015
Feb
ruary
4, 2
016
Ma
rch
21,
201
6
Ma
rch
24,
201
6
April 7,
201
6
Number of parties (rhs) Top 3 (numbers of representatives)
Simple Majority PEC required votes (3/5 of total)
257
33
42
48
10111213141516171819
-
16
32
48
64
80
19
95 (
FH
C 1
te
rm)
19
99 (
FH
C 2
te
rm)
20
03 (
Lu
la 1
te
rm)
20
07 (
Lu
la 2
te
rm)
20
11
(D
ilma
1 t
erm
)
1H
201
4
20
15
(D
ilma
2 t
erm
)
Se
pte
mb
er
16
, 2
01
5
Octo
be
r 8
, 2
015
De
ce
mbe
r 8
, 2
015
Fe
bru
ary
4, 2
016
Ap
ril 7
, 2
01
6
Number of parties (rhs) Top 3 (numbers of representatives)
Simple Majority PEC required votes (3/5 of total)
49
5
Topic Legal instrument Current status
Expected
conclusion
date
Reduction in revenue earmarking
(DRU)
Constitutional
AmendmentApproved by the Lower House and the Senate
Concluded in
Aug 2016
Investment Partnership Program
(PPI)
Provisional
MeasureApproved by the Lower House and the Senate
Concluded in
Sep 2016
Change in oil field auction rules Ordinary Law Approved by the Lower House and the SenateConcluded in
Nov 2016
New Fiscal Regime (freeze of gov’t
expenditures in real terms)
Constitutional
AmendmentApproved by the Lower House and the Senate
Concluded in
Dec 2016
Budget Law (PLOA) 2017 Budget Law Approved by the Lower House and the SenateConcluded in
Dec 2016
Labor ReformComplementary
LawApproved by the Lower House and the Senate
Concluded in
Jul 2017
Still to be sent to Congress 2018
2019
Still to be sent to Congress
Creation of TLP (long term rate for
BNDES loans)
Provisional
MeasureUnder Lower House appreciation
Concluded in
Sep 2017
Tax ReformDifferent pieces of
legislation2018/2019
Social Security ReformConstitutional
AmendmentApproved at the Commission-level by the Lower House
States’ debt renegotiationComplementary
Law
Basic framework approved by Congress, and partially
enacted by the President
Change in Eletrobras law to allow
privatization
Provisional Measure
or Ordinary Law
Concluded in
Dec 2016
2) Fiscal Reform Agenda
6
6
Lower House Source: Câmara dos Deputados.
SenateSource: Senado.
1) Politics – Congress profile
113
51
175
86
87
129
46
171
84
82
Right Centre Right Centre Centre Left Left
2014election
2017 breakdown
15
3
34
14
15
17
2
42
8
111
Right Centre Right Centre Centre Left Left Independent
2014election
2017 breakdown
7
7
Share of aggregate valid votes for mayor in
Brazil’s largest cities and state capitals, %
Source: Brazil Electoral Court.
Number of elected mayors in Brazil’s largest
cities and state capitals
Source: Brazil Electoral Court.
1) Politics – Voters’ profile
2016
8
81) Politics – 2018 elections
President&Congressnon-reformists
President (non-ref) & Congress
(ref)
President (ref) & Congress
(non-ref)
President&Congressreformists
Google searches for Car Wash operationUp to Sep 20. Source: Google trends.
0 20 40 60 80 100
Distrito FederalPiaui
TocantinsPara
BahiaRio de Janeiro
CearaMaranhao
Minas GeraisSanta Catarina
AlagoasParana
Mato GrossoPernambuco
Mato Grosso do SulRio Grande do Norte
São PauloAmazonas
Rio Grande do SulEspirito Santo
RondoniaSergipe
Goiais
Google searches for Car Wash operationUp to Sep 20. Source: Google trends.
0
10
20
30
40
50
60
70
80
90
100
1/5
/2014
3/5
/2014
5/5
/2014
7/5
/2014
9/5
/2014
11/5
/2014
1/5
/2015
3/5
/2015
5/5
/2015
7/5
/2015
9/5
/2015
11/5
/2015
1/5
/2016
3/5
/2016
5/5
/2016
7/5
/2016
9/5
/2016
11/5
/2016
1/5
/2017
3/5
/2017
5/5
/2017
7/5
/2017
9/5
/2017
Car Wash Operation Car wash operation (news search)
Car Wash operation list
elections
expectationsfor Janot's list
Impeachment
Lula became a defendant JBS
bullish
9
9
Societal priorities & Vote Intention by Income Bracket
Societal prioritiesSource: Datafolha.
Vote Intention by Income BracketSource: Datafolha.
1) Politics – 2018 elections
45%
40%
11% 4%
% of Population
Up to 2 m.w. 2 a 5 5 a 10 More than 10
0
5
10
15
20
25
30
Corr
uptio
n
Hea
lth
Une
mplo
ym
ent
Vio
len
ce
Ed
uca
tion
Sep 2017
Up to 2 w.m.2-55-10More than 10
0
10
20
30
40
50
Une
mplo
ym
ent
Po
ve
rty
Vio
lence
He
alth
Infla
tion
Co
rru
ptio
n
Mar-03 Dec-06 Nov-10
Dec-14 Nov-15 Jul-16
Jul-17 Sep-17
0
5
10
15
20
25
30
35
40
45
Up to 2 m.w. 2 a 5 5 a 10 More than 10
Lula (PT) Marina (Rede) Alckmin (PSDB)
João Doria (PSDB) Bolsonaro (PSC)
10
10
Brazilian voter profile
Brazilians ideology profile Source: Datafolha.
1) Politics – 2018 elections
0
5
10
15
20
25
30
35
Right Centre Right Centre Centre Left Left
Nov-13 Sep-14 Jul-17
11
11
Good news: economy will help
Misery index (Inflation + unemployment) Sources: IBGE and Santander.
1) Politics – 2018 elections
10
13
16
19
22Ja
n-0
4
Oct-
04
Jul-
05
Apr-
06
Jan
-07
Oct-
07
Jul-
08
Apr-
09
Jan
-10
Oct-
10
Jul-
11
Apr-
12
Jan
-13
Oct-
13
Jul-
14
Apr-
15
Jan
-16
Oct-
16
Jul-
17
Apr-
18
12
12
What people look for in a president …
Desirable aspects of a presidential candidate, % Source: Datafolha.
1) Politics – 2018 elections
87
79
65
59
33
31
24
5
12
17
21
18
27
20
6
7
16
17
47
39
53
Never involved incorruption scandals
Administrativeexperience
Political background
Corporate experience
Religious
New to politics
From the military
Very important Somewhat important Not important Don't know
13
13
Approval/rejection of potential candidatesSource: Ipsos Barômetro Político, June, 2017.
Potential approval, % Source: Ipsos Barômetro Político, June, 2017.
1) Politics – 2018 elections
0% 20% 40% 60% 80% 100%
Michel TemerAécio Neves
Eduardo CunhaRenan Calheiros
José SerraDilma Rousseff
FHCGeraldo Alckmin
Rodrigo MaiaLula
Marina SilvaHenrique Meirelles
Ciro GomesJair Bolsonaro
João DoriaCarmen LúciaLuciano Huck
Disapproves Approves Doesn't know
0 20 40 60 80
Michel Temer
Aécio Neves
José Serra
Geraldo Alckmin
Lula
Marina Silva
Ciro Gomes
Henrique Meirelles
Jair Bolsonaro
João Doria
Carmen Lúcia
Luciano Huck
Approves Doesn't know
14
141) Politics – 2018 elections (key dates)
• April 6, 2018: deadline for candidates to join/change political parties. Deadline to register political address. Candidates holding cabinet positions or seating mayors/governors not running for reelection must step down by this date.
• July 5, 2018: pre-candidates can begin intraparty advertisement for nomination
• July 20 – August 5, 2018: period for parties to promote conventions and define
candidates (conventions are not mandatory)
• August 15, 2018: deadline for parties to register candidates
• August 16, 2018: official beginning of campaigns
• August 25 – September 29, 2018: period of propaganda broadcast on radio and
television
• October 7, 2018: first round of voting
• October 28, 2018: second round of voting
15
Mismatch between tax collection and spending
15
Public debt% of GDP. Source: BCB.
Central government: revenue/expenditure% of GDP. Source: STN.
2) Fiscal Reform Agenda - Stalled
50
74
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
Dec-0
6A
pr-
07
Aug
-07
Dec-0
7A
pr-
08
Aug
-08
Dec-0
8A
pr-
09
Aug
-09
Dec-0
9A
pr-
10
Aug
-10
Dec-1
0A
pr-
11
Aug
-11
Dec-1
1A
pr-
12
Aug
-12
Dec-1
2A
pr-
13
Aug
-13
Dec-1
3A
pr-
14
Aug
-14
Dec-1
4A
pr-
15
Aug
-15
Dec-1
5A
pr-
16
Aug
-16
Dec-1
6A
pr-
17
Net Public debt-ratio-to-GDP Gross Public debt-ratio-to-GDP
Investment GradeInvestment Grade
Up grade
Junk bond
14%
15%
16%
17%
18%
19%
20%
Nov-
02
Aug-0
3
May-0
4
Feb-0
5
Nov-
05
Aug-0
6
May-0
7
Feb-0
8
Nov-
08
Aug-0
9
May-1
0
Feb-1
1
Nov-
11
Aug-1
2
May-1
3
Feb-1
4
Nov-
14
Aug-1
5
May-1
6
Feb-1
7
Federal Net Revenues (of GDP)
Federal Spending (% of GDP)
16
As a result, a worsening dynamic in the gross public debt-GDP ratio
16
Gross and Net Government Debt (% of GDP)Sources: MinFin and Santander estimate.
69.9%
78.2%
84.0%
88.9%92.1%
94.2% 95.7% 96.3% 96.2% 96.1%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Gross Debt Ratio to GDP
2) Fiscal Reform Agenda - Stalled
Primary Balance (% of GDP)Sources: MinFin and Santander estimate.
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2017 2018 2019 2020 2021 2022 2023 2024 2025
Primary balance (% of GDP)
17
However, international capital does not seem to care about public debt level
17
Gross Government Debt (% of GDP) vs
Sovereign rateSources: Bloomberg and S&P.
2) Fiscal Reform Agenda - Stalled
AUS
AUTBRA
BGR
CHL
CHN COLCRI
HRV
DNK
EGY
SLVFIN
FRA
DEU
GRC
GTM
HUN
ISL
IND
IDN
IRL
ISR
ITA
JPN
MYS MEX
NLD
NGA
NOR
PAK
PAN
PER
PHL
POL
PRT
ROU
RUS
SRB
SVK
SVN
ZAF
KOR
ESP
SWE THA
TUR
GBR
USA
URY VNM
0
100
200
300
AAA BBB+ BB BAA-
5-year CDS spreads (bp)
Source: Bloomberg and S&P.
0
100
200
300
400
Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17
Spread Brazil/BB countries Spread Brazil/BBB countries Spread Brazil/BBB- countries
18
18
Social Security
Currently, social security benefits represents ~ 40% of total spending, in 2024 will consume about 60% of total spending (despite still young population) .
Federal Spending Breakdown- % Of Spending
CeilingSources: Min. da Fazenda and Santander estimates.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
2017 2018 2019 2020 2021 2022 2023 2024
Payroll Other Mandatory Spending Health
Education Other current expenditures Capital expenditures (PAC)
Social Security benefits
2) Fiscal Reform Agenda - Stalled
19
19
Social Security Reform (proposal), crucial points of the reform:
Simulation of Social Assistance
spending ratio of GDPSources: FinMin and Santander estimate.
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0%
200
1
200
3
200
5
200
7
200
9
201
1
201
3
201
5
201
7
201
9
202
1
202
3
202
5
202
7
202
9
203
1
203
3
203
5
203
7
203
9
Social spending ratio to GDP (minimum wage policy unchanged)
Social spending ratio to GDP (new policy)
Contribution (% of GDP)
Sources: FinMin and Santander estimate.
Benefits (% of GDP)
Sources: FinMin and Santander estimate.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2001 2003 2005 2007 2009 2011 2013 2015
Urbana Rural
15.00% 5.00% 5.00% 15.00%
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80+
Ag
e (
ye
ars
)
2014
Men Women
85%
15%
15.00% 5.00% 5.00% 15.00%
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80+
Ag
e (
ye
ars
)
2050
Men Women
66%
34%
Age Pyramid 2014Source: IBGE.
Age Pyramid 2050Source: IBGE.
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2001 2003 2005 2007 2009 2011 2013 2015
Urbana Rural
2) Social Security Reform
20
20
Social Security Reform (proposal), crucial points of the reform:
Eligibility criteria (minimum age for retirement at 65 years old for men and 62 for women, but without unification of social security regime),
Stricter criteria for survivals benefits,
Not allowing accumulating benefits higher than 2 minimum wages,
Transition rules : Additional of 1/3 to the number of years remaining for retirement under the current rule (30 years of contribution for women and 35 years for men), given the minimum age for retirement is 55 years old for men and 53 years old for women
Expected Survival by age (number of years)
Source: IBGE.
Social Security deficit ratio of GDP simulation.
Sources: IBGE, Social Security Minister and Santander
estimate.
15.2
22.1
25.2
12
18.4
21.2
9.2
15
17.5
5
8
11
14
17
20
23
26
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
20
20
20
25
20
30
20
35
20
40
20
45
20
50
20
55
20
60
60 years old 65 years old 70 years old
2) Social Security Reform
21
21
2) Privatization Calendar
Gov't
expectation
(BRL bn)
Eletrobras* 13.0
Cemig ** 11.0
Congonhas (SP Airport) 6.0
* secondary offer / ** 4 Power plants
BRL 58.5bn
3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 Gov't
expectation
(BRL bn)
Airports 12.0
Highways 8.5
Ports 12.0
Eletric Energy Co 24.0
Oil (pre-salt)
Others
Brazilian Mint
Instant Lottery 2.0
Tender Offer
Auction
22
The end of tax exemptions
22
Fiscal SlippageSource: MinFin.
BRL %GDP
Simplified tax regime for SME 82.9 1.3%
Tax free industry zone 25.6 0.4%
Non profit entities 24.5 0.4%
Tax Exemption of consumer staples 23.8 0.4%
Reduction in payroll taxation 17.0 0.3%
Income tax deduction 16.9 0.3%
Worker benefits 11.4 0.2%
Tax exemption for saving account 8.4 0.1%
Tax exemption for medicines 7.4 0.1%
Tax exemption for Regional development 6.6 0.1%
Total 224.5 3.6%
2) Ending of Fiscal Slippage
23
23
Monetary Policy is effective!
3) Economic Recovery Path
Household Consumption y/y vs DI 1-y (2
quarters lagged)Sources: IBGE, BCB and Santander.
Industrial and Investments y/y vs DI 1-y (2
quarters lagged)Sources: IBGE, BCB and Santander.
0
5
10
15
20
25
30
35-8
-6
-4
-2
0
2
4
6
8
10
2002
.III
2003
.II
2004
.I
2004
.IV
2005
.III
2006
.II
2007
.I
2007
.IV
2008
.III
2009
.II
2010
.I
2010
.IV
2011
.III
2012
.II
2013
.I
2013
.IV
2014
.III
2015
.II
2016
.I
2016
.IV
Household Consumption DI 1-year (rhs)
0
5
10
15
20
25
30
35-20-15-10-505
1015202530
2002
.III
2003
.II
2004
.I
2004
.IV
2005
.III
2006
.II
2007
.I
2007
.IV
2008
.III
2009
.II
2010
.I
2010
.IV
2011
.III
2012
.II
2013
.I
2013
.IV
2014
.III
2015
.II
2016
.I
2016
.IV
Industrial Investment DI 1-year (rhs)
24
24
ForecastSource: Santander estimates.
GDP growth q/q Source: Santander estimate
So far the economic recovery was based on Agriculture and Consumption,
looking ahead the risks are on the upside (if there is strong Investment recovery).
3) Economic Recovery Path
0.30.5
0.91.2
1.00.8
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
Components Weights (%) 2014 2015 2016 2017F 2018F
Total GDP 100.0 0.5 -3.8 -3.6 0.8 3.2
Agriculture & Livestock 5.6 2.7 3.2 -6.6 11.6 3.7
Industry 21.4 -1.5 -6.3 -3.8 0.2 3.5
Services 73.0 1.0 -2.7 -2.7 0.1 2.8
Household Consumption 63.5 2.3 -3.9 -4.2 0.9 3.4
Government Consumption 20.3 0.8 -1.1 -0.6 -1.5 0.3
Investments 15.7 -4.2 -13.9 -10.2 -2.2 6.0
Exports 12.2 -0.9 6.2 1.9 4.2 2.8
Imports (-) 11.7 -1.9 -14.1 -10.3 3.7 3.6
GDP Breakdown - Annual Change (%)
25
25
Actual GDP vs. Potential GDPSource: : IBGE, FGV, IPEA and Santander estimates /
(level series - basis: 2013:1=100) .
Output Gap (Actual GDP - Potential GDP) - %
Sources: IBGE, FGV, IPEA and Santander estimates
Output gap will likely close st the end of 2019, therefore the CB has room to
maintain its expansionary monetary policy.
3) Economic Recovery Path
end-2019
64
68
72
76
80
84
88
92
96
100
104
108
3Q
00
2Q
01
1Q
02
4Q
02
3Q
03
2Q
04
1Q
05
4Q
05
3Q
06
2Q
07
1Q
08
4Q
08
3Q
09
2Q
10
1Q
11
4Q
11
3Q
12
2Q
13
1Q
14
4Q
14
3Q
15
2Q
16
1Q
17
4Q
17
3Q
18
2Q
19
1Q
20
4Q
20
Potential GDP
Actual GDP
-6.5
-5.5
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
3Q
00
2Q
01
1Q
02
4Q
02
3Q
03
2Q
04
1Q
05
4Q
05
3Q
06
2Q
07
1Q
08
4Q
08
3Q
09
2Q
10
1Q
11
4Q
11
3Q
12
2Q
13
1Q
14
4Q
14
3Q
15
2Q
16
1Q
17
4Q
17
3Q
18
2Q
19
1Q
20
4Q
20
end-2019
26
Labour market and retail sales should keep improving
26
Household Consumption GDP x Broad Retail
SalesSource: IBGE
Unemployment rate
Source: IBGE.
-14
-8
-2
4
10
16
-8
-4
0
4
8
12
2Q
04
4Q
04
2Q
05
4Q
05
2Q
06
4Q
06
2Q
07
4Q
07
2Q
08
4Q
08
2Q
09
4Q
09
2Q
10
4Q
10
2Q
11
4Q
11
2Q
12
4Q
12
2Q
13
4Q
13
2Q
14
4Q
14
2Q
15
4Q
15
2Q
16
4Q
16
2Q
17
Household Consumption GDP (left axis)
Broad Retail Sales (right axis)
3) Economic Recovery Path
11.5
10.1
8.3
7.26.7
9.6
12.7
12.3
11.0
4.5
5.5
6.5
7.5
8.5
9.5
10.5
11.5
12.5
13.5
dez-0
2ju
n-0
3d
ez-0
3ju
n-0
4d
ez-0
4ju
n-0
5d
ez-0
5ju
n-0
6d
ez-0
6ju
n-0
7d
ez-0
7ju
n-0
8d
ez-0
8ju
n-0
9d
ez-0
9ju
n-1
0d
ez-1
0ju
n-1
1d
ez-1
1ju
n-1
2d
ez-1
2ju
n-1
3d
ez-1
3ju
n-1
4d
ez-1
4ju
n-1
5d
ez-1
5ju
n-1
6d
ez-1
6ju
n-1
7d
ez-1
7ju
n-1
8d
ez-1
8
ProjeçõesForecasts
27
Some positive signals are emerging in the labour market
27
Income and Total Incomey/y.Source: PNAD (IBGE)
Formal Jobs net creationy/y%. Sources: IBGE and Santander.
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
250,000
jun
/06
dez/0
6
jun
/07
dez/0
7
jun
/08
dez/0
8
jun
/09
dez/0
9
jun
/10
dez/1
0
jun
/11
dez/1
1
jun
/12
dez/1
2
jun
/13
dez/1
3
jun
/14
dez/1
4
jun
/15
dez/1
5
jun
/16
dez/1
6
jun
/17
3.0
2.3
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
abr-
13
jun
-13
ago
-13
out-
13
dez-1
3
fev-1
4
abr-
14
jun
-14
ago
-14
out-
14
dez-1
4
fev-1
5
abr-
15
jun
-15
ago
-15
out-
15
dez-1
5
fev-1
6
abr-
16
jun
-16
ago
-16
out-
16
dez-1
6
fev-1
7
abr-
17
jun
-17
Salário Real Médio
Massa Salarial Real
3) Labour Market
28
28
Investment vs Business Confidencey/y. Sources: IBGE and FGV.
Business Confidence vs Brazil CDS 5-ySources: IPEA and Santander
… however, still timid effect on the confidence indices
-40
-20
0
20
40
60
1Q
00
4Q
00
3Q
01
2Q
02
1Q
03
4Q
03
3Q
04
2Q
05
1Q
06
4Q
06
3Q
07
2Q
08
1Q
09
4Q
09
3Q
10
2Q
11
1Q
12
4Q
12
3Q
13
2Q
14
1Q
15
4Q
15
3Q
16
2Q
17
Investments Business Confidence
0
100
200
300
400
50070
80
90
100
110
120
Apr-
10
Sep-1
0
Feb-1
1
Jul-
11
Dec-1
1
May-1
2
Oct-
12
Mar-
13
Aug-1
3
Jan
-14
Jun
-14
Nov-1
4
Apr-
15
Sep-1
5
Feb-1
6
Jul-
16
Dec-1
6
May-1
7
Business Confidence 5y BZ CDS (reversed scale)
3) Confidence and Investments
29
Inflation
… all the way down, which helps the economic recovery
Regulated prices vs Market
prices inflationIndex 2013 Base 100. Sources: IBGE
and Santander.
Service prices vs Industrial
prices inflation
%yoy. Sources: IBGE and Santander.
5.05.56.06.57.07.58.08.59.09.510.0
0.5
1.5
2.5
3.5
4.5
5.5
6.5
7.5
Aug-1
3
Nov-1
3
Feb-1
4
May-1
4
Aug-1
4
Nov-1
4
Feb-1
5
May-1
5
Aug-1
5
Nov-1
5
Feb-1
6
May-1
6
Aug-1
6
Nov-1
6
Feb-1
7
Industrial Goods prices inflation (lhs)
Service prices inflation
90
95
100
105
110
115
120
125
130
135
Dec-1
2
Mar-
13
Jun-1
3
Sep-1
3
Dec-1
3
Mar-
14
Jun-1
4
Sep-1
4
Dec-1
4
Mar-
15
Jun-1
5
Sep-1
5
Dec-1
5
Mar-
16
Jun-1
6
Regulated prices inflation Market prices inflation
95100105110115120125130135140
Dec-1
2
Mar-
13
Jun
-13
Sep-1
3
Dec-1
3
Mar-
14
Jun
-14
Sep-1
4
Dec-1
4
Mar-
15
Jun
-15
Sep-1
5
Dec-1
5
Mar-
16
Jun
-16
Sep-1
6
Dec-1
6
Mar-
17
Preços Administrados Preços Livres
-10
-5
0
5
10
15
20
Aug
-07
Dec-0
7A
pr-
08
Aug
-08
Dec-0
8A
pr-
09
Aug
-09
Dec-0
9A
pr-
10
Aug
-10
Dec-1
0A
pr-
11
Aug
-11
Dec-1
1A
pr-
12
Aug
-12
Dec-1
2A
pr-
13
Aug
-13
Dec-1
3A
pr-
14
Aug
-14
Dec-1
4A
pr-
15
Aug
-15
Dec-1
5A
pr-
16
Aug
-16
Dec-1
6A
pr-
17
Aug
-17
Dec-1
7A
pr-
18
Aug
-18
Dec-1
8
Food at home
Food at home
%yoy. Sources: IBGE and Santander.
30
Inflation
Inflation Forecasts%. Source: Santander.
Regulated inflation Forecasts%. Source: Santander.
2015 2016 2017 (f) 2018 (f) 2019 (f)
Regulated 18.1 5.5 7.0 5.5 5.0
Water and Sewage 14.8 20.1 10.6 5.2 4.0
Electric energy 51.0 -10.7 10.6 5.0 4.0
Urban transportation 9.2 7.8 5.5 6.3 4.0
Gasoline 20.1 2.5 5.9 4.9 4.0
Medicines 6.9 12.5 4.6 3.1 3.5
Healthcare plan 12.2 13.6 13.6 12.0 12.0
Market 8.5 6.6 2.0 3.7 3.9
IPCA 10.7 6.3 3.2 4.2 4.2
2015 2016 2017 (f) 2018 (f) 2019 (f)
IPCA 10.7 6.3 3.2 4.2 4.2
Regulated Prices 18.1 5.5 7.0 5.5 5.0
Market Prices 8.5 6.5 2.0 3.7 3.9
Industrial Ex Foodstuff 6.2 4.8 1.4 3.0 3.1
Non-durables Ex Foodstuff10.9 9.3 2.1 4.3 4.8
Food at home 12.9 9.4 -3.5 9.0 5.3
Semi-durables 5.3 4.1 3.0 4.0 4.0
Durables 3.3 1.4 -0.8 0.5 0.5
Services 8.1 6.5 4.9 3.3 3.8
31
Monetary policy
Inflation Expectations behavior
Source: BCB.
Inflation expectations are anchored in the long term, and the output gap is very negative
4.0
4.5
5.0
5.5
6.0
6.5
13/1
1/20
1424
/12/
2014
05/0
2/20
1520
/03/
2015
05/0
5/20
1516
/06/
2015
27/0
7/20
1504
/09/
2015
19/1
0/20
1530
/11/
2015
12/0
1/20
1624
/02/
2016
06/0
4/20
1618
/05/
2016
29/0
6/20
1609
/08/
2016
20/0
9/20
1601
/11/
2016
14/1
2/20
1622
/01/
2017
07/0
3/20
1718
/04/
2017
2018;2019e 2020
2017
Output Gap (Actual GDP - Potential GDP) - %
Sources: IBGE, FGV, IPEA and Santander estimates
-6.5
-5.5
-4.5
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5
3Q
00
2Q
01
1Q
02
4Q
02
3Q
03
2Q
04
1Q
05
4Q
05
3Q
06
2Q
07
1Q
08
4Q
08
3Q
09
2Q
10
1Q
11
4Q
11
3Q
12
2Q
13
1Q
14
4Q
14
3Q
15
2Q
16
1Q
17
4Q
17
3Q
18
2Q
19
1Q
20
4Q
20
end-2019
32
Monetary policy
Therefore, there is still room for further interest rate cuts
Real interest rate ex-ante (DI 1-y minus
inflation expectation)Sources: BCB and Santander.
Real Neutral Rate
Sources: Santander estimate.
1234567891011121314
7
9
11
13
15
17
19
11/2
1/2
003
5/2
1/2
004
11/2
1/2
004
5/2
1/2
005
11/2
1/2
005
5/2
1/2
006
11/2
1/2
006
5/2
1/2
007
11/2
1/2
007
5/2
1/2
008
11/2
1/2
008
5/2
1/2
009
11/2
1/2
009
5/2
1/2
010
11/2
1/2
010
5/2
1/2
011
11/2
1/2
011
5/2
1/2
012
11/2
1/2
012
5/2
1/2
013
11/2
1/2
013
5/2
1/2
014
11/2
1/2
014
5/2
1/2
015
11/2
1/2
015
5/2
1/2
016
11/2
1/2
016
5/2
1/2
017
Selic (target) lhs DI 1-yr minus CPI 12 months ahead
MethodLast
Value
Lower
Bound*Avg*
Upper
Bound*
HP statistical filter 5.9 3.6 5.2 6.6
Yield curve 5.7 2.4 6.2 9.5
Taylor rule (10-year window) 5.7 5.7 7.3 8.1
Fundamentals-based long term 5.2 2.9 5.3 8.0
Taylor rule (8-year window) 3.4 2.8 5.8 7.3
Fundamentals-based short term 4.1 2.9 5.4 12.2
33
Credit Market / Monetary policy
BNDES credit portfolio: outstanding loans Source: BCB.
Selic and TJLP differentialSources: BCB and Santander estimate.
0
150
300
450
600
750
0%
5%
10%
15%
20%
25%
jan/0
7
jul/0
7
jan/0
8
jul/0
8
jan/0
9
jul/0
9
jan/1
0
jul/1
0
jan/1
1
jul/1
1
jan/1
2
jul/1
2
jan/1
3
jul/1
3
jan/1
4
jul/1
4
jan/1
5
jul/1
5
jan/1
6
jul/1
6
jan/1
7
jul/1
7
BRL billion (rhs) % of GDP % of total credit
8.25%
7.0%
0%
5%
10%
15%
20%
25%
30%
jan/0
0ju
l/00
jan/0
1ju
l/01
jan/0
2ju
l/02
jan/0
3ju
l/03
jan/0
4ju
l/04
jan/0
5ju
l/05
jan/0
6ju
l/06
jan/0
7ju
l/07
jan/0
8ju
l/08
jan/0
9ju
l/09
jan/1
0ju
l/10
jan/1
1ju
l/11
jan/1
2ju
l/12
jan/1
3ju
l/13
jan/1
4ju
l/14
jan/1
5ju
l/15
jan/1
6ju
l/16
jan/1
7ju
l/17
Selic-TJLP gap Selic TJLP
34
Credit Market
Debt Burden and Household DebtSources: BCB and Santander.
15
20
25
30
35
40
45
50
15
16
17
18
19
20
21
22
23
24
Fe
b-0
5
Au
g-0
5
Fe
b-0
6
Au
g-0
6
Fe
b-0
7
Au
g-0
7
Fe
b-0
8
Au
g-0
8
Fe
b-0
9
Au
g-0
9
Fe
b-1
0
Au
g-1
0
Fe
b-1
1
Au
g-1
1
Fe
b-1
2
Au
g-1
2
Fe
b-1
3
Au
g-1
3
Fe
b-1
4
Au
g-1
4
Fe
b-1
5
Au
g-1
5
Fe
b-1
6
Au
g-1
6
Fe
b-1
7
Au
g-1
7
Fe
b-1
8
Debt Burden (lhs) Household Debt (rhs)
The debt burden is declining
35
Credit Market
…so the credit channel will work
Credit Outstanding Sources: BCB and Santander.
NPL (individuals and corporates)Sources: BCB and Santander.
10.8%
4.1%
5.0%
9.0%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
jan
/09
jul/
09
jan
/10
jul/
10
jan
/11
jul/
11
jan
/12
jul/
12
jan
/13
jul/
13
jan
/14
jul/
14
jan
/15
jul/
15
jan
/16
jul/
16
jan
/17
jul/
17
jan
/18
jul/
18
BNDES Direto
Private banks
State-owned banks(ex BNDES)
Total5.2
6.0
6.2
5.7
3.3
5.5
4.2
3.0
3.5
4.0
4.5
5.0
5.5
6.0
5.0
5.5
6.0
6.5
7.0
7.5
ma
r/1
1
se
t/1
1
mar/
12
se
t/1
2
ma
r/1
3
se
t/1
3
ma
r/1
4
se
t/1
4
ma
r/1
5
se
t/1
5
ma
r/1
6
se
t/1
6
ma
r/1
7
set/1
7
ma
r/1
8
se
t/1
8
Individuals Corporate
Forec
36
CompetitivenessCompetitiveness improvement of 2015 has lagged effect in labor cost and trade balance
Unit Labor Costs (USD)Up to Jul16. Sources: IBGE, CNI and Santander.
Real Effective Exchange Rate1988-2016=100. Sources: BCB and Santander.
0
20
40
60
80
100
120
140
160
180
200
jan
/88
jan
/89
jan
/90
jan
/91
jan
/92
jan
/93
jan
/94
jan
/95
jan
/96
jan
/97
jan
/98
jan
/99
jan
/00
jan
/01
jan
/02
jan
/03
jan
/04
jan
/05
jan
/06
jan
/07
jan
/08
jan
/09
jan
/10
jan
/11
jan
/12
jan
/13
jan
/14
jan
/15
jan
/16
jan
/17
REER - IPCA(Purchase power)
45
60
75
90
105
120
135
150
165
180
jan-0
4
jul-0
4
jan-0
5
jul-0
5
jan-0
6
jul-0
6
jan-0
7
jul-0
7
jan-0
8
jul-0
8
jan-0
9
jul-0
9
jan-1
0
jul-10
jan-1
1
jul-1
1
jan-1
2
jul-1
2
jan-1
3
jul-1
3
jan-1
4
jul-1
4
jan-1
5
jul-1
5
jan-1
6
jul-1
6
jan-1
7
Avg 2004-2014
37
Balance of Payments
External solvency: External financing is sufficient for declining needs. Therefore, the room for BRL depreciation is limited
Public sector: net FCY exposure (USD billion)USD bn, 12-month flows. Source: BCB.
Current account deficitUSD bn, 12-month flows , % GDP Source: BCB
-300
-200
-100
0
100
200
300
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
de
z 2
017
Net outstanding swaps
FX-linked public domestic bonds
Public external debt
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
-120
-100
-80
-60
-40
-20
0
20
40
60
jan/9
6ju
l/96
jan/9
7ju
l/97
jan/9
8ju
l/98
jan/9
9ju
l/99
jan/0
0ju
l/00
jan/0
1ju
l/01
jan/0
2ju
l/02
jan/0
3ju
l/03
jan/0
4ju
l/04
jan/0
5ju
l/05
jan/0
6ju
l/06
jan/0
7ju
l/07
jan/0
8ju
l/08
jan/0
9ju
l/09
jan/1
0ju
l/10
jan/1
1ju
l/11
jan/1
2ju
l/12
jan/1
3ju
l/13
jan/1
4ju
l/14
jan/1
5ju
l/15
jan/1
6ju
l/16
jan/1
7ju
l/17
USD billion
% GDP
38
Balance of Payments
Foreign Direct Investment
FDI (USD billion)USD bn, 12-month flows. Source: BCB.
-20
0
20
40
60
80
100
120
140
jan/9
6ju
l/96
jan/9
7ju
l/97
jan/9
8ju
l/98
jan/9
9ju
l/99
jan/0
0ju
l/00
jan/0
1ju
l/01
jan/0
2ju
l/02
jan/0
3ju
l/03
jan/0
4ju
l/04
jan/0
5ju
l/05
jan/0
6ju
l/06
jan/0
7ju
l/07
jan/0
8ju
l/08
jan/0
9ju
l/09
jan/1
0ju
l/10
jan/1
1ju
l/11
jan/1
2ju
l/12
jan/1
3ju
l/13
jan/1
4ju
l/14
jan/1
5ju
l/15
jan/1
6ju
l/16
jan/1
7ju
l/17
Equity Intercompany loans
39
Santander forecasts2014 2015 2016 2017 2018 2019
GDP (%)
GDP Growth 0.5 -3.8 -3.6 0.8 3.2 3.0
Inflation (%)
IPCA-IBGE 6.4 10.7 6.3 3.2 4.2 4.0
IGP-M 3.7 10.5 7.2 -0.4 4.5 4.0
FX Rate
BRL/USD - end of period 2.66 3.90 3.26 3.20 3.50 3.57
BRL/USD - average 2.35 3.33 3.49 3.18 3.37 3.53
Interest Rates (%)
SELIC - end of period 11.75 14.25 13.75 7.00 6.75 8.50
Labor Market
Unemployment rate (average) 6.8 8.5 11.5 12.9 11.4 10.2
Balance of Payments
Exports (USD bi) 225.1 191.1 185.3 207.8 226.1 251.0
Imports (USD bi) 229.1 171.5 137.6 150.9 166.3 185.3
Trade Balance (USD bi) -4.0 19.7 47.7 56.9 59.9 65.8
Current Account (USD bi) -104.2 -58.9 -23.5 -23.8 -23.5 -20.7
Current Account (% of GDP) -4.2 -3.3 -1.3 -1.1 -1.1 -1.1
Fiscal Accounts
Primary Balance (% of GDP) -0.6 -1.9 -2.5 -2.5 -2.3 -1.8
Net Public Sector Debt (% GDP) 32.6 35.6 45.9 50.0 57.9 62.8
Gross Public Sector Debt (% GDP) 56.3 65.5 69.5 77.2 84.0 88.9
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