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1Ministério da Fazenda
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The International Crisis and The
Challenges for Brazil
Guido Mantega
October - 2008
2Ministério da Fazenda
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The strongest crisis since 1929.
This crisis is deeper than those which occurred in nineties (bil. crises).
The epicenter was in developed countries (tril. crisis).
A systemic crisis– local turmoil is transmitted to all markets and all countries.
THE DEPTH OF THE CRISIS
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CRISIS ARE WORSE IN DEVELOPED COUNTRIES
Slower growth.
Potential growth of domestic markets is negligible.
Less solid macroeconomic fundamentals.
Financial institutions are too leveraged and have junk assets .
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THE CRISIS HARMS LESS THE EMERGING COUNTRIES
Faster growth.
Potential growth of domestic markets is significant.
Solid macroeconomic fundamentals and higher level of international reserves.
Financial institutions are less leveraged and have less junk assets.
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FIRST STAGE(From August/2007 to August/2008)
The crisis begin in USA and in Europe. The impact in Brazilian economy is negligible.
Brazilian government is concerned about shocks on commodities prices and about the inflation behavior.
Reduction of International credit and more expensive funding for emerging countries.
Deterioration of the Brazilian current account in emerging countries due to the increase of oil price and to the increase of capital outflows.
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SECOND STAGE(September/2008 and October/2008)
Financial institutions reveal their weakness in balance sheets and the assets devalue strongly.
The solvency crisis becomes a confidence crisis.
Problems in USA:Fannie Mae, Freddie Mac, Lehman Brothers,
Problem in Europe: Fortis, Dexia, HBOS, Bradford and Bingley
Credit Crunch over the world for short-term operations.
Commodities prices decrease and almost all currencies devaluates with respect to the dollar.
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SOLUTIONS AND PROJECTIONS
The states must come up with solutions to the problem. All the weapons must be used Bailout programs in USA and in Europe.
New stage in 2009: Credit constrained, less leverage and higher
interest rates. World economy will grow slower.
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SHORT-TERM IMPACTS ON BRAZIL
Credit crunch in the export sector. More Liquidity constraints to Brazilian firms. Domestic credit becomes more expensive. Losses in equity and derivatives. Increase of uncertainty about the economy
performance in 2009.
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What Does the Brazilian Government Make to Mitigate the Harms of Liquidity
Constraints?
The Government issues short-term loans to the bank system (public offers).
Spend international reserves in order to offer funding to the export sector.
Relaxes the reserve requirements for the banking system.
Increases financial resources of BNDES to be used in exports financing.
Anticipate the disbursement for the harvest of 2008/09
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Clearinghouses –guarantee the settlement of all registered transactions.
They compulsory register all derivatives operations with the identification of the clearing agent, of the broker and, also of the final beneficial owner.
Risk calculation in real time (based on stress testing) and mark-to-market.
Collateral pledged in the Clearinghouse’s custody account, with segregation between the different clients.
Legal Protection of Pledged Collateral
Financial Regulation in Brazil (Risk Management)
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BRAZIL – sustainable growth
Variation (%)2nd
Quarter
2007
3rd
Quarter 2007
4th
Quarter 2007
1st
Quarter 2008
2nd
Quarter 2008
Year to Date – Annualized Basis 4.9 5.1 5.4 5.9 6.0
Trailing 4 Quarters – Annualized Basis
4.8 5.1 5.4 5.8 6.0
Year over Year basis 5.4 5.6 6.2 5.9 6.1
Quarter on Quarter
(seasonally adjusted)1.3 1.9 1.8 0.8 1.6
Source: IBGE Elaborated by: MF/SPE
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6.7
16.2
(10)
(5)
-
5
10
15
20I.
03
III.
03
I.0
4
III.
04
I.0
5
III.
05
I.0
6
III.
06
I.0
7
III.
07
I.0
8
Household Consumption
Investments
BIGGET INVESTMENT CYCLE AND MASS CONSUMPTION MARKETYear over Year – Quarterly Basis (% Variation)
Source: IBGE Elaborated by: MF/SPE
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CPI - accum. 12 months - (IPCA)
4,9%
6,3%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
J an04
Apr04
J ul04
Oct04
J an05
Apr05
J ul05
Oct05
J an06
Apr06
J ul06
Oct06
J an07
Apr07
J ul07
Oct07
J an08
Apr08
J ul08
Oct08
J an09
Apr09
J ul09
Oct09
Sep/08
Dec/09
FOCUS - Market Expectations (10/03/2008)
DOWNWARD INFLATION TREND
Source: BCB Elaborated by: MF/SPE.
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2002
62%
38%
Developed
Developing
2007
50% 50%
Developed
Developing
BRAZILIAN EXPORT DESTINATION COUNTRIES
Source: MDIC. Elaborated by: MF/SPE
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14.1 9.9 8.3 12.5
-9.4
27.5
-7.6
4.2 11.714.0
13.630.035.0
-34.0-29.0
1.7
2002 2003 2004 2005 2006 2007 2008* 2009*
FDI (net) Current Account
MARKET EXPECTATIONS 2008/09
FOREIGN DIRECT INVESTMENT (NET) XCURRENT ACCOUNT
(US$ billions)
*/ FOCUS Readout - Market Expectations (10/03/2008). Source: BCB Elaborated by: MF/SPE
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FOREIGN EXCHANGE TRANSACTIONS (US$ billions)
2.0
5.97.3
3.3 4.22.7
6.78.4
2.94.7
2.64.1
7.0
(2.0)
0.8
(2.0)
2.1
(6.5)
0.6
1.4
(1.7)(2.8)
(5.6) (5.1)
(2.1)-4.2
-8
-6
-4
-2
0
2
4
6
8
10
Sep07
Oct07
Nov07
Dec07
Jan08
Feb08
Mar08
Apr08
May08
Jun08
Jul 08 Aug08
Sep08
FinancialCommercial
Source: BCB Elaborated by: MF/SPE
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206.5
59.8
30507090
110130150170190210230
Sep05
Dec05
Mar06
Jun06
Sep06
Dec06
Mar07
Jun07
Sep07
Dec07
Mar08
Jun08
Sep08
Variation: Mar/06 and Sep/08146.7 billions
IMF International Settlement
Mar/06
Sep/08
INTERNATIONAL RESERVES(US$ billions)
Source: BCB. Elaborated by: MF/SPE.
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41.838.8
30.3
19.216.1 14.7 14.0
(1.1)(0.9)
7.0
11.5
20.4
27.3
32.7
-5
0
5
10
15
20
25
30
35
40
452
00
2
20
03
20
04
20
05
20
06
20
07
20
08
*
Total External Debt/GDP
Total Net External Debt/GDP
EXTERNAL SOLVENCY INCREASE
*/ Estimation - August/08.Source: BCB. Elaborated by: MF/SPE
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PUBLIC SECTOR BORROWIG REQUIREMENTS(% of GDP)
3.89 4.18 4.35 3.86 3.97 4.42
-4.65
-2.43 -2.96 -3.00-2.26 -1.90
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
2003 2004 2005 2006 2007 2008*
PRIMARY NOMINAL
Jan–Aug/08: 5.78%
Jan-Aug/08: -
0.58%
*/ Trailing 12 months ending August/08Source: BCB. Elaborated by: MF/SPE.
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*/ Forecast – September/08.Source: BCB Elaborated by: MF/SPE
47.0 46.544.7
42.7
38.9
52.450.548.4
45.544.5
38.9
20
25
30
35
40
45
50
55
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*
PUBLIC SECTOR NET DEBT (% of GDP)
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17.28%18.13%
17.92%
14.91%
17.13%17.38%
17.04%
18.36%
8%
11%
14%
17%
20%
Jun06
Aug06
Oct06
Dec06
Feb07
Apr07
Jun07
Aug07
Oct07
Dec07
Feb08
Apr08
Jun08
Basel Index in Brazil
Index Recommended Internationally
BASEL INDEX (MINIMAL CAPITAL REQUIREMENTS) (Average Index of the Top 10 banks in Brazil*)
*/ Weighted Average Index Based on the Total Asset Values.Source: BCB. Elaborated by: MF/SPE
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Retorno sobre Ativos (em %)
0,00
0,50
1,00
1,50
2,00
2,50
3,00
3,50
BR AS IL C O LÔ M B IA C HILE AR G EN TIN A EU A R EIN O U NIDO
*/ Weighted Average Based on the Top 10 Private Banks in BrazilSource: The Bankers - Top 1000 Biggest Banks Ranking in 2008. Elaborated by: MF/SPE
PROFITABILITY OF BRAZILIAN BANKS*Return On Assets – ROA (%)
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PROFITABILITY RECORDS - PRIVATE SECTOR
Source: Conjuntura Econômica (August/08). Elaborated by: MF/SPE
Shareholders' EquityMedian of the Top 500 (%)
3.4
4.84.4 4.6
1.2
6.3 6.6
2.8
11.3
14.1
12.513.0
13.4
0
2
4
6
8
10
12
14
16
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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SUSTAINABLE ECONOMIC GROWTH CYCLE
Brazil has the right economic instruments to maintain its current vigorous cycle despite the international financial crisis:
PAC (Growth Acceleration Program) Continuance and Investment Increase
Productivity Gains
Investments in Infrastructure
Even though with a Moderate Reduction of GDP Growth for 2009.
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GDP GROWTH
2.7
1.1
5.75.0
4.5
5.05.4
3.2
3.8
-
1
2
3
4
5
6
7
2002 2003 2004 2005 2006 2007 2008 2009 2010
PAC Projections
GDP Growth
Projections
Source: IBGE (up to 2007). MF/SPE (projections 2008-10). Elaborated by: MF/SPE
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