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Brazil: looking beyond the crisisGesner Oliveira
Luiz CasteliRafael Oliveira
April 11, 2016
Three points...
1• Policy mistakes explain a good part, but not all
Brazilian economic difficulties
2• Investment in infrastructure is a key variable to
resume growth
3• Crisis and opportunity: a silent revolution is
happening in Brazilian infrastructure
2
1. The crisis is not only Dilma´s fault...
Why is Brazil in a recession?...
Macro & international factors• End of the commodity boom and international liquidity• End of the domestic consumption boom• End of ilimited expansion of government expenditures• Macro policy mistakes
Political & institutional crises• Disfunctional political system• Decline of the presidente´s popularity index and government support• Lava Jato operation and its impact upon oil & gas and construction
Specific factors• Argentine crisis and its impact upon the auto industry• Uncertainty caused by intervention in contracts (e.g.electricity)• Other micro policy mistakes
Growth resumption requires a new political and business environment...
19
97
19
98
19
99
20
00
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
F
20
17
F
20
18
F
3.39
0.35 0.49
4.38
1.28
3.07
1.22
5.66
3.154.00
6.015.02
-0.24
7.57
3.92
1.76
2.74
0.14
-3.80 -3.50
-0.30
0.60
Dilma
0.20%
Lula
4.0%
FHC
2.2%
Period´s Average
GDP Growth (%)
Source: IBGE; GO Associados forecast
6
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
0.3%
8.3%
2.8% 2.7%
5.9%3.1%
-7.1%
10.2%
0.4%
-2.3%
2.1%
-3.0%
-8.3% -8.1%
0.1%
Forecast (F)
Consumption’s weakness and rising unemployment shall bring a 8.1% fall of the industrial product in 2016...
Source: IBGE; (F) GO Associados forecast
Industrial Production (YoY, %)
7
Retail also slowed down and a 3.8% fall is expected in 2016...
Source: IBGE; (F) GO Associados forecast
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
9.2
4.86.2
9.7 9.1
5.9
10.9
6.78.4
4.3
2.2
-4.1 -3.8
Retail Sales(YoY, %)
Forecast
8
In the last 12 months, 1.7 million formal jobs were lost...
Source: Ministry of Labour (MTE)
Jan-00
Jul-00Jan
-01Jul-0
1Jan
-02Jul-0
2Jan
-03Jul-0
3Jan
-04Jul-0
4Jan
-05Jul-0
5Jan
-06Jul-0
6Jan
-07Jul-0
7Jan
-08Jul-0
8Jan
-09Jul-0
9Jan
-10Jul-1
0Jan
-11Jul-1
1Jan
-12Jul-1
2Jan
-13Jul-1
3Jan
-14Jul-1
4Jan
-15Jul-1
5Jan
-16-300
-200
-100
0
100
200
300 Balance of formal jobs in feb/16:Last 12 months: -1.7 million
In the month: -104.6 thousands
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
9.0%
9.5%
10.0% 9.50
Unemployment rate (%) - PNAD
Unemployment is growing fast, reaching 9.5% in january...
Source: National Survey by Household Sampling (PNAD)/IBGE
Forecast(Average year )
2016: 11.6%
Job quality is getting worse...
mar/13
may/1
3jul/1
3
sep/13
nov/13
jan/1
4
mar/14
may/1
4jul/1
4
sep/14
nov/14
jan/1
5
mar/15
may/1
5jul/1
5
sep/15
nov/15
jan/1
6-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
-1,319
-615
1,328
Formal Jobs (YoY, in millions) Informal Jobs (YoY, in millions) Self-Employed (YoY, in millions)
Source: National Survey by Household Sampling (PNAD)/IBGE
Thousands of jobs
Deterioration of the fiscal situation is at the heart of the crisis...
Feb-03
Jul-03
Dec-03
May-04Oct-
04
Mar-05
Aug-05Jan
-06Jun-06
Nov-06Apr-0
7
Sep-07
Feb-08
Jul-08
Dec-08
May-09Oct-
09
Mar-10
Aug-10Jan
-11Jun-11
Nov-11Apr-1
2
Sep-12
Feb-13
Jul-13
Dec-13
May-14Oct-
14
Mar-15
Aug-15Jan
-16-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
-2.11
Primary Balance (% GDP)
Source: Brazil Central Bank
Forecast2016: -1.7%2017: -1.3%
Government debt is growing fast...
Source: Brazil Central Bank
Dec-06
May-07
Oct-07
Mar-08
Aug-08Jan
-09Jun-09
Nov-09Apr-1
0
Sep-10
Feb-11
Jul-11
Dec-11
May-12
Oct-12
Mar-13
Aug-13Jan
-14Jun-14
Nov-14Apr-1
5
Sep-15
Feb-16
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
70.00
36.80
67.60
Net Debt (% GDP) Gross Debt (% GDP)
Forecast:Net Debt
2015: 35.0% of GDP
2016: 42.7% of GDP
2017: 46.6% of GDP
Gross Debt
2015: 66.2% of GDP
2016: 73.8% of GDP
2017: 77.2% of GDP
Inflation decelarated, but shall remain above the upper band in 2016...
Jan-05
Jul-05Jan
-06Jul-0
6Jan
-07Jul-0
7Jan
-08Jul-0
8Jan
-09Jul-0
9Jan
-10Jul-1
0Jan
-11Jul-1
1Jan
-12Jul-1
2Jan
-13Jul-1
3Jan
-14Jul-1
4Jan
-15Jul-1
5Jan
-16Jul-1
60
2
4
6
8
10
12
Ytd Inflation Target Upper Band Lower Band
CPI – (YoY, %)
Upper Band(6.5)
Lower Band (2.5)
Target(4.5)
Forecast (F) CPI2016: 7.32017: 5.5
Source: IBGE / GO Associados forecast (F)
14
Interest rate will remain high, with a downward bias...
Source: Brazil Central Bank / (F) GO Associados forecast
2009 2010 2011 2012 2013 2014 2015 2016F
8.80%
10.80% 11.00%
7.30%
10.00%
11.75%
14.25%13.25%
Selic interest rate (%) – end of period
15
jan/05 dec/05 nov/06 oct/07 sep/08 aug/09 jul/10 jun/11 may/12 apr/13 mar/14 feb/15 jan/16 dez/16 nov/171.50
2.00
2.50
3.00
3.50
4.00
4.50
A new threshold for the exchange rate and its volatility...
Source: Brazil Central Bank / GO Associados forecast
Dec/2016: R$ 4.00/US$Dec/2017: R$ 4.20/US$
Exchange rate R$/US$
Forecast (F)
The external sector has responded fast to the exchange rate change...
2011 2012 2013 2014 2015 2016F-10
0
10
20
30
40
50
0
50
100
150
200
250
300
29.8
19.4
2.3
-4.1
19.7
45.5
Trade Balance(US$ Billlions)
Balance Exports (right axis) Imports (right axis)
Source: Ministry of Development, Industry and Trade. (F) GO Associados forecast16
The good and the bad news...
The bad news...
• A solution to the political crisis is a necessary but not suficient
condition for growth resumption
• Likely tension between popular expectations and fiscal and
monetary discipline
The transition period will be harder than after Collor´s impeachment...
Source: DataFolha poll with 2.779 interviewed in 170 municipalities between April 7th and 8th
16-17 dec 15 24-25 feb 16 17-18 mar16 7-8 april 160
5
10
15
20
25
30
20 20
17
21
19 19
21
19
2724
19
17
4
6 68
6
5
6
7
1st Scenario - with Aécio Neves
Lula (PT) Marina (Rede) Aécio (PSDB)Bolsonaro (PSC) Ciro Gomes (PDT)
16-17 dec 15 24-25 feb 16 17-18 mar16 7-8 april 160
5
10
15
20
25
30
22 2017 22
24 23 23 23
1412 11
9
5
7
6
87
6
7
8
2th Scenario - with Geraldo Alckmin
Lula (PT) Marina (Rede) Alckmin (PSDB)Bolsonaro (PSC) Ciro Gomes (PDT)
24-25 feb 16 17-18 mar16 7-8 april 160
5
10
15
20
25
30
21 17
2223 2422
15 1311
6 7 7
5
7 7
3rd Scenario - with José Serra
Lula (PT) Marina (Rede) Serra (PSDB)Bolsonaro (PSC) Ciro Gomes (PDT)
24-25 feb 16 17-18 mar16 7-8 april 160
5
10
15
20
25
19 17
21
17
17 16
20
1412
8 87
65
4th Scenario - with Sérgio Moro and more than one PSDB´s candidate
Lula (PT) Marina (Rede) Aécio (PSDB)Sérgio Moro (no party) Serra (PSDB)
The good news...
• Political change will generate a positive shock on expectations
• There is less resistance to private participation in investment
• Lava jato operation has accelerated change in business culture
and governance
2. Investment is a key variable to resume growth...
Investment rate in Brazil is low compared to other emerging countries...
ChinaQatar
IndonesiaIndia
Iran
Saudi A
rabia
South Korea
Malasya
Thailan
d
Ecuador
Peru
Average (2
6 countri
es)
United Arab Em
irates
Colombia
Bulgary
Mexico
Uruguay
Chile
South Afri
caBoliv
iaBrazil
Russia
Argentine
Turke
y
Venezuela
Paraguay
Nigeria
05
101520253035404550
24.7
19.0
Source: IMF projections
Investment rate (% GDP) – 2015
Infrastructure investment (% GDP) in Brazil in last two decades has been lower than in other emerging countries...
Brazil India China World
2.20
4.70
8.50
3.80
Source: McKinsey (study for the EXAME anual report of Infrastrcuture 2013-2014)
Brazilian infrastructure lacks quality...
Switz
erland
Hong Kong SA
R
United Arab Em
irates
Finland
Singap
ore
Netherlands
Austria
Icelan
dJapan
France
Panama
Puerto Rico Chile
Mexico
Uruguay
Bolivia
ColombiaBrazil
Libya
0
1
2
3
4
5
6
7 #1 #2 #3 #4 #5 #6 #7 #8 #9 #10
#39 #45 #50#69 #80
#99 #108#120
#144
Source: World Economic Forum (2014)
Infrastructure Ranking (0 to 7)
Brazilian W&S situation does not correspond to the country’s economic development…
$0.00 $10,000.00 $20,000.00 $30,000.00 $40,000.00 $50,000.00 $60,000.0020
40
60
80
100
GDP per capita (US$)
Sew
age
treat
men
t (%
)
BRAIND
RUS
ARG
URU
CHL
CHN
SVN USA
Source: World Bank
Only half of the country has sewage services coverage...
Total water coverage Total sewage coverage Treatment of sewage generated
Water Lost in Distribution0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
83%
50%
41%37%
99%92%
86%
31%
Current Situation PLANSAB (2033)
Source: PLANSAB e SNIS 2014
103 MILLIONS WITHOUT SEWAGE
COLLECTION
121 MILLIONS WITHOUT SEWAGE
TREATMENT
With the current pace of sanitation investments, Brazil would only achieve universalization in 2052...
20142015
20162017
20182019
20202021
20222023
20242025
20262027
20282029
20302031
20322033
20342035
20362037
20382039
20402041
20422043
20442045
20462047
20482049
20502051
20520
50
100
150
200
250
300
350
400
450
PLANSAB Current Investment
Billi
ons (
R$)
Current investment level
More than 80% of Brazil´s roads are unpaved...To
tal R
oad
1,69
1,52
2 km
Paved Roads203,599 km
12.0%
Federal Highways65,930 km
32.4%
State Highways110,842 km
54.4%
Municipal Highways26,827 km
13.2%
Unpaved Roads1.358.829 km
80.4%
Planned highways (physically non-existent)
129,094 km7.6%
Source: (CNT, 2014)
Density of Brazil’s paved road network is very low...
EUA China Argentina Rússia Austrália Canadá Brasil0
50
100
150
200
250
300
350
400
450
500
438.1
359.9
83.254.3 46 41.6
23.9
Source: (CNT, 2014)
Road network density paved – km (highway) / 1,000 km² (territorial area)
62% of Brazilian highways are in fair, poor or very poor conditions...
Great10%
Good28%
Regular38%
Bad17%
Terrible7%
Source: (CNT, 2014)
Brazilian air network lacks density...
Source: SAC
Brazil USA
Population 200 millions 315 millions
Area 8.5 mi km² 9.6 mi km²
Aircraft in service 460 5,190
Cities covered 105 390
Markets covered 450 3,000
32
GDP identity illustrates the importance of investment for the country return to growth in the short term...
)
Positive balance, but not enough to resume
the growth
Falling household purchasing power
Fiscal consolidation
Main source of growth
Program of Investment in Logistics (PIL) is essential for economic recovery...
R$ 69.4 billions
R$ 198.4 bi
Investments announced by the government (PIL 2015-18)
Estimated investments by the government/planned auctions for
2016
• 8 highways (R$ 30.6 bi)• 4 railroads (R$ 30.4 bi)• 4 airports (R$ 6.92 bi)• 5 port areas (R$ 1.5 bi)
Input-output methodology
R$ 212.7 biGDP
R$ 4.1 miJobs
R$ 13.9 biTax revenues
R$ 36 biWages
Crisis and opportunity...
• The tragic situation of the Brazilian infrastructure can also be seen
as a major business opportunity...
• Repressed demand for infrastructure
• Lower barriers for entrants
• Window of opportunity to acquire strategic assets
3. A silent revolution in infrastructure...
Despite the crisis, PPPs have flourished in several states...
Source: Diário Oficial da União – GO Associados elaboration
SP MG SC RJ PR MA ES PA AL MT PE RS MS DF RO Federal AM GO TO PI BA CE RN0
10
20
30
40
50
60
147
2 2 3 1 1 1 1 1 1 3 1
27
23
14
3 7 3 4 2 1 3 2 3 21
12
3 11
10
12
5
7 3 2 33
42 3
1 1 3 2 2 1 2 2
Public Private Partnerships and concessions by federal unit (FU) - 12/06/2014 – 07/04/2016
Contracted partnership Partnership being structured Partnership intention
PPPs have ocurred in diverse sectors...
Source: Diário Oficial da União – GO Associados elaboration
Sanitation
Public Li
ghting
Solid w
aste
Urban transp
ortation
Vehicle st
orage
Parking
Public build
ings
Urbanization
Health
Funeral
Housing
Airports
Environmental
Education
Citizen se
rvice
s
Telecommunica
tion
Highways
Transporte
Hidroviário
Culture
Prisons
Drainage
Customs
Information te
chnology
Logistics
0
10
20
30
40
50
60
70
18
3 4 2 2 1 1 1 1 1 1 2 1 1
22
20 11 7 7 52
4 3 5 23
1 12
1 21
2 1
22
11
56
12
62 1 1 3 2 1 1 1 2 1
Contracted partnership Partnership being structured Partnership intention
Three key ingredients to develop infrastructure...
2. Planning
3. Management1. Regulation
Five ways to cope with the crisis...
Short run plan to cope with the rising deficit and debt
Long run plan to assure fiscal equilibrium through reforms
Change expectations creating a new climate for business (a “Macri effect”)
New political and institutional pact, including measures against corruption and compliance programs and to reduce the regulatory risk
Incentives to increase investment and international trade agreements
Reminding the three points...
1• Policy mistakes explain a good part, but not all
Brazilian economic difficulties
2• Investment in infrastructure is a key variable to
resume growth
3• Crisis and opportunity: a silent revolution is
happening in Brazilian infrastructure projects
40
Thank you!