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Otaviano Canuto BRAZIL – Ministry of Finance BRAZIL DAY 2003 New York, November 17, 2003 From the Confidence Crisis Towards Sustainable Growth.

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Presentation on theme: "Otaviano Canuto BRAZIL – Ministry of Finance BRAZIL DAY 2003 New York, November 17, 2003 From the Confidence Crisis Towards Sustainable Growth."— Presentation transcript:

1 Otaviano Canuto BRAZIL – Ministry of Finance BRAZIL DAY 2003 New York, November 17, 2003 From the Confidence Crisis Towards Sustainable Growth

2 Otaviano Canuto BRAZIL – Ministry of Finance I. The 2002 Confidence Crisis II. Challenges and Accomplishments: a. External Adjustment b. Disinflation c. Fiscal Sustainability d. Reduction of FX Exposure of Public Sector III. Recovering Economic Activity IV. Sustainable Growth

3 Otaviano Canuto BRAZIL – Ministry of Finance I. The 2002 Confidence Crisis

4 Otaviano Canuto BRAZIL – Ministry of Finance Sudden Stop Capital Inflows(*) (US$ billion) (*) FDI, medium and long term loans (excluding loans to the Central Bank) 61.7 52.8 24.8 2000 2001 2002 US$ 8.9 billion GAP US$ 28.0 billion GAP

5 Otaviano Canuto BRAZIL – Ministry of Finance Basis Points 11/Nov572 500 1,000 1,500 2,000 2,500 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Brazil Risk (Embi+) Spread Over Treasury

6 Otaviano Canuto BRAZIL – Ministry of Finance Nominal Exchange Rate (R$/US$) R$/US$ 11/Nov2.90 2.2 2.5 2.8 3.1 3.4 3.7 4.0 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Nov 03

7 Otaviano Canuto BRAZIL – Ministry of Finance GDP x Confidence Shocks GDP Change After Large Exchange Rate Crises (%) Brazil (2002/03*) Argentina (2002) Uruguay (2002) Thayland (1998) Malasya (1998) South Korea (1998) * BC Projection for 2003: 0.6% 1,0 -11,0 -10,8 -10,5 -7,4 -6,7 -4,9 Russia (1998)

8 Otaviano Canuto BRAZIL – Ministry of Finance II. Challenges and Accomplishments: a. External Adjustment

9 Otaviano Canuto BRAZIL – Ministry of Finance Current Account Deficit US$ billion 33,4 25,3 24,2 23,2 7,7 -3,9 0 5 10 15 20 25 30 35 40 19981999200020012002 Jan-Sep 2003

10 Otaviano Canuto BRAZIL – Ministry of Finance Private External Debt: Rollover Rate 6-Month Moving Average 20 40 60 80 100 120 140 160 Jun 01Oct 01Feb 02Jun 02Oct 02Feb 03Jun 03 Sep 03 158.3 %

11 Otaviano Canuto BRAZIL – Ministry of Finance Trade Balance -10 -5 0 5 10 15 20 25 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Sep 03 US$ billion Sep23.1 12-Month, Accumulated

12 Otaviano Canuto BRAZIL – Ministry of Finance Trade Balance US$ billion 12-Month, Accumulated 45 50 55 60 65 70 Jan 96Feb 97Mar 98Apr 99May 00Jun 01Jul 02Sep 03 Imports Exports 69.6 46.6

13 Otaviano Canuto BRAZIL – Ministry of Finance Terms of Trade Export Prices / Import Prices Export Prices / Import Prices 1996 = 100 85 90 95 100 105 110 Jun 94May 95Apr 96Mar 97Feb 98Jan 99Dec 99Nov 00Oct 01Sep 02Sep 03 91.4

14 Otaviano Canuto BRAZIL – Ministry of Finance * BC forecast Net Foreign Direct Investment US$ billion 28.9 28.6 32.8 22.5 16.6 10.0 0 5 10 15 20 25 30 35 199819992000200120022003*

15 Otaviano Canuto BRAZIL – Ministry of Finance Current Account + Debt Amortizations US$ billion -10 0 10 20 30 40 50 60 70 80 90 Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Sep 03 Current Account Deficit Curr Acc Def + M/L Term Amortizations Medium and Long Term Amortizations 12-Month, Accumulated 27.6 24.0 -3.6

16 Otaviano Canuto BRAZIL – Ministry of Finance Exports/Total External Debt 22.9 21.3 25.4 27.7 28.6 31.8 0 5 10 15 20 25 30 35 199819992000200120021H2003 %

17 Otaviano Canuto BRAZIL – Ministry of Finance Exchange Rate Volatility 21-day volatility 5 5 10 15 20 25 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Oct 03 % p.a. Oct 6: 5.79 Oct 6: 5.79

18 Otaviano Canuto BRAZIL – Ministry of Finance BoP - Uses and Sources US$ billion 20012002 2003 2003 YearYearJan-Sep Uses-58.4-38.8-15.6 Current account -23.2-7.73.9 Medium and long term amortizations -35.2-31.1-19.5 Sources58.438.815.6 Foreign Direct Investment 22.516.66.5 Portfolio investments 2.21.81.5 Medium and long-term disbursements 34.618.616.5 Bonds, notes and commercial papers 17.06.28.2 Trade credit 3.31.30.8 Loans14.311.17.5 Brazilian investments abroad -4.6-5.1-2.8 Loans to the Monetary authority (IMF) 6.611.511.1 Short-term and other 0.3-4.6-4.3 Reserve assets -3.3-0.3-13.2 Of which: bank deposits 0.04.3-1.6 Capital account 0.00.40.3 Year -28.4 -1.2 -27.1 28.4 10.0 2.1 24.0 11.4 1.8 10.8 -5.5 5.2 2.0 -9.4 -0.8 0.0

19 Otaviano Canuto BRAZIL – Ministry of Finance II. Challenges and Accomplishments: b. Disinflation

20 Otaviano Canuto BRAZIL – Ministry of Finance Selic and Swap Rates 15 17 19 21 23 25 27 29 31 33 Jan 00Oct 00Jul 01Apr 02Jan 03Oct 03 % Selic Swap 360 17.7% 18.9% Over-Selic RateSwap 360

21 Otaviano Canuto BRAZIL – Ministry of Finance Real Interest Rates 8 9 10 11 12 13 14 15 16 17 18 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Oct 03 % p.a. 10 12 14 16 18 20 22 24 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Oct 03 Real Selic Rate Real 360-day Rate

22 Otaviano Canuto BRAZIL – Ministry of Finance -0.4 0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2 % IPCA and IPCA-15 Inflation IPCA-15IPCA Jan 02 Mar 02 May 02 Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Oct 03

23 Otaviano Canuto BRAZIL – Ministry of Finance IPCA, Tradable, Non-tradable and Regulated Prices 4 6 8 10 12 14 16 18 20 22 24 Jan 02 May 02 Sep 02 Jan 03 May 03 Oct 03 IPCATradables Non Tradables Regulated % 14.0% 18.9% 8.1% 15.4% 12-month, accumulated change

24 Otaviano Canuto BRAZIL – Ministry of Finance IPCA, Tradable, Non-tradable and Regulated Prices 0 5 10 15 20 25 30 35 40 45 50 Jul 02Sep 02Nov 02 Jan 03 Mar 03May 03Sep 03 IPCATradableNon-TradableRegulated 3-month Moving Average, Annual % Jul 03Oct 03

25 Otaviano Canuto BRAZIL – Ministry of Finance IPCA: % of Items with Price Increases Sep63.5% Average63.4% Jan85.9% % 50 55 60 65 70 75 80 85 90 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03

26 Otaviano Canuto BRAZIL – Ministry of Finance IPCA: Market Expectations - 2003 9.57% 9.5 10.0 10.5 11.0 11.5 12.0 12.5 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 % Nov 03

27 Otaviano Canuto BRAZIL – Ministry of Finance Inflation Expectations 12 Months Ahead IPCA 4 6 8 10 12 14 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 % 6.01%

28 Otaviano Canuto BRAZIL – Ministry of Finance IPCA: Market Expectations – 2004 6.0% Median 6.0 6.5 7.0 7.5 8.0 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 % Nov 03

29 Otaviano Canuto BRAZIL – Ministry of Finance II. Challenges and Accomplishments: c. Fiscal Sustainability

30 Otaviano Canuto BRAZIL – Ministry of Finance Primary Surplus 12-Month, Accumulated % of GDP Target for 2003: 4.25% -2 0 1 2 3 4 5 6 7 Jul 94Oct 95Jan 97Apr 98Jul 99Oct 00Jan 02Apr 03 Sep 03 4.43%

31 Otaviano Canuto BRAZIL – Ministry of Finance Net Public Sector Debt - % of GDP Sep 02 62.5% % of GDP 45 50 55 60 65 Oct 00Mar 01Aug 01Jan 02Jun 02Nov 02Apr 03Oct 03 57.7%

32 Otaviano Canuto BRAZIL – Ministry of Finance Net Public Sector Debt Dynamics % of GDP 40.0% 20 25 30 35 40 45 50 55 60 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Baseline Scenario

33 Otaviano Canuto BRAZIL – Ministry of Finance III. Challenges and Accomplishments: d. Reduction of FX Exposure of Public Sector

34 Otaviano Canuto BRAZIL – Ministry of Finance Domestic Public Debt FX Debt/Total Debt 28 30 32 34 36 38 40 42 1 2 3 4 5 6 7 8 9 10 Fixed Rate Debt/Total Debt sep 03 26,5% Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03 sep 03 9,0% Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03 % 26

35 Otaviano Canuto BRAZIL – Ministry of Finance FX Debt Rollover Rate 0 10 20 30 40 50 60 70 80 90 100 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 % % of FX Debt Rollover Rate (including swap) Principal + final coupon

36 Otaviano Canuto BRAZIL – Ministry of Finance FX Indexed Debt 61.2 60 62 64 66 68 70 72 74 76 78 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 US$ billion FX Debt (Including Swaps) Outstanding – US$ billion

37 Otaviano Canuto BRAZIL – Ministry of Finance III. Recovering Economic Activity

38 Otaviano Canuto BRAZIL – Ministry of Finance Real Wage in Manufacturing 98 99 100 101 102 103 104 105 106 107 108 Jan 02 Mar 02 Mai 02 Jul 02 Sep 02 Nov 02 Jan 03 Mar 03 May 03 Jul 03 1992=100 Seasonally Adjusted Sep 03

39 Otaviano Canuto BRAZIL – Ministry of Finance Interest Rate Household Loans 68 72 76 80 84 88 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Sep 03 % p.a. 87.3% 70.7%

40 Otaviano Canuto BRAZIL – Ministry of Finance 360-days Swap Rate and Car-loan Rate 37 39 41 43 45 47 49 51 53 55 57 Jan 02Mar 02May 02Jul 02Sep 02Nov 02Jan 03Mar 03May 03Jul 03Sep 03 18 20 22 24 26 28 30 32 360-days Swap rate Car-loan Rate % p.a.

41 Otaviano Canuto BRAZIL – Ministry of Finance Durable Goods Output 1992=100 Seasonally Adjusted, 3-month Moving Average 150 155 160 165 170 175 180 185 Jan 02May 02Sep 02Jan 03May 03Sep 03

42 Otaviano Canuto BRAZIL – Ministry of Finance Car Sales 100 110 120 130 140 150 160 170 Jan 02Apr 02Jul 02Oct 02Jan 03Apr 03Jul 03Oct 03 Seasonally Adjusted 1993=100 Domestic Sales Source: Anfavea

43 Otaviano Canuto BRAZIL – Ministry of Finance IV. Sustainable Growth

44 Otaviano Canuto BRAZIL – Ministry of Finance Investment/GDP and Growth (1970-2002) GDP growth Investment/GDP Investment/GDP has been lower than 20% in the last 20 years

45 Otaviano Canuto BRAZIL – Ministry of Finance Structural Reforms: Social Security; Tax Reform; New Bankruptcy Law & other microeconomic reforms Microfinance Regulatory Framework Public-Private Partnerships Lifting Investment to GDP

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