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Brazil: Policies and Prospects

Brazil: Policies and Prospects. August 2002. Background: Main Structural Changes. Inflation Stabilization Financial Stability Fiscal Responsibility Moving to a Floating Foreign Exchange Rate Productivity and Others. IPCA Monthly Inflation. 47.43. 50. 45. 40. 35. 30. 25. %. 20. 15.

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Brazil: Policies and Prospects

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  1. Brazil: Policies and Prospects August 2002

  2. Background: Main Structural Changes • Inflation Stabilization • Financial Stability • Fiscal Responsibility • Moving to a Floating Foreign Exchange Rate • Productivity and Others

  3. IPCA Monthly Inflation 47.43 50 45 40 35 30 25 % 20 15 Real Plan 10 5 0 -5 Jul-01 Jul-02 Jul-98 Jul-99 Jul-00 Jul-94 Jul-95 Jul-96 Jul-97 Jan-95 Jan-94 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02

  4. IPC-FIPE – Real Exchange Rate Average: Jan/88 to Jul/02 3.6 3.43 3.4 3.2 3.0 2.8 2.6 2.4 2.2 Average: IPC-FIPE 2.0 1.95 1.8 1.6 1.4 1.2 1.0 Jul-90 Jul-91 Jul-93 Jul-94 Jul-96 Jul-89 Jul-97 Jul-99 Jul-00 Jul-01 Jul-02 Jul-92 Jul-95 Jul-98 Jan-90 Jan-92 Jan-93 Jan-95 Jan-96 Jan-91 Jan-98 Jan-99 Jan-01 Jan-02 Jan-94 Jan-97 Jan-00 Prices as of July 2002 (R$/US$)

  5. Fiscal Adjustment Consolidated Primary Surplus 12-month % of GDP 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% Jul 94 Mar 95 Nov 95 Jul 96 Mar 97 Nov 97 Aug 98 Mar 99 Nov 99 Jul 00 Mar 01 Nov 01

  6. Public Sector Borrowing Requirements Accumulated in 12 months 5.0 4.5 4.2 4.0 4.2 3.8 4.0 4.0 3.6 % of GDP 3.5 3.7 3.1 3.0 3.0 2.8 2.5 2.0 Oct-01 Oct-02 Apr-02 Jun-01 Feb-02 Jun-02 Dec-01 Dec-02 Aug-01 Aug-02

  7. Net Foreign Direct Investment US$ billion 32.8 28.9 28.6 6.7 6.1 8.8 22.5 Net FDI - privatizations 19.0 1.1 Privatizations 5.2 26.1 10.8 22.7 21.4 19.8 2.3 13.7 4.4 8.4 2.1 2.1 1.3 1.1 1.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

  8. Industrial Productivity and ULC 180 Industrial Productivity/1 160 140 120 100 ULC in US$/2 80 60 40 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jun-02 /1 1992=100/Seasonally adjusted series /2 June 1994=100/Nominal ULC/12-month moving average

  9. Illiteracy Rate Above 15 years old (%) 21.9 18.3 16.9 16.2 15.6 14.7 13.8 13.3 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Source: IPEA, based on PNAD, IBGE

  10. Children in School 7-14 year-old (%) 97.0 95.7 94.8 93.0 91.3 90.2 88.7 87.0 80.5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Source: IPEA, based on PNAD, IBGE

  11. II. 2001 and 2002 Period

  12. Evolution of the Nominal Exchange Rate Exchange Rate 3.80 Election Concerns 3.60 September 11th 3.40 3.20 3.09 Inflation Targeting 3.00 2.80 World Economic Slowdown 2.60 Change in the Exchange Rate Regime R$/US$ 2.40 2.20 2.00 1.80 Energy Crisis 1.60 1.40 1.20 Technology Stocks Crisis 1.00 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Sep-98 Sep-99 Sep-00 Sep-01 Nov-98 Nov-99 Nov-00 Nov-01 May-98 May-99 May-00 May-01 May-02 Daily figures updated up to August 20th. 2002

  13. III. Balance of Payments

  14. IMF Agreement • New Stand-By Arrangement - US$ 30 billion • 2002: US$ 6 billion • NIR floor: US$ 5 billion • Primary surplus: 3.75% of GDP for 2003 and no less than that level for 2004 and 2005 • WB + IDB = US$ 7 billion

  15. Trade Balance - US$ billion 10 9.0 7.0 8 6 4 2.6 2 0 -0.7 -2 -1.3 -4 -6 -6.6 -8 1998 1999 2000 2001 2002* 2003* * BC forecasts

  16. Current AccountDeficit US$ billion 40 33.4 35 25.3 30 24.2 23.2 25 17.0 15.4 20 15 10 5 0 1998 1999 2000 2001 2002* 2003* * BC forecasts

  17. Foreign Direct Investment US$ billion 32.8 35 28.9 28.6 30 22.5 25 17.0 16.5 20 15 10 5 0 1998 1999 2000 2001 2002* 2003* * BC forecasts

  18. External Financing Requirements US$ billion 6 4.6 4 0.8 0.5 2 0 -1.6 -2 -4 -3.2 -6 -8 -8.6 -10 1998 1999 2000 2001 2002* 2003* * BC forecasts External financing requirements = current account deficit - net foreign direct investments (includes intercompany loans).

  19. Changes in International Reserves US$ million 2001 2002 2003 Dec Jan-Jul Aug-Dec Year Year I - Reserve position (end of the previous period: 37 234 35 866 39 060 35 866 37 742 1. Net Purchases (+)/sales (-) of Banco Central -950 -2 605 -5 134 -7 739 0 2. Banco Central's foreign operations -417 5 798 3 816 9 615 -13 984 Disbursements 0 14 762 6 600 21 362 6 650 Bonds 0 3 940 0 3 940 4 000 IMF 9 972 6 000 15 972 0 Multilateral (IBRD/IDB) 850 600 1 450 2 650 Amortizations -156 -6 778 -1 092 -7 870 -16 074 Bonds, MYDFA and Paris Club -156 -2 393 -915 -3 309 -4 582 IMF -4 384 -177 -4 561 -11 492 Interest 100 -2 211 -1 691 -3 902 -4 560 Expenditure -50 -3 090 -2 358 -5 448 -5 960 Reserve interest earnings 150 879 667 1 546 1 400 Other -361 24 0 24 0 II - Total Banco Central operations (1+2) -1 367 3 193 -1 318 1 875 -13 984 III - Reserve position (end of the month) 35 866 39 060 37 742 37 742 23 758 (-) Loans from IMF 8 313 14 453 20 276 20 276 8 784 (-) Sovereign Buy Back (exceeding value) 0 1 457 2 385 2 385 1 957 (-) Difference of parity -284 -404 -404 -404 -269 IV - Net reserves position (IMF concept) 27 837 23 553 15 485 15 485 13 286

  20. BoP: Assumptions US$ million 2002 2003 Jan-Jul Aug-Dec Year Year Trade Balance 3,804 3,196 7,000 9,000 Exports 31,275 23,325 54,600 59,000 % variation -7.7% -4.1% -6.2% 8.1% Imports 27,471 20,129 47,600 50,000 % variation -18.9% -7.3% -14.4% 5.0% Net foreign direct investment 10,546 5,954 16,500 17,000 Equity capital 5,640 2,415 8,055 13,500 FDI conversions 5,665 3,539 9,204 3,500 Intercompany loans -759 0 -759 0 Medium and Long Term Loans (rollover rate) Securities 43% 57% 44% 80% Loans 60% 66% 62% 100% Short-term and others 861 1,452 2,313 100 Short-term instruments, liabilities (net) -718 94 -625 0 Short-term loans (net) 140 -500 -360 0 Short-term credit lines (net) 3,968 2,253 6,221 0 Of which: Banco Central do Brasil 0 2,000 2,000 0 1/ Other -2,529 -395 -2,924 100 Brazilian investments abroad -1,746 -2,098 -3,844 -5,855 Net direct investment abroad -1,686 -452 -2,138 -1,400 Portfolio investments (net) -196 -204 -400 600 2/ Other investments (net) 136 -1,442 -1,306 -5,055 Of which: bank deposits 2,645 1,500 4,145 -1,355 1/ Includes derivatives (liabilities operations), other short-term liabilities and errors and omissions. 2/ Includes derivatives (assets operations).

  21. External Debt - Amortizations and Interest Maturities 1/ US$ million 2002 2003 Jan-Jul Aug-Dec Year Year Interest 8 877 8 183 17 059 17 050 Non-financial public sector 4 260 3 208 7 469 8 001 Central government (affects reserves) 3 219 2 358 5 577 5 960 2/ 4 616 4 975 9 591 9 049 Private sector Amortizations 17 536 11 704 29 240 28 004 Non-financial public sector 4 024 2 507 6 531 8 869 Central government (affects reserves) 2 394 915 3 309 4 582 2/ 13 512 9 197 22 709 19 135 Private sector Total 26 413 19 887 46 299 45 054 Non-financial public sector 8 285 5 715 14 000 16 870 Central government (affects reserves) 5 613 3 273 8 886 10 541 2/ Private sector 18 128 14 172 32 299 28 184 1/ Forecast based on debt position in March, 2002. 2/ Includes financial public sector.

  22. Total External Debt 240 225.61 223.79 216.92 220 209.90 191.62 200 179.94 180 160 145.73 148.30 159.26 135.95 US$ billion 140 123.44 120 123.91 100 80 60 40 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 Does not include intercompany loans

  23. IV. Credit Lines

  24. Credit Lines – Bank to Bank US$ billion Trade Other Total Jan 2001 14.1 7.7 21.8 Jul 2001 15.7 6.2 21.9 Jan 2002 13.7 5.6 19.3 Jul 2002 12.2 5.2 17.4 Aug 2002* 11.8 5.0 16.8 * Until 16th. Bank to Bank data informed by 40 Brazilian banks.

  25. Credit Lines – Bank to Bank Total US$ billion 23 22 21 20 19 18 17 16 Jul-01 Jul-02 Oct-01 Jan-02 Apr-02 Jan-01 Apr-01 Jun-01 Jun-02 Feb-02 Mar-02 Feb-01 Mar-01 Sep-01 Dec-01 Nov-01 Aug-01 May-01 May-02 Aug-02

  26. Exports: Total and Export Financing 6 60 5 50 4 40 3 30 Total Exports and Exports Financing (US$ billion) Export Financing / Total Exports (%) 2 20 1 10 0 0 Jul-01 Jul-02 Oct-01 Jan-02 Apr-02 Jun-01 Feb-02 Jun-02 Mar-02 Sep-01 Dec-01 Nov-01 Aug-01 May-02 Aug –02* Total Exports Export Financing Exp. Financ./Total Exports *Until the 21st.

  27. V. Fiscal Sustainability

  28. 1/ Interest rate 2/ "Skeletons" Net Public Sector Debt Baseline Scenario 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Inflation GDP deflator (average) 7.59 4.94 3.87 3.63 3.50 3.50 3.50 3.50 3.50 3.50 Inflation GDP deflator (Dec-Dec) 5.89 4.00 3.75 3.50 3.50 3.50 3.50 3.50 3.50 3.50 GDP real growth 1.30 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 3.50 17.59 13.36 13.09 12.82 12.82 12.82 12.82 12.82 12.82 12.82 Real interest rate 11.05 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 9.00 Nominal currency depreciation 22.87 2.46 2.22 1.97 1.97 1.97 1.97 1.97 1.97 1.97 Primary (% of GDP) -3.75 -3.75 -3.75 -3.75 -3.75 -3.75 -3.75 -3.75 -3.75 -3.75 1.61 0.65 0.75 0.75 0.75 0.75 0.00 0.00 0.00 0.00 Net debt (% of GDP) 58.88 58.27 57.54 56.77 55.94 55.07 53.42 51.69 49.86 47.95 1/ Implicit internal net debt interest rate. 2/ Net of the privatization proceeds (% of GDP).

  29. Net Public Sector Debt - % of GDP Baseline Scenario 60 58.9 58.3 57.5 58 56.8 55.9 56 55.1 54 53.4 52 51.7 50 49.9 48 47.9 46 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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