Brazil:
Recent Economic Developments
Afonso Bevilaqua
April 2005
1
I. Economic Activity
II. Credit
III. Inflation
IV. External Sector
V. Fiscal Policy and Debt Management
VI. Strengthening Resistance to Shocks
2
I. Economic Activity
3
GDP Growth
Compared to Same Quarter of Previous Year
7
5.6
6
4.9
5
%
6.1
4.0
4
3
2
1.5
0.9
1
0.0
0
-0.2
-1
1Q03
Source: IBGE
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
4
GDP Growth
Compared to Previous Quarter, Seasonally Adjusted
2.5
1.9
2.0
1.8
1.4
1.5
1.0
%
1.0
0.6
0.4
0.5
0.0
1Q03
2Q03
3Q03
-0.5
4Q03
1Q04
2Q04
3Q04
4Q04
-0.4
-1.0
-1.5
-1.2
Source: IBGE
5
GDP x Fixed Capital Investment
Compared to Same Quarter of Previous Year
20
15
%
10
5
0
-5
-10
1Q03
2Q03
3Q03
GDP
Source: IBGE
4Q03
1Q04
2Q04
3Q04
4Q04
Fixed-Capital Investment
6
Contribution of Internal and External
Demands to GDP Growth
GDP Growth Decomposition (y-o-y)
7
5
%
3
1
-1
-3
-5
I
II
III
IV
I
2002
III
IV
I
2003
Internal Demand
Source: IBGE
II
II
III
IV
2004
External Demand
7
Industrial Output
112
109
s.a., 2002 = 100
106
103
100
97
94
91
88
85
Jan
99
Jul
99
Source: IBGE
Jan
00
Jul
00
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Feb
05
8
Industrial Output
%
Dec 04-Feb 05
Sep 04-Nov 04
2004
2003
+0.5
+8.3
Capital Goods
+0.9
+19.7
Intermediate Goods
-0.8
+7.4
Durable
+3.7
+21.8
Semi and Non-Durable
+4.3
+4.0
Total
Consumer Goods
Source: IBGE
9
Real Retail Sales
3-Month Moving Average
s.a., 2003 = 100
113
110
107
104
101
98
Jan
01
Jul
01
Jan
02
Source: IBGE, Banco Central
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Jan
05
10
Retail Sales
%
Nov 04-Jan 05
Aug 04-Oct 04
2004
2003
+3.1
+9.2
Furniture & Electronics
+5.6
+26.4
Fuel and Lubricants
+0.1
+4.7
Supermarket, Food,
Beverage and Tobacco
+3.0
+7.2
Vehicles & Autoparts
+0.0
+17.8
Clothing
+3.9
+4.7
Total
Source: IBGE
11
The Role of the Monetary Impulse
24
right scale
Real Interest Rate
left scale
(Feb 05)
20
108
16
103
12
98
8
93
Jul
00
Jan
01
Jul
01
Jan
02
Source: IBGE, Banco Central
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
s.a., 2002 = 100
% p.y.
113
Industrial Output (t+6)
Mar
05
12
Formal Job Creation
Accumulated in 12 Months
2.0
1.5
million
1.0
0.5
0.0
-0.5
-1.0
Jan
95
Jan
96
Jan
97
Jan
98
Jan
99
Jan
00
Source: Ministry of Labour and Employment
Jan
01
Jan
02
Jan
03
Jan
04
Feb
05
13
Industrial Employment and Payroll
108
117
107
2002 = 100
105
111
104
Industrial Payroll
right scale
103
102
101
Industrial Employment
left scale
100
99
108
105
2002 = 100
114
106
102
99
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan
01 01 01 02 02 02 03 03 03 04 04 04 05
Source: CNI
14
Self-Propagating Forces
s.a, 3-Month MA, 2003 = 100
110
Supermarket Sales
left scale
108
114
106
110
104
106
102
Industrial Payroll
right scale
100
102
s.a., 3-Month MA,1992 = 100
118
112
98
98
Jan
02
May
02
Source: IBGE
Sep
02
Jan
03
May
03
Sep
03
Jan
04
May
04
Sep
04
Jan
05
15
Consumers Confidence
150
140
130
120
110
100
90
80
Jan
00
Jul
00
Jan
01
Source: Fecomércio SP
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Feb
05
16
Capacity Utilization
84
83
3-Month MA, %
82
81
80
79
78
77
76
75
Jan
97
Source: CNI
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
17
Investment x Capacity Utilization
86
135
82
78
74
105
Investment
right scale
Capacity Utilization
left scale
95
Sources: IBGE and CNI
4Q04
1Q03
1Q02
1Q01
1Q00
1Q99
1Q98
1Q97
1Q96
1Q95
1Q94
85
1Q93
70
1Q92
%
115
1990=100
125
18
Investment x Country Risk
1 900
135
Investment
1 600
Basis Points
125
1990=100
1 300
1 000
Country Risk (t-2)
115
700
105
400
I II III IV I II III IV I II III IV I II III IV I II III IV I II III
2000
2001
2002
Sources: IBGE and JP Morgan
2003
2004
2005
19
II. Credit
20
Selic vs. Market Interest Rates
% p.y.
33
31
Selic Rate
29
Swap 180 days
27
Swap 360 days
25
23
21
19
17
15
Jun
00
Feb
01
Source: Bacen
Oct
01
Jun
02
Feb
03
Oct
03
Jun
04
Feb
05
21
Swap Rates vs. Credit Rates
32
56
30
54
Swap 360 days
left scale
52
26
% p.y.
50
Acquisition
of Vehicles
right scale
24
48
46
44
22
42
20
% p.y.
28
40
18
38
16
36
14
34
Jun
00
Feb
01
Source: Bacen
Oct
01
Jun
02
Feb
03
Oct
03
Jun
04
Feb
05
22
Swap Rates vs. Credit Rates
29
100
Swap 180 days
left scale
27
96
92
Personal Credit
right scale
23
88
84
21
80
% p.y.
% p.y.
25
76
19
72
17
68
15
64
Jun
00
Feb
01
Source: Bacen
Oct
01
Jun
02
Feb
03
Oct
03
Jun
04
Feb
05
23
Swap Rates vs. Credit Rates
29
35
33
Swap 90 days
left scale
31
% p.y.
25
Vendor
right scale
23
29
27
21
% p.y.
27
25
19
23
17
21
15
19
Jun
00
Feb
01
Source: Bacen
Oct
01
Jun
02
Feb
03
Oct
03
Jun
04
Feb
05
24
Intermediation Spread vs. Credit Supply
34
282
Average Spread
right scale
33
262
32
252
31
242
30
232
Non-Earmarked Credit
left scale
29
222
28
212
Jan
03
27
May
03
Source: Bacen
Sep
03
p.p.
R$ billion
272
Jan
04
May
04
Sep
04
Feb
05
25
Average Spread:
Individuals and Companies
15.5
60
Companies
left scale
15.0
56
14.0
52
p.p.
p.p.
14.5
13.5
48
Individuals
right scale
13.0
12.5
44
Jan
03
May
03
Source: Bacen
Sep
03
Jan
04
May
04
Sep
04
Jan
05
26
Credit Contracts with
Payroll-Deduction of Repayments
220
Credit Contracts with
Payroll-Deduction of Repayments
Jan 2004 = 100
200
180
160
140
Non-earmarked Credit
120
100
Jan
04
Mar
04
May
04
Jul
04
Sep
04
Nov
04
Feb
05
27
Non-Earmarked Credit/GDP
15.5
15.0
%
14.5
14.0
13.5
13.0
Jan Mar May
03
03
03
Source: Bacen
Jul
03
Sep Nov Jan Mar May Jul
03
03
04
04
04
04
Sep Nov
04
04
Feb
05
28
III. Inflation
29
IPCA Inflation Rate
3.5
3.0
2.5
%
2.0
1.5
1.0
0.5
0.0
-0.5
Jan
02
Apr
02
Jul
02
Oct
02
Jan
03
Apr
03
Jul
03
Oct
03
Jan
04
Apr
04
Jul
04
Oct
04
Feb
05
30
IPCA Inflation Rate
Accumulated in 12 months
18.0
16.5
15.0
%
13.5
12.0
10.5
9.0
7.39
7.5
6.0
4.5
Jan Apr Jul
02 02
02
Oct Jan
02
03
Apr Jul
03
03
Oct Jan Apr Jul
03
04 04
04
Oct
04
Feb
05
31
Core Inflation
IPCA: 3-Month Moving Average
1.8
%
1.6
Exclusion
1.4
Smoothed trimmed means
1.2
Non-Smoothed trimmed means
1.0
0.8
0.6
0.4
0.2
Jan
02
Apr
02
Jul
02
Source: Bacen
Oct
02
Jan
03
Apr
03
Jul
03
Oct
03
Jan
04
Apr
04
Jul
04
Oct
04
Feb
05
32
Tradables x Non-tradables Inflation
IPCA: 3-Month Moving Average
3.5
3.0
2.5
Tradables
%
2.0
Non-Tradables
1.5
1.0
0.5
0.0
-0.5
Jan
02
Apr
02
Source: Bacen
Jul
02
Oct Jan
02
03
Apr Jul
03 03
Oct Jan
03
04
Apr Jul
04 04
Oct
04
Feb
05
33
Wholesale inflation:
Industrial x Agriculture Prices
3.0
Industrial
2.0
%
1.0
0.0
-1.0
Agriculture
-2.0
-3.0
Jan
04
Mar
04
May
04
Jul
04
Sep
04
Nov
04
Jan
05
Mar
05
34
Industrial Prices: Wholesale x IPCA
3.0
Wholesale Industrial Prices
(Excluding fuels)
2.5
2.0
%
1.5
1.0
0.5
0.0
Consumer Industrial Prices
(Excluding fuels)
-0.5
-1.0
Jan
03
May
03
Sources: IBGE, FGV
Sep
03
Jan
04
May
04
Sep
04
Feb
05
35
Food Prices x IPCA
2.5
2.0
1.5
IPCA
%
1.0
0.5
0.0
-0.5
Food Prices (IPCA)
-1.0
Jan
03
Source: IBGE
May
03
Sep
03
Jan
04
May
04
Sep
04
Feb
05
36
Inflation: (% of Items
with Price Increases)
90
%
80
70
60
50
Jan
99
Jul
99
Jan
00
Jul
00
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Feb
05
37
Commodities Prices
Chicago Commodities Bureau (CRB) Price Index
125
1995 = 100
115
Metals
105
95
Food
85
75
65 Jan
02
Apr
02
Source: CRB
Jul
02
Oct
02
Jan
03
Apr
03
Jul
03
Oct
03
Jan
04
Apr
04
Jul
04
Oct
04
Feb
05
38
Market Inflation Expectations: 2004-06
7.5
2004
7.0
% p.a.
6.5
2005
6.0
5.5
2006
5.0
4.5
Jul
04
Aug
04
Source: Bacen
Sep
04
Oct
04
Nov
04
Dec
04
Jan
05
Feb
05
Mar
05
39
Market Inflation Expectations for 2005
Quarterly Inflation Expectations
1.9
1.8
1.7
1.6
%
1.5
1.4
1.3
1.2
1.1
Jul
04
Aug
04
Sep
04
1Q05
Oct
04
Nov
04
2Q05
Dec
04
Jan
05
3Q05
Feb
05
Mar
05
4Q05
40
Market Inflation Expectations
12-Months Ahead
6.4
% p.a.
6.2
6.0
5.8
5.6
5.4
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
04
04
04
04
04
04
05
05
05
Source: Bacen
41
IV. External Sector
42
Market Expected FX Path in 2005
3.3
June 2004
R$/US$
March 2004
3.1
September 2004
2.9
December 2004
March 2005
2.7
2,5
Dec
04
Source: Bacen
Mar
05
Jun
05
Sep
05
Dec
05
43
Current Account: 1996/2004
11.7
10
5
US$ billion
0
-5
-10
-15
-20
-25
-30
-35
-40
1996
1997
Source: Bacen
1998
1999
2000
2001
2002 2003
2004
44
Current Account vs. Trade Balance
14
40
35
7
30
25
-7
20
Current Account
left scale
15
-14
10
5
-21
Trade Balance
right scale
-28
-35
Jan
96
US$ billion
US$ billion
0
Jan
97
Source: Bacen
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
0
-5
-10
Feb
05
45
Trade Balance
101.5
12-Month, Accumulated
100
US$ billion
90
80
Exports
70
65.6
60
Imports
50
40
Jan
99
Jul
99
Jan
00
Jul
00
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Source: Ministry of Development, Industry and Foreign Trade
Jan
04
Jul
04
Mar
05
46
Exports and Imports Volume
3-Month Moving Average
250
230
1996 = 100
210
190
Exports
170
150
130
Imports
110
90
70
Jan
96
Jan
97
Source: Funcex
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
47
Export and Import Prices
3-Month Moving Average
105
1996 = 100
100
95
Imports
90
85
80
Exports
75
Jan
96
Jan
97
Source: Funcex
Jan
98
Jan
99
Jan
00
Jan
01
Jan
02
Jan
03
Jan
04
Jan
05
48
Imports Substitution
128
135
Industrial Output
right scale
124
Dec 1995 = 100
125
120
120
116
115
112
110
108
105
104
Imported Volume
left scale
100
95
100
90
96
Dec
95
Dec
96
Dec
97
Dec
98
Dec
99
Dec
00
Dec
01
Dec
02
Dec 1995 = 100
130
Dec
03
Dec
04
49
Brazilian Exports by Market
and by Product 2004
European
Union
25.0%
Others
31.3%
Chile
2.6%
Japan
2.9%
Mexico
4.1%
US
20.8%
China
5.6%
Argentina
7.6%
Semimanufactured
13.9%
Other
1.6%
Primary
29.6%
Manufactured
54.9%
50
Foreign Direct Investment
3-Month Moving Average
3.5
3.0
US$ billion
2.5
2.0
1.5
1.0
0.5
0.0
Jan
Jul
Jan
Jul
Jan
Jul
Jan
Jul
Feb
01
01
02
02
03
03
04
04
05
51
V. Fiscal Policy and Debt Management
52
Consolidated Public Sector Primary Surplus
6
4.8
5
% of GDP
4
3
2
1
0
-1
-2
Jul
94
Jan
96
Source: Bacen
Jul
97
Jan
99
Jul
00
Jan
02
Jul
03
Feb
05
53
Debt-to-GDP Ratio
62
57
58
56
54
% of GDP
52
47
52
50
51.3
Jan
04
Mar
04
May
04
Jul
04
Sep
04
Nov
04
Feb
05
42
37
32
27
Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Feb
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Source: Bacen
54
Debt Dynamics
1999
Net debt increase
7.0%
1. Primary surplus
-2.9%
2. Pure interest on the debt
8.2%
3. Depreciation on domestic debt 3.8%
4. Depreciation on foreign debt
2.8%
5. Skeletons
1.3%
6. Privatization proceeds
-0.8%
7. Effect of GDP growth
-5.3%
Memo:
Debt dynamics (1+2+7)
Currency (3+4)
Net "skeletons" (5+6)
*2005: data of February
2000 2001 2002
0.1% 3.9% 2.9%
-3.3% -3.5% -3.3%
6.8% 6.9% 7.2%
0.8% 1.5% 4.8%
0.8% 1.5% 4.4%
0.8% 1.5% 0.9%
-1.8% -0.1% -0.2%
-3.9% -3.9% -11.0%
0.0% -0.4% -0.5%
6.6% 1.6% 3.0%
0.5% -1.0% 1.4%
2003
1.7%
-4.1%
9.1%
-1.4%
-1.6%
0.0%
0.0%
-0.3%
2004
-5.4%
-4.4%
7.0%
-0.2%
-0.3%
0.4%
0.0%
-7.7%
2005*
-0.5%
-0.8%
1.3%
0.0%
-0.1%
0.0%
0.0%
-0.7%
-7.1% 4.7% -5.1% -0.2%
9.2% -3.0% -0.5% -0.1%
0.7% 0.0% 0.4% 0.0%
55
Market Consensus of the Expected
Public Debt/GDP Trajectory
End of Year
60
% of GDP
58
December 2002
56
54
December 2003
52
50
December 2004
Dec 04:
51.8%
48
46
2003
Source: Bacen
2004
2005
2006
2007
2008
56
Debt-to-GDP Ratio Trend
62
60
Market Expectation
2005/2008 (annual
data)
2002/2004 (quarterly data)
56
54
52
50
48
47.0%
2008
2007
2006
2005
4Q2004
3Q2004
2Q2004
1Q2004
4Q2003
3Q2003
2Q2003
1Q2003
4Q2002
3Q2002
2Q2002
46
1Q2002
% of GDP
58
57
Rollover of FX-Linked Debt
170
167.2%
150
130
%
110
90
77.8%
69.3%
70
50
30
10
2001
Source: Bacen
2002
2003
5.1%
0%
2004
Jan-Mar
2005
58
FX-Linked Debt Outstanding
75
55
45
2002:
reduction of
US$11.7b
2003:
reduction of
US$9.4b
2004:
reduction of
US$25.7b
2005:
reduction of
US$10.6b
US$ billion
65
35
25
15
Jan Apr Jul
02
02 02
Source: Bacen
Oct Jan Apr Jul
02 03
03 03
Oct Jan Apr Jul
03 04
04 04
Oct Jan
04 05
59
FX-Linked and Fixed Domestic Debt as a
Share of the Total Debt
45
40
FX-Linked Domestic Debt
35
30
%
25
20.4
20
15
10
Fixed Domestic Debt
6.0
5
0
Jan
02
May
02
Source: Bacen
Sep
02
Jan
03
May
03
Sep
03
Jan
04
May
04
Sep
04
Feb
05
60
VI. Strengthening Resistance to Shocks
61
FX Flows and BCB´s FX Acquisitions
4
FX Flows
3
FX BCB's Acquisitions
US$ billion
2
1
-
0
-
-
-
-
-
-
-
-
-
-1
-2
-3
Jan
04
Mar
04
Source: Bacen
May
04
Jul
04
Sep
04
Nov
04
Jan
05
Mar
05
62
Net International Reserves
35
US$ billion
30
25
20
15
Jan
99
Jul
99
Jan
00
Source: Bacen
Jul
01
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Feb
05
63
Interest Payments/Exports Ratio
36
32
%
28
24
20
16
12
1996
1997
Source: Bacen
1998
1999
2000
2001
2002
2003
2004
64
Net External Debt/Exports Ratio
4.0
3.5
3.0
2.5
2.0
1.5
1.0
1996
Source: Bacen
1997
1998
1999
2000
2001
2002
2003
2004
65
Net External Debt/GDP Ratio
40
35
%
30
25
20
15
10
1996
1997
Source: Bacen
1998
1999
2000
2001
2002
2003
2004
66
Impact of a 1% FX change on
Debt/GDP ratio
38
34
b.p.
30
26
22
18
14
10
Jan
00
Jul
00
Source: Bacen
Jan
01
Jul
01
Jan
02
Jul
02
Jan
03
Jul
03
Jan
04
Jul
04
Feb
05
67
Brazil:
Recent Economic Developments
Afonso Bevilaqua
April 2005
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