May 10th, 2002
A recent study, based on the estimates collected in 2000 and 2001 by the Investor Relations
Group (GCI) of the Banco Central do Brasil, shows the difficulties of projecting the results of
economic variables in the long term. From the mid-2001 onwards, the changes in both the
domestic and the international economic environment, and in the expectations about their future
behavior, have led to an overestimation of the exchange rate at the end of 2001, and also to the
underestimating of the trade balance and Foreign Direct Investment (FDI). However, the
projections in the 2001 variations of GDP and general and consumer price indices were
optimistic in relation to their respective actual results; the confidence in a sound fiscal policy also
allowed optimistic projections of the Net Public Sector Debt/GDP in the main part of the period
considered in this study. See below details on the study’s results. The methodology for identifying
the more pessimistic and optimistic institutions is explained at the end of this report.
I. Results
The institutions surveyed by the GCI could not foresee the adverse factors affecting the economy in
2001 (as the deceleration of the US economy, the Argentinean crisis and the rationing of
electricity). Regarding the exchange rate (Graph 1), the average market projection for December
2001 slowly began to converge to the actual value only from September 2000 on; in the first
semester of 2001, its depreciation was accelerated by the uncertainty related to the results of the
trade balance. In retrospect, one can now note that this shift was exaggerated from July 2001 on,
and its upward trend reverted only in October, when the appreciation of the exchange rate signaled
that, at the end of the period, it would be lower than the expected by the market by that time. The
most pessimistic institution maintained its projections above the average projection of the market
for 21 out of the 24 months; the most optimistic institution reached this positioning though having
corrected upward its projections more steeply than the average estimate by the beginning of 2001,
and not having followed the general downward trend at the end of the year.
Graph 1
Projections for the end-2001 Exchange Rate
3.10
2.90
R$/US$
2.70
2.50
2.30
2.10
1.90
1.70
Jan/00
Apr/00
Jul/00
Oct/00
Jan/01
Most Pessimistic Institution's Projection
Actual
Apr/01
Jul/01
Oct/01
Average
Most Optimistic Institution's Projection
The FDI exceeded the current account deficit (of 4.2% of GDP) in 2000 by 1.3%. Domestic and
international uncertainties affected the FDI inflow negatively in the first half of 2001. However,
despite the terrorist attacks on the United States in September 2001, the capital inflows to Brazil
were strengthened at the end of the year; thus, FDI was almost sufficient to finance the whole
current account deficit in 2001 (Graph 2).
Graph 2
Projections for the 2001 Foreign Direct Investment
27
25
US$ billion
23
21
19
17
15
Jan/00
Apr/00
Jul/00
Oct/00
Most Pessimistic Institution's Projection
Actual
Jan/01
Apr/01
Jul/01
Oct/01
Average
Most Optimistic Institution's Projection
Information for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br
These circumstances surprised the institutions surveyed by the GCI. From May 2000 to May 2001,
approximately, the average market projection was close to the final result of the FDI in 2001;
however, the increasing instability of the scenarios in the second quarter of 2001 led to steep
corrections in the projections considered here. Those of the most pessimistic institution were close
to the actual figure of the FDI for 12 out of the 24 months considered (from April 2000 to March
2001), being clear, as in the other cases, the deterioration of its expectations between May and
September of 2001. The most optimistic institution achieved this rank as its projections were stable
at a high level from June 2000 to February 2001. The actual result of the FDI was somewhat of a
surprise for the market as it was far above the average projection of the market, and as the most
optimistic institution corrected its projections downwards between the two last months of the
analyzed period.
The Brazilian trade balance has shown better results in the recent years, though the deficit in 2000.
The depreciation of the exchange rate, at the end of 2001, leveled around 18%, and turned out to be
an important factor for last year’s trade surplus (Graph 3).
Graph 3
Projections for the Trade Balance Result in 2001
10
US$ billion
8
6
4
2
0
Jan/00 Mar/00 May/00 Jul/00 Sep/00 Nov/00 Jan/01 Mar/01 May/01 Jul/01 Sep/01 Nov/01
-2
-4
Most Pessimistic Institution's Projection
Actual
Average
Most Optimistic Institution's Projection
Information for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br
Once again the favorable and unfavorable factors, and the difficulty to weigh up their relative
importance, were the reasons for mistaken projections for a large part of the period in consideration,
by the institutions surveyed by the GCI. The projections for the end-2001 trade balance were
optimistic until shortly after the first half of 2000; for the following eleven months (from October
2000 to August 2001), they proved to be excessively biased by negative prospects about the
variables, and only in the final quarter of 2001 did they begin to converge towards the final figure
of the trade balance. In different ways, the uncertainty at the beginning of 2001 affected the
projections both of the most optimistic and the most pessimistic institutions, among those surveyed
by the GCI.
In short, one can perceive that the successive changes of circumstances and expectations led to
underestimating the actual results of the trade balance and FDI at the end of 2001, and to
exaggerated projections of the end of the year value of the exchange rate - not only by the most
pessimistic institution for each of the variables, but also by the whole set of institutions taking part
in the GCI survey. The significant difficulties for modeling and adequately quantifying a number of
factors affecting those results, and their simultaneous impacts, proved to be enough to generate
quite mistaken projections in the period under study.
On the other hand, the long experience of Brazilian institutions with the inflationary process and the
great variety of appropriate techniques for such task might suggest that, concerning the price
indices, the projections might have been more accurate; however it did not happen. Apart from the
periods between the harvests and adverse climatic conditions, which reinforced the seasonal
behavior of prices of agricultural products, and the readjustment of prices of public utilities in the
middle of each year, new pressures related to the external scenario, the electricity rationing and the
depreciation of the exchange rate, together with the higher external demand for livestock products,
affected domestic prices. By the end of 2001, in spite of the smoother net effects of the rationing in
relation to the initial expectations, the results of the general and consumer price indices were well
above the forecasts.
In this context, the projections regarding the accumulated variation of the IGP-DI in 2001 turned
out to be considerably underestimated by the market and by both the most optimistic and
pessimistic institutions, with their respective data converging to the actual value only by the end of
Information for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br
the year (Graph 4). It is worth highlighting, however, the convergence of their projections during
2001.
Graph 4
Projections for the 2001 IGP-DI Variation
12
11
10
9
%
8
7
6
5
4
Jan/00
Apr/00
Jul/00
Oct/00
Jan/01
Most Pessimistic Institution's Projection
Actual
Apr/01
Jul/01
Oct/01
Average
Most Optimistic Institution's Projection
In the same way, but to a lesser extent, IPCA projections were also very optimistic compared to the
actual result of 2001 (Graph 5). Interestingly, both institutions with extreme projections offered the
same estimates in the first quarter of the period; another coincidence: both made projections above
(in the case of the most pessimistic) and below (in the other case) the average projection of the
market for more than 18 out of the 24 months considered.
Graph 5
Projections for the 2001 IPCA Variation
8.0
7.5
7.0
6.5
%
6.0
5.5
5.0
4.5
4.0
3.5
Jan/00
Apr/00
Jul/00
Oct/00
Most Pessimistic Institution's Projection
Actual
Jan/01
Apr/01
Jul/01
Oct/01
Average
Most Optimistic Institution's Projection
Information for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br
The several shocks that affected the Brazilian economy, including the shift of expectations during
the rationing of electricity, made very difficult to correctly estimate the performance of the GDP in
2001 (Graph 6).
Graph 6
Projections of the 2001 GDP Growth
6.00
5.50
5.00
4.50
4.00
%
3.50
3.00
2.50
2.00
1.50
1.00
Jan/00 Mar/00 May/00 Jul/00 Sep/00 Nov/00 Jan/01 Mar/01 May/01 Jul/01 Sep/01 Nov/01
Most Pessimistic Institution's Projection
Actual
Average
Most Optimistic Institution's Projection
Both the most pessimistic and optimistic institutions offered similar projections to the average
estimate of the market in the second semester of 2000. Between April and May of 2001, showing
more sensitivity to the negative expectations caused by the rationing, both made steeper downward
readjustments in their projections than the market as a whole. By the end of 2001, the change of
expectations as to the effects of the rationing led the market to overestimate, which were not
followed by the most pessimistic institution in October and November. The final projections, as of
December 2001, exceeded the actual figure of that year, in the case of the market and both the
mentioned institutions.
Between 2000 and 2001, the primary surplus and the nominal deficit of the Public Sector
Borrowing Requirements (NFSP), and also the total of net interest paid, were relatively stable in
relation to the GDP, justifying the market confidence, as already seen in the previous years, in a
sound fiscal policy. However, the several circumstances that affected those variables represented a
considerable obstacle to accurately project the actual Net Public Sector Debt/GDP ratio (Graph 7).
Information for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br
Graph 7
Projections of the 2001 Net Public Debt/GDP
58
56
54
% GDP
52
50
48
46
44
42
40
Feb/00
Apr/00
Jun/00
Aug/00
Oct/00
Dec/00
Most Pessimistic Institution's Projection
Actual
Feb/01 Apr/01
Jun/01
Aug/01 Oct/01
Dec/01
Average
Most Optimistic Institution's Projection
In fact, the average projection of the market started a trend towards what would be the actual
number only from October 2000 on. The institution with the most pessimistic projections, however,
had estimates above the market projections from the beginning of 2000, and maintained them stable
for over nine months; the one with the most optimistic projections also maintained its figures almost
unchanged for 13 months until March 2001, even when the market had already made a significant
correction. The overshooting of projections at the beginning of the final semester of 2001 can be
noticed in the three curves in different months, with the market average getting much closer to the
actual figure very late in the year.
II. Methodology
Since the creation of the Investor Relations Group (GCI), one of its main attributes has been to
collect the projections of several institutions about certain economic variables of the Brazilian
economy, which is currently done through the site http://www.bcb.gov.br/expectativa.
The consolidated data are released by the Market Readouts every week, and the series are available
on the site of the Central Bank (http://www.bcb.gov.br), aiming to strengthen the GovernmentInformation for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br
Market partnership. Additionally, the information obtained is important for the decisions of
economic policy under the responsibility of the Central Bank, so that permanent effort is made to
enlarge the sample of institutions and to evaluate the quality of the data obtained.
In this context, this study analyzed the forecasting capacity of the market in situations characterized
by high volatility, as in 2000 and 2001. The methodology adopted is described below.
(1) The study considered the projections for the year 2001, available at the end of each of the 24
months of 2000 and 2001, for the set of variables above considered.
(2) Besides the average projection of each month, for each of the variables, the projections of the
most optimistic/pessimistic institutions were also selected.
(3) For each variable included in the survey were selected (for both, the most optimistic and most
pessimistic projections), in each month, data of the 20 institutions with the more
optimistic/pessimistic projections. Such institutions were defined as those that, in each month of
the study, had the lower/higher projections, considering variables whose more adequate result,
for the economic policy strategy, was “low” (such as the price indices, the exchange rate and
the Net Public Sector Debt/GDP ratio) - and vice-versa, in the case of the variables whose
desirable result was ”high” (trade balance, FDI and GDP).
•
For each variable, when necessary, other institutions with the same projection of the 20th
most optimistic/pessimistic institution were also included in the basic list of each
variable – so that sometimes it contained more than 20 institutions.
(4) After the selection of the 20 (or more) most optimistic/pessimistic institutions for each variable,
a weighting criterion was adopted: considering the list of selected institutions, the projection of
the most optimistic/pessimistic received 20 “points”, to the next lowest projection were
attributed 19 “points” and so forth, so that in theory the one before the last had 2 “points” and
the last, 1 “point”. (The punctuation of the last institutions is in theory because, due to
coincident projections, even with 20 or more selected institutions sometimes the last projection
received more than 1 point).
Information for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br
(5) Finally, for each of the variables considered, the points obtained by each institution were
summed up, month-by-month, allowing the identification of the most optimistic and the most
pessimistic among them, considering the 24 months analyzed.
Lastly, it should be mentioned that other procedures were applied to the determination of both the
most optimistic and the most pessimistic institutions, for each of the variables considered, and the
results were not significantly different than those presented in the graphs above.
Information for unrestricted disclosure. It is not intended to bind Banco Central do Brasil in its monetary or foreign
exchange policy actions. Questions and comments to gci.bacen@bcb.gov.br