1

Brazil: Economic Outlook

Fernanda NechioDeputy Governor for International Affairs and Corporate Risk

May 29, 2020

Brazil before Covid-19

Improving fundamentals, gradual recovery, inflation within target

Pandemic impact

Virus spread

Severe economic impact

Response to the crisis

Central Bank guaranteeing liquidity and financial stability

Monetary policy

Overview

3

Brazil before the pandemic

Gradual economic recovery

Source: IBGE / ME

Gradual recovery...

-10

-8

-6

-4

-2

0

2

4

6

8

10

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

Mar

-10

Dec

-10

Sep

-11

Jun

-12

Mar

-13

Dec

-13

Sep

-14

Jun

-15

Mar

-16

Dec

-16

Sep

-17

Jun

-18

Mar

-19

Dec

-19

GDP (quarter) left

GDP (annual) right

-800

-600

-400

-200

0

200

400

600

800

1.000

Dec

-12

May

-13

Oct

-13

Mar

-14

Au

g-1

4

Jan

-15

Jun

-15

No

v-1

5

Ap

r-1

6

Sep

-16

Feb

-17

Jul-

17

Dec

-17

May

-18

Oct

-18

Mar

-19

Au

g-1

9

industry

civil construction

commerce

services

agriculture, vegetal extraction, hunting and fishing

… in all sectors(Net jobs – thousands)

Comfortable international position

Source: BCB / IMF

CA deficit more than financed by FDI(US$ billion) Sizable buffers against shocks

(US$ billion)

-120

-100

-80

-60

-40

-20

0

20-20

0

20

40

60

80

100

120

1995 2000 2005 2010 2015 2020

Milh

ares

FDI

Current Account Deficit(inverted)

-200

-100

0

100

200

300

400

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019Foreign reserves Repo linesFX Swaps OthersNet FX position ARA range 100% - 150%

$ 298.5 bi (May 25, 2020)

Improving fundamentals with reform agenda

Labor market reform

Spending cap law

Comprehensive pension reform

Divestments and privatization program

Others include credit registry law, trade

agreements, improvements in business

conditions, OECD liberalization

benchmarks convergence

jan-16

jan-17jan-18

jan-20

0

2

4

6

8

10

12

14

16

18

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y

Yiel

d(%

)

Yield curve responding to improvedfundamentals

7

The pandemic impact

-4,8

-14,2

-3,4

-6,8

-20

-15

-10

-5

0

5

10

Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020

Gro

wth

rat

e (q

oq

saa

r, %

)

Gross Domestic Product

US

Euro Area

Japan

China (annual rate)

-16,4

-11,2

-4,6

0,3

-20

-15

-10

-5

0

5

10

Mar

17

May

17

Ju

l 17

Se

p 1

7

No

v 1

7

Jan

18

Mar

18

May

18

Ju

l 18

Se

p 1

8

No

v 1

8

Jan

19

Mar

19

May

19

Ju

l 19

Se

p 1

9

No

v 1

9

Jan

20

Mar

20

Gro

wth

rat

e (m

om

saa

r, %

)

Retail sales

US

Euro Area

Japan

China

14,7

7,4

2,5

6,0

0

2

4

6

8

10

12

14

16

Oct

17

Dec

17

Feb

18

Ap

r 1

8

Jun

18

Au

g 1

8

Oct

18

Dec

18

Feb

19

Ap

r 1

9

Jun

19

Au

g 1

9

Oct

19

Dec

19

Feb

20

Ap

r 2

0

Gro

wth

rat

e (%

)

Unemployment Rate

US

Euro Area

Japan

China

36,1

33,4

41,9

49,4

30

35

40

45

50

55

60

Nov 17 May 18 Nov 18 May 19 Nov 19 May 20

Dif

fusi

on

ind

ex (

po

ints

)

Purchasing Managers Index (PMI)

US

Euro Area

Japan

China

Main economies heading toward deep recession

Source: Refinitiv.

Uneven but widespread contagion

Confirmed cases

411.821

Deaths

25.598

Lethality

6,2%

*Numbers as of May 27, 2020 Source: Brazilian Ministry of Health

Accumulated cases of COVID-19

Acc

um

ula

ted

case

s

Notification date

Source: BCB/Derin

Challenging outlook for emerging economies

Source: Bloomberg, DERIN, Refinitiv.

-70

-50

-30

-10

10

t t+15 t+30 t+45 t+60 t+75 t+90 t+105 t+120 t+135

US$

bill

ion

Days after event

Sizable capital outflows(Accumulated non-resident portfolio flows to EM*)

GFC (9/8/08)

Taper Tantrum (5/17/13)

China Scare (7/26/15)

COVID-19 (1/21/20)

* Daily net total flows for Mexico, Korea, Taiwan, India, Indonesia, South Africa, Thailand, Phillipines, Sri Lanka, and Vietnam.

-4,0

-3,0

-2,0

-1,0

0,0

1,0

2,0

Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

Stan

dar

t d

evia

tio

ns

(un

its)

Sharp decline in risk appetite

Advanced economies

Emerging economies

-0,06

-2,45

Fonte: BCB/Derin

Sizable impact on financial assets

Source: Refinitiv.

* Composite of equity indexes of China, Hong Kong, India, Indonesia, Malasia, Mongolia, Pakistan, Philippines, Sri Lanka, South Korea, Taiwan, Thailand, Vietnam, Bosnia, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Kazakhstan, Latvia, Lithuania, Poland, Romania, Serbia, Slovak, Turkey, Ukraine, Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela, Panama, Abu Dhabi, Egypt, Ghana, Israel, Jordan, Kenya, Kuwait, Lebanon, Mauritius, Morocco, Nigeria, Oman, Qatar, Saudi Arabia, South Africa, and Tunisia.

** Composite of currencies of Brazil, Mexico, Argentina, Chile, Colombia, Peru, China, Hong Kong, Taiwan, India, Indonesia, South Korea, Malaysia, Singapore, Thailand, Philippines, Russia, Turkey, Czech Republic, Bulgaria, Romania, Hungary, Poland, and South Africa.

Data reflecting activity slowdown

Decline in industrial production...(s.a., 2012=100)

75

80

85

90

95

100

105

110

jan

fev

mar

abr

mai

jun jul

ago

set

ou

t

no

v

de

z

2013 2014 2015 20162017 2018 2019 2020

... services (PMS) ... and retail (PMC)

83

84

85

86

87

88

89

90

91

92

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20

Total

Seasonally adjusted series

MM3M Monthly

2014=100

80

82

84

86

88

90

92

94

96

98

Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20

Retail (aggregate, s.a.)

MM3M Monthly

2014=100

Source: IBGE

Decline in output and employment

Sharp decline in economic activity(IBC-Br, 2002=100)

Sharp decline in employment (net jobs)

-400.000

-300.000

-200.000

-100.000

0

100.000

200.000

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

industry

civil construction

commerce

services

agriculture, vegetal extraction, hunting and fishing

130

132

134

136

138

140

Jan-1

9

Mar

-19

May

-19

Jul-

19

Sep

-19

Nov-1

9

Jan-2

0

Mar

-20

Indicators pointing toward further slowdown

Sharp decline in PMIElevated uncertainty index

(Economic Uncertainty Indicator, FGV)

20

25

30

35

40

45

50

55

May

-17

No

v-1

7

May

-18

No

v-1

8

May

-19

No

v-1

9

May

-20

Industry PMI

Services PMI

100

120

140

160

180

200

220

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Jan

-20

Ap

r-2

0

Uncertainty

Moving average (6m)

405060708090

100110

Mai2016

Ago Nov Fev Mai2017

Ago Nov Fev Mai2018

Ago Nov Fev Mai2019

Ago Nov Fev Mai2020

ServicesIC ISA IE

60

70

80

90

100

110

120

Mai2016

Ago Nov Fev Mai2017

Ago Nov Fev Mai2018

Ago Nov Fev Mai2019

Ago Nov Fev Mai2020

Retail Sales

50

60

70

80

90

100

110

Mai2016

Ago Nov Fev Mai2017

Ago Nov Fev Mai2018

Ago Nov Fev Mai2019

Ago Nov Fev Mai2020

Construction

40

60

80

100

120

Mai2016

Ago Nov Fev Mai2017

Ago Nov Fev Mai2018

Ago Nov Fev Mai2019

Ago Nov Fev Mai2020

Industry

50

60

70

80

90

100

110

Mai2016

Ago Nov Fev Mai2017

Ago Nov Fev Mai2018

Ago Nov Fev Mai2019

Ago Nov Fev Mai2020

Consumers

Low confidence in all sectors

Fonte: FGV

17

Response to the crisis

Timely and robust BCB response 2020 2008

Liquidity support

Term-deposit reserve requirements from 31% to 25% and

regulation enhancements on Liquidity Coverage Ratio (LCR) 135 -

Term-deposit reserve requirements from 25% to 17% 70 82

Regulatory easing on Agrobusiness Credit Bills 2.2 -

Loans backed by financial notes guaranteed by sovereign bonds

and debentures670 -

Repos with sovereign global bonds 50 25

Term deposits guaranteed by deposit insurance (NDPGE) 200 10

Repo backed by debentures and reserve requirements 91 -

Total 1218.2 117

% GDP 16.7% 3.5%

Capital relief

Overhedge 520 -

Decline of Capital Conservation Buffer 637 -

Total 1157 0

% GDP 16.4% 0%

Exemptions for new loan-loss provisions 3.2 -

Other measures

Swap line with the Fed US$ 60 bi US$ 30 bi

Credit line for SMEs R$ 40 bi -

(up to, in R$ billion)

Amounts

Measures:

For additional details and updates see: https://www.bcb.gov.br/en/about/covid-19-measures

Increase in credit concessions in 2020

0

2

4

6

8

10

12

14

16

18

20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

R$

bill

ion

Weeks

Nonearmarked new credit transactions to households(not including overdraft and credit card)

Weekly data, accumulated over the last five working days

2019 2020

Source: Document 3050.

0

10

20

30

40

50

60

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

R$

bill

ion

Weeks

Nonearmarked new credit transactions to corporations(not including overdraft and credit card)

Weekly data, accumulated over the last five working days

2019 2020

Source: Document 3050.

20

Monetary policy

Uncertain outlook

Sources of uncertainty:

Human and capital losses

Length of lockdowns

Lockdown unwinding speed

Pace of economic recovery

Effects and timespan of fiscal measures → particularly important for countries with

limited fiscal space

-5,8

2,3 2,4

-3,9

3 2,5

-3

3 2,7

-1,5

3,5 3,2

-6,45

1,9 1,9

-4,8

3,22,35

4,3

1,5

6,95

-5,9

4,7

-5,2

3

-7,5

4,7

1,2

9,2

-7,5

4,7

-7,5

4,7

1,2

9,2

-15

-10

-5

0

5

10

15

20 21 22 20 21 22 20 21 22 20 21 22 20 21 22 20 21 22 20 21 22

Argentina Brazil Chile Colombia Mexico Russia India

Gro

wth

(yo

y, %

)

Emerging Economies - growth

MedianIMF WEO, April 2020

Wide range of forecasts

Source: Bloomberg*Data as of May 25,.2020

-5,7

3,93,0

-4,7

2,21,2

-7,6

5,0

1,8 1,8

8,0

5,6

-5,9

4,7

-5,2

3,0

-7,5

4,7

1,2

9,2

-15

-10

-5

0

5

10

15

20 21 22 20 21 22 20 21 22 20 21 22

USA Japan Euro Area China

Gro

wth

(yo

y, %

)

Main Economies - growth

MedianIMF WEO, April 2020

Challenging outlook

Source: BCB-Focus

-5,89

3,50

-7

-5

-3

-1

1

3

5

Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20

Decline in GDP growth expectations

2020

2021

1

2

3

4

Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20

Decline in CPI inflation expectations

2020

2021

-0,08-0,2

0,0

0,2

0,4

0,6

Jun-19 Aug-19 Oct-19 Dec-19 Feb-20 Apr-20

Low readings of core inflation (MoM, average)

2019/2020 2018/20191,96

2,13

0

1

2

3

4

5

6

2017 2018 2019 2020

Low readings of current headline CPI inflation (YoY)

Inflation Core

*Market expectatios from Focus Survey

Monetary stimulus to face drop in inflation and expectations

Source: BCB

2

5

8

11

14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

3%0

1

2

3

4

5

6

7

8

9

10

11

Jun

06

Jun

07

Jun

08

Jun

09

Jun

10

Jun

11

Jun

12

Jun

13

Jun

14

Jun

15

Jun

16

Jun

17

Jun

18

Jun

19

Jun

20

Jun

21

Jun

22

Realized

Market Expectaions

IPCA inflation and survey-based expectationsRecord low Selic rate

Reduced space for countercyclical policies

0

1

2

3

4

5

6

7

8

Jan 01 Feb 01 Mar 01 Apr 01 May 01

Inte

rest

rat

e (%

per

ye

ar)

Record low policy rates

Brazil

Mexico

Peru

Chile

Colombia

South Africa

0

100

200

300

400

500

31-jan 14-fev 28-fev 13-mar 27-mar 10-abr 24-abr 08-mai 22-mai

Bas

is p

oin

ts

Elevated risk premia (5-year CDS)

Brazil Chile Colombia Peru South Africa Mexico

58

08

4146

11

55

0

10

20

30

40

50

60

70

Brazil Chile Colombia Mexico Peru South Africa

Net

deb

t(%

GD

P)*

Some countries with larger net debt...

Brazil

Chile

ColombiaMexico

Peru

South Africa

0

2

4

6

8

10

0 10 20 30 40 50 60 70

Yiel

d (

% p

.y.)

Net fiscal debt (% GDP)

... and larger long rates

Source: Bloomberg, Refinitiv.

* IMF, Fiscal Monitor, October 2019

Yield curve reflecting recent increase in risk premium

Fonte: Bloomberg

Jan 16

Jan 17Jan 18

Jan 19May 20

0

2

4

6

8

10

12

14

16

18

3M 6M 1Y 2Y 3Y 4Y 5Y 6Y 7Y 8Y 10Y

Yile

d (

% p

er

year

)

Sovereign yield curve

Source: Bloomberg..

27

Thank you!

Fernanda NechioDeputy Governor for International Affairs and Corporate Risk Management