the economic consequences of the...

The Economic Consequences of the Real

Economic Department

The great recession: A Four Act Drama.

2gradualinvestimentos.com.br

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I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP (YoY accumulated) Source: IBGE

I/2

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IV/2

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The Ortodox View

A portrait of the conscience.

The Ortodox View.


Two main hipotesis:

1. Brazil growth during 2002 and 2008 was due an external commodity shock.

2. The main brazilian problem is increasing government spending that delivered

fiscal imbalance.

The Ortodox View: commodity boom and gloom.


$-

$20,00

$40,00

$60,00

$80,00

$100,00

$120,00

$140,00

$160,00

0

50

100

150

200

250

300

350

400

450

500

Commodity & Oil

CRB (USD) Oil (First active Contract)

Source: Bloomberg01/2002 – 06/2008CRB = 184%Oil = 525,4%



95

130

165

200

235

270

305

I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I III I

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP Brazil (index SA)

GDP Exports Imports

Source: IBGE



-40,00%

-20,00%

0,00%

20,00%

40,00%

60,00%

80,00%

100,00%

120,00%

I/2002-III/2008 IV/2008-IV/2009 I/2010-IV2013 I/2014-II/2016

GDP growth - Brazil (%) (SA)

GDP Households Government Spending Gross Investments Exports Imports

Source: IBGE, Gradual Investimentos



-20,00% -10,00% 0,00% 10,00% 20,00% 30,00% 40,00% 50,00%

Imports

Exports

Gross Investment

Government Spending

Households

Components contribution to GDP - Brazil (estimated) Source: IBGE, Gradual Investimentos



0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

Brazil Indonesia India China,People's

Republic of

Turkey RussianFederation

Chile South Africa Mexico Korea,Republic of

Poland

Trade Balance to GDP (at 2015)

Exports to GDP Imports to GDP

Source: IMF - WEO



60,0

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100,0

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jan

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/11

jan

/12

jan

/13

jan

/14

jan

/15

jan

/16

Terms of Trade - Brazil (index) Source: FUNCEX

I/2

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20

08

The Ortodox View: spending fast?


R$(400.000,00)

R$(200.000,00)

R$-

R$200.000,00

R$400.000,00

R$600.000,00

R$800.000,00

R$1.000.000,00

R$1.200.000,00

R$1.400.000,00d

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Primary Balance - Brazil (BRL millions) (12 month accumulated)

Total Expenditure Net Income Primary Balance (above the line)

Source: Ministry of Finance



-4,00

-3,00

-2,00

-1,00

0,00

1,00

2,00

3,00

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Median primary surplus 2007-2013 (as % of GDP) Source: IMF - Data Mapper/WEO



-3,00

-2,50

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The Economic Consequences of the Real

Unconsciouness speaks.

The Economic Consequences of the Real.


𝑚𝑒𝑐 = 𝑄𝑛

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Two simple equations...

Marginal Efficiency of Capital (mec)

Where:

Q = prospective return

r = risk free interest rate

n = number of periods

Where:

F = Face Value

PV = Present Value

n = number of periods

Zero Cupon Bond Yield (yield)



2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

Brazil 12,31 10,11 6,79 7,85 4,44 4,84 4,5 1,41 4,09 5,34 3,58 6,13

Chile 0,84 2,69 -1,83 1,16 1,88 0,28 0,81 3,51 1,56 -1,6 -0,65 0,7

Mexico 4,92 2,95 3,74 1,78 0,93 0,1 0,68 0,96 -0,47 -1,08 0,52 1,69

Colombia 1,15 3,02 3,81 1,83 1,5 -0,17 1,02 1,81 1,31 0,84 -0,89 1,27

Indonesia -4,37 3,15 1,41 -1,81 3,72 -0,46 2,21 1,45 -0,58 -0,61 2,61 3,19

China 3,98 3,32 0,97 4,11 3,41 1,21 2,46 3,5 3,5 4,1 3,05 2,25

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Real Interest Rate (ex-post) (YoY) Source: Bloomberg, Gradual Investimentos

* as oct/2016



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jan

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abr/

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ou

t/1

6

House Price Index

São Paulo Rio e Janeiro

Source: FIPE/ZAP, Gradual Investimentos



0,30%

0,35%

0,40%

0,45%

0,50%

0,55%

0,60%

0,65%

0,70%

0,75%

0,80%

jan

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abr/

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abr/

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ou

t/1

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Rental Yield

Brazil São Paulo Rio de Janeiro

Source: FIPE/ZAP, Gradual Investimentos



R$ -

R$ 200,00

R$ 400,00

R$ 600,00

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R$ 1.600,00ju

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Real minimum wage (in BRL) Source: IPEA Data, Gradual Investimentos

Vargas suicide Military coup 1964

Plano Real

Dilma Impeachment



50

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110

130

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170

190

jan-04 jan-05 jan-06 jan-07 jan-08 jan-09 jan-10 jan-11 jan-12 jan-13 jan-14 jan-15 jan-16

Currencies (index 100 = 01/2004)

JPY EUR MXN CHF SEK BRL

Source: Bloomberg, Gradual Investimentos



$-

$50,00

$100,00

$150,00

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$250,00

$300,00

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14

Minimun wage – purchasing power parity (USD) Source: IPEA Data, Gradual Investimentos



-R$ 400.000,00

-R$ 200.000,00

R$ -

R$ 200.000,00

R$ 400.000,00

R$ 600.000,00

R$ 800.000,00

R$ 1.000.000,00

R$ 1.200.000,00

R$ 1.400.000,00d

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Primary Balance - Brazil (BRL millions) (12 month accumulated)

Total Expenditure Net Income Primary Balance (above the line)

Source: Ministry of Finance



TAX RELIEF IN 2015 = BRL 400 BILLION



3%

2,30%

1,40%

1,10%

0,90%0,80%

0,70%

0,50% 0,50%

0,30% 0,30% 0,25% 0,20%

0% 0%0%

1%

1%

2%

2%

3%

3%

4%

Domestic Workers as percentage of Household Expenditure SurveySource: IBGE, BLS, Eurostats, INE (Chile), CSO (Ireland)

According to the ILO's 2013 report, Brazil has around 7.2 million domestic employees or 13% of the total. Brazil is the country with the largest number of domestic employees in absolute terms.



R$ -

R$ 200.000,00

R$ 400.000,00

R$ 600.000,00

R$ 800.000,00

R$ 1.000.000,00

R$ 1.200.000,00

R$ 1.400.000,00

R$ 1.600.000,00

R$ 1.800.000,00

1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Investment Fund Industry Net Worth (constant price) (BRL million)

Fixed Income Stocks Multi-Asset Currency Pension

ETF FIDC Private Equity (FIP) Real State (FII) OFF-SHORE

Source: ANBIMA



R$ -

R$ 20.000,00

R$ 40.000,00

R$ 60.000,00

R$ 80.000,00

R$ 100.000,00

R$ 120.000,00

R$ 140.000,00

R$ 160.000,00

R$ 180.000,00

R$ 200.000,00

2008 2009 2010 2011 2012 2013 2014 2015

Private Equity (FIP) net worth (BRL million) Source: ANBIMA

620% increase



R$ -

R$ 200.000,00

R$ 400.000,00

R$ 600.000,00

R$ 800.000,00

R$ 1.000.000,00

R$ 1.200.000,00

R$ 1.400.000,00

R$ 1.600.000,00

FixedIncome

Multi-Asset Pension PrivateEquity (FIP)

Stocks FIDC Real State(FII)

OFF-SHORE Currency ETF

Investment Fund Industry Net Worth (constant price) (BRL million) in 2015

Source: ANBIMA



“The schedule of the marginal efficiency of capital is of fundamental importance because it is

mainly through this factor (much more than through the rate of interest) that the

expectation of the future influences the present. The mistake of regarding the marginal

efficiency of capital primarily in terms of the current yield of capital equipment, which would

be correct only in the static state where there is no changing future to influence the present,

has had the result of breaking the theoretical link between to-day and to-morrow. Even the

rate of interest is, virtually, a current phenomenon; and if we reduce the marginal efficiency of

capital to the same status, we cut ourselves off from taking any direct account of the

influence of the future in our analysis of the existing equilibrium.”

Chapter 11, The Marginal Efficiency of Capital.

John Maynard Keynes

General Theory of Employment, Interest and Money



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Main Interest Rate Target (YoY)

Brazil Chile Mexico Indonesia China Russia UK USA Colombia

Source: Bloomberg, Gradual Investimentos

ContatosDepartamento Econômico

André Perfeito, economista-chefe

[email protected]

Camila de Caso

[email protected]

Ouvidoria/SAC: 0800 655 1466

DISCLAIMER

This report was prepared by Gradual Investimentos and is distributed free of charge for the sole purpose of providing

information to the market. Gradual Investimentos does not have any connection with any person that act in the scope of the

analyzed companies or economic scenarios. The company does not receive for the services provided nor has

business/commercial relationships with the companies analyzed. Although it has been taken all the necessary care in order

to assure all the information at the time, its precision and accuracy are not guaranteed and Gradual Investimentos are not

responsible for them. The prices, opinions and forecasts contained in this report are subject to change at any time without

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