THE BRAZILIAN ECONOMY AND THE AGENDA FOR REFORMS

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2 THE BRAZILIAN ECONOMY AND THE AGENDA FOR REFORMS VIII CNI DIPLOMATIC BRIEFING José Augusto Coelho Fernandes Policy and Strategy Director Brasilia, November 21st, 2017

3 FROM JUNE TO NOVEMBER WHAT CHANGED IN THE BRAZILIAN ECONOMY? 3

4 THE QUESTIONS WHAT THE ECONOMIC INDICATORS SAY ABOUT THE RECOVERY? WHAT WAS THE EVOLUTION OF THE REFORMS? 4

5 FROM JUNE TO NOVEMBER All ECONOMIC INDICATORS IMPROVED REFORMS KEPT IN PROGRESS 5

6 ECONOMIC SCENARIO HOW THE ECONOMY MOVED? 6

7 INCREASE IN BUSINESS CONFIDENCE BUSINESS CONFIDENCE INDEX ICEI* NOW JUNE 56,0 Confidence 51,9 Lack of confidence 45,8 Jun-17 out/14 jan/15 abr/15 jul/15 out/15 jan/16 abr/16 jul/16 out/16 jan/17 abr/17 jul/17 out/17 Oct-14 Oct-15 Oct-16 Oct-17 *The ICEI varies in the interval. Figures above 50 points indicate that entrepreneurs are confident. Source: ICEI Business confidence index. 7

8 INDUSTRIAL PRODUCTION STOPPED FALLING INDUSTRIAL PRODUCTION JUNE NOW 88,5 87,1 87,3 Sep-15 set/15 mar/16 set/16 mar/17 set/17 Sep-16 Jun-17 Sep-17 Source: IBGE 8

9 MOST SECTORS ARE GROWING INDUSTRIAL PRODUCTION BY SECTOR Tobacco Computers, electronics and opticals products Motor vehicles, trailers and semi-trailers Repair and installation Mining and quarrying Textiles Wearing apparel Other manufacturing Rubber and plastics products Machinery and equipment Pulp and Paper Basic metals Furniture Soap and detergents, cleaning preparations and others Leather and footwear Industry Manufacturing Food Wood products Beverages Chemicals (exc. Soap and detergents, cleaning preparations and others) Metal products (except machinery and equipment) Non-metallic mineral products Coke, refined petroleum products and biofuel Electrical equipment Pharmaceutical chemicals and pharmaceuticals Printing and reproduction Other transport equipment -10,3-12,5-0,6-1,2-2,3-3,5-5,4-6,2-7,2 6,4 6,1 5,1 4,6 4,5 2,9 2,8 2,5 2,4 1,8 1,7 1,6 1,6 0,9 0,1 0 14,8 22,9 20,3 Source: IBGE *Average from January to September 2017 against the average for the same period in 2016 (%) 9

10 INFLATION: BETTER THAN EXPECTED IPCA INDEX 12,0 10,5 12-month inflation 9,0 7,5 JUNE 3,00 NOW 6,0 2,54 Inflation target 4,5 3,0 Forecast 1,5 0,0 Dec-15 Jun-16 Sep-16 Dec-16 Jun-17 Sep-17 Dec-17 dez/15 mar/16 jun/16 set/16 dez/16 mar/17 jun/17 set/17 dez/17 Source: IBGE Forecast: CNI 10

11 A LOWER RISK EMBI+ Brasil JUNE 289 NOW Oct-14 Feb-15 out/14 fev/15 jun/15 out/15 fev/16 jun/16 out/16 fev/17 jun/17 out/17 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Oct-17 Source: EMBI 11

12 INVESTMENTS: A SLOW RECOVERY INVESTMENT INTENTIONS INDEX JUNE 46,5 NOW 49,6 40,7 out/15 fev/16 jun/16 out/16 fev/17 jun/17 out/17 Oct-15 Oct-16 Jun-17 Oct-17 *The index range from The higher the index, the more likely industry is to invest Source: CNI 12

13 nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai abr-mai-jun mai-jun-jul jun-jul-ago jul-ago-set ago-set-out set-out-nov out-nov-dez nov-dez-jan dez-jan-fev jan-fev-mar fev-mar-abr mar-abr-mai Apr-May-Jun abr-mai-jun mai-jun-jul jun-jul-ago Jul-Aug-Sep jul-ago-set UNEMPLOYMENT START DECREASING AS A PERCENTAGE OF THE LABOR FORCE (%) JUNE 13,0 NOW 12,4 6, Source: Continuous PNAD/IBGE 13

14 EXCHANGE RATE: STABLE, FOR HOW LONG? DAILY EXCHANGE RATE (PTAX CLOSING RATE*) IN R$ PER US$ 3,8 3,7 3,6 3,5 3,4 3,3 3,2 3,1 3 2,9 JUNE 3,23 NOW 3,25 2,8 Jun-17 Sep-16 set/16 out/16 Oct-16 nov/16 Nov-16 dez/16 Dec-16 jan/17 Jan-17 fev/17 Feb-17 mar/17 Mar-17 abr/17 Apr-17 mai/17 May-17 jun/17 jul/17 Jul-17 ago/17 Aug-17 set/17 Sep-17 out/17 Oct-17 nov/17 Nov-17 Source: Central Bank of Brazil * The Closing Ptax rate is the arithmetic average of bid and offer rates published in daily bulletins. 14

15 SUMMARY JUNE NOW BUSINESS CONFIDENCE 51,9 56,0 INDUSTRIAL PRODUCTION 87,1 87,3 INFLATION 3,00 2,54 RISK 289,0 243,0 INVESTMENT INTENTIONS 46,5 49,6 UNEMPLOYMENT 13,0 12,4 EXCHANGE RATE 3,23 3,25 15

16 TOWARD A CYCLICAL RECOVERY TREASURY INTEREST RATE SELIC (%) HOUSEHOLD DEBT (%) LEVERAGE (DEBT/EQUITY) ,25 7, ,4 41,6 1,0 0,9 0,8 0,7 0,6 0,5 0,61 0,65 0,71 0,69 0,76 0,93 0, ,4 ago/13 Aug-13 jun/14 Jun-14 abr/15 Apr-15 fev/16 Fev-16 Dec-16 dez/16 out/17 Oct-17 ago/11 Aug-11 ago/12 Aug-12 Aug-13 ago/13 Aug-14 ago/14 Aug-15 ago/15 Aug-16 ago/16 Aug-17 ago/ Q 1T Source: Central Bank of Brazil. Source: Central Bank of Brazil. Source: CEMEC-IBMEC. 16

17 REFORMS IN BRAZIL CONSTITUTIONAL REFORMS REGULATORY REFORMS ORDINARY LAW REFORMS 17

18 CNI 36 PROPOSALS JUNE NOW 4 COMPLETED 8 COMPLETED 22 IN PROGRESS 21 IN PROGRESS 10 HAVE STALLED 7 HAVE STALLED 18

19 REFORMS ACCOMPLISHED: MAIN HIGHLIGHTS FISCAL Limit on public expenses EDUCATION High school reform GOVERNANCE Regulatory agencies Public sector companies LABOR Outsourcing Labor reform Excluding commuting accidents from the FAP (Accident Prevention Factor) calculation SECTORIAL Petroleum & Gas (sharing regime review) Charging the CDE (Energy Development Bill) proportionally Modernizing concessions for exploiting natural gas onshore TRADE Trade facilitation Trade negotiations IN PROGRESS 19

20 THE NEW LABOR LAW 54 AMENDED CONSOLIDATED LABOR LAW ( CLT ) 922 articles 43 NEW ONES 09 REVOKED 20

21 THE NEW LABOR LAW PREVALENCE OF NEGOTIATION OVER LEGISLATION NEW CONTRACTS MODELS MORE FLEXIBILITY RESPECT TO FUNDAMENTAL RIGHTS LEGAL CERTAINTY COOPERATION 21

22 REFORMS: WHAT IS ON THE PIPELINE Land Regulation for Foreigners Environment Licensing Social Security Reform Penalties Against Counterfeit Products Data Regulation Lobbying Regulation Tax Reform 22

23 OTHER REFORMS BEEN IMPLEMENTED / PIPELINE DOING BUSINESS LINKED REFORMS DEBUREAUCRATIZATION GAS ELETRIC MODEL TELECOMMUNICATIONS REFORMS LINKED TO OECD ACCESS 23

24 CHANGES IN THE INFRASTRUCTURE LANDSCAPE: THE SHARE OF THE PRIVATE SECTOR TODAY WITH PPI NEW CONCESSIONS AIRPORTS ELECTRICITY 10 airports 53% of domestic passengers 65% of generation 61% of distribution 39% of transmition More 14 airports 74% of total passengers 88% of generation 63% of distribution 77% of transmition ROADS 15% of paved federal roads (9,600 Km) 19% of paved federal roads (more 2,500 Km) RAILROADS 90% of railroads (27,000 Km) More 3,000 Km PORTS SEWAGE 237 areas in public ports 180 private terminals 9.3% of the Market 150 municipalities 91 companies 5 new private terminals 29% of the Market 1630 municipalities Concession analysis of 14 state level companies 24

25 SOME CONCLUSIONS 1. The economy improved since the last Briefing in June in all economic indicators 2. The recession is over, but the recovery is in a moderate pace 3. Brazil has been in a reform momentum 4. The greatest challenge on reforms will be Social Security 5. Government should keep its capacity to advance ordinary laws and regulatory reforms up to middle We do not bet in a lame duck 6. Main uncertainties will be connected to the 2018 elections. Expect noises in exchange rate and stock exchange 25

26 National Confederation of Industry - Brazil