Challenges to monetary policy in the EMEs

Transcription

1 Challenges to monetary policy in the EMEs A view into the Brazilian Case Governor of the Banco Central do Brasil Ilan Goldfajn November 18th, 2017

2 Outline Benign international conditions and Emerging Markets Economies (EMEs) The current economic situation in Brazil Issues for discussion Final Remarks 2

3 Outline Benign international conditions and Emerging Markets Economies (EMEs) The current economic situation in Brazil Issues for discussion Final Remarks 3

4 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 basis points Benign conditions for EMEs How long? CDS (5-Year, Sovereign) Brazil Turkey Russia South Africa Mexico Source: Thomson Datastream 4

5 Outline Benign international conditions and Emerging Markets Economies The current economic situation in Brazil Issues for discussion Final Remarks 5

6 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 basis points Brazil: Risk has fallen Brazil: CDS (5-Year, Sovereign) 12/22/ /16/ Source: BCB / Bloomberg 6

7 Jun 14 Aug 14 Oct 14 Dec 14 Feb 15 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 Brazilian Real has stabilized Brazilian exchange rate - R$/US$ 4 Jan Oct Jul Source: BCB / IBGE 7

8 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 index points % p.a. Asset prices have improved Brazil: Stock Exchange Index (Ibovespa) 80,000 Brazil: 5-year real interest rate* 8 9/23/ ,000 60,000 50,000 11/16/ , ,000 30,000 1/26/ , /10/ *5-year inflation-indexed bond (NTN-B) interest rate. Source: BCB / Bloomberg 8

9 % Inflation expectations anchored CPI (IPCA), Annual Percent Change IPCA targets * Medians of Market expectations as of November 10th Source: BCB / IBGE 9

10 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Dec 15 Feb 16 Apr 16 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17 Oct 17 % p.a. % p.a. As a consequence, interest rates declined 15 Monetary Policy Interest Rate (Selic Rate) 9 Real ex ante interest rate* /16/ * 12-month pre-fixed interest rate (from the Swap DI market) minus 12-month expected inflation (Focus survey) Source: BCB / Bloomberg 10

11 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18 Index number, s.a. Recession ended and the recovery is underway 175 Real GDP* *In red, market forecast (Focus report, 11/10/2017). Source: BCB / IBGE 11

12 Comfortable balance of payments Position Current account deficit: 0.6% of the GDP in September FDI: 4.2% of the GDP in September (seven times the deficit) Trade balance surplus: US$ 59 billion this year until October International reserves: more than US$ 380 bi, 20% of the GDP 12

13 Outline Benign international conditions and Emerging Markets Economies The current economic situation in Brazil Issues for discussion Final Remarks 13

14 Issues for Discussion Why the recession was so severe? Why did disinflation lagged so much and, once in place, was so fast? Why is the neutral interest rate so high in Brazil? Why are banks interest spreads so wide? 14

15 Issues for Discussion Why the recession was so severe? Why did disinflation lagged so much and, once in place, was so fast? Why is the neutral interest rate so high in Brazil? Why are banks interest spreads so wide? 15

16 % Severe recession 15 Annual real GDP growth Real GDP accumulated growth (%) Real GDP per capita accumulated growth (%) ,3-7, ,3-12, ,8-7, ,2-8, *In red, medians of market expectations as of November 10th Source: IBGE / Ipeadata 16

17 Why the recession was so severe? 1) Reversal of previous excessive stimulative policies 2) Investigations, political instability and impact on corporates 3) Deleveraging process 17 Source: BCB

18 Issues for Discussion Why the recession was so severe? Why did disinflation lagged so much and, once in place, was so fast? Why is the neutral interest rate so high in Brazil? Why are banks interest spreads so wide? 18

19 % Inflation resisted and then fell sharply Dec CPI (IPCA), 12-Month Percent Change Aug Conditional Forecast* 6 4 Oct Dec Dec Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18 Sep 18 * Scenario with Focus Selic and Exchange Rates Source: BCB / IBGE 19

20 % Why the disinflation take so long? 2) Defensive behavior by price setters in an environment of uncertainty and high expected inflation CPI (IPCA), 12-Month Percent Change Jan 13 Sep 13 May 14 Jan 15 Sep 15 May 16 Jan 17 Sep 17 May 18 Jan 19 Sep 19 Breakeven inflation rate (01/29/2016) Breakeven inflation rate (07/29/2016) CPI (observed) Source: BCB / IBGE 20

21 Issues for Discussion Why the recession was so severe? Why did disinflation lagged so much and, once in place, was so fast? Why is the neutral interest rate so high in Brazil? Why are banks interest spreads so wide? 21

22 % Why is the neutral interest rate so high? 1) Fiscal pressure Central Government primary expenditure real annual growth Mean Source: STN 22

23 Why is the neutral interest rate so high? 2) Half of Credit in Brazil is at subsidized rates Earmarked loans Non earmarked loans Portfolio by source of funds Dec/ % 58% Payroll loans Housing Individuals Individuals + Credit card 24% 26% Corporate Corporate; 69% BNDES 26% 24% 61% Working capital + Foreign trade Source: BCB 23

24 % p.a. Why is the neutral interest rate so high? National Development Bank TJLP (old): discretionary TLP (new): market based 25 Selic rate versus TJLP Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan Selic TJLP Source: BCB 24

25 Issues for Discussion Why the recession was so severe? Why did disinflation lagged so much and, once in place, was so fast? Why is the neutral interest rate so high in Brazil? Why are banks interest spreads so wide? 25

26 Why is the bank interest spread so wide? Bank interest spread decomposition: average* Profits and others 23.3% 4.0 bps Delinquency 55.7% 9.6 bps Direct taxation 15.6% 2.7 bps Reserve Requirements + tax charges and FGC 1.7% 0.3 bps Administrative costs 3.8% 0.7 bps *Total credit - multiple and commercial banks. Source: BCB 26

27 Reforms and BC+ agenda 1. Labor reform 2. Education reform 3. Constitutional spending ceiling 4. Changes in the oil and gas sector 5. Privatization program 6. New market-oriented interest rate (TLP) for National Development Bank (BNDES) operations 7. Law approving the electronic registration of collateral and guarantees 8. Positive credit bureau: New piece of legislation 27

28 Outline Benign international conditions and Emerging Markets Economies The current economic situation in Brazil Issues for discussion Final Remarks 28

29 Final remarks Recession was deep due to deleveraging, non economic factors, and reversal of excessive stimulative policies. Inflation remained high during the recession and receded fast when expectations clearly improved. Reforms and adjustments: essential to sustainable growth and low inflation 29

30 Challenges to monetary policy in the EMEs A view into the Brazilian Case Governor of the Banco Central do Brasil Ilan Goldfajn November 18th, 2017