Exchange Rate, Inflation, Growth and Development in Brazil

Transcription

1 Exchange Rate, Inflation, Growth and Development in Brazil Nelson Barbosa Presented at the Conference Financial Governance After the Crisis Cosponsored by the Levy Economics Institute of Bard College and MINDS Multidisciplinary Institute for Development and Strategies, with support from the Ford Foundation Rio de Janeiro, September 26, 2013

2 Three Questions on the Brazilian ER What happened? Recent trend and fluctuations in the Brazilian ER Why it happened? ER and macroeconomic policy What are the main implications? ER and development 2

3 What Happened? Since 2006 the Brazilian ER fluctuations have been heavily influenced by the evolution of commodity prices and international financial conditions After the 2008 crisis the Brazilian government adopted a series of capital controls and regulation to avoid an excessive appreciation of the BRL (QT against QE) More recently the expected end in QE led to a realignment in asset prices and depreciation of BRL Despite the volatility, the BRL has shown a recurring tendency to appreciate when compared to other currencies 3

4 jan/93 jan/94 jan/95 jan/96 jan/97 jan/98 jan/99 jan/00 jan/01 jan/02 jan/03 jan/04 jan/05 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/ Brazilian "Real" Stabilization Plan (fixed ER) Brazil: Real Effective Exchange Rate (jun/94=100) Current Period: Commodity Cycles, Financial Crisis and QE (floating ER) Speculative Attacks and Corrections (floating ER) Source: BCB 4

5 Brazil: BRL/USD exchange rate and commoditiy prices (Dec/05=100) Exchange Rate BRL/USD Brazilian Commodity index PERIOD OF MORE ACTIVE CAPITAL CONTROLS AND REGULATION ( ) 85 Source: BCB 65 dez/05 dez/06 dez/07 dez/08 dez/09 dez/10 dez/11 dez/12 5

6 Nominal Exchange Rate (domestic price of the USD), Dec/05=100 Brazil South Africa Australia Source: FRED database 60 dez/05 dez/06 dez/07 dez/08 dez/09 dez/10 dez/11 dez/12 6

7 Nominal Exchange Rate (domestic price of the USD), Dec/05=100 Brazil India Mexico Source: FRED database 60 dez/05 dez/06 dez/07 dez/08 dez/09 dez/10 dez/11 dez/12 7

8 Nominal Exchange Rate (domestic price of the USD), Dec/05=100 Brazil Japan Eurozone UK Source: FRED database 60 dez/05 dez/06 dez/07 dez/08 dez/09 dez/10 dez/11 dez/12 8

9 Nominal Exchange Rate (domestic price of the USD), Dec/05=100 Brazil China South Korea Source: FRED database 60 dez/05 dez/06 dez/07 dez/08 dez/09 dez/10 dez/11 dez/12 9

10 Why it Happened? The ER has been the main transmission mechanism of monetary policy in Brazil Since the beginning of inflation targeting, the REER appreciated in almost all years in which the government target was met Even though the government does not target the ER, it tries to avoid excessive appreciation or depreciation through its FX operations In theory inflation targeting is compatible with ER smoothing and this also contributes to faster growth in the medium run But the dependence of inflation targeting on the exchange rate makes the BRL appreciate in the absence of exogenous adverse trends or shocks 10

11 14 Brazil: Annual Consumer Inflation Rate, in% (IPCA) Market Expectations 4 2 Source: IPEADATA and BCB Exp 2014 Exp 11

12 25% Brazil: consumer inflation rate (12-month rolling average) 20% 15% Tradable Non-tradable 10% 5% Source: IPEADATA 0% jan/02 jan/03 jan/04 jan/05 jan/06 jan/07 jan/08 jan/09 jan/10 jan/11 jan/12 jan/13 12

13 Year Initial target Interval of tolerance Brazil: 14 years of inflation targeting Effective Inflation Was the initial target met? Average nominal exchange rate % change in the nominal exchange rate Average real effective exchange rate (jun/94=100) % change in the real effective exchange rate Additional Observations 1998 NA NA 1,65 NA 1,16 NA 70,6 NA ,0 2,0 8,94 YES 1,81 56,4 105,7 49,9 The initial target was set in mid ,0 2,0 5,97 YES 1,83 0,9 97,1-8,1 The initial target was set in mid ,0 2,0 7,67 NO 2,35 28,4 120,6 24,1 The initial target was set in mid ,5 2,0 12,53 NO 2,92 24,3 133,2 10,5 The initial target was set in mid ,3 2,0 9,30 NO 3,08 5,4 137,9 3,5 The initial target was set in mid-2001, changed to 4%, with +/- 2.5%, in mid- 2002, and changed again, to 8.5%, in the beginning of ,75 2,50 7,60 NO 2,93-4,9 135,5-1,7 The initial target was set in mid-2002 and changed to 5.5% in the beggining of ,50 2,50 5,69 YES 2,44-16,8 110,5-18,5 The initial target was set in mid ,50 2,00 3,14 YES 2,18-10,6 98,7-10,7 The initial target was set in mid ,50 2,00 4,46 YES 1,95-10,5 91,6-7,2 The initial target was set in mid ,50 2,00 5,90 YES 1,83-5,8 89,1-2,7 The initial target was set in mid ,50 2,00 4,31 YES 2,00 8,9 88,5-0,7 The initial target was set in mid ,50 2,00 5,91 YES 1,76-11,9 77,2-12,8 The initial target was set in mid ,50 2,00 6,50 YES 1,67-4,8 75,2-2,6 The initial target was set in mid ,50 2,00 5,84 YES 1,95 16,7 84,3 12,2 The initial target was set in mid

14 Two Nonlinearities and One Asymmetry Economic growth seems to be a nonlinear (concave-down) function of the level of the REER in Brazil Inflation seems to be a positive function of the level of the REER, but with a nonlinear pattern (3 rd degree polynomial) in Brazil These two stylized facts mean that inflation targeting ends up limiting the fluctuation of the REER to the interval consistent with the government s inflation target The government does not have a target for the NER or the REER, but it reacts to ER volatility in an asymmetric way Depreciation leads to higher interest rates Appreciation leads to reserve accumulation 14

15 Economic Growth There is a long-run relationship between economic growth and the level of the REER (VEC model) in Brazil. In intuitive terms, either too much appreciation of depreciation is bad for growth. Real Effective Exchange Rate 15

16 Inflation There is also a long-run relationship between inflation and the level of the REER (VEC model) in Brazil. In intuitive terms, either too much depreciation is bad for inflation and vice versa. For intermediary values of REER, inflation is stable Real Effective Exchange Rate 16

17 Economic Growth Inflation Real Effective Exchange Rate Real Effective Exchange Rate In Brazil inflation is a function of the level of the REER in the long run. As a result, inflation targeting ends up limiting the fluctuation of the REER, which in its turn influences income growth 17

18 Inflation targeting and the real interest rate On one side, the asymmetric monetary policy of Brazil tends to appreciate the BRL On the other side, the asymmetric monetary policy of Brazil has also been able to reduce the Brazilian real interest rate substantially in recent years Despite the above, the Brazilian RIR is still high when compared to the rest of the world And the recent change in the Brazilian TOT indicates that the phase of continuous appreciation will not continue 18

19 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 22% 12% to 22% Real base interest rate (expected annual rate in %) 20% 18% 16% 14% 8% to 14% 12% 10% 4% to 10% 2% to 8% 8% 6% 4%??? 2% 0% Source: IPEADATA 19

20 Brazil: Terms of Trade (2006 = 100) 12-month average Source: IPEADATA/FUNCEX 90 20

21 What are the main implications? To reduce financial fragility, the government increased its foreign reserves in a context of high RIR The government also used financial incentives to compensate the negative impact of REER appreciation on the competitiveness of manufacturing The two actions pushed gross public debt up and increased the net interest rate on public debt And the appreciation of the REER created a two-velocity economy, tradable vs non-tradable 21

22 65.0 Net and Gross Public Debt in % of GDP Gross Net 22

23 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr Brazil: Difference between gross and net public debt in % of GDP Loans to federal financial institutions FAT fund resources FX reserves and other assets (net) Source: BCB 23

24 dez/89 nov/90 out/91 set/92 ago/93 jul/94 jun/95 mai/96 abr/97 mar/98 fev/99 jan/00 dez/00 nov/01 out/02 set/03 ago/04 jul/05 jun/06 mai/07 abr/08 mar/09 fev/10 jan/11 dez/11 nov/ Brazil: ULC in USD, jun/94= Source: BCB 24

25 Alternative ways to increase competitiveness In theory the high ULC in foreign exchange can be reduced in three ways Internal devaluation: slow down growth and push unemployment up to reduce the growth rate of labor productivity External devaluation: increase in the exchange rate substantially to reduce the real wage in foreign currency Growth acceleration: accelerate the growth rate of labor productivity, through higher investment and institutional reforms 25

26 The Brazilian Response The Brazilian government chose the growth alternative and has been trying to increase labor productivity through a series of actions Higher investment in infrastructure (PAC, PIL, Oil and Energy, ICT, etc) Financial incentives to private investment (PSI/BNDES) Financial incentives to innovation (INOVA EMPRESA/FINEP) Higher investment in education (PRONATEC) Institutional reforms (tax reform and financial deepening) 26

27 Investment-GDP ratio: despite the faster growth of investment in relation to GDP, the country s investment ratio did not go up substantially because there was also a reduction in the relative price of fixed capital (ER appreciation and tax cuts) 22 Brazil: Investment in % of GDP Current Prices Cosntant Prices

28 What are the results so far? The race to competitiveness Economic growth and investment are accelerating But the productivity gains tend to materialize slowly Investment in infra-structure is also recovering slowly, but the sequence of concessions in infra-structure will boost productivity in the medium run The political cycle blocks any major institutional reform in The pace of the recovery in investment and institutional reforms will determine how much the REER will have to change 28