RETHINKING MACRO POLICY II: FIRST STEPS AND EARLY LESSONS APRIL 16 17, 2013 Capital Account Management in Brazil Marcio Holland Secretary of Economic Policy Ministry of Finance, Brazil Paper presented at the Rethinking Macro Policy II: First Steps and Early Lessons Conference Hosted by the International Monetary Fund Washington, DC April 16 17, 2013 The views expressed in this paper are those of the author(s) only, and the presence of them, or of links to them, on the IMF website does not imply that the IMF, its Executive Board, or its management endorses or shares the views expressed in the paper.
Capital Account Management in Brazil Marcio Holland Secretary of Economic Policy Ministryi of Finance, Brazil IMF-WB Spring Meeting/Fiscal Forum Rethinking Macro Policy II: First Steps and Early Lessons April 18, 2013
2 Expansion of International Liquidity (US$ trillions) (USA, Europe, United Kingdom and Japan) - 2007-2013 10 9 8 7 6 5 LTRO1 QE 1 QE 2 LTRO2 QE 3 8,96 4 3 2 1 0 Source: Bloomberg Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil 2
Unconventional Monetary Policy Zero lower bound monetary policy in advanced economies associated with intense liquidity injection in their domestic financial system. Fiscal situation in most advanced economies is rather a problem than part of the solution. Central Bankers are trying to boost growth under such challenging circumstances. However, this has led to the currency war, as it is a non- cooperative or competitive not zero-sum game. 3
4 Ex-ante Real Interest Rate (% p.a), Before and Then BEFORE THE 2008 FINANCIAL CRISES Real Interest Rates in 2007 9,50 AFTER THE 2008 FINANCIAL CRISES Real Interest Rates in 2013 9,50 7,50 7,70 7,50 5,50 5,50 2007 3,50 1,93 1,81 1,66 3,57 2013 3,50 2,13 150 1,50 0,05 150 1,50-1,69-1,46-1,39-1,19-0,40 0,62 (0,50) -0,50 (2,50) (1,61) Germany France USA Italy China Mexico Brazil -2,50 USA Germany China France Italy Mexico Brazil Source: Bloomberg Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil 4
5 Brazil is implementing a set of policies that sustains economic growth Flexible monetary policy Countercyclical fiscal policy Floating exchange rate regime with more competitive Brazilian Real under currency war Promoting investment, mainly in infrastructure sector, fostering productivity Reduction of financial costs of investments Reduction of tax costs with widen tax exemptions due to fiscal space Promoting long-term capital market And, also managing capital inflows as part of the economic policy toolkit 5
6 The policy toolkit to manage capital account Higher IOF rates on short-term capital inflows, including external loans up to 1 year. IOF rates derivate margin deposit. IOF rates on excessive long position on BRL. Banks have to park at the Central Bank 60% of short dollar positions that exceed the limit of US$ 3 billion. The deposits should be in cash and receive no interest rate. 6
7 IOF rates on Portfolio Investments and External Loans 3/12 2/2008 10/1 19/2009 10/0 04/2010 10/1 18/2010 07/2 26/2011 12/0 01/2011 02/2 29/2012 03/0 09/2012 Today Portfolio Fixed Income 1.50% 2.00% 4.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Long-Term Corporate Bonds Derivative Margin Deposit External Loan up to 1.50% 2.00% 4.00% 6.00% 6.00% 0.00% 0.00% 0.00% 0.00% Equity 0.00% 2.00% 2.00% 2.00% 2.00% 0.00% 0.00% 0.00% 0.00% 0.38% 0.38% 0.38% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 90 Days 5.38% 5.38% 5.38% 5.38% 6.00% 6.00% 6.00% 6.00% 6.00% 270 Days 038% 0.38% 000% 0.00% 000% 0.00% 0.00% 00% 600% 6.00% 6.00% 600% 6.00% 600% 6.00% 600% 6.00% 1 Year 0.38% 0.00% 0.00% 0.00% 6.00% 6.00% 6.00% 6.00% 6.00% 2 Years 0.38% 0.00% 0.00% 0.00% 6.00% 6.00% 6.00% 6.00% 6.00% 038% 0.38% 000% 0.00% 000% 0.00% 0.00% 00% 000% 0.00% 0.00% 00% 600% 6.00% 600% 6.00% 000% 0.00% 3 Years Excessive Long Positions On BRL 5 Years 0.38% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 6.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.00% 1.00% 1.00% 1.00% 1.00% 7 Source: Ministry of Finance Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil
8 Carry Trade Transactions: changing capital account composition Carry Return* (% accumulated on a 12-month basis) March, 2008 Poland Czech Republic Brazil Chile Norway Switzerland Hungary Euro Zone Denmark Sweden New Zeland Phillipines Australia Japan Canada India Russia Singapore Malaysia Mexico United Kingdom China Indonesia South Korea South Africa -6,4-4,7 24,6 2,9 2,8 2,6 7,3 7,0 6,4 23,7 20,0 19,6 18,3 18,2 18,1 17,2 16,8 16,5 16,4 13,2 13,0 12,11 11,3 30,6 29,6 March, 2013 Chile Mexico Phillipines New Zeland China (offshore) South Korea China Australia Sweden India Malaysia Singapore Russia Poland Norway Canada Indonesia Hungary Euro Zone Denmark Brazil United Kingdom Switzerland Czech Republic Japan South Africa -4,9-5,1-7,3-0,7-1,4-1,9-2,0-2,4-3,9-4,2 7,6 6,8 5,1 4,1 4,0 3,6 3,6 3,2 2,5 2,1 1,5 1,0 0,4-4,3-13,1-14,1-15 -5 5 15 25 35-15 -10-5 0 5 10 * The carry return is equal to the return on investment in fixed income securities minus the cost of foreign currency loans. Source: Bloomberg Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil 8
9 Brazil: macroprudential measures put forward since 2011 stamped appreciation 2,60 MANAGING CAPITAL ACCOUNT 240 2,40 2,20 2,00 Compulsory deposit on short dollar position IOF on external loans shorter than 5 years IOF on excessive long position on BRL 2,03 IOF on external loans shorter than 2 years 2,02 IOF on external loans shorter than 180 1,80 1 year 1,79 1,60 1,64 1,40 jan-08 abr-08 jul-08 out-08 jan-09 abr-09 jul-09 out-09 jan-10 abr-10 jul-10 out-10 jan-11 abr-11 jul-11 out-11 jan-12 abr-12 jul-12 out-12 jan-13 abr-13 Source: Thomson Reuters Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil 9
Financial i Account (On 12 Month Basis USD Million) 100.000 MANAGING CAPITAL ACCOUNT 80.000 Other Foreign Investments Foreign Direct Investment Portfolio Investment 63.737 60.000 40.000 29.823 20.000 16.442 0-20.000 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Source: Central Bank of Brazil Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil 10
90.000 80.000 70.000 Foreign Direct Investment (On 12 Month Basis USD Million) Intercompany Transactions Equity Capital 60.000 50.000000 40.000 30.000 20.000 10.000 12.925 50.813 63.737 0 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013 Source: Central Bank of Brazil Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil 11
12 Why? Less liability dollarization and low fear of floating Reduced debt to GDP ratio and country risks Better public debt denomination and maturity Low interest on debt to GDP ratio Good economic perspectives in the medium term 12
13 65 Net Public Sector Debt (% of GDP) 60 55 50 45-24.7% of GDP 40 35 30 60 0,4 4,8 0,6 8,4 7,3 5,5 8,5 2,1 9,2 6,4 5,1 5,7 5 5 4 4 4 3 4 3 3 3 3 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* * February, 2013 Source: Central Bank of Brazil Produced by: Secretary of Economic Policy/Ministry of Finance - Brazil 13
14 Increase of Investors Confidence for Sovereign Bonds Commitment to fiscal responsibility throughout the years combined with economic growth have contributed to the reduction of credit risk* in Brazil. YIELDS OF 10-YEAR BRAZILIAN AND US BONDS (% PER ANNUM) 16,0 14,0 12,0 10,0 14,6 12,6 10,8 8,0 6,0 4,0 2,0 0,0 6,2 3,3 Brazilian Sovereign Bonds 7,8 5,9 6,1 45 4,5 47 4,7 5,3 US Treasury Bonds 2,5 50 5,0 3,1 4,2 3,1 184 1,84 * Measured by the differential of yields on issue date from 10-year Brazilian bonds denominated in USD and yields from US Treasury bonds, same maturity traded on the secondary market on the same date. ** From October 2012, Brazilian and US Treasury 10-year yield bonds (same maturity) traded on the secondary market on the same date. 14 Source: Brazilian Treasury Secretariat/Ministry of Finance and Bloomberg Produced by: Secretary of Economic Policy/Ministry of Finance
15 Summing up Excessive international liquidity provokes side effect in emerging market economies. Brazil has put forward a set of macroprudential macroeconomic policy including capital account management, along with conventional monetary policy. Capital account management is much more a technical issue rather than an ideological one. It has been obtained successful results under the circumstances. Growth prospects: investment is the main economic policy in a context of inflation under control, growth-friendly fiscal consolidation program, solid financial system, and strong income inequalities reduction. 15
Capital Account Management in Brazil Marcio Holland Secretary of Economic Policy Ministryi of Finance, Brazil IMF-WB Spring Meeting/Fiscal Forum Rethinking Macro Policy II: First Steps and Early Lessons April 18, 2013