Green Shoots Consumption-led cyclical recovery and needed reforms November, 2017 FERNANDO HONORATO BARBOSA Chief Economist, Director fernando.honorato@bradesco.com.br 1
The economy is improving. Families have deleveraged quite well
Endividamento e comprometimento HOUSEHOLD DEBT Debt service ratio as % of disposable income 55 50 45 40 Household debt Household debt ex. housing Debt Service Ratio Debt Service Ratio ex. housing 41.6 35 30 25 20 15 Source: BCB, Bradesco 3 05 06 07 08 09 10 11 12 13 14 15 16 17 23.2 21.1 18.5
Companies are also seeing an improvement in their operational balance sheets
MANUFACTURING INVENTORIES Seasonally adjusted 57 Month 55 3 months Average 53 51,68 51 52,8 49 47 45 07 08 09 10 11 12 13 14 15 16 17 Source: Bradesco Business Survey 5
Título do Gráfico JOBS AND GDP Employment and IBC-BR 150,0 148,0 146,0 144,0 50 49 142,0 48 140,0 138,0 136,0 134,0 Monthly GDP (left) Formal employment (right,mn) 135,1 45,8 47 46 132,0 12 13 14 15 16 17 45 Source: CAGED, BCB, Bradesco 6
Inflation will be below target in 2018
NUCI com ajuste sazonal CAPACITY UTILIZATION - INDUSTRY Seasonally adjusted, % 86,0 84,0 Capacity utilization Average since 2001 82,0 80,0 80,5 78,0 76,0 74,0 74,3 72,0 Source: FGV, Bradesco 8 07 08 09 10 11 12 13 14 15 16 17
WAGE INCREASES Business survey, all sectors, % 9,0 8,5 8,0 7,5 7,0 6,5 6,0 5,5 5,0 4,5 4,0 13 14 15 16 17 4,9 Source: Bradesco 9
CURRENT ACCOUNT AND FDI USD Billions, 12 months 140 120 100 80 60 40 20 0-20 Current account deficit FDI 83,6 12,5-40 jul-97 jul-99 jul-01 jul-03 jul-05 jul-07 jul-09 jul-11 jul-13 jul-15 jul-17 Source: IBGE, Bradesco 10
POLICY RATE Selic, % p.a. 15,0% 14,0% 13,0% 12,0% 11,0% 10,0% 9,0% 8,0% 7,0% 6,0% 5,0% 13,75% 12,75% 8,75% 12,50% 10,50% 7,25% 11,00% 14,25% 11,25% 10,25% 9,25% 8,25% 8,00% 7,50% 6,75% 08 09 10 11 12 13 14 15 16 17 18 19 Source: BCB, Bradesco 11
And the economy is starting to respond...
Título do Gráfico NEW ORDERS-TO-INVENTORIES Manufacturing and retail 1,2 1,1 1,0 New orders / inventories (retail) New orders / inventories (manufacturing) 1,04 1,03 0,9 0,8 09 10 11 12 13 14 15 16 17 Source: Bradesco Business Survey 13
EMPLOYMENT Seasonally adjusted jan/12 mai/12 set/12 jan/13 mai/13 set/13 jan/14 mai/14 set/14 jan/15 mai/15 set/15 jan/16 mai/16 set/16 jan/17 mai/17 set/17 93000,0 92.587 92000,0 91000,0 91.288 90000,0 89000,0 89.496 88000,0 Sources: FGV, Bradesco 14
GDP GROWTH % QoQ, s.a. 3,0% 2,3% 2,0% 1,6% 1,0% 0,0% -1,0% -2,0% 0,0% 0,7% 0,3% -0,1% 0,4% 0,5% 0,0% -1,3% 0,3% -1,2% -0,9% -1,4% 1,0% 0,2% 0,5% 0,2% 0,8% 0,8% -0,4% -0,5% -2,3% -3,0% mar-12 dez-12 set-13 jun-14 mar-15 dez-15 set-16 jun-17 mar-18 dez-18 Sources: IBGE, Bradesco 15
Thinking medium term
GDP PER CAPITA 2016, PPP Latin America Developed Countries Peers Chile 23,969 US 57,294 New Zealand 37,108 Uruguay 21,570 Australia 48,806 Czech Rep. 33,223 Argentina 20,171 Canada 46,240 Poland 27,715 Mexico 18,865 Japan 38,894 Hungary 27,211 Brazil 15,211 Korea 37,948 Russia 26,109 Colombia 14,162 Spain 36,451 Turkey 21,147 Peru 13,019 Italy 36,313 Bulgaria 20,116 Bolívia 7,191 Portugal 28,515 Thailand 16,835 Brazil 15,211 China 15,424 Brazil 15,211 South Africa 13,179 India 6,658 Sources: FMI, Bradesco 17
Título do Gráfico PER CAPITA INCOME Share of USA income, % 60% 50% South Korea / USA Brazil / USA China / USA 40% 30% Education, productivity and trade liberalization 20% Reforms 10% Savings 0% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: IBGE, Bradesco 18
INVESTMENTS % of GDP 21,5% 21,0% 20,5% 19,5% 18,5% 17,5% Misallocation of capital, protectionism, frequent regulatory change, lack of Federal Budget to invest 16,5% 15,5% 16,5% 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 16,1% Sources: IBGE, Bradesco 19
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 PUBLIC DEBT / GDP 1% GDP, varying real PIB interest 2%, variando rates juros, and 5-year com teto cap valendo on expenditure ate 2022 3% of interest rates 4% of interest rates 5% of interest rates 6% of interest rates 170 160 150 140 130 120 110 100 90 80 70 Source: BCB, Bradesco 20
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 PUBLIC DEBT / GDP PIB 2%, variando juros 2% GDP, varying real interest rates and 20-year cap on expenditure 3% of interest rates 4% of interest rates 5% of interest rates 6% of interest rates Base 110 100 90 80 70 60 50 40 Source: BCB, Bradesco 21
Social Security Expenditure (%GDP) SOCIAL SECURITY AND DEMOGRAPHY As % of GDP; as % of elderly population Gasto com previdência e perfil demográfico 18 16 Italy 14 Greece 12 Brazil Poland Finland Japan 10 Germany Luxembourg 8 Turkey 6 4 Chile United States 2 Mexico 0 5 10 15 20 25 30 35 % of population over 60 years old Sources: UN, Bradesco 22
Can Brazil become investment grade again?
EXTERNAL INDICATORS 2017 Investment grade Speculative grade Sample mean AAA to A- mean BBB+ to BBBmean Speculative grade mean Brazil Total external debt / GDP 52% 67% 50% 45% 27% Net external liabilities / GDP 19% -11% 34% 55% 36% International Reserves (US$ bi) 138 226 93 45 377 International Reserves (months of import) 8,6 8,0 8,2 9,1 30,0 Current account / GDP (*) -3,3% -1,5% -2,6% -4,2% -0,3% External financing needs / (Reserves + Exports) (**) 150% 197% 114% 132% 62% Sample from 70 countries * Mean of deficit countries ** Current account + Debt servicing maturing in 12 months Source: EIU, S&P, Bradesco 24
REAL vs FAIR VALUE Modelo DXY/CDS/TT, em R$/US$ 4,5 4,0 BRL Model DXY/CDS/TT 3,5 3,0 2,5 3,28 2,72 2,0 1,5 jan-12 jul-12 jan-13 ago-13 fev-14 ago-14 fev-15 ago-15 fev-16 ago-16 mar-17 set-17 Source: IBGE, Bradesco 25
FEDERAL DEBT INDICATORS 2017 Investment grade Speculative grade mean Sample mean AAA to A- mean BBB+ to BBBmean Speculative grade mean Brazil Interest expenses / Tax Revenues 9% 4% 7% 12% 18% Gross Debt / GDP 55% 50% 51% 60% 77% Net Debt / GDP 30% -300% 37% 51% 60% Source: S&P, Bradesco 26
7,0 6,5 6,0 5,5 REAL INTEREST RATE NTN-B, in % Juros Reais no Brasil (NTN-B) 5,0 4,5 4,0 3,5 12-year real interest rate 1-year real interest rate 5,00 3,0 2,94 2,5 mar-16 jun-16 set-16 dez-16 mar-17 jun-17 set-17 Source: Ambima, Bradesco 27
OUR FORECASTS... 2016 2017 2018 Consumer inflation - IPCA (%) 6,3 3,0 3,9 GDP growth (%) -3,6 0,9 2,8 Industrial Production (%) -6,6 1,4 3,5 Retail Sales (%) -6,2 1,5 3,0 Unemployment Rate (% of labor force) 11,2 12,8 12,5 Outstanding Credit Growth (%) -3,0 1,0 5,0 Trade Balance (BCB, USD bn) 45,0 66,3 60,3 Current Account (USD bn) -23,5-7,2-27,7 Exchange Rate (BRL/USD, eop) 3,26 3,10 3,20 Selic (%, eop) 13,75 7,00 6,75 Primary Balance (BRL bn) -155,8-159,0-155,0 Gross Debt (% of GDP) 69,5 76,6 78,5 Source: Bradesco 28
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