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Brazil Positive Scenario for 2019 2020

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INVESTMENT SOLUTIONS & PRODUCTS
Americas | Europe | Latin America
Brazil
Positive scenario for 2019 and 2020
Leonardo Fonseca
[email protected]
Lucas Vilela
[email protected]
September 11, 2019
Important Information: This report represents the views of the Investment Strategy Department of Credit Suisse and has not been prepared in accordance with the
legal requirements designed to promote the independence of investment research. It is not a product of the Credit Suisse Research Department and the view of the
Investment Strategy Department may differ materially from the views of the Credit Suisse Research Department and other divisions at Credit Suisse, even if it
references published research recommendations. Credit Suisse has a number of policies in place to promote the independence of Credit Suisse’s Research
Departments from Credit Suisse’s Investment Strategy and other departments and to manage conflicts of interest, including policies relating to dealing ahead of the
dissemination of investment research. These policies do not apply to the views of Investment Strategists contained in this report
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Index
 Summary
5
 Politics
11
 External sector
27
 Inflation
43
 Monetary policy
51
 Economic activity
63
 Fiscal policy
81
 Asset prices
103
 Brazil in numbers
125
September 11, 2019
3
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Summary
Overview
Diagnosis: low growth and deteriorated fiscal accounts
 The two main structural problems of the Brazilian
economy are low economic growth and the
deterioration of public accounts:
–
–
Breakdown of GDP growth
(%, pps)
Productivity
3.1
GDP growth was close to 2.0% per year on average
between 1980 and 2018, with most of this growth
coming from demographic factors. Labor productivity
grew by only 0.2% per year on average in the same
period. In recent years, the dynamics of productivity
have been even worse.
Public accounts have been on a path of significant
deterioration in recent years due to the strong growth in
primary expenditures, especially mandatory ones. The
incoming administration will need to implement a strong
fiscal adjustment in order to stabilize gross debt as a
percentage of GDP in the medium term.
Demography
3.4
1950-1980
2.0
1.7
0.2
0.6
1981-2018
Periods
2001-2018
Primary balance of the central government
(% of GDP)
21
20
Net revenues
19
18
17
16
15
Total expenditures
14
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: The Conference Board, National Treasury, Credit Suisse
September 11, 2019
6
Overview
Solution: microeconomic and fiscal reforms
 The government will have to focus on the fiscal
consolidation process and the productivity agenda
to put the country back on the path of sustainable
development:
–
–
Productivity agenda: The country's low productivity is
explained by a combination of factors. Among the main
measures in this area, we highlight the tax reform, the
opening of Brazilian economy to trade, the
competitiveness of the banking system, privatizations,
and education reform.
Fiscal consolidation: Mandatory spending accounts for
the majority of primary expenditures, with social
security accounting for most of these expenditures.
Social security reform is necessary, but it will hardly be
enough to solve the country's entire fiscal problem. The
freezing of public-sector wages, the reduction of fiscal
subsidies, and even increasing the tax burden are
additional measures that could be addressed.
Global competitiveness index for emerging markets
Malaysia
Qatar
China
Czech Republic
Thailand
Chile
Indonesia
Russian Federation
Poland
India
Bulgaria
Mexico
Turkey
Philippines
Hungary
South Africa
Colombia
Romania
Peru
Brazil
Argentina
Bangladesh
Egypt
Uganda
Pakistan
Venezuela
23
25
27
31
32
33
36
38
39
40
49
51
53
56
60
61
66
68
72
80
92
99
100
114
115
127
Breakdown of primary expenditures of central government
(%, 2017)
19.7%
10.3%
22.2%
Social security (INSS) + continuous cash benefit program
47.8%
Personnel and social charges
Mandatory, ex continuous cash benefit program (BCP)
Discretionary expenditures – all branches
Source: National Treasury, World Economic Forum, Credit Suisse
September 11, 2019
7
Overview
Base scenario: benign environment for reforms
 Most of the necessary reforms requiring approval by the Brazilian Congress in the coming years need either a
qualified majority or 60% of the members of each house of Congress.
 In the general election of 2018, the party of the elected president succeeded in becoming one of parties with
the highest number of representatives in the Chamber of Deputies and won four of 81 seats in the Senate.
 Congress has become more aligned with the president's ideology, with centrist and right-wing parties
increasing their representation at the expense of leftist parties, which now hold about 30% and 22% of the
seats in the Chamber of Deputies and the Senate, respectively.
 The first year of a presidential term is very productive. Congress has approved on average two constitutional
amendments authored by the executive branch in the first year of each presidential term since 1995.
Furthermore, 45% of constitutional amendments approved occurred in the first year of the president's term.
 Congress has been debating some major reforms (e.g., social security, tax reform and privatizations) in recent
years, which makes the prospects of approval of these measures more favorable.
 The strong deterioration in macroeconomic conditions in recent years increased the sense of urgency
regarding the necessity to approve the most important reforms.
Source: Credit Suisse
September 11, 2019
8
Overview
Base scenario: higher GDP growth and stable inflation
 Our baseline scenario assumes that the government will be able to win approval of some major reforms,
particularly the social security and tax reforms. We also expect progress in the concessions and privatization
programs, as well as a reduction of trade barriers.
 We are forecasting:
–
Continuity of the economic recovery: We expect GDP growth of 1.2% in 2019 and 2.7% in 2020, driven mostly by the
main components of domestic demand, particularly household consumption and investments.
–
Low and stable inflation: Inflation should remain stable at 3.7% between 2018 and 2019 and increase to 4.0% in 2020.
High idle capacity will allow inflation to remain low for the coming quarters, and the anchoring of expectations regarding
fiscal policy should keep the dynamics of the exchange rate less volatile.
–
Further monetary easing: More expansionist monetary policies in developed markets associated with inflation expectations
below the Central Bank’s inflation target will allow the Central Bank of Brazil to cut Selic basic interest rate by more than
100 basis points in the next two meetings, with the policy rate reaching 5.00% p.a. at the year-end of 2019.
–
Lower fiscal imbalances: The approval of social security reform and the use of non-recurring revenues should contribute to
significant improvement in fiscal accounts in the short term.
–
Maintenance of a strong external position: High international reserves, low foreign debt, and foreign direct investment
inflows far outstripping the current-account deficit continue to suggest low vulnerability of external accounts.
Source: Credit Suisse
September 11, 2019
9
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Politics
PT and PSL are parties most represented in Chamber
 With 54 deputies, the PSL, the party of President Jair Bolsonaro, has the second-highest number of
representatives in the Chamber of Deputies. The PT will be the main opposition party, with 55 deputies.
 The two other traditional parties, the PSDB and the MDB, saw a significant reduction in their representation in
the last election: the number of PSDB deputies declined from 54 to 30 and the number of MDB deputies,
from 66 to 34.
Party representation at Chamber of Deputies
PODE 11 AVANTE
7
PTB 11
SD 14
PROS 10
PV 4
CIDADANIA 8
PHS 1
PSB 32
MDB PMN PSD
36
2
34
PSDB 30
PL 38
PRB 31
PATRI 4
PP 39
PSC 8
PDT 27
NOVO 8
REDE 1
DEM 28
PT 55
PCdoB 8
PSOL 10
PRP 1
513
PSL 54
deputies
Source: Chamber of Deputies, Credit Suisse
September 11, 2019
12
MDB is the largest party in Senate
 The MDB is the largest party in the Senate. President Jair Bolsonaro's PSL is represented by four senators.
 The PT’s representation declined from 13 to 6 seats. Although it is still the largest leftist party in the Senate, it
is now trailed closely by Rede, PSB and PDT.
Party representation in Senate
MDB
13
PODE 8
PSDB 8
PROS 3
PL 2
PRB 1
CIDADANIA 3
PP 6
PSB 3
PDT 4
PSC 1
DEM 6
REDE 3
PT 6
PSD
9
81
senators
PSL 4
No party affiliation 1
Source: Senate, Credit Suisse
September 11, 2019
13
PSL has fewer deputies than former presidents’ parties
 Despite the strong increase in the representation of the PSL in the Chamber of Deputies, Bolsonaro is the
president with the lowest representation in the lower chamber since the redemocratization. He will need
additional support from other center-right parties in order to have a majority in the lower chamber.
 However, the parties on the left (e.g., PT, PDT, and PSB), which will probably vote against the government’s
proposals regardless of the subject matter, will hold 24% of the seats in the Chamber of Deputies in 2019.
Distribution of parties in the Chamber (Seats, election year)
1994
1998
President’s party
2002
2006
2010
2014
2018
Main rightwing parties
PSL
0
1
1
0
1
1
54
PP
85
60
49
41
44
38
39
107
83
75
89
78
66
34
MDB
3
3
4
0
0
36
36
13
12
26
23
41
34
38
0
0
0
1
8
21
31
PSDB
63
99
70
66
54
54
30
DEM
89
105
84
65
43
21
28
PTB
32
31
26
22
22
25
11
PT
50
59
91
83
86
69
55
PSB
15
18
22
27
35
34
32
PDT
34
25
21
24
27
19
27
22
17
44
72
74
95
98
PSD
PL
PRB
Main leftwing parties
Other
Other parties
Source: Superior Electoral Court (TSE), Credit Suisse
September 11, 2019
14
PSL has fewer senators than former presidents’ parties
 The PSL only has four senators, fewer than those of former presidents' parties at the beginning of their
terms. President Jair Bolsonaro should have the support of some center-right and rightwing parties, such as
the PSD, DEM, and PSDB.
 Independent parties such as the MDB and the PSDB play an important role in negotiations for approval of
measures in the Senate.
President’s party
Distribution of parties in Senate (Seats, election year)
1994
1998
2002
2006
2010
2014
2018
MDB
20
25
25
19
19
17
13
PSDB
14
13
13
15
11
9
8
PSD
0
0
0
0
1
2
9
PP
6
0
0
1
5
5
6
DEM
19
17
15
13
6
5
6
PODE
0
0
0
0
0
3
8
PSL
0
0
0
0
0
0
4
PL
0
1
1
4
5
5
2
PT
4
7
13
9
13
13
6
PDT
5
5
3
5
4
6
4
PSB
2
3
3
3
5
6
3
7
6
4
5
7
7
12
Main rightwing parties
Main leftwing parties
Other parties
Other parties
Source: Superior Electoral Court (TSE), Credit Suisse
September 11, 2019
15
Higher number of seats for right-wing parties in the Chamber
 PSL’s strong performance led to a rightwards shift on the balance of power in the Chamber.
 Parties around the ideological median will be important for the government in order to approve the main
reforms. Traditional parties such as MDB and PSDB will represent the median member of Congress.
Neutral center-right
Neutral center-left
Distribution of parties in the lower chamber (% Chamber)
11
Bolsonaro coalition
Haddad coalition
PT 55
X Meets barrier clause
X Doesn’t meet barrier clause
Median legislator
10
PSL 54
9
8
39 PP
7
6
PSD 36
MDB 34
PSB 32
5
38 PL
31 PRB
28 DEM
PSDB 30
PDT 27
4
3
2
1
0
SD 14
PSOL 10
PCdoB
CIDADANIA
8
PTB 11
8
PROS 10
REDE
Left
1
PHS
1
PV
4
11 PODE
PSC
7 Avante
2 PMN
Center
8
8 NOVO
4 PATRI
1 PRP
Right
Note: Graph extracted from an article by professors Carlos Pereira and Frederico Bertholini for Folha de S. Paulo newspaper in October 2018. Data from the election results
Source: Folha de S. Paulo, Credit Suisse
September 11, 2019
16
Approval of PECs is a lengthy process
 To be enacted into law, a bill for constitution amendment (PEC) needs to be approved by four special
committees and in a floor vote by 60% of representatives in each house, in two rounds of voting.
 For PECs drafted by the executive branch, the average time from submission to enactment is 388 days. The
fastest this process has ever taken is 183 days and the slowest, 1352 days.
Step-by-step process for congressional approval of a PEC
Legal committee in
house of origin
Interval of
five sessions
(Chamber of Deputies
or Senate)
First round
of voting in
house of
origin
Special
committee
Deadline of 40
plenary sessions
308 votes needed
in Chamber
49 votes needed
in Senate
Second round
of voting in
house of
origin
308 votes needed
in Chamber
49 votes needed
in Senate
First round of
voting in
second house
Interval of
five sessions
49 votes needed
in Senate
308 votes needed
in Chamber
Second round
of voting in
second house
49 votes needed
in Senate
308 votes needed
in Chamber
Five sessions of debate
Legal
committee in
second house
If there are amendments, the PEC will
return to the house of origin until the
same text is approved by both houses
of Congress
(Chamber or Senate)
Average time for processing PECs drafted by executive branch: 388 days | standard deviation: 163 days
Source: Chamber of Deputies, Credit Suisse
September 11, 2019
17
First year of a new term is much more effective
 The first year of a new term is usually more active
and productive for debating and implementing
reforms. Benefiting from his “honeymoon period,”
the new president will have more sway over
Congress to win approval of his measures.
 Of the 71 Bills for Constitutional Amendment (PEC)
authored by the executive branch, 38 were
submitted in the first year of the term. Approval of
PECs are even more concentrated in this period:
13 of all 24 executive-originated PECs enacted
were approved in the first year.
Average PECs submitted and approved, by year of term
3.8
45%
Proposed PECs
Enacted PECs
Proposed
Sarney
Collor
Itamar Franco
FHC I
FHC II
Lula I
Success rate
Lula II
2.5
30%
1.7
33%
1.4
15%
0.4
First year
PECs authored by executive branch
Second year
Source: Chamber of Deputies, Credit Suisse
Rousseff I
0.4
Third year
0.6
0.2
Fourth year
Rousseff II
Temer
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0
0
6
0
3
0
16
5
3
3
4
3
4
0
2
4
2
0
5
2
1
0
2
0
0
0
4
2
0
0
Enacted by year
of proposition
0
0
0
0
0
0
9
1
2
1
1
2
1
0
2
0
0
0
2
0
0
0
2
0
0
0
0
1
0
0
Enacted by year
of enactment
0
0
0
0
0
0
5
2
1
3
2
1
1
2
2
0
0
0
2
0
0
0
1
0
0
1
0
1
0
0
September 11, 2019
18
Most presidents won approval of at least one PEC
 More PECs were drafted and enacted in former president Fernando Henrique Cardoso’s two terms than in
those of all subsequent presidents combined. President Lula won approval of constitutional amendments only
in the first year of both of his terms.
 The average approval time is long due to the increased requirements for approval of such legislation. The
Temer administration managed the fastest approval of a constitutional amendment: 183 days for approval of
the New Fiscal Regime.
Overview of PECs drafted by executive branch, by administration
President
Proposed
Enacted during term
Overall enacted
Average time of approval
Rate of approval
FHC I
27
11
13
432
48%
FHC II
11
6
4
394
36%
Lula I
8
2
2
233
25%
Lula II
8
2
2
188
25%
Rousseff I
2
2
2
546
100%
Rousseff II
4
0
0
-
0%
Temer
2
1
1
183
50%
Source: Chamber of Deputies, Credit Suisse
September 11, 2019
19
Since 2002, the pace of reforms has been slower
 President Lula supported a tax reform to make the overall tax system less regressive and a pension reform
reducing expenditures related to the social security reform for public-sector employees (RPPS).
 President Temer approved the New Fiscal Regime, which imposes a spending limit on federal government
spending for the next 10 years.
Approved executive-drafted constitutional amendments since FHC administration (2002–2018)
President in
office
Directly related
Year
proposed to economy
Removes a
Explanation
right/privilege
Temer
2016
Instituted New Fiscal Regime, which imposes a rule prohibiting real growth in federal government expenditures over
the next ten years
Rousseff
2011
Extends for another 50 years the validity period of the Manaus Free Trade Zone
Rousseff
2011
Extension of removal of constitutional earmarking of federal revenues (DRU)
Lula
2007
Increased delivery of funds by federal government to Municipality Participation Fund (FPM)
Lula
2007
Extension of removal of constitutional earmarking of federal revenues (DRU)
Lula
2003
Lula
2003
Tax reform with intention to achieve neutrality by, among other things, simplifying the ICMS, exempting a standard
box of food staples from taxes, increasing the federalization of funds, and extending the Provisional Contribution on
Financial Transfers (CPMF) and the removal of constitutional earmarking of federal revenues (DRU)
Social security reform. Granted the Federal Supreme Court (STF) power to determine the salary of its judges, which
will serve as the ceiling for public-sector employees and public agents. Changed the Social Security Regime for
Public-Sector Employees (RPPS), reducing benefit amounts
Source: Chamber of Deputies, Credit Suisse
September 11, 2019
20
Many unpopular measures approved in first year of new term
 Not only is the "honeymoon" the period in which a president’s legislative agenda is the busiest, it is also when
Congress is most open to approval of potentially unpopular measures.
 Most presidents have taken advantage of this period to submit bills for fighting inflation or for fiscal
consolidation.
Unpopular measures approved in first year of presidential term1
President
Date submitted
Date approved
Deputies in favor
Senators in favor
Savings confiscated by federal
government
15-Mar-1990
13-Apr-1990
249
55
Tax reform
30-Apr-2003
31-Dec-2003
346
55
Reform of Social Security Regime for
Public-Sector Employees (RPPS)
30-Apr-2003
31-Dec-2003
357
51
Rousseff
Much lower adjustment in minimum
wage than the usual
10-Feb-2011
25-Feb-2011
361
55
Temer
Spending cap
15-Jun-2016
15-Dec-2016
359
53
Collor
Measures
Lula
Note: In 1990 there were 503 federal deputies and 72 senators, less than the current 513 federal deputies and 81 senators.
Source: Chamber of Deputies, Credit Suisse
September 11, 2019
21
“Honeymoon” also impacts approval of other laws
 Bills of supplemental law (PLP), which contain implementing regulations for provisions of the Constitution, also
have a high threshold for congressional approval, requiring 50% + 1 of votes in each full house of Congress.
 The average success rate of a PLP is significantly higher in the first term of a new administration. This
“honeymoon” effect is more muted for Provisional Decrees (MP) and bills of ordinary law (PL).
Average success rate of measures authored by executive branch
MPs
83%
PLPs
PECs
PLs
79%
78%
71%
54%
45%
39%
39%
36%
31%
33%
33%
30%
33%
26%
15%
First year
Second year
Third year
Fourth year
Source: Chamber of Deputies, Credit Suisse
September 11, 2019
22
High popularity of current administration
 The popularity of the current administration is 35%, lower than that of Lula and of Rousseff in her first
mandate and below that of José Sarney. Bolsonaro’s popularity is closer to that of Fernando Henrique
Cardoso in his two terms and to that of Itamar Franco and Fernando Collor. We believe that this level is
supportive for the government to implement its main reforms.
Sarney
Collor
Franco
Cardoso
100
1
Lula
2
1
Rousseff
2
1
Temer
2
90
Bolsonaro
Percentage of respondents who rate the current administration as good or excellent (%)
80
70
60
50
40
30
20
10
0
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
Source: Ibope, Credit Suisse.
September 11, 2019
23
Economic reforms approved in Congress so far in 2019
Proposal
Summary
Final phase
Conclusion
Positive credit reporting
(PLP 441/2017)
The bill reduces legal uncertainty regarding positive credit reporting, thus
reducing the risk of violation of bank secrecy rules.
Once the bill was approved by Congress,
the president signed it into law on April 9,
2019.
Converted into
Supplemental Law
166/2019
External capital in airlines
(MP 863/2018)
The Provisional Decree eliminates the restriction on foreign capital in
airlines in Brazil.
Approved in Congress, the bill was signed
into law by the president, with partial veto,
on June 17.
Converted into Law
13842/2019
Supplemental Credit (PLN
4/2019)
The bill provides supplemental credit of BRL 249 billion, to reinforce the
allocations in the Budget Act in effect
Approved by Congress, the president
signed the bill into law on June 17, 2019
Converted into Law
13846/2019
MP for Ministerial
Organization (MP
870/2019)
This Provisional Decree establishes the basic framework of the entities of Approved in Congress, the bill was signed
the Office of the President of the Republic and the Ministries and defines into law by the president on June 18
their duties and basic structure.
Converted into Ordinary
Law 13844/2019
Fighting social security
fraud (MP 871/2019)
To fight fraud in the social security system (INSS), on January 18, 2019
the government issued the MP that creates the Special Program for
analysis of benefits with possible irregularity.
Converted into Law
13846/2019
MP for protection of
personal information (MP
869/2018)
The Provisional Decree creates the National Data Protection Authority
Signed into law by the president, with
(ANPD) and includes it into the structure of the Office of the President of partial veto, on July 8
the Republic.
Converted into Law
13.853/2019
MP for economic freedom
(MP 881/2019)
The bill proposes 14 actions aiming to reduce bureaucracy for small
businesses and limit the government's involvement in unjustified
economic policy programs.
Process closed
Approved in Congress, the bill was signed
into law by the president on June 18
Bill approved by Congress. MP awaits
presidential sanction
Source: Eurasia Group, Credit Suisse.
September 11, 2019
24
Privatizations already total BRL66bn in 2019
Privatizations and divestments
Seller
Caixa (FGEduc)
Asset
8.9% of IRB Brasil RE
Date
27-Feb-2019
Amount (BRL bn)
2.5
Petrobras
Assets with distributors in Paraguay
8-Mar-2019
1.6
Petrobras
Pasadena Refinery
1-May-2019
2
Petrobras
Transportadora Associada de Gás (TAG)
13-Jun-2019
33.5
Cash
2.3% of Petrobras
26-Jun-2019
7.3
Banco do Brasil
9.35% of Neoenergia
28-Jun-2019
1.8
Petrobras
30% of BR Distribuidora
23-Jul-2019
9.6
Banco do Brasil and BNDES
Assets at IRB
22-Jul-2019
7.4
TOTAL
65.7
Concessions
Type
Airports
Railroads
Ports
Date
15-Feb-19
Concession
period
30 years
Winning bid
(BRL mn)
1900
Investments
(BRL mn)
2150
Várzea Grande (MT), Sinop (MT), Rondonópolis (MT), Alta-Floresta (MT)
16-Feb-2019
Vitória (ES), Macaé (RJ)
17-Feb-2019
30 years
40
770.6
30 years
437
591.7
Ferrovia Norte Sul (FNS)
18-Feb-2019
30 years
2700
2700
Port of Vitória (ES) TGL Capuaba
19-Feb-2019
25 years
165
128.2
Port of Cabedelo (PB) AE 10, E11, AI01
20-Feb-2019
25 years
54.5
71
Port of Belém (PA) BEL02A, 02B, 04, 08, 09
21-Feb-2019
15–25 years
267.32
305.8
Port of Vila do Conde (PA) VDC 12
22-Feb-2019
15–25 years
180.5
126
Terminal STS13A - Port of Santos
23-Feb-2019
25 years
35
110.7
Terminal STS20 - Port of Santos
24-Feb-2019
25 years
112.5
219.3
Terminal PAR01 - Port of Paranaguá
25-Feb-2019
25 years
1
87
5892.82
7260.3
Asset
Recife (PE), Maceió (AL), João Pessoa (PB), Aracaju (SE), Juazeiro do Norte (CE), Campina Grande (PB)
TOTAL
Source: Eurasia Group, Credit Suisse.
September 11, 2019
25
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External sector
Current-account deficit to increase to USD24bn in 2019
 Resumption of domestic demand is expected to lower the trade balance and increase remittances of profits
and dividends in the coming years. The lower growth of the main trade partners should contribute also to
reduce the trade surplus. As a result, the current-account deficit would increase from USD14.5bn (0.8% of
GDP) in 2018 to USD24bn (1.2% of GDP) in 2019 and USD37bn (1.8% of GDP) in 2020.
Breakdown of current-account deficit
(USD billion)
4
3
1
4
3
3
2
4
-5
-8
-3
-2
2
-7
-8
-3
-4
2
1
-8 -8
-1
-9 -11
-5 -7
-4 -4
2 12
2 2
-1 -1 -2 -2
-15 -14 -14 -13
-5
-4 -3 -5
-1 -2 -1
2
24
33
43
-2 -2 -4
-13 -13 -13
-6 -7 -2
-13
-1
4
4
1
3
1998
2000
2002
2004
3
2
3
3
45 38
45
3
2
28
25
24
18
17 4 3 18
1 2
-5 -6 -8 -9
-7
-14
-17
-7
-19
-19
-11
-22 -20
-8
-3 -4 -5 -10 -12
-23
-4
-14 -17
-16 -22
-19
-6
-23 -23
-8
-25
-34
-8
-21
-1
-9
-6 -4
-3
-19 -9 -15 -19
-6 -59
-5
-56 -48
-12 -8
-19 -28
3
-11
1996
3
1
2006
2008
2010
-15 -16
2012
64
3
3
6
3
53 47
45
0
-3
-17 -15 -17
-19
-25 -20 -20 -20
-6 -6
-5
-7
-17
-22
-16
-23
-12
-13
-15
-16
Transfers
Trade balance
Other services and income
Equipment rentals
Interest
Transportation
Profits and dividends
Travel
-19
2014
2016
2018
2020e
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
28
IDI to continue to finance current-account deficit
 Despite the higher current-account deficit expected for the next years, inward direct investment (IDI) will
remain sufficiently high to finance it.
 IDI is characterized as a less volatile type of investment and more closely associated with the fundamentals of
the economy. The privatization and infrastructure agenda of the incoming administration could boost IDI in the
coming years. We expect IDI to increase from USD88bn in 2018 to USD95bn in 2019.
Balance of inward direct investment and current account
(USD billion, % of GDP)
4.7
5.0
4.4
4.2
3.3
3.3
2.2
1.3
0.4
-2.8
1.7
1.7
1.5
2.9
1.8
3.7
3.9
3.2
1.2
3.0
1.9
0.3
-1.8
-4.3
-3.8
1998
2000
-3.4
2008
2010
3.1
4.7
4.9
2.7
0.3
-0.6
-1.3 -0.4
-0.8
-1.2
-1.9
-3.0
-3.2
Current account (% of GDP)
2006
2.7
4.6
-4.1
-4.2
2004
-0.2
-1.6
-3.6
2002
3.4
3.7
3.4
0.4
-2.9
-3.9
3.6
1.0
0.2
3.9
4.1
3.8
3.0
0.0
Foward Direct Investment (% of GDP)
1996
3.2
1.2
-1.6
-1.3
-3.5
1.8
2.7
0.7
-0.1
-0.6
-1.5
1.7
1.3
2.5
3.3
2012
Balance (% of GDP)
2014
2016
2018
2020e
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
29
Imports should keep increasing in 2019
 The trade balance declined from USD59bn in 2018 to USD47bn in 2019 and USD45bn in 2020. Resumption
of economic activity has been the main driver behind the more robust growth in imports this year.
 Imports will likely continue to grow by 5% yoy and 4% yoy in 2019 and 2020, respectively. On the other hand,
exports are expected to remain relatively stable between 2018 and 2019, as the lower price of commodities in
the external market would offset the effect of the more depreciated exchange rates.
 Our scenario does not assume a significant impact from the government's agenda of greater trade openness
in 2019 and 2020. More meaningful impacts would occur in the medium and long terms.
Trade balance and growth in exports and imports (USD billion, % year-on-year change)
67
Exports (%)
44
47
45
Imports (%)
40
Trade balance (USD billion) 34
24
23
25
25
17
15 14
17 16
32
32
6
30
13
23
21 2
3
-1
-1 4
-15
59
42
48
47
45
32
25
30
20
27 24
19
7
2
-5
-23
-26
-1
0
18
20
-4
-7 -4
-25
10 10
5
3 4
-1
-3
-15
20
-20
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020e
Source: Ministry of Development, Industry, and Commerce (MDIC), Credit Suisse
September 11, 2019
30
Exports to increase to remain relatively stable in 2019
 Exports should total USD238bn in 2019, slightly lower than the USD239bn exported in 2018. The lower
growth of Argentina, China and Europe should contribute to reduce exports of manufactured goods in 2019,
despite the more depreciated average of exchange rate.
Total exports, by product (USD billion)
5
5
6
6
4
3
92
2009
31
90
2010
2011
Basic Products
113
2012
113
2013
74
29
110
2014
Semi-manufactured
3
87
85
88
31
30
31
119
121
122
2018
2019e
2020e
80
31
26
122
4
80
73
33
3
5
5
28
20
62
93
80
36
67
91
3
28
87
79
2015
2016
101
2017
Manufactured
Others
Source: Ministry of Development, Industry, and Commerce (MDIC), FUNCEX, Credit Suisse
September 11, 2019
31
Imports to increase to USD191bn in 2019
 Imports should increase for the fourth consecutive year. The higher imports should be concentrated in
intermediate products, the group most sensitive to the industrial production. Imports of intermediate products
should increase from USD105bn in 2018 to USD110bn in 2019 and USD113bn in 2020.
 The more depreciated exchange rate should prevent a more robust growth in imports this year.
Total imports, by product (USD billion)
125
123
132
127
104
73
99
36
35
41
39
25
17
18
7
12
2009
32
33
29
11
16
15
20
13
21
12
23
2010
2011
2012
2013
26
31
Non-durable consumer goods
85
22
113
105
110
22
22
23
94
12
18
4
17
18
16
5
18
29
6
19
29
6
19
31
10
23
23
7
20
2014
2015
2016
2017
2018
2019e
2020e
Durable consumer goods
Capital goods
Fuels
7
20
Intermediate goods
Source: Ministry of Development, Industry, and Commerce (MDIC), FUNCEX, Credit Suisse
September 11, 2019
32
Commodities represent 67% of all exports
 The share of commodities in total exports increased
from 52.3% in 2000 to 67.7% in 2018. Three of
the main commodities (soybeans, oil, and iron ore)
totaled 38.7% of all exports in 2018.
 The increase of the share of commodities in total
exports is explained partly by the lower
competitiveness of the economy. The low growth in
productivity compared to other economies reduced
Brazil's capacity to compete in global trade,
especially with emerging economies in Asia.
Exports (USD billion)
256
202
82
23
46
8
43
96
31
64
9
56
242 242
225
218
191 185
98
103
31
22
25
51
8
54
51
10
57
44
6
55
94
17
32
6
49
Other
21
39
11
32
Oil and distillates
41
9
Metal commodities
56
61
85
13
29
8
49
Total
96
90
87
240
2010 2011 2012 2013 2014 2015 2016 2017 2018
Vehicles
Agricultural commodities
Breakdown of exports (USD billion, % of total)
Year
Commodities
Main commodities
Soy complex
Oil and distillates
Iron ore
Steel and metal products
Paper and pulp
Sugar
Chicken
Beef
Coffee
Non-ferrous metals
Pork
Other commodities
Non-commodities
Main non commodities
Chemicals
Auto parts
Heavy machinery
Automobiles and motorcycles
Transportation vehicles
Aircraft
Electrical and electronics
Pharmaceuticals
Footwear
Ex-commodities and noncommodities
Total
USD bn
2000 2005 2010 2018
28.8 69.3 135.8 162.3
22.5 57.0 121.2 147.4
4.2
9.4 17.1 40.9
1.9
9.1 23.0 31.7
3.0
7.3 28.9 20.2
5.9 12.6 13.1 15.9
2.5
3.4
6.8 10.4
1.2
3.9 12.8
6.5
0.8
3.5
6.2
6.2
0.8
3.0
4.5
6.1
1.8
2.9
5.7
4.9
0.2
0.7
1.9
3.4
0.2
1.1
1.2
1.1
6.3 12.3 14.5 14.9
24.3 46.0 56.6 65.0
21.3 39.9 48.7 52.9
3.9
7.0 12.2 13.0
3.4
6.6
8.4 12.2
3.1
7.0
8.2
9.1
1.8
4.7
4.6
5.3
1.0
3.6
3.6
4.2
3.4
3.2
4.0
3.5
2.8
5.3
4.8
3.2
0.2
0.5
1.3
1.2
1.6
2.0
1.6
1.1
2.0
3.4
9.4
12.6
% of total
2000 2005 2010 2018
52.3 58.4 67.3 67.7
40.9 48.0 60.1 61.5
7.6
8.0
8.5 17.1
3.4
7.6 11.4 13.2
5.5
6.1 14.3
8.4
10.7 10.6
6.5
6.6
4.6
2.9
3.3
4.3
2.2
3.3
6.3
2.7
1.5
3.0
3.1
2.6
1.4
2.6
2.2
2.6
3.2
2.4
2.8
2.0
0.4
0.6
1.0
1.4
0.3
0.9
0.6
0.4
11.4 10.3
7.2
6.2
44.1 38.8 28.1 27.1
38.7 33.6 24.1 22.0
7.0
5.9
6.1
5.4
6.1
5.6
4.1
5.1
5.6
5.9
4.1
3.8
3.3
3.9
2.3
2.2
1.8
3.1
1.8
1.7
6.2
2.7
2.0
1.5
5.2
4.5
2.4
1.3
0.4
0.4
0.6
0.5
2.9
1.7
0.8
0.5
3.6
2.9
4.7
5.2
55.0 118.7 201.8 239.9
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
33
China accounts for 27% of Brazil’s exports
 China is Brazil’s main trading partner, accounting for 27% of its exports and 20% of its imports. Trade with the
Asian country has been increasing steadily since 2000. The United States, Argentina, and the European
Union are also important trading partners.
Total exports, by partner (%)
5
4
5
4
3
5
9
11
24
24
2
3
4
3
5
4
4
3
6
6
4
3
6
4
3
4
4
3
4
8
8
9
4
3
6
9
4
3
5
4
4
4
3
3
5
5
5
6
7
9
8
9
7
25 23 21 19 18 16 14
4
6
6
6
6
7
Total imports, by partner (%)
8
9
8
3
6
6
3
5
7
3
6
2
4
7
8
2
5
7
12 12
10 10 10 11 10 12 13 13
14 15
17 17 19 18 19 19 22 27
2003
Others
2006
2009
China
2012
2015
United States
2018
9
9
9
22
23 23
2
51 49 50 52 54 53 54 54 51 49 50 48 50 49 48
47 43
46 49
2000
8
5 6 5 5 5
3 3 2 2 3
9
12 11 10 10
8
2
3
20
8
5
3
8
18 17 16
6
4
7
7
4
3
9
7
4
3
9
9
7
4
3
8
8
4
4
9
15 15
16
10 12
7
7
6
6
5
8
4
7
4
7
4
7
6
4
6
6
3
6
7
4
7
6
3
6
6
3
6
15 15 15 17 16 16
15 15 15
16 16 18
18 20
14 14 15
17
12
68 70 65
61 64 65
53 48 53 59 61 49 62 65 64
47
42 42 44
2000
Argentina
2003
2006
Netherlands
2009
2012
Japan
2015
2018
Germany
Source: MDIC, Credit Suisse
September 11, 2019
34
Government's external debt remained stable since 2014
 Brazil's total external debt remained relatively stable since 2014.
While the government's external debt remained relatively stable,
the composition of private external debt changed significantly.
Composition of external debt, by holder
(% of total)
 Companies’ debt (companies and intercompany loans) increased
from USD324bn in 2014 to USD369bn in 2018, while banks’
liabilities declined from USD157bn to USD97bn in the period.
Commercial
credit
 Overall, the small government external debt compared to FX reserves
(USD380bn) highlights the low external vulnerability of the country.
Total external debt (USD billion)
416
352
263
278
63
64
74
64
62
65
66
79
65
103
69
138
84
98
95
106
455
78
487
561
540
545
538
75
64
70
72
69
General government
157
147
137
133
97
Banks
130
140
110
116
119
115
208
206
222
108
132
3
73
Loans
Companies
174
Debt
instruments
17
Debt
instruments
53
Debt
instruments
Loans
General government
Monetary authority
105
128
24
Banks
82
549
68
Companies
228
47
237
Intercompany loans
Loans
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
35
Short-term external debt represents just 11% of total
 Total external debt is highly concentrated in long-term debt and intercompany loans. Both components totaled
89% of total external debt in 2018. Short-term debt totaled USD59bn in 2018.
 Contrary to the early 2000s, the prospects for external accounts remain favorable. Total external debt, which
reached 600% of FX reserves in 2002, represents only 142% of FX reserves in 2018: 16% is short term,
63% long term, and 62% intercompany loans.
 The high level of FX reserves significantly reduces the country's external vulnerability.
Total external debt by time to maturity¹
USD billion
% FX reserves
Intercompany loans
Short term
Long term
561 540 549 545 538
455
416
352
228 235 220
199
17 20 19 188
23 20 19 19 27
19 20
187 195 183
151 152
2002
2004
2006
208
128 174
62
206 222 228
237
106
58 51
278
263
95 40 33 33
56 51
241
59
79 57
65
47
39 37 31
269 295 280 295 284 270 266 242
199
154 162 167
2008
2010
2012
Intercompany loans
Short term
Long term
45
487
2014
2016
2018
42
41 36
35
34
35
495
395
2002
345
2004
31
24
280
57 58
26 33
30 34 49 16 14 61 61 62
177 22 19 33 33
9
15 14 16
20
9
11
13
86 84 70 69 77 79 78 81 80 74 71 63
2006
2008
2010
2012
2014
2016
2018
1Year-to-date
value for 2018.
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
36
FX reserves strongly reduce external vulnerability
 The level of FX reserves accumulated in previous years make the country much less vulnerable to balance-ofpayment crises and capital outflows.
 The IMF's indicator of the adequate level of international reserves (Assessing Reserve Adequacy – ARA)
points to a more-than-sufficient level of FX reserves in Brazil. The ARA metric evaluates: (i) exports, to reflect
the potential loss from a reduction in external demand and terms of trade; (ii) expanded payment solutions, to
capture the capital flight risk of residents through liquidation of domestic assets; (iii) short-term external debt,
to consider the risk of rolling over this liability; and (iv) other obligations, to capture other channels of capital
loss, especially investments in securities and equities of non-resident investors.
Reserves compared with Assessing Reserve Adequacy (ARA) index in 2018 (%)
3.01
0.38
Pakistan
South Africa
Argentina
Turkey
Ukraine
Chile
China
Hungary
Poland
Malaysia
Indonesia
Mexico
Colombia
Brazil (2010)
India
Romania
Bulgaria
Brazil (2018)
1.88 1.64
1.57 1.56 1.43
1.29 1.28 1.18 1.15 1.15
1.03 1.03 0.90 0.85 0.81
0.77 0.67 0.63
Philippines
Brazil (2015)
2.10 1.92
Thailand
Peru
Russia
2.42
ARA intervals from 1.0 to 1.5 point to adequate international reserves according to the IMF
Source: IMF, Credit Suisse
September 11, 2019
37
Rating agencies likely to upgrade Brazil in 2019
 Of the main credit rating agencies, S&P and Fitch rate Brazil three notches below investment grade and
Moody’s, two. In their reports, the agencies have been emphasizing the need for approval of structural reforms
to solve the unsustainable path of the public debt.
 Approval of social security reform in 2S19 would probably lead S&P and Fitch to increase Brazil’s rating from
BB- to BB.
Outlooks:
Brazil’s sovereign credit rating
BBB+
BBB
BBBBB+
BB
BBB+
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
BBB
BBBBB+
BB
BBB+
B
Positive
Stable
Negative
Investment grade
Speculative grade
Investment grade
Speculative grade
Investment grade
Speculative grade
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: S&P, Moody’s, Fitch, Credit Suisse
September 11, 2019
38
Exchange rate of BRL4.00/USD in 2019
 In 2019, we expect the BRL/USD exchange rate to depreciate from BRL/USD 3.87 in year-end 2018 to
4.00 in the year-end 2019. The lower interest rate differential to developed markets has been driven a strong
outflow of investments, mostly repayment of corporate external debt. The resumption of the economic activity
and the privatization of the state-owned-companies could drive an appreciation of the exchange rate.
Nominal real effective BRL/USD exchange rate and real rate in relation to USD3 (BRL/USD)
7.5
7.0
6.5
RER -
6.0
Average
REER
RER - USD
Nominal
USD2
5.5
2011
2012
2013
2014
2015
2016
2017
2018
2019
2.72
3.05
3.26
3.30
4.03
3.83
3.47
3.91
3.88
2.34
2.64
2.79
2.91
3.77
3.69
3.33
3.77
3.85
1.67
1.96
2.17
2.36
3.39
3.44
3.20
3.68
3.81
5.0
4.5
4.0
3.9
3.5
REER1
3.0
2.5
2.0
Nominal FX rate
1.5
1.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Real effective exchange rate: real exchange rate weighted by share of various countries in Brazil's total exports.
2 Real BRL/USD exchange rate: exchange rate less the difference between inflation in Brazil and in the USA.
3 Year to date through April.
Source: Central Bank of Brazil, Credit Suisse
1
September 11, 2019
39
Few periods of strong inflows of portfolio investments
 The country saw three periods of strong inflows of portfolio investments: May-07 to Sep-08, Oct-09 to Sep11, and March-13 to Aug-15. The two first periods were characterized by strong economic growth, healthy
public accounts, and a historically high sovereign credit rating. Approval of important structural reforms (e.g.,
social security reforms in 1998 and 2003) were not sufficient to trigger inflows despite being necessary to
improve the fundamentals of the economy and the country’s credit rating.
Inflow of portfolio investments and Brazil's credit rating (USD billion, cumulative 12 months)
60
19-Dec-03
 Lula’s social security
reform
 Lula’s tax reform
50
40
30-Dec-2005
Brazil anticipates
last payment of
IMF loan
15-Sep-2008
Brazil's external position is strong (FX reserves of
USD207bn), minimizing impact of global financial crisis
20
10
Fixed income
Equities
30
S&P rating
(RHS)
0
-10
-20
-30
-40
Dec-95
15-Dec-98
FHC’s social
security reform
Jul-97
Mar-99
17-Nov-11
S&P rates Brazil two notches above investment
grade; government's fiscal austerity (forecast of
primary surplus of 3.5% of GDP) and central
bank autonomy are praised
1-Aug-2006
Brazil boosts its external position,
buying USD90bn of FX reserves
in one year
Oct-00
Jun-02
Jan-04
Sep-05
Apr-07
Dec-08
Jul-10
Mar-12
Oct-13
Jun-15
Jan-17
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
BCCC+
CCC
CCCCC
C
SD
D
NR
Dec-18
Period of strong inflows into fixed income and equities, totaling more than USD20bn.
Source: Credit Suisse
1
September 11, 2019
40
IDI of USD 95bn in 2019
Current account
Trade balance
Travel
Transportation
Equipment rentals
Profits and dividends
Interest payments
Others
Capital and financial account
Investments (liabilities)
Inward direct investment
Total equities
Securities in Brazil
Medium- and long-term loans and securities abroad
Inflows
Amortizations
Short-term loans and securities abroad
Other Brazilian liabilities
Investments (assets)
Outward direct investment
Other Brazilian assets
Derivatives
Errors and omissions
Reserve assets
2010
-79.0
18.5
-10.7
-6.1
-13.7
-58.8
-12.0
3.8
2011
-76.3
27.6
-14.7
-8.0
-16.7
-55.8
-14.4
5.7
2012
-83.8
17.4
-15.7
-8.4
-18.7
-47.8
-16.6
6.0
2013
-79.8
0.4
-18.6
-9.4
-19.1
-18.7
-19.3
4.8
2014
-101.4
-6.6
-18.7
-8.7
-22.6
-28.4
-21.4
5.0
2015
-54.5
17.7
-11.5
-5.7
-21.5
-15.5
-22.9
4.9
2016
-24.0
45.0
-8.5
-3.7
-19.5
-18.9
-22.9
4.5
2017
-7.2
64.0
-13.2
-5.0
-16.8
-15.8
-24.5
4.1
2018
-14.5
53.6
-12.3
-6.2
-15.0
-16.9
-20.0
2.4
2019e
2020e
-23.6
-39.1
46.9
-14.5
-6.0
-17.3
-21.5
-20.0
8.8
45.2
-15.5
-6.7
-19.0
-23.0
-19.5
-0.6
69.7
30.7
82.4
37.7
17.5
30.1
60.6
-30.6
27.4
-164.4
80.3
37.0
102.4
7.2
5.3
47.7
82.1
-34.5
-3.9
-121.6
82.8
38.8
92.6
5.6
11.4
18.7
56.3
-37.6
-4.1
-85.3
78.3
38.0
75.2
11.1
31.0
2.5
60.5
-58.0
-0.1
-81.6
96.3
40.0
87.7
11.5
27.1
21.6
71.2
-49.6
24.9
-132.7
50.3
33.8
59.9
9.8
16.7
-3.6
72.9
-76.5
-6.3
-42.8
9.1
33.3
72.5
11.0
-26.7
-15.7
55.2
-70.9
4.4
-12.3
-1.7
72.7
68.5
5.7
-5.1
-5.7
58.7
-64.3
-5.3
14.6
7.3
86.6
88.3
-5.6
-4.3
-7.4
63.6
-70.9
5.9
9.7
23.6
105.1
39.1
118.2
94.8
3.0
5.0
-2.4
62.5
-64.9
-4.5
9.2
94.0
15.0
7.5
-10.0
61.0
-71.0
0.0
11.7
-71.8
-26.8
-45.1
-35.0
-16.1
-18.9
-33.3
-2.1
-31.2
-62.9
-15.6
-47.3
-74.1
-20.6
-53.5
-43.5
-3.1
-40.4
-47.3
-14.7
-32.6
-68.2
-19.4
-48.9
-73.2
-14.1
-59.2
-76.5
-75.1
-15.0
-61.5
-20.0
-55.1
0.1
3.6
-49.1
0.0
4.4
-58.6
0.0
4.3
-18.9
-0.1
4.6
5.9
1.6
4.4
-10.8
3.4
2.8
-1.6
-1.0
13.5
-9.2
0.7
6.4
-5.1
2.8
6.3
-2.9
0.0
0.0
0.0
0.0
-5.0
-4.0
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
41
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Inflation
IPCA inflation of 3.7% in 2019 and 4.0% in 2020
 IPCA inflation is expected to remain stable at 3.7% between 2018 and 2019 and increase to 4.0% in 2020.
The lower inflation of administered prices in 2019 should be offset by the higher inflation in market prices.
IPCA inflation and central bank's inflation target (%, year-on-year change)
14.0
12.0
IPCA
10.0
8.0
Upper limit
6.0
Target
4.0
Lower limit
2.0
0.0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019e
2020e
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020e
100
IPCA
7.7
12.5
9.3
7.6
5.7
3.1
4.5
5.9
4.3
5.9
6.5
5.8
5.9
6.4
10.7
6.3
2.9
3.7
3.7
4.0
26
Monitored
10.1
14.2
14.0
9.2
8.7
4.3
1.5
3.5
4.5
3.2
5.6
3.7
1.5
5.3
18.1
5.5
8.0
6.2
4.3
4.5
74
Market
6.6
11.8
7.2
6.9
4.2
2.6
5.7
7.0
4.2
7.1
6.6
6.5
7.3
6.7
8.5
6.6
1.3
2.9
3.4
3.9
16
Food
9.6
21.6
6.7
2.6
0.6
-0.1
12.4
10.7
0.9
10.7
5.4
10.0
7.6
7.1
12.9
9.4
-4.9
4.5
4.3
4.0
35
Services
4.8
5.5
7.1
6.8
6.8
5.5
5.2
6.4
6.4
7.6
9.0
8.7
8.7
8.3
8.1
6.5
4.5
3.3
3.8
4.2
23
Industrial
5.5
10.5
6.9
10.0
4.2
1.4
2.1
4.0
2.9
3.5
3.6
1.8
5.2
4.3
6.2
4.8
1.0
1.1
2.2
3.3
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
44
Market prices to increase in 2019 and 2020
 Inflation in market prices was much lower than its historical average in 2017 and 2018. Several factors
explained this dynamic: (i) low food inflation due to the increase in the supply of food items; (ii) a reduction in
demand pressure on services and industrial prices due to the deep recession; (iii) exchange rate appreciation
in 2017; and (iv) low inertia due to the low IPCA inflation in 2017.
 For the coming years, most of these factors will either contribute less to lower inflation or even have the opposite
effect: The depreciation of the BRL/USD rate in 2018 and 1H19 will likely put pressure on costs in 2H19 and
2020, economic slack will be less favorable than it has been in recent years. As a result, we expect inflation in
market prices to increase from 2.9% in 2018 to 3.4% in 2019 and 3.9% in 2020.
Inflation in market prices and in administered prices
(%, year-on-year change)
2005
Market
Monitored
2011
2013
1.3
2015
2017
4.5
2.9
2.8
2019e
10.7
2005
6.4
5.9 6.5 5.8 5.9
5.9
5.7
6.2
2.9
4.3
3.4
4.5
3.9
5.5
6.6
8.0
7.3
5.3
6.7
1.5
3.7
8.5
18.1
2009
6.5
7.1
5.6
6.6
7.0
4.5
4.2
3.2
5.7
2007
3.5
2.6
1.5
4.2
4.3
8.7
Monitored
Market
Breakdown of IPCA inflation by market prices and
administered prices (%, percentage points)
3.1
1.3
6.3
4.3
5.1
1.8 4.1
6.4
3.0
5.2
4.8
5.0 5.6
5.2
5.0 2.9
4.4
3.7 3.7 4.0
1.0 2.1 2.5 2.9
1.5 0.9
1.3 2.0 1.6 1.1 1.2
1.2
0.4 1.0 1.3 0.9
0.4
2007
2009
2011
2013
2015
2017
2019e
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
45
Services inflation to rise to 3.8% in 2019
 Services inflation is expected to increase from 3.3% in 2018 to 3.8% in 2019. The higher inflation in the group
would be explained by more pronounced inflation in food away from home and rents. These components should be
pressured by higher food inflation and past inflation (e.g., costs linked to IGP inflation will accelerate). In 2020, the
lower contribution from the slackness of the economy will be the main driver behind the increase in service inflation.
Inflation in services (%, year-on-year change)
2017
2018
2019e
8.37
6.42
6.00
5.68
4.57
4.52
3.34
3.80
4.01
3.82
3.85
4.27
3.81
3.18
1.47
Services
5.54
5.03
Food away from home
Domestic worker
1.94
Rent
Courses
Condominium
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
46
Inflation in industrial goods to rise to 2.2% in 2019
 Inflation of industrial goods should increase from 1.1% in 2018 to 2.2% in 2019.
 The increase in inflation in industrial goods would be explained by the more depreciated exchange rate.
Inflation in industrial goods (%, year-on-year change)
3.2
2.9
2.8
3.3
3.2
2.2
1.5
1.1
1.0
Dec-17
Dec-18
0.9
1.0
0.6
-0.4
-0.8
Dec-19e
Industrials
New vehicle
Apparel
-4.2
Eletronics
Ethanol
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
47
Inflation in administered prices to drop to 4.3% in 2019
 We project a decline in inflation in administered prices, from 6.2% in 2018 to 4.3% in 2019. Lower inflation in
electricity, gasoline and healthcare plan would be the main drivers of this movement.
10.5
16.0
2017
2018
2019e
3.5
4.0
6.8
4.6
5.2
-0.5
-5.4
-1.3
0.1
4.3
4.9
6.0
4.5
6.7
6.3
4.0
2.6
1.6
4.5
5.1
8.7
8.3
10.4
11.2
1.8
4.3
6.2
7.2
8.0
10.3
13.5
Inflation in administered prices (%, year-on-year change)
Administered
Gasoline
Healthcare
plan
Residential Pharmaceutical
electricity
products
Urban
bus fare
Water
tariff
LPG
Fixed
telephone
Vehicle
registration
Intercity
bus fare
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
48
Balance of risks for inflation in 2019 and 2020
A reduction of non-tariff barriers
and import tariffs would increase
the competitiveness of the
economy and reduce inflationary
pressures.
Trade
Exchange Rate
More easy financial
conditions in the USA and
other developed markets
would lead to an
appreciation of Brazilian
currency.
US market
Deterioration in financial
conditions (triggered by absence
of reforms or reversion of the
easing conditions in developed
markets) could depreciate the
Brazilian currency.
Oil
Given the low inflation in
several items, inertia could be
more benign than we
assumed in our scenario.
Inertia
Lower supply of oil products
(e.g., sanctions on main
exporters or cuts in oil
production by them) could
raise oil prices from their
currently low level.
Weather
Fiscal reforms
could contribute to
a more
appreciated local
currency, resulting
in a favorable
pass-through to
domestic prices.
Fiscal reform
Bad weather could trigger two negative
impacts on prices: (i) food products,
due to shortages; and (ii) higher
electricity rates.
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
49
Brazil’s inflation target converging to its peers’ targets
 The central bank had reduced the inflation target from 4.5% in 2018 to 4.25% in 2019, 4.0% in 2020,
3.75% in 2021. The lower center of the inflation target range is compatible with the average midpoint of
inflation target ranges observed in emerging economies (4.0%) and represents a structural improvement for a
country with a history of high inflation.
 The main risk to meeting the new targets is non-advancement of the fiscal consolidation process. The
maintenance of high fiscal deficits would eventually lead the country to fiscal dominance, preventing the
monetary authority from meeting the lower inflation targets.
Inflation targets of countries over time1 (%)
Trajectory
Current
2018: 4.5%
2019: 4.25%
2020: 4%
2021: 3.75%
Zambia
Uruguay
Uganda
Turkey
Thailand
Serbia
Russia
Romania
Czech Republic
Dominican Republic
Poland
Peru
Paraguay
Mexico
Philippines
Israel
Iceland
Indonesia
India
Hungary
Guatemala
Georgia
Ghana
Colombia
Chile
Brazil
Bangladesh
Armenia
Argentina
South Africa
Albania
Average of
emerging of
4.0%
Switzerland
Sweden
United Kingdom
New Zealand
Norway
Japan
South Korea
Canada
Australia
Average of developed
countries of 2.1%
Ukraine
10
9
8
7
6
5
4
3
2
1
0
Blue line represents the path of inflation target center of each central bank of each inflation targeting over time
Source: Central Banks, Credit Suisse
1
September 11, 2019
50
Monetary policy
Selic rate to decline to 5.00% in the year-end 2019
 Further monetary stimulus in developed economies associated with the idle capacity of the economy should
allow the Central Bank to cut Selic interest rate by 50 bps in September and 50 bps in October.
Selic interest rate, real Selic rate, and IPCA inflation (%, p.a.)
20
Real Selic
18
IPCA
Selic
16
14
12
10
8
6
4
2
0
1Q04 4Q04 3Q05 2Q06 1Q07 4Q07 3Q08 2Q09 1Q10 4Q10 3Q11 2Q12 1Q13 4Q13 3Q14 2Q15 1Q16 4Q16 3Q17 2Q18 1Q19 4Q19 3Q20
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
52
Current monetary easing cycle will be longest since 2000
 The central bank started the current easing cycle on October 2016 with a 25bps cut. In our scenario, the
cumulative change in the Selic rate will reach 925 bps on October 2019, the second highest monetary
stimulus since 2000.
 Furthermore, based on our forecast for the Selic rate in 2019 and 2020, the current easing cycle will be the
longest in the period.
Cumulative change in Selic interest rate in easing cycles
(percentage points)
0
February 2002 to September 2002 (Fraga)
-2
March 2000 to March 2001 (Fraga)
-4
January 2009 to July 2009 (Meirelles)
August 2011 to October 2012 (Tombini)
-6
October 2016 to December 2020 (Ilan and Roberto Campos)
-8
September 2005 to September 2007 (Meirelles)
-10
June 2003 to August 2004 (Meirelles)
-12
T
T+4
T+8
T+12
T+16
T+20
T+24
T+28
T+32
T+36
T+40
T+43
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
53
Monetary easing cycle to continue to fuel economy in 2019
 The low Selic rate will continue to stimulate the economy throughout 2019 and 2020. Our models—Structural
Vector Autoregressive (SVAR) models and one Vector Autoregressive (VAR) model for Brazil1—indicate that
cuts in the Selic rate had a strong impact on the subsequent quarters. The cumulative effect of keeping the
rate low for a prolonged period will likely accelerate the economy in the coming quarters.
 At same time, monetary policy normalization should start before the emergence of demand pressures on
inflation, taking into account its lagged effect.
Response of output gap to 100bps rise in Selic rate (pps)
0.05
0.05
VAR
0.00
VAR
0.00
-0.05
-0.05
Complete SVAR
-0.10
Complete SVAR
-0.10
-0.15
-0.15
-0.20
Restricted SVAR
Restricted SVAR
-0.25
-0.30
Response of domestic absorption gap to 100bps rise in
Selic rate (pps)
1
2
3
4
5
6
7
Quarters
8
-0.20
9
10
11
12
-0.25
1
2
3
4
5
6
7
Quarters
8
9
10
11
12
The models follow the methodology of Ouliaris, S., Pagam, A.R., and Restrepo, J. (2016), “Quantitative Macroeconomic Modeling with Structural Vector Autoregressions,” Working Paper, IMF. The models relate the variables: output gap, domestic
absorption gap, inflation, interest rate, and real effective exchange rate, and two exogenous variables to capture interactions with the global economy (i.e., global trade gap and Fed funds rate). The output gap and domestic absorption measures were
obtained using the Beveridge-Nelson decomposition and were based on AR (4) models and a time horizon of 12 quarters for the out-of-sample forecast. Domestic absorption is composed of consumption and investments.
Source: Central Bank of Brazil, Brazilian Statistics Bureau (IBGE), Credit Suisse
1
September 11, 2019
54
Interest rate differential reached the lowest level ever
 The strong monetary easing cycle implemented since 2016 drove the differential of domestic interest rate and
foreign interest rate to the lowest level ever. The difference between the 1 year interest rate in Brazil against
USA declined from 11.4pp in September 2016 to 4.1pp in May 2019. For the 10 year maturity, the difference
declined from 10.4pp to 6.7pp in the same period.
 The same happened with real rates. The differential of the 1 year real interest rates reached 1.1pp in April
2019, the lowest level since 2013. The differential for the long term real interest rate (10 year) also posted a
strong declined from 5.8pp in September 2016 to 3.8pp in April 2019.
16
Nominal 10 year interest
rate yield difference
14
12
10
8
6
4
Nominal spot interest rate difference
2
0
Sep-09
Jan-11
Jun-12
Oct-13
Mar-15
Jul-16
Dec-17
Difference between domestic and foreign real interest
rate 1 (%, p.a.)
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Mar-19
Real interest rate 10 year yield difference
Real spot interest rate difference
Sep-09
Feb-10
Jul-10
Dec-10
May-11
Oct-11
Mar-12
Aug-12
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Feb-15
Jul-15
Dec-15
May-16
Oct-16
Mar-17
Aug-17
Jan-18
Jun-18
Nov-18
Apr-19
Difference between domestic and foreign nominal
interest rate 1 (%, p.a.)
Real Fed funds and Selic interest rates are obtained by subtracting the nominal rate by the current inflation. The nominal 10 year were obtained by the term structure of interest rate of each country, and the real 10 year rates
are nominal interest rates for US and Brazil subtracted by the inflation, respectively.
Source: FRED, National Treasury, Credit Suisse
1
September 11, 2019
55
Central bank has become more sensitive to inflation
 To capture changes in the reaction function of the Central Bank of Brazil, we used a time-varying Taylor rule
for the Selic interest rate. The monetary policy rate set by the central bank is a function of the neutral interest
rate, the deviation of inflation to its target, and the output gap(1,2).
 The results of the estimates suggest that the central bank has become more sensitive to inflation over time
and less sensitive to the output gap.
𝑺 = 𝑺∗+ ρ(St-1 –S*)+ α(π- π*) + β (GDP *),
where S is the Selic rate, S* is the neutral interest rate, π* is the inflation target, and GDP* is the output gap.
Coefficient of differential between
past Selic rate and natural rate
1.00
Coefficient of deviation
of inflation to target
0.45
Henrique
Meirelles
Alexandre
Tombini
Ilan
Goldfajn
0.95
0.35
0.60
Henrique
Meirelles
Alexandre
Tombini
0.50
Ilan
Goldfajn
0.25
0.90
0.15
0.40
0.05
0.30
-0.05
0.85
Alexandre
Tombini
-0.15
0.80
Sep-03
Coefficient of
output gap
Jun-07
Mar-11
Dec-14
Sep-18
-0.25
Sep-03
Jun-07
Mar-11
Ilan
Goldfajn
Dec-14
Sep-18
0.20
0.10
Sep-03
Henrique
Meirelles
Jun-07
Mar-11
Dec-14
Sep-18
The GDP gap and the neutral interest rate were calculated using the Hodrick-Prescott filter. For more details, see Areosa, M. (2008): “Combining Hodrick-Prescott Filtering with a Production Function Approach to Estimate
Output Gap,” Central Bank of Brazil Working Paper, Series 172. ² The model uses a Epanechnikov kernel smoothing nonparametric technique for a linear model and estimates the best fit for each observation, allowing for shifts
to be identified when the institution changes its sensitivity to the parameters. See Epanechnikov, V. A. (2008): “Non-Parametric Estimation of a Multivariate Probability Density” for more details.
Source: Credit Suisse
1
September 11, 2019
56
Conditions for credit expansion are favorable
 The continuity of more favorable financial conditions
owing to further monetary stimulus will likely result
in more significant expansion of non-earmarked
bank lending in the next few quarters. The current
starting point for the credit cycle is favorable:
–
–
Supply conditions: Following the sharp rise in the postrecession period, the delinquency rate in nonearmarked bank loans to both individuals and
corporations is at its lowest level of the past few
months. This situation will likely stimulate private banks
to supply credit.
Demand conditions: Both households and corporations
have gone through a deleveraging process for the past
few years, which makes it easier for both segments to
take out loans.
Dynamics of delinquency in non-earmarked bank loans
(% of stock of credit)
Total
6
5
4
3
Individuals
7
6
5
4
Businesses
6
5
4
3
September 11, 2019
Jun-19
Mar-19
Dec-18
Sep-18
Jun-18
Mar-18
Dec-17
Sep-17
Jun-17
Mar-17
Dec-16
Sep-16
Jun-16
Source: Central Bank of Brazil, Credit Suisse
Mar-16
2
57
Total bank lending to rise 8.8% in 2019 and 2020
 Further Selic basic interest rate cuts will keep growth in bank lending on a positive trend in the coming
quarters.
 Growth in total lending should increase from 5.0% in 2018 to 8.8% in 2019 and 8.9% 2020, a movement
that should be driven by non-earmarked lending, which is more responsive to the effects of monetary policy.
 Earmarked lending should resume, although at a more moderate pace, after three consecutive contractions
between 2016 and 2018.
Growth in bank lending (%, p.a.)
35
30
Earmarked
25
Total
20
15
10
Non-earmarked
5
13.7
11.2
8.8
8.9
3.2
5.8
0
-5
-10
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019e
2020e
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
58
Non-earmarked lending should continue to recover
 The main driver of the acceleration in bank lending will be the non-earmarked portfolio, for both households
and businesses.
 Our base-case scenario assumes that the more favorable financial conditions seen in recent months should
continue to contribute to a resumption in non-earmarked lending in the next two years.
 This environment will favor an increase in private institutions' share of the credit market in the next few years.
Growth in non-earmarked lending (%, p.a.)
40
30
Total
Individuals
20
15.0
13.7
10
12.5
Business
0
12.0
11.2
10.5
-10
-20
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019e
2020e
Source: Central Bank of Brazil, Credit Suisse.
September 11, 2019
59
Acceleration in credit originations in recent months
 Further monetary stimulus and maintenance of the Selic interest rate at historical low level for a prolonged
period should keep credit originations on an upward trend, reversing the sharp decline observed during the
recession from 2Q14 to 4Q16. Real growth in non-earmarked lending has remained strong in recent months.
 Monetary easing should be one of the main drivers of the resumption of economic activity in the coming
quarters.
Non-earmarked and earmarked lending Breakdown of real non-earmarked
(% of GDP)
lending (BRL mn, seas. adj., Jun-19 prices)
60
350,000
Breakdown of real growth
in non-earmarked lending
(%, year-on-year change)
35
30
50
300,000
25
20
40
250,000
15
10
30
200,000
5
0
20
150,000
-5
-10
10
100,000
-15
-20
0
Apr-11
Apr-13
May-15
Earmarked % of GDP
Source: Central Bank of Brazil, Credit Suisse.
Jun-19
May-17
Non-earmarked
% of GDP
50,000
Apr-11 Apr-13
Non-earmarked
May-15 May-17 Jun-19
Businesses
Individuals
-25
Apr-12
Jan-14
Non-earmarked
Jun-19
Nov-15
Aug-17
Businesses
Individuals
September 11, 2019
60
Real growth in credit originations close to historical level
 Real growth in credit originations in recent months is in line with the level observed in the past few years. For
example, growth in interest rate reference credit (which excludes leasing, credit card purchases for immediate
payment, and other transactions backed by minimum or government reserves) have remained close to 10% in
real terms, close to the growth of this series before the economic crisis of 2015–16.
 Originations of interest rate reference credit to both individuals and businesses have posted real growth.
Real growth in originations of reference credit (%, yearon-year change)
Real growth in originations of reference credit to both
individuals and businesses (%, year-on-year change)
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
Dec-01
-20
Nov-04
Oct-07
Sep-10
Total originations of reference credit
Aug-13
Jul-16
Jun-19
3-month moving average change
in total reference credit
-30
Jun-01
Jun-04
Jun-07
Originations to businesses
Jun-10
Jun-13
Jun-16
Jun-19
Originations to individuals
Source: Central Bank of Brazil, Credit Suisse.
September 11, 2019
61
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September 11, 2019
62
Economic activity
Truckers' strike reversed positive momentum of indicators
 After the end of the recession in 4Q16, the main economic activity indicators (i.e., industrial production, broad
real retail sales, and core real retail sales) started an upward trend, showing robust acceleration until 1Q18.
 However, the tightening of financial conditions due to high uncertainty regarding the outcome of the elections
and the truckers' strike reversed the upward trend of industrial production in 2Q18 and 3Q18. Despite these
events, real retail sales continued to see positive momentum.
Dynamics of industrial production
(Index number, seasonally adjusted, Dec-16=100)
Dynamics of retail sales and real revenues from services
(Index number, seasonally adjusted, Dec-16=100)
110
115
Manufacturing
Broad retail sales
105
110
100
105
Core retail sales
95
100
Total
90
95
85
Mining
90
80
Real revenues from services
75
Dec-16
May-17
Oct-17
Mar-18
Aug-18 Dec-18
Jun-19
85
Dec-16
May-17
Oct-17
Mar-18
Aug-18 Dec-18
Jun-19
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
64
Household consumption to explain higher GDP growth in 2020
 The GDP growth in 2019 should continue to be driven by expansion in household consumption. A sharp
improvement in financial conditions driven by the anchoring of expectations regarding the fiscal consolidation
process should maintain the positive outlook for the credit market. Labor market conditions should also
continue to improve in 2019. As a result, domestic demand should lead to acceleration in economic activity in
the coming quarters.
GDP growth on demand side (%, p.a.)
Exports
Imports
33.6
2020e
2018
2014
-2.3
-14.2
2016 -10.3
5.0
8.5
3.7
5.1
9.4
1.1
6.7
2012
2020e
2018
2016
6.8
0.9
5.2
4.1
2.3
3.5
Imports
2014 -1.6
11.7
Exports
2012
2020e
-4.2
-13.9
2016 -12.1
-2.5
2018
2014
2012
4.1
3.7
5.8
17.9
6.8
0.8
5.8
0.0
2020e
2018
Gross fixed capital formation
64.0
2019e 2020e
Gross fixed-capital formation
-0.2
0.0
0.2
2018
4.8
0.7
1.8
2017
2010
2016
-0.9
-1.4
2014
2020e
Government consumption
20.0
Government consumption
1.4
1.9
1.8
2.8
2018
-3.2
2016 -3.9
2014
2012
2010
6.2
4.8
3.5
3.5
2.3
Household consumption
2014
2.7
-3.3
-3.5
2015
2010
2013
Household consumption
11.6
12.6
15.0
2016
2012
1.2
1.1
1.1
0.5
2012
2011
3.0
3.9
2.2
2.3
1.5
0.8
2010
1.9
2010
4.0
2010
7.5
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
65
Household consumption to accelerate in coming quarters
 Our expectation of an acceleration in household consumption in 2019 and 2020 is due to the following
factors:
–
Rise in consumer confidence in a scenario of lower risk aversion in the domestic market owing to the expectation that the
fiscal consolidation agenda will be implemented
–
Greater expansion in bank lending, due to postponement of the monetary tightening cycle
–
Higher growth in wage bill as a result of faster job creation
Response of growth in household consumption to change of one percentage point in its drivers1 (%)
Consumer confidence
Real wage bill
1.25
4
Credit
2
Upper bound
1.00
Real interest rate
Upper bound
3
8
1
Upper bound
Upper bound
6
0
0.75
Median
0.50
2
Median
1
-1
4
-2
2
Median
Median
-3
0.25
0.00
1
0
Lower bound
0
5
Quarters
10
-1
Lower bound
0
5
Quarters
10
0
-4
-5
Lower bound
Lower bound
0
5
Quarters
10
-2
0
5
Quarters
10
The impulse-response functions presented are calculated using a model that co-integrates household consumption, consumer confidence, real expanded wage bill, real interest rate, and total credit as a proportion of GDP.
Source: Brazilian Statistics Bureau (IBGE), Getulio Vargas Foundation (FGV), Central Bank of Brazil, Credit Suisse
September 11, 2019
66
Deleveraging of households and companies in 2016-2018
 The sharp decline in interest rates from 2016 to 2018 drove a process of household and corporate
deleveraging in the period.
 The debt-service ratio of households declined from a level close to 23% at the end of 2015 to below 20% in
February 2019. In the case of the non-financial private sector, which includes companies and households, the
movement was similar, with a sharp decline in the debt-service ratio in recent quarters.
 Continuity of low interest rates for a prolonged period will tend to keep the debt-service ratio of companies and
households at a moderate level.
Debt-service ratio of households for amortization and
interest on debt (% of total wage bill)
Debt-service ratio of non-financial private sector
(% of GDP)
25
45
Debt-service ratio
40
20
Interest
payments
15
10
35
Debt-service ratio
30
25
Amortization
5
Average from 1999 to 2018
20
15
0
Mar-05
Mar-07
Feb-09
Feb-11
Feb-13
Feb-15
Feb-17
Feb-19
10
Mar-99
May-02
Jul-05
Sep-08
Nov-11
Jan-15
Mar-18
Source: Bank of International Settlements (BIS), Central Bank of Brazil, Credit Suisse
September 11, 2019
67
Unemployment rate to continue to decline in 2019 and 2020
 Labor market conditions will likely continue to improve in 2019 and 2020. The unemployment rate is expected
to decline from 12.3% in 2018 to 11.8% in 2019 and 10.6% in 2020. This downward trend would be driven
by the resumption of economic activity, which would accelerate job creation in the formal sector. Real wages
are expected to accelerate in 2019, after decelerating from 2017 to 2018. The greater increase in real wages
and in the working population will contribute to an expansion in real wage bill. Real wage bill is expected to
grow from 2.0% in 2018 to 3.6% in 2019 and 4.6% in 2020.
Projections of main variables of labor market (%, p.a.)
Unemployment rate
12.7
11.5
Employed population
12.3
11.8
10.6
8.5
7.1
6.8
Labor force
2013
1.4
1.1
2014
1.5
1.1
2015
2016
2017
2018e
2019e
2020e
Real wages
3.3
-1.9
1.5
0.4
1.9
2.5
0.9
2.9
-0.3
-0.1
-1.9
-3.1
1.8
1.4
4.7
1.1
1.9
0.1
Real wage bill
2.3
2.6
0.6
1.5
1.1
2.1
1.7
3.6
2.1
4.6
2013 2014 2015 2016 2017 2018e 2019e 2020e
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
68
Higher real wage bill driven by rise in working population
 The low inflation rate continued to contribute to growth in real wages in 1Q19. Nominal wages accelerated in
the past few quarters, driving an increase in real wage bill.
 The more positive outlook for the dynamics of the unemployment rate in the coming quarters should contribute
to further acceleration in nominal wages.
1.1
8.3
6.3
7.7
5.7
4.8
1.4
4.0
4.1
2.0
2.1
-4.2
1.8
0.6
3.1
-3.7
0.6
3.3
-3.7
1.1
6.8
7.5
5.5
4.7
5.9
6.7
5.1
5.8
4.5
4.7
4.4
2.8
2.3
Real wage bill
-4.1
-4.9
0.0
2.4
-4.1
-3.5
-4.7
1.9
-4.4
-3.8
0.6
1.6
-3.3
-1.9
2.3
-2.8
-3.0 -4.0
2.4
3.6
Real wage
-8.7
-7.1
-10.4
-9.5
-8.6
-7.7
-6.5
-6.6
-6.3
-5.7
6.5
6.5
5.0
6.7
6.0
7.4
5.5
8.5
6.7
-0.3
-2.5
2.4
Inflation
-2.8
-0.1
0.0
-0.7
1.4
-2.9
-5.8
6.7
1.6
-2.6
1.0
-9.2
0.8
1.1
-3.5
2.6
-10.1
0.2
-6.1
4.9
3.8
2.1
-6.5
Nominal wage bill
3.7
2.1
-6.4
4.8
4.1
6.0
6.8
6.0
7.6
7.2
9.6
9.4
Nominal wage
5.9
6.5
8.6
9.7
9.5
10.1
10.3
3.4
7.7
8.7
3.8
9.2
3.7
3.4
7.6
5.2
7.4
5.3
12.2
10.1
11.7
5.0
11.4
10.5
11.9
8.6
9.9
Real habitual earnings (%, year-on-year change, percentage points)
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18e 1Q19 2Q19e 3Q19e 4Q19e
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
69
Investments to increase in upcoming quarters
 Investments will also be an important driver of the acceleration in economic activity in 2020. The following
drivers of investments suggest a more favorable scenario in this period:
–
Improvement in credit conditions, with a likely expansion in non-earmarked lending to businesses
–
Increase in business confidence in a scenario of lower uncertainty regarding the sustainability of public debt due to the
implementation of a fiscal consolidation process
–
A more appreciated local currency, which reduces the price of imported capital goods
Response of investments to change of one percentage point in its drivers1 (%)
Real interest rate
3
Business confidence
1.5
Upper bound
2
Real exchange rate
0.4
Upper bound
Upper bound
0.2
1
1.0
0.0
0
-1
Median
-2
-0.2
Median
Median
-0.4
-3
0.0
Lower bound
-4
-5
0.5
Lower bound
0
5
Quarters
10
-0.5
0
5
Quarters
10
-0.6
Lower bound
-0.8
0
5
Quarters
10
The impulse-response functions presented are calculated using a model that co-integrates investments, real interest rate, business confidence, and real exchange rate.
Source: Brazilian Statistics Bureau (IBGE), Getulio Vargas Foundation (FGV), Central Bank of Brazil, Credit Suisse
1
September 11, 2019
70
Low growth in industrial production in 2019
 On the supply side, the sectors that should benefit the most from an acceleration in domestic demand in the
coming quarters are the industrial and services sectors. Among industrial sectors, manufacturing should lead
this acceleration in production in 2020. In the services sector, the most cyclical segments (e.g., commerce,
transportation, and financial intermediation) should post the highest output growth in the period.
GDP growth on supply side (%, p.a.)
Weights Components
100
GDP
14
Net tax on products
86
Value added at basic prices
2010
2011
2012
2013
2014
2015
2016
2017
2018 2019e 2020e
7.5
10.8
7.0
4.0
5.3
3.7
1.9
3.7
1.6
3.0
3.7
2.9
0.5
0.8
0.5
-3.5
-6.0
-3.2
-3.3
-5.6
-2.9
1.1
1.5
1.0
1.1
1.4
1.1
1.2
1.3
1.1
2.7
3.1
2.6
5
2
10
4
2
Agriculture
Mineral extraction
Manufacturing
Construction
Production of electricity, gas, and water
6.7
14.9
9.2
13.1
6.3
5.6
3.5
2.2
8.2
5.6
-3.1
-1.9
-2.4
3.2
0.7
8.4
-3.2
3.0
4.5
1.6
2.8
9.1
-4.7
-2.1
-1.9
3.3
5.7
-8.5
-9.0
-0.4
-5.2
-1.2
-4.8
-10.0
6.5
12.5
4.2
1.7
-7.5
1.0
0.1
1.0
1.3
-2.5
2.3
1.0
-5.4
0.9
0.7
3.3
2.0
5.3
3.3
3.0
3.0
18
11
4
3
15
15
7
8
Industry
Commerce
Transportation, storage, and mail
Information services
Public administration, healthcare, and education
Other services
Financial intermediation
Real estate and rental activities
10.2
11.1
11.2
5.4
2.2
3.3
9.3
4.9
4.1
2.3
4.3
6.5
1.9
4.6
6.2
1.9
-0.7
2.4
2.0
7.0
1.3
3.6
1.5
5.1
2.2
3.4
2.6
4.0
2.2
1.6
1.8
5.1
-1.5
0.6
1.5
5.3
0.1
1.9
-0.6
0.7
-5.8
-7.3
-4.3
-0.9
0.2
-3.7
-1.2
-0.4
-4.6
-6.7
-5.6
-2.1
0.3
-1.4
-3.4
0.2
-0.5
2.1
1.2
-1.0
-0.2
0.7
-1.6
1.2
0.6
2.3
2.2
0.3
0.2
1.0
0.4
3.1
0.3
1.5
0.8
3.2
0.3
1.7
0.4
2.9
3.4
3.2
3.2
3.5
0.5
2.5
2.5
3.5
63
Services
5.8
3.5
2.9
2.8
1.0
-2.7
-2.3
0.5
1.3
1.4
2.4
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
71
Current recovery is the slowest of recent decades
 The Brazilian economy has entered a recession on nine occasions since the early 1980s: (i) 1Q81–1Q83, (ii)
3Q87–4Q88, (iii) 3Q89–1Q92, (iv) 2Q95–3Q95, (v) 1Q98–1Q99, (vi) 2Q01–4Q01, (vii) 1Q03–2Q03, (viii)
4Q08–1Q09, and (ix) 2Q14–4Q16.
 The current process of activity resumption has been one of the slowest since 1980. The only recovery process
slower than the current one was that of 3Q87–4Q88, since the economy entered another recession in the
following quarters.
 The high uncertainty regarding the adjustment of public accounts and the gradual deleveraging of companies
and households explain the slow pace of economic recovery.
GDP dynamics in episodes of activity resumption
(index number = 100 at end of recession)
120
115
110
105
100
95
90
Q-10
Q-9
Recession:
Q-8
Q-7
Q-6
1st
Q-5
2nd
Q-4
Q-3
3rd
Q-2
Q-1
4th
Q
Q+1
5th
Q+2
Q+3
6th
Q+4
Q+5
7th
Q+6
Q+7
8th
Q+8
Q+9 Q+10
9th occasion
Source: Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
72
GDP growth near 2.0% in recent years
 Brazil's economic growth has declined significantly over the past few decades. GDP growth averaged 6.6%
from 1950 to 1980, making the country one of the fastest-growing economies in the period.
 As of 1981, however, the Brazilian economy entered a path of slow growth. Average GDP growth decelerated
to around 2.0% from 1981 to 2018. This period was marked by nine recessions; the most recent one, from
2Q14 to 4Q16, led to sharp contraction in economic activity.
Breakdown of GDP growth from 1950 to 2018
(%, pps, p.a.)
15
Demography
10
Productivity
Average
1950-1980
6.6
GDP
Average
1981-2018
5
2.1
0
-5
-10
1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018e
Source: The Conference Board, Credit Suisse
September 11, 2019
73
Demographics have driven GDP growth since 1980
 GDP growth can be broken down into growth in labor productivity, growth in the rate of employment (working
population divided by the total population), and population growth.
 Brazil's economic growth from 1950 to 1980 was explained by both strong growth in labor productivity and
favorable demographics.
 However, nearly all GDP growth since 1981 is explained by demographics. Growth in productivity was close to
zero in this period.
Breakdown of GDP growth
Labor
productivity
GDP
Demographic factors
Breakdown of GDP growth, by period
(%, pps, p.a.)
Demographics
𝒀
=
GDP
growth
∆𝒀
𝒀
𝑷𝑶
×
Growth in
productivity
=
𝒀
∆
𝑷𝑶
+
𝑷𝑶
𝑷𝑶𝑷
×
𝑷𝑶𝑷
Rate of employment
Population
Growth in
employment rate
Population
growth
𝑷𝑶
∆
𝑷𝑶𝑷
3.4
0.2
0.6
3.1
+
Productivity
∆𝑷𝑶𝑷
1950-1980
2.0
1.7
1981-2018
2001-2018
Source: The Conference Board, Credit Suisse
September 11, 2019
72
74
Productivity expanded little for an emerging economy
 Labor productivity is normally measured by two metrics: (i) the ratio of GDP to the total number of employed
workers; and (ii) the ratio of GDP to the total number of hours worked by the workers.
 By both measures, the productivity of Brazilian workers from 1980 to 2018 has been very weak compared
with that of other emerging economies. For example, growth in productivity of Brazilian workers in this period
was higher only that of countries such as South Africa and Venezuela.
GDP per worker in emerging economies from 1980 to 2018
(1980 = 100)
GDP per hour worked in emerging economies from 1980
to 2018 (1980 = 100)
600
1,200
500
1,000
400
800
300
600
200
400
100
200
0
0
1980
1985
1990
1995
2000
2005
2010
2015 2018
1980
1985
1990
1995
2000
2005
Argentina
Bangladesh
Brazil
Bulgaria
Chile
Colombia
Hungary
Indonesia
Malaysia
Mexico
Pakistan
Peru
Philippines
Poland
Russia
South Africa
Thailand
Turkey
Ukraine
Venezuela
Romania
2010
2015 2018
India
Source: The Conference Board, Credit Suisse
September 11, 2019
75
Growth of 3.0% requires sharp rise in productivity
 For annual growth to exceed 2.5% in the next few years, Brazil would need to see a sharp rise in labor
productivity.
 Based on the forecast of the Brazilian Statistics Bureau (IBGE) for population growth and the return of the
employment rate to its historical peak, growth in productivity would need to increase from the 0.2% seen from
1981 to 2018 to 1.5% per year in the next ten years to keep GDP growth at close to 2.5% in this period. To
sustain growth at 4.0% p.a., labor productivity would need to increase at the pace seen from 1950 to 1980.
Simulations of GDP growth under different scenarios for growth in productivity
(%, p.a.)
8
6
4
2
0
4.1
4.0
3.9
3.9
2.6
2.5
2.4
2.4
1.1
1.0
0.9
0.9
Prod = 3.0%
Prod = 2.5%
Prod = 2.0%
2.3 Prod = 1.5%
Prod = 1.0%
0.8 Prod = 0.5%
Prod = 0%
3.8
-2
-4
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Source: The Conference Board, Credit Suisse
September 11, 2019
76
Poor allocation of inputs explains low productivity in Brazil
 If we compare a Brazilian worker to a US worker with the same level of education and the same amount of
investment, the Brazilian worker would still have lower productivity. This difference is due to the lower capacity of
Brazilian workers to use production inputs, a measure known as total-factor productivity (TFP).
 An international comparison of productivity shows that the pace of improvement in physical capital and human
capital in Brazil has not been much different from that of the majority of emerging and developed economies.
On the other hand, the pace of growth in TFP in Brazil has been much lower.
Stock of capital1
(USD trillion, PPP of 2011)
Human capital
(index)
Total-factor productivity
(PPP of 2011, USA=1)
25
3.5
1.5
20
3.0
15
2.5
10
2.0
5
1.5
0
1950 1958 1966 1974 1982 1990 1998 2006 2014
1.0
1950 1958 1966 1974 1982 1990 1998 2006 2014
1.0
0.5
0.0
1950 1958 1966 1974 1982 1990 1998 2006 2014
Argentina
Bangladesh
Brazil
Bulgaria
Chile
Colombia
Hungary
India
Indonesia
Malaysia
Mexico
Pakistan
Peru
Philippines
Poland
China
Russia
South Africa
Thailand
Turkey
Ukraine
Venezuela
Romania
China was excluded from the stock of capital exhibit to avoid distorting the exhibit’s scale..
Source: Penn World Table, Credit Suisse
1
September 11, 2019
77
Inefficiency in Brazil has many causes
 TFP is understood as the representation of many dimensions of an economy, from trade openness to
institutional soundness. Brazil has weaknesses in all these dimensions.
Drivers of total-factor productivity
Ease of doing business
Adoption of technology
 Availability of scientists and engineers
Regulatory and legal
frameworks
Size and efficiency of the
government
 Ease of starting a business
 Obtaining construction licenses
 Availability of recent technologies
 Protection of minority investors
 Government spending
 Capacity for innovation
 Performance of agreements
 Fiscal health
 Access to credit
 Capacity of the country to attract talent
 Resolution of insolvency
 Level of independence of monetary policy
 Freedom of trade
 Capacity of the country to retain talent
 Property rights
 Government efficiency
 Level of flexibility of labor market
 Absorption of technology at corporate level
 Government integrity
 Level of taxation
 Freedom to invest
 Cooperation between universities and business in R&D
 Efficiency of the Judiciary
 Financial freedom
 Level of inward direct investment
 Ethics and corruption
 Level of competition in
domestic market
 Total patents
 Level of undue influence
 Training to adopt technology
 Security
 Workforce training
 Corporate ethics
Trade openness
 Accounting transparency
 Exports and imports of goods and services as
a share of global trade or GDP
 Registration of property
 Efficiency of financial market
 Financial reliability
Quality of education
 Quality of education
Source: World Bank, Heritage Foundation, Global Competitiveness Report, WIPO, UNCTAD, Penn World Table, Credit Suisse
September 11, 2019
78
Trade openness is one of the causes of differences in TFP
 The weight of various factors in the dynamics of TFP was calculated based on panel estimations with
information on 56 countries, from 1995 to 2014, based on the joint estimation1, backward selection2, and
forward selection3 methods. The variables with the highest statistical significance and weight in the
specifications are trade openness and government integrity.
Explanatory variables of TFP for each of the methods adopted
Joint estimation
Backward selection
Forward selection
Imports and exports of goods and services in global trade
Government integrity
Flexibility of labor market
Resolution of insolvency
Registration of property
Property rights
Access to credit
Investment in training to adopt technology
Ease of starting a business
Total patents
Government efficiency
Workforce training
Significance
0
0.1%
1%
5%
10%
Joint estimation: The model is estimated with all variables together; variables that have statistically significant coefficients and the sign in conformity with that suggested by literature are chosen. The model considers a fixed effect for
country and year. 2 Backward selection: Based on the complete estimation, the variables without statistical significance and with the sign opposite to that suggested by the theory were removed one by one, according to the probability
value (p-value). The lower the value, the higher the probability that the coefficient of a given variable will be different from zero. The chosen model is that in which only variables with statistically significant coefficients and the sign in
conformity with that suggested by literature are left. 3 Forward selection: This methodology consisted of building the models based on all possible combinations of the variables contained in six specific groups. The following restrictions
were imposed: (i) one variable per group; and (ii) sign of the coefficients in line with that indicated by literature. The selected model was the one with the highest adherence to the data for all specifications.
Source: World Bank, Heritage Foundation, Global Competitiveness Report, WIPO, UNCTAD, Penn World Table, Credit Suisse
1
September 11, 2019
79
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Fiscal policy
Nominal deficit of 6.5% of GDP in 2019
 The reduction in the primary deficit as a percentage of GDP, from 1.7% in 2018 to 1.0% in 2019 and 0.8%
in 2020, will contribute to a decline in the nominal deficit, from 7.1% of GDP in 2018 to 6.5% of GDP in
2019 and 6.6% of GDP in 2020.
 Continuity of low interest rates by historical standards would also contribute to keep the nominal deficit at a
more moderate level. However, Brazil should continue to implement austere fiscal measures for interest rates
to converge from the current levels to the magnitude of other emerging market economies.
Interest rate payments and primary and nominal deficits (% of GDP)
0.2
3.5
2.3
0.1
0.2
0.9
1.0
2.7
-2.9
2.6
-3.5
0.2
1.1
0.1
0.8
2.6
1.0
2.1
-3.6
2.2
-2.7
-5.2
-6.6
-7.3
-6.7
-6.0
2.3
0.6
1.3
0.1
0.8
0.5
1.2
1.6
2.1
-2.0
-3.2
-5.3
-5.1
-3.2
-5.0
-2.5
-5.4
0.4
0.3
1.8
-0.1
1.4
-2.3
-4.4
-0.4
-4.7
2005
2006
-5.4
Central government
2007
2008
2009
2010
2011
States and municipalities
2012
0.1
0.1
0.1
0.0
0.0
-2.5
-1.8
-1.7
-1.0
-0.8
-5.5
-5.8
-6.5
-6.6
2013
2014
2019e
2020e
-5.5
-6.1
-6.0
Nominal
2004
0.2
-1.9
-1.6
-3.0
-8.4
2003
Average
-6.5
-8.4
-7.1
-7.8
-9.0
-10.2
2015
2016
Government-owned companies
2017
2018
Payment of interest
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
82
Rigidity of primary expenditures is very high
 The new administration will need to implement a fiscal adjustment that combines an increase in revenues
either by raising taxes or reducing subsidies, and a reduction in primary expenditures.
 However, the primary expenditures of the central government are very rigid, and approximately 48% of them are
social security expenditures. Personnel expenditures represent 22% of the total. Other mandatory expenditures
(i.e., court judgments and requisitions to treasury for payment of judgments) and related discretionary expenditures
are equivalent to 21% of the total. Finally, just 9.2% of primary expenditures are eligible for cuts.
Breakdown of primary expenditures (% of total, rolling 12 months through September 2018)
Social
Security (INSS)
47.7%
Other mandatory expenditures
9.7%
Earmarked
Discretionary
11.4%
Non-earmarked
Discretionary
9.2%
0.4%
0.3%
0.7%
0.1%
Fund for Support and Development
of K-12 Education (Fundeb)
federal gov't supplement
Extraordinary receivables(ex PAC)
Supplemental FGTS
(LC No. 110/01)
Kandir Act (Supplemental Laws
No. 87/96 and 102/00)
Other mandatory expenditures
Federal District,
constitutional fund
100%
2.2%
Expenditures for Growth
Acceleration Program (PAC)
0.2%
2.5%
Ministry of Education
1.0%
1.0%
Legislature, judiciary and Federal
Prosecution and Defense
Service (MPF)
1.0%
Ministry of Health
1.0%
Tax relief under MP 540/11,
563/12, and 582/12
1.0%
Subsidies,
subventions,
and Proagro
0.0%
Court judgments and
court-ordered debt
instruments (OCC)
Wage
bonus
2.7%
special legislation and
damages payments
9.6%
4.2%
1.3%
Unemployment
insurance
12.4%
Inactive
personnel
Active
personnel
43.5%
7.0%
7.9%
Continuous cash benefit
(LOAS/RMV)
Social security
benefits
Social benefits 8.2%
Total
Other expenditures of
executive branch
Personnel
22%
Source: Brazilian Treasury, Credit Suisse
September 11, 2019
83
Aging population a challenge for economy
 Brazil’s old-age dependency ratio (ratio of individuals aged 65 or above to the population aged 20 to 64 years)
is set to increase from 13.0% in 2015 to 21.5% in 2030 and 48.3% in 2060, with an average increase of
0.8% per year. Compared to OECD countries, it will be the fastest aging of a population seen to date.
 The transition poses a challenge to the sustainability of growth and fiscal accounts, especially those related to
the social security system.
Demographic distribution of population (millions of persons, %)
2015
2030
90+
13.0%
80-84
2060
Old-age dependency
ratio
21.5%
48.3%
70-74
60-64
Men
50-54
Women
40-44
30-34
20-24
10-14
0-4
10
(10)
-
10
Millions
Source: Brazilian Statistics Bureau (IBGE), Credit
Suisse
10
(10)
-
10
Millions
10
(10)
10
10
-
Millions
September 11, 2019
84
High pension expenditures due to demographics
 Social security spending accounted for 12.7% of GDP in 20151, 8.6pps higher than expected, given the
relationship between expenditures and the dependency rate across a sample of countries. This is also the
greatest deviation from the trend line among all the countries considered in the sample2.
 In view of the aging population and the current retirement rules, Brazil’s expenditures should reach
unprecedented levels over the next few decades.
Pension expenditures and old-age dependency rate
Social security expenditures (% of GDP)
25
Brazil 2060
20
Brazil 2030
15
Brazil 2015
10
5
0
0
5
10
15
20
25
Old-age dependency rate
30
35
40
45
50
¹In the above analysis, the amount of social security expenditures for the RPPS in Brazil were considered constant and equal to 3.6% of GDP; ²The sample is composed of the following countries: Australia, Austria, Belgium,
Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, Korea, Latvia, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal,
Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States, Argentina, China, India, Indonesia, Russia, Saudi Arabia, and South Africa
Source: OECD, Brazilian Statistics Bureau (IBGE), Credit Suisse
September 11, 2019
85
Current retirement rules are benevolent
Retirements
Age
Disability
Time of
contribution
Survivor's
pension
Type
Minimum age
Time of contribution
Urban
65 (men); 60 (women)
Minimum contribution of 180 months worked.
Farm
60 (men); 55 (women)
Minimum contribution of 180 months worked. Proof of farming activity for at least 180 months, even if discontinuous.
Permanently disabled worker unable to exercise any labor or to be requalified for another profession, according to INSS medical expert. Benefit is paid as long as the
disability persists; expert examination performed every two years¹.
Full
None
Men: 35 years of contribution and 180 months effectively worked; Women: 30 years of contribution and 180 months
effectively worked.
Proportional
53 (men); 48 (women)
Men: 30 years of contribution and 180 months effectively worked; Women: 25 years of contribution and 180 months
effectively worked.
Progressive,
85/95
None
Men: sum of age and time of contribution = 95 and 180 months effectively worked; Women: sum of age and time of
contribution = 85 and 180 months effectively worked.
Death of insured or, in the event of disappearance, court-declared presumption of death. Deceased must have been insured in INSS system on date of death. Duration of
benefit may vary according to number of contributions of deceased, in addition to other factors.
Allowances / other benefits
Illness
Illness that renders the person temporarily incapable of working. Waiting period of 12 contributions (exempt in the event of an on-the-job accident or illnesses set forth by
law). For employees at a company: leave from work for at least 15 days (calendar days or intermittently over 60 days).
Accident
Existence of permanent side effects that reduce insured's ability to work. This entitlement is analyzed by INSS medical expert at the time of the expert evaluation. The
benefit is paid as a kind of reimbursement due to the accident and therefore does not prevent the person from continuing to work. There is no minimum time of contribution,
since it is only for on-the-job accidents.
Imprisonment
Beneficiary must have been an insured on the date of imprisonment.
Maternity pay
Men: Benefit also paid to fathers who carry out the role of mothers, both in cases of adoption by men and in the case of men who become widowers during a child's birth.
Women: 10 months of work for individual contributors, optional contributors, and special insured workers.
Welfare benefits (LOAS/RMV)
Elderly
Minimum age of 65 years. Monthly household income (per capita) less than one-fourth of the minimum wage. Must not be enrolled in any social security system. Must not
receive benefits of any kind, other than medical assistance. Must prove that they do not have the means to support themselves and that they are not being supported by
their family.
Disabled
Monthly household income (per capita) less than one-fourth of the minimum wage. Must not be enrolled in any social security system. Must not receive benefits of any kind,
other than medical assistance. Must prove that they do not have the means to support themselves and that they are not being supported by their family.
¹ Except for those aged 60 years or more.
Source: Secretariat of Social Security, Credit Suisse
September 11, 2019
86
Greater weight of retirement and survivors’ pensions
 Survivors’ pensions and retirement benefits represent 83.4% of total expenditures in the social security
system. A reduction in the growth of social security expenditures requires changes to the criteria for eligibility
and calculation of the amount of both social security benefits.
Breakdown of social security expenditures in RGPS in 2017
(BRL billion, % of total)
61.9%
Urban
26.1%
2.2%
Total
(Rural +
Urban)
Retirement,
time of
contribution
Retirement,
disability
Retirement
due to age
151.9
5.2
26.3
89.4
21.5
Sick pay
0.6
Others
105.5
9.6%
22.8
11.7
Workers
compensation
LOAS,
elderly
Rural
Total
(Rural +
Urban)
28.2
0.8
LOAS,
persons with
disability
Lifetime
Monthly
benefit
Payment
(RMV)
106.5
Survivor’s
pension
431.9
368.0
45.7
71.1
58.8
Source: Secretariat of Social Security, Credit Suisse
September 11, 2019
87
Retirement by time of contribution is the most expensive
 Retirement by time of
contribution yields the
highest average benefit,
of BRL1,931 per month,
and accounts for 28% of
social
security
expenditures,
despite
representing only 17%
of benefits. On the other
hand, social assistance
benefits (LOAS) are the
lowest
payments,
averaging BRL851 per
month, and account for
10% of expenditures
and 14% of benefits.
23.9%
Breakdown of social security expenditures in 2017 ('000, BRL)
Number of benefits ('000) Average value of benefits (BRL) Persons Expenditures
(%)
(%)
Non-farm Farm
Total Non-farm
Farm
Total
Total
24,573 29,462
34,097
1,315
837
1,181
100
100
Social security benefits (private-sector employees)
20,001 28,639
29,462
1,420
837
1,232
86
90
Social security
19,210 19,454
28,639
1,433
837
1,237
84
88
Retirements
12,607 10,293
19,454
1,521
837
1,281
57
62
Age
3,929 6,363
10,293
1,120
836
944
30
24
Disability
2,802
461
3,263
1,219
842
1,166
10
9
Time of contribution
5,876
22
5,898
1,934
1,054
1,931
17
28
Survivor's pension
5,261 2,360
7,621
1,271
833
1,136
22
21
Allowances / other benefits
1,285
215
1,500
1,250
864
1,195
4
4
56
8
64
838
758
829
0
0
Maternity pay
Others
0
0
0
695
0
695
0
0
791
32
823
1,102
750
1,089
2
2
Disability
196
13
209
1,476
831
1,435
1
1
Survivor's pensions
109
4
113
1,256
848
1,242
0
0
Sick pay
126
7
133
1,443
879
1,414
0
0
Allowance in case of accidents
316
8
324
809
459
800
1
1
45
0
45
215
0
215
0
0
4,552
62
4,614
851
851
851
14
10
4,483
0
4,483
851
-
851
13
9
Elderly
1,998
0
1,998
852
-
852
6
4
Disabled
2,485
0
2,485
850
-
850
7
5
69
62
131
850
851
851
0
0
Workers compensation
Additional allowance
Welfare benefits
Welfare benefits (LOAS)
Monthly lifetime income
Age
Disability
Social security charges of the federal government (EPU)
9
10
19
853
853
853
0
0
59
51
112
850
851
850
0
0
21
0
21
1,704
15
1,704
0
0
Source: Secretariat of Social Security, Credit Suisse
September 11, 2019
88
Minimum retirement age to increase with pension reform
Social Security Regime for the Private Sector (RGPS)
General principle of reform
Current rule
Contribution rates
Rules for retirement due to age
8% to 11%
Retirement possible if the sum of age and time of contribution
results in 95 years, for men, and 85 years, for women, with 15
years of effective work. Possible to retire due to age at 65 years,
for men, and 60 years, for women, with only 15 years of contribution.
Retirement due to time of contribution after 35 years of
contribution, for men, and 30 years, for women.
For farm workers, at 60 years for men and 55 for women, with
15 years of work
Transition rule
Formula for calculation of benefit
Average of 80% of the highest base salaries, multiplied by the social
security factor.
Survivor's pensions
Prohibits the cumulative receipt of two survivor’s pensions, if the
deceased was a spouse. However, cumulative payment of a
survivor’s pension and a retirement pension is allowed.
The benefit amount is equivalent to 100% of the amount the
retired individual received before his or her death.
People with disabilities may receive the BPC at any age. The
elderly will be entitled to the benefit at age 65. Individuals whose
per capita household income is lower than one-fourth the minimum
wage are entitled to the benefit.
The benefit amount is one time the monthly minimum wage.
Continuous Cash Benefit Program (BCP)
Proposal submitted by Bolsonaro administration
End of retirement for time of contribution under RGPS system;
increase in minimum retirement age for women; social security contribution
rates proportional to income.
From 7.5% to 14%, in proportion to income.
Minimum age: 65 for men in non-farm jobs, 62 for women in
non-farm jobs, 60 for farm jobs
Minimum time of contribution: 20 years
Minimum age of 60 for teachers, with at least 30 years of
contribution
End of retirement for time of contribution.
Three possibilities for workers that would have retired due to time of
contribution: Transition 1 – System of points: the sum of age and time
of contribution should total 96 (men) and 86 (women), with
increases of 1 point per year until reaching 105 points (men) and
100 points (women), with a minimum time of contribution of 35
years (men) and 30 years (women). Benefit calculated according to the
new formula. Teachers will have a bonus of five years.
Transition 2 – Time of contribution of 35 years (men) and 30 years
(women) with minimum age of 61 (men) and 56 (women), with increments
of 0.5 years per year until reaching the minimum ages under the new
rules (65 and 62). Teachers have a bonus of five years. Benefit
calculated according to new rule.
Transition 3 – Those with two years left before reaching the
minimum time of contribution (35 years for men, 30 for women) would
need to work for an additional 50% of the time remaining until
retirement. Benefit is adjusted according to the social security
factor.
60% of the average base salaries + 2% for each year of
contribution in excess of 20 years, limited to a minimum of one
time the monthly minimum wage and a maximum of the ceiling for
social security contributions.
60% of the amount + 10% for each additional dependent until
reaching 100%. For cases of job-related death, the benefit is 100%.
For non-disabled elderly, the amount of the benefit will be equal to
BRL 400 for those aged 60 to 70 years, and one time the monthly
minimum wage for those 70 years or older; for elderly with disabilities,
one time the monthly minimum wage, regardless of the age.
Source: Brazilian Ministry of the Economy, Credit Suisse.
September 11, 2019
89
Stricter rules for public social security
Minimum age
Current rules
Bolsonaro's proposal
Men: age 60
Men: age 65; Women: age 62. Mandatory retirement is
established for those aged 75 years.
Women: age 55
Time of
contribution
35 years for men and 30 years for women
Benefit
calculation
Joined public sector before 2003: Full benefits (equal to last
compensation in full-time position from which person retired).
Adjustment of benefit with parity to compensation of active
Employees.
Workers hired before December 31, 2003 are entitled to receive the full
benefit at 65 years (men) and 62 years (women). For those
hired after such date, the rule is the same as that for the
RGPS.
Joined public sector between 2003 and 2013: Average of
highest compensations (80% of contributions since 1994), with
adjustments equal to those in effect for private-sector social security regime.
Joined public sector as of 2013: Average of highest
compensations (80% of contributions since 1994), with
adjustments equal to those in effect for private-sector social security regime
(RGPS). Benefit subject to cap in effect for RGPS.
System of points: The sum of age and time of contribution of 96
points for men and 86 for women, increasing 1 point per year
until reaching 105 (men) and 100 (women). Minimum age of 61 years
for men and 56 years for women, minimum time of service in public
sector of 20 years and at least 5 years in the position.
Transition rule
States and
municipalities
Employees of states and municipalities would be subject to the
retirement rules of the corresponding social security system in their
respective jurisdictions.
All new rules for benefits under the RPPS system apply to states,
municipalities, and the Federal District. In the event of a financial
and actuarial deficit, contribution rates will be raised to at least 14%, within
180 days. Establishment of a private pension plan within two years.
Source: Brazilian Ministry of the Economy, Credit Suisse.
September 11, 2019
90
Approval of original bill would reverse system’s deficit
 In the scenario without reform, the social security
deficit of the RGPS system would reach 5.3% of
GDP by 2030. The bill proposed by President Jair
Bolsonaro would lead to a deficit reduction to 3.2%
of GDP by 2030, which would represent total
savings of BRL808bn (at 2019 prices), according
to the government’s estimates for the period.
 As a result, the government would need to approve
additional fiscal measures to guarantee that the
fiscal consolidation process is compatible with
stabilization of the gross debt as a percentage of
GDP in the coming years.
Simulations of social security deficit¹
(% of GDP)
6.8%
Without reform
6.3%
5.8%
5.3%
4.8%
4.3%
3.8%
3.3%
23.9%
Reform scenario
2.8%
2019
2023
¹ Simulations based on our estimates of the impacts of the reform, assuming that it is approved in 2019 and that the new rules come into effect in 2020.
2027
2031
2035
Source: Brazilian Ministry of the Economy, Credit Suisse.
September 11, 2019
91
New rule for increase in minimum wage to be set
 The current rule for adjustment of the minimum wage, in effect since 20121, will be applied for the last time in
2019. The rule establishes that the adjustments are based on the rate of INPC inflation for the previous year
added to the highest between GDP growth for two years prior and zero.
 With the end of the rule, the executive branch could send a provisional measure indicating a new adjustment
methodology to the National Congress, where its conversion into ordinary law will be analyzed by both the
Chamber of Deputies and the Senate and will require approval by a simple majority.
 The past few years saw a sharp real increase in the minimum wage, higher than growth rate of GDP per
capita and the average real wage of the formal labor market.
Real minimum wage
(BRL, 2018 prices)
Dynamics in real terms of minimum wage, GDP per
capita, and average wage in formal market (1996=100)
1600
250
Minimum wage
1400
1200
200
1000
800
150
GDP per capita
600
400
100
200
0
1940
Average wage in formal market
50
1953
1966
1979
1992
2005
2018
1996
1999
2002
2005
2008
2011
2014
2017
Laws No. 12382/2011 and 13152/2015.
Source: Ministry of Labor, Credit Suisse
1
September 11, 2019
92
MW rule has strong impact on pension spending
 Changes in the minimum wage rule would have a significant impact on public expenditures, since almost 70%
of social security benefits are linked to it.
 Our base-case scenario assumes that, under the new rule, the minimum wage will be adjusted only for
inflation. This scenario is compatible with fiscal savings with social security expenditures of BRL375bn (at
2017 prices) from 2020 to 2030.
 In the alternative scenario, in which the minimum wage is adjusted for productivity, the impact would be
approximately half of that in the period.
Breakdown of benefits by multiples of monthly minimum
wage in 2017 (%)
12.5
> 3 minimum
wage
2> x > 3
minimum wage
1> x > 2
minimum wage
12.0
8
16
Social security expenditures under different minimum
wage rules (% of GDP)
Current-rule
8
11.5
Breakdown of
benefits by multiples
of monthly
minimum wage
11.0
10.5
68
≤ 1 minimum
wage
10.0
9.5
Minimum wage
varies according to
productivity
Minimum wage with
zero real growth
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Source: Secretariat of Social Security, Credit Suisse
September 11, 2019
93
Tax relief programs to account for 4.1% of GDP in 2019
 The government will need to implement a strong
fiscal consolidation process in the coming years.
Although a significant part of the adjustment will
likely be implemented through a reduction in
primary expenditures (e.g., pension expenditures),
there is still room for implementation of measures
on the revenue side.
 The loss of tax revenues due to exemptions or
reduced tax rates is widespread. Reversal of tax
incentives, even if partial, is fundamental for the
fiscal adjustment process.
 Tax relief programs will likely account
BRL306bn in 2019, or 4.1% of GDP.
for
 Studies on certain tax relief programs are necessary
to quantify their possible benefits, in terms of either
their direct benefits to the society or an increase in
productivity or in the economy's efficiency.
Consolidated Optional Single-Rate Tax Regime (Simples Nacional) for micro and small enterprises (SME).
Source: Ministry of Planning, Budgeting, and Management; Ministry of Finance; Credit Suisse
1
Tax relief projected for 2019 (BRL million, %)
Total
%
1 “Simples Nacional”1
87,253 28.4
2 Exempt and non-taxable earnings (individual income tax)
32,134 10.5
Retired declarants aged 65 or over
8,671
2.8
13,895
4.5
8,469
2.8
959
0.3
3 Free Trade Zone of Manaus and free trade areas
24,727
8.1
4 Nonprofit organizations
24,258
7.9
5 Agriculture and agribusiness
30,233
9.8
6 Deductions from taxable earnings (individual income tax)
20,098
6.6
15,502
5.1
4,596
1.5
9,562
3.1
12,538
4.1
Medical, dental, and pharmacy benefits for employees
5,645
1.8
Public transportation and taxi
2,413
0.8
9,378
3.1
Retirement due to serious illness or accident
Indemnity for employment severance
Other
Medical expenses
Education expenses
7 Payroll tax breaks
8 Benefits for workers
9 Medication, pharmaceuticals, and medical equipment
10 Other
Total
56,216 18.3
306,397 100
September 11, 2019
94
Only certain taxes not subject to one-year waiting period
 Most taxes are legally subject to either a 90-day or a 1-year waiting period, which means that changes to tax
laws come into effect only after 90 days or 1 year, respectively.
 The only taxes not subject to any waiting period are the Importation Tax (II) and Exportation Tax (IE), the Tax
on Financial Transactions (IOF), the War Tax, the Income Tax (IR), and the taxable bases of the State Motor
Vehicle Ownership Tax (IPVA) and the Municipal Property Tax (IPTU).
Taxes subject to 90-day or 1-year waiting period
1-year waiting period
90-day waiting period
Imports
Exports
Tax on Industrialized Products (IPI)
Tax on Financial Transactions (IOF)
War Tax
Compulsory loan (public calamity and war)
Cide fuels tax
State Tax on the Circulation of Goods and the Provision of Services (ICMS), fuels
Social Contribution to Healthcare (CSS)
Income Tax (IR)
Taxable base of the State Motor Vehicle Ownership Tax (IPVA)
Taxable base of the Municipal Property Tax (IPTU)
Source: Brazilian Revenue Service, Credit Suisse
September 11, 2019
95
Need for substantial fiscal adjustment in coming years
 After several years of deterioration in public accounts, Brazil will need to implement a significant fiscal
adjustment over the next few years. Even based on favorable assumptions for GDP growth and interest rates,
the fiscal adjustment needs to be substantial. For example, the primary balance would have to rise from its
current level by:
–
3.3pps (from -1.7% to 1.7%): scenario with GDP growth of 2.0% and a real interest rate of 4.0%
–
2.6pps (from -1.7% to 0.9%): scenario with GDP growth of 2.5% and a real interest rate of 3.5%
–
1.7pps (from -1.7% to 0.0%): scenario with GDP growth of 3.0% and a real interest rate of 3.0%
Primary balance needed to stabilize gross debt at 85%
(% of GDP)
GDP growth
Real interest rate
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
1.0
0.9
1.3
1.7
2.1
2.6
3.0
3.4
3.8
4.3
1.5
0.4
0.9
1.3
1.7
2.1
2.6
3.0
3.4
3.8
2.0
0.0
0.4
0.9
1.3
1.7
2.1
2.6
3.0
3.4
2.5
-0.4
0.0
0.4
0.9
1.3
1.7
2.1
2.6
3.0
3.0
-0.9
-0.4
0.0
0.4
0.9
1.3
1.7
2.1
2.6
3.5
-1.3
-0.9
-0.4
0.0
0.4
0.9
1.3
1.7
2.1
4.0
-1.7
-1.3
-0.9
-0.4
0.0
0.4
0.9
1.3
1.7
4.5
-2.1
-1.7
-1.3
-0.9
-0.4
0.0
0.4
0.9
1.3
5.0
-2.6
-2.1
-1.7
-1.3
-0.9
-0.4
0.0
0.4
0.9
Source: National Treasury, Credit Suisse
Size of fiscal adjustment needed to stabilize gross debt
(% of GDP)
GDP
growth
of 2.0%
GDP
growth
of 2.5%
GDP
growth
of 3.0%
1.6
2.0
2.5
2.9
3.3
3.7
4.2
4.6
5.0
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
3.0
3.4
3.8
4.3
4.7
1.3
1.7
2.1
2.6
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2.1
2.6
3.0
3.4
3.8
0.9
1.7
4.3
1.3
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
Real interest rate
September 11, 2019
96
It will take time for debt-to-GDP ratio to stabilize
 Stabilization of the gross debt at 85% of GDP requires the primary balance to converge to a primary surplus of
0.0% to 1.7% of GDP, depending on the assumptions used for the real interest rate and GDP growth.
 It would take a few years for the primary balance to reach this range. Even based on conservative assumptions
for growth in expenditures and the dynamics of non-recurring revenues and GDP growth of 4.0%, the primary
balance compatible with stabilization of the gross debt as a percentage of GDP would be reached in 2021.
 Over a ten-year horizon, gross debt as a percentage of GDP would stabilize only in the scenario with GDP
growth remaining higher than 1.5% in this period.
Simulations for path of primary balance in coming years (% of GDP)
Assumptions for exogenous variables
in 2019–2028 period
Elasticity of real growth in recurring revenues to
real GDP growth: 1.2.
Primary balance compatible with stabilization of gross debt
8
6
4
Real growth in expenditures: zero, compatible
with Constitutional Amendment ("EC") 95.
2
0
Non-recurring revenues: Stable as percentage
of GDP on average from 2012 to 2017.
Compatible with debt’s stability
GDP (4.0%)
GDP (3.5%)
GDP (3.0%)
GDP (2.5%)
GDP (2.0%)
GDP (1.5%)
GDP (1.0%)
-2
-4
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
Source: Brazilian Treasury, Credit Suisse
September 11, 2019
97
Gross debt is high, even after deducting reserves
 Although Brazil's gross debt is high compared with
that of other countries, it can be argued that the
level of international reserves (USD371bn in 2017)
should be taken into account when analyzing the
public debt, since reserves have had a positive
influence on increases in debt and are highly liquid.
 Although high by historical standards, Brazil's
reserves-to-GDP ratio is not high compared with
that of other emerging economies. For example, in
the sample of countries classified by the IMF as
emerging economies, the average reserves-to-GDP
ratio was 19.1% in 2017, higher than Brazil's
18.1% for the same period.
 Accordingly, Brazil's relative position in terms of
public debt as a percentage of GDP does not
change when we deduct international reserves.
Gross debt compared with international reserves
(% of GDP, 2017)
Gross debt
Gross debt
less reserves
Reserves
Brazil
84.0
Ukraine
18.1
75.6
65.9
16.2
59.4
India
70.2
14.9
55.3
Hungary
69.9
18.3
Pakistan
67.2
Mexico
54.2
Malaysia
54.2
South Africa
52.7
Argentina
52.6
Poland
51.4
Colombia
49.4
China
47.8
Thailand
41.9
Philippines
37.8
Romania
36.9
Venezuela
34.9
Bangladesh
32.4
Indonesia
51.6
5.2
62.0
14.8
39.3
32.1
13.0
39.6
8.3
44.3
20.8
30.6
15.1
34.3
26.3
21.5
43.1
(1.2)
23.4
14.5
19.0
17.9
Average
1.4
28.9
33.4
12.6
19.8
12.5
16.4
Turkey
28.5
Peru
25.5 Average
Bulgaria
23.9
Chile
23.6
14.1
17.4 46.1
19.1 23.3
Russia
22.1
9.9
18.6
29.0
46.9
(3.5)
(22.9)
Average
9.5
(5.9)
27.1
Source: International Monetary Fund (IMF), Credit Suisse
September 11, 2019
98
Gross debt to remain on uptrend in next few years
 Despite the more favorable scenario for economic growth and, consequently, for the dynamics of the fiscal
accounts, the path of gross debt as a percentage of GDP will remain on an uptrend in the next few years.
 Even considering in our base-case scenario the scheduled return of funds by the BNDES to the Brazilian
Treasury, gross debt as a percentage of GDP is expected to increase from 76.7% in 2018 to 79.2% in 2020.
Net debt as a percentage of GDP will likely increase from 53.8% of GDP in 2018 to 60.8% of GDP in 2020.
Paths of gross and net debt (% of GDP)
76.7
74.1
Gross debt
61.0
54.3
56.3
50.2
56.1
55.5
56.7
46.5
79.2
69.9
65.5
60.8
59.2
56.0
51.8
47.9
77.3
51.3
53.7
58.0
56.3
53.8
51.6
51.5
46.2
44.5
Net debt
40.9
38.0
37.6
34.5
2003
2004
2005
2006
2007
2008
2009
2010
2011
35.6
32.2
2012
30.5
2013
32.6
2014
2015
2016
2017
2018
2019e 2020e
Source: Central Bank of Brazil, Credit Suisse
September 11, 2019
99
Most states have social security deficit
 According to the Statement of Social Security and Pass-Through Information (DIPR), the social security deficit
of the states totaled BRL94.4bn in 2017, of which BRL70bn referred to the deficit of civil servants and
BRL24.4bn to the deficit of military personnel.
 The states with highest social security deficits in nominal terms are São Paulo, Rio de Janeiro, Minas Gerais,
and Rio Grande do Sul. The social security deficit of the state of Rio de Janeiro was BRL18.3bn in 2017,
indicating that most of its nominal deficit is the result of an imbalance in the social security account.
Social security deficit of states (BRL million, 2017)
Amapá
Roraima
Rondônia
Military police employees
Tocantins
Sergipe
Pará
Amazonas
Maranhão
Piauí
Mato Grosso
Mato Grosso do Sul
Alagoas
Paraíba
Ceará
Espírito Santo
Rio Grande do Norte
Goiás
Pernambuco
Distrito Federal
Santa Catarina
Bahia
Paraná
Rio Grande do Sul
Minas Gerais
Rio de Janeiro
São Paulo
Public-sector employees
Acre
21,000
18,000
15,000
12,000
9,000
6,000
3,000
0
-3,000
Source: Brazilian Treasury, Secretariat of Social Security, Credit Suisse
September 11, 2019
100
Rio de Janeiro is the state with highest debt/revenue ratio
 Certain states have also reached the cap for debt as a percentage of net current revenues established by the
Fiscal Responsibility Act. The state with the highest ratio of net debt to net current revenues is Rio de Janeiro,
with almost 300% in 2017.
 Other very important states to Brazil's economy, such as Rio Grande do Sul, São Paulo, and Minas Gerais,
have also exceeded the cap established by the Fiscal Responsibility Act for this ratio.
 The high indebtedness of states is a major fiscal risk to the situation of the federal government's fiscal accounts.
Consolidated debt of states (% of net current revenues)
2016
350%
2017
300%
250%
Cap set by Fiscal Responsibility Act
200%
150%
100%
50%
0%
RJ
RS
SP
MG
AL
SC
GO
MS
AC
BA
SE
RO CE
PE
RR
PR
AP
PI
MA
AM
ES
PB
TO
MT
DF
RN
PA
Source: Brazilian Treasury, Credit Suisse
September 11, 2019
101
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Asset prices
Strong performance of BR equities and rates since 2016
 Investments in BR bonds and equities are heading towards to their fourth straight year of positive performance
in both absolute and relative (to US assets) terms. For example, the Ibovespa increased by 15.1% year to
date after a 102% appreciation from 2016 to 2018.
 On the other hand, the BRL has depreciated against the USD for the past two years. The lower interest rate
differential is one of the main drivers of this dynamic.
Return on selected assets1 (%, yoy)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
YTD2
Ibov
-11.0
-17.0
97.3
17.8
27.7
32.9
43.6
-41.2
82.7
1.0
-18.1
7.4
-15.5
-2.9
-13.3
38.9
26.9
15.0
15.1
2 year Brazilian bond
-6.9
-14.4
27.6
-2.2
2.5
6.6
-0.8
1.0
0.5
-0.6
3.2
5.4
-7.1
-2.2
-5.9
9.9
5.7
1.2
2.7
USD/BRL
18.5
53.2
-18.3
-8.1
-12.1
-8.5
-16.7
30.0
-24.6
-4.8
12.3
9.5
15.5
12.7
49.1
-18.0
1.8
17.1
7.0
S&P
-13.0
-23.4
26.4
9.0
3.0
13.6
3.5
-38.5
23.5
12.8
0.0
13.4
29.6
11.4
-0.7
9.5
19.4
-6.2
16.7
2 year US bond
4.1
2.8
-0.4
-2.4
-2.5
-0.8
3.4
4.6
-0.7
1.1
0.7
0.0
-0.3
-0.6
-0.8
-0.3
-1.4
-1.2
1.9
DXY
6.6
-12.8
-14.7
-7.0
12.8
-8.2
-8.3
6.0
-4.2
1.5
1.5
-0.5
0.3
12.8
9.3
3.6
-9.9
4.4
2.9
1 The
returns on both two-year constant maturity Brazilian generic bonds and two-year constant maturity US generic bonds are calculated using zero coupon bonds with the term
structure of interest rates. As result, returns do not consider the roll-down return from non-generic bonds.2 Up to August 30.
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Fed, Bloomberg and Credit Suisse.
September 11, 2019
104
Optimal portfolio in 2019 was long equities, rates, and USD
 The year-to-date 2019 optimal portfolio was overall bullish on Brazilian assets. The portfolio combines: (i) long
positions in Brazilian equities and bonds; (ii) short BRL against USD; (iii) long US equities and bonds; (iv) short
USD against currencies of developed markets. The short position in BRL against USD is usually perceived as
hedge for the long position in Brazilian equities and bonds.
 The year-to-date risk parity portfolio had an overall lower bullish position on Brazilian assets and return below
of the risk free asset.
Markowitz portfolio with short-selling but without
leverage (%, weight)
Risk parity portfolio with equal budgeting
(%, weight)
US 2Y
USD/
BRL
DXY
Monthly
Return
Vol
annualized
Sharpe
ratio
94%
-7%
8%
-49%
5.5%
7.0%
8.5
Jan-19
5%
6%
6%
96% -100%
56%
70%
-29%
4.9%
7.0%
7.6
Feb-19
4%
Mar-19
12%
53% -100%
91%
32%
12%
3.0%
7.0%
4.2
Mar-19
Apr-19
27%
100% -100%
9%
30%
34%
4.4%
7.0%
6.7
May-19
13%
-53%
100%
18%
13%
9%
4.9%
7.0%
Jun-19
-15%
55%
100%
19%
1%
-61%
5.5%
Jul-19
-20%
63%
100%
-80%
-63% 100%
Aug-19
25%
2% -100%
94%
49%
YTD2
23%
12%
Ibov
S&P BR 2Y
Jan-19
31%
22%
Feb-19
40%
6%
US
2Y
USD/
BRL
DXY
Monthly
Return
Vol
annualized
Sharpe
ratio
31%
32%
6%
21%
0.7%
2.0%
0.8
10%
27%
47%
2%
10%
0.2%
1.3%
-2.9
5%
10%
18%
33%
4%
30%
0.8%
2.4%
1.5
Apr-19
3%
8%
17%
54%
4%
15%
0.4%
1.2%
-1.8
7.5
May-19
4%
7%
21%
28%
5%
35%
0.1%
1.7%
-3.0
7.0%
8.6
Jun-19
6%
10%
22%
45%
6%
11%
1.0%
1.4%
4.2
4.5%
7.0%
6.8
Jul-19
5%
9%
28%
34%
7%
15%
0.6%
1.5%
0.3
28%
5.2%
7.0%
8.1
Aug-19
6%
6%
31%
28%
5%
23%
0.5%
3.0%
0.0
51% -34%
12.9%
7.0%
1.8
YTD
4%
7%
22%
36%
5%
26%
4.1%
1.8%
-0.2
Ibov
S&P BR 2Y
The optimal portfolio is calculated as the one that maximizes the return limited to a 7% annualized volatility. The local macro hedge fund industry has usually a benchmark volatility
rate of 7%.The risk parity portfolio is calculated as the portfolio in which the weights of each asset is such that the contribution of risk to the portfolio is uniformly equal among assets.
The optimal portfolio was estimated by taking into account the return and volatilities realized in the reference month. Therefore, the exercise can be understood as the optimal ex-post
portfolio. We assumed the interbank deposit interest rate DI as the risk free asset. 2 Up to August 30.
Source: (Anbima), Fed, Bloomberg and Credit Suisse.
1
September 11, 2019
105
Hedge funds adding positions in BR assets since end 2018
 Local hedge funds have been increasing their positions in Brazilian assets since the end of the presidential
election in 2018. However, the long positioning remains below the peak of the beginning of 2017, when
economic activity began its resumption after the 2014-2016 recession.
 Deeper economic reforms, further monetary stimulus, and more robust economic growth in the coming
quarters should support the funds’ long positions in Brazilian assets. The main risk remains on the external
front, due to the possibility of a sharp deceleration in global growth.
Positions of local hedge funds in Brazilian assets (%, weighted by assets under management)
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
Aug-19
May-19
Feb-19
Nov-18
Aug-18
May-18
Feb-18
Nov-17
Aug-17
May-17
Feb-17
Nov-16
Aug-16
May-16
Feb-16
Nov-15
Aug-15
May-15
Feb-15
Nov-14
Aug-14
May-14
Feb-14
Nov-13
Aug-13
May-13
Feb-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
-2.5
The index is calculated as follows: (i) We calculate the linear regression coefficients of local hedge fund shares for the following variables: Ibovespa, two-year BR bonds, BRL/USD exchange rate,
S&P, two-year US bonds, and DXY. The coefficients are calculated for each local hedge fund, in a survey with the 64 main local macro hedge funds. (ii) We weigh each asset’s coefficient by the
assets under management of the corresponding hedge fund. (iii) The index is the sum of the weighted coefficients for the Ibovespa, two-year BR bonds, and the BRL/USD exchange rate.
1
September 11, 2019
106
Local hedge funds in line with optimal portfolio
 So far this year local hedge funds have been holding a long position in Brazilian equities and bonds, combined
with a short position in the BRL against the USD as hedge.
 In recent months, local funds have been switching their long equities with long bond positions, in line with the
downward revisions in the forecasts for GDP growth in 2019 and 2020 and further monetary easing.
Position of local hedge funds in Ibovespa Position of local hedge funds in 2Y BR
(% change in share prices of funds vs. %
bonds (% change in share prices of funds
change in Ibovespa, weighted by AuM )
vs. pp change in rates, weighted by AuM)
15%
0.0%
10%
BR 2Y ex
4 main
funds
-0.5%
10%
BR 2Y
Ibov
Position of local hedge funds in USD/BRL
(% change in share prices of funds vs. %
change in USD/BRL, weighted by AuM)
5%
USD/
BRL
-1.0%
0%
-1.5%
5%
0%
Jan-19
Ibov ex 4
main
funds
Feb-19
Apr-19
Jun-19
Aug-19
-2.0%
-2.5%
Jan-19
USD/
BRL ex 4
main
funds
-5%
Feb-19
Apr-19
Jun-19
Aug-19
-10%
Jan-19
Feb-19
Apr-19
Jun-19
Aug-19
The position of local hedge funds is estimated using linear regression of change in fund shares versus changes in the following variables: the Ibovespa, two-year Brazilian interest rates, USD/BRL,
S&P, two-year US interest rates, and DXY. Source: Bloomberg, Credit Suisse
1
September 11, 2019
107
Locals became more bearish on US equities in 2019
 Local hedge funds became more bearish on US equities in May, switching from a long to a short position. The
reversal was in line with the intensification of the US–China trade war in the period. Local players also became
neutral on the USD against the currencies of other developed markets and increased their long position in
two-year US bonds, most likely due to the prospects of further monetary easing in the US.
Position of local hedge funds in S&P
(% in fund shares vs. % in S&P, weighted
by AuM)
5%
3%
0.5%
S&P ex 4
main
funds
4%
Position of local hedge funds in 2Y US
bonds (% in fund shares vs. % in 2Y US
interest rates, weighted by AuM)
S&P
20%
US 2Y ex
4 main
funds
15%
0.0%
2%
10%
5%
1%
0%
-0.5%
DXY
0%
-1%
-5%
-2%
-1.0%
-3%
US 2Y
DXY ex 4
main
funds
-10%
-15%
-4%
-5%
Jan-19
Position of local hedge funds in DXY
(% in funds shares vs. % in DXY, weighted
by AuM)
Feb-19
Apr-19
Jun-19
Aug-19
-1.5%
Jan-19
Feb-19
Apr-19
Jun-19
Aug-19
-20%
Jan-19
Feb-19
Apr-19
Jun-19
Aug-19
The position of local hedge funds is estimated using linear regression of changes in fund shares versus changes in the Ibovespa, two-year Brazilian interest rates, USD/BRL, S&P, two-year US
interest rates, and DXY. Source: Bloomberg, Credit Suisse
1
September 11, 2019
108
Sharp decline in yield curve in 2019
 The Brazilian yield curve saw a strong shift in 2019, with a decline in interest rates in all maturities driven by
lower interest rates in the developed economies, improvement in Brazil’s fiscal position, and the more benign
inflation dynamics.
Brazilian yield curve (%, p.a.)
14
13
The shaded area is delimited by the peak and
trough of the 360 business day yield curve
12
11
10
9
8
7
6
5
9/3/2019
8/26/2019
7/24/2019
3/21/2018
3,024
2,898
2,772
2,646
2,520
2,394
2,268
2,142
2,016
1,890
1,764
1,638
1,512
1,386
1,260
1,134
1,008
882
756
630
504
378
252
126
4
Business days
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Credit Suisse
September 11, 2019
109
Natural interest rate has been declining
 Approval of the pension reform, which will have a strong fiscal impact on public accounts, and lower interest
rates in the international markets will keep the natural interest rate on a downward path.
 Lower for longer: The nominal interest rate should remain low for a longer period, since spare capacity is high
and inflation remains anchored.
Natural interest rate and average real interest rate (%, p.a.)
14
Natural interest rate
Real rates
12
10
8
6
4
2
0
Aug-03
Nov-04
Mar-06
Jul-07
Nov-08
Mar-10
Jul-11
Nov-12
Mar-14
Jul-15
Oct-16
Feb-18
Jun-19
1The
natural interest rate is calculated as the average of six filtered real rates. We applied two statistical filters (Hodrick-Prescott and Christiano Fitzgerald) to three real rates: (i) five-year NTNB real
rates with constant maturity; (ii) ex-ante real rates (360-day interbank deposit (DI) rate vs. swap rate less expected inflation in 12 months); (iii) ex-post real rates (Selic less current inflation).
Source: Bloomberg, Brazilian Association of Financial and Capital Market Entities (Anbima), US Federal Reserve, IpeaData, Central Bank of Brazil, B3, Credit Suisse
September 11, 2019
110
Flattening of the yield curve intensified in 2019
 Our expectation that monetary easing in Brazil will continue in the coming months reduces room for further
flattening of the yield curve.
 Continuation of this movement will depend on whether liquidity remains high in developed markets and on the
implementation of a reformist agenda in Brazil, which should reduce the country’s fiscal vulnerability and boost
its productivity in the coming years.
Interest rate spreads (percentage points, p.a.)
3.0
Short (6M1Y)
Medium (1Y2Y)
Long (2Y5Y)
2.5
2.0
1.5
1.11
1.0
0.61
0.5
0.07
0.0
-0.5
-1.0
-1.5
Sep-09
Jun-10
Mar-11
Jan-12
Oct-12
Jul-13
Apr-14
Jan-15
Oct-15
Jul-16
May-17
Feb-18
Nov-18
Aug-19
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Credit Suisse
September 11, 2019
111
Interest rate differential should remain low in 2019 and 2020
 Unlike other episodes of high liquidity in the global markets, Brazil should be able to enjoy the current
environment of low interest rates globally. Brazil’s high spare capacity, anchored inflation expectations, belowtarget current inflation, and more favorable prospects for the fiscal consolidation process should enable the
Central Bank of Brazil to keep the policy rate low in the coming quarters.
Difference between Brazilian and US rates (percentage points, p.a.)
18
6M
1Y
5Y
16
14
12
10
8
6
5.59
4
3.61
3.44
2
0
Sep-09
Jun-10
Mar-11
Jan-12
Oct-12
Jul-13
Apr-14
Jan-15
Oct-15
Jul-16
May-17
Feb-18
Nov-18
Aug-19
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Credit Suisse
September 11, 2019
112
Long-term real rates close to historical lows
 The current level of real interest rate is close to the historical lows. In addition to the liquidity level in the
international financial markets, continuity of this downward trend will depend on the prospects for the fiscal
and productivity agendas.
Real interest rates for selected maturities (%, p.a.)
9
1Y
5Y
10Y
8
7
6
5
4
3
3.54
3.11
2
2.12
1
0
Sep-09
Jun-10
Mar-11
Jan-12
Oct-12
Jul-13
Apr-14
Jan-15
Oct-15
Jul-16
May-17
Feb-18
Nov-18
Aug-19
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Credit Suisse
September 11, 2019
113
Breakeven inflation below center of inflation target range
 Breakeven inflation one year ahead is below the center of the central bank’s inflation target range of 4.0% for
2020. The low implied inflation reduces room for an outperformance of short-term real bonds.
 Breakeven inflation for longer maturities is slightly higher than the center of the inflation target range for the
longest maturity (3.75% in 2021).
Breakeven inflation one year ahead and median
market expectation one year ahead (%, yoy)
Breakeven inflation five and ten years ahead and
five-year, five-year forward inflation (%, yoy)
10
10
1y Breakeven
1y Focus
9
9
8
1260 business days
2520 business days
5y5y
8
7
7
6
6
5
5
4
4
3
2
Jan-10
Aug-11
Mar-13
Oct-14
Jun-16
Jan-18
Aug-19
3
Jan-12
Nov-13
Oct-15
Sep-17
Aug-19
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Market Readout, Credit Suisse
September 11, 2019
114
Real rate differentials have been on downward trend
 The difference between Brazilian and US real rates have been on a downward trend since 2016 and reached
its lowest level in recent months. The benign environment for inflation in the short term and the monetary
authority’s commitment to keeping inflation under control in the following years should keep this differential
low in the coming quarters.
Difference between Brazilian and US real rates (%, p.a.)
8.0
5Y
7.5
10Y
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.17
3.0
2.5
Sep-09
2.68
Oct-10
Dec-11
Jan-13
Feb-14
Mar-15
May-16
Jun-17
Jul-18
Aug-19
Source: Brazilian Association of Financial and Capital Market Entities (Anbima), Credit Suisse
September 11, 2019
115
External factors drove BRL depreciation in 2019
 The USD/BRL rate depreciation from 3.87 to 4.15 between January and August was explained by external
factors. Domestic factors did not have a significant impact on the exchange rate this year. This dynamic was
also seen in 2018, when the 17% depreciation of the USD/BRL exchange rate was entirely explained by
external factors.
Breakdown of annual change in USD/BRL rate into
external and domestic factors (percentage points)
Change driven by
domestic factors
Change driven by
external factors
Breakdown of monthly change in USD/BRL rate into
external and domestic factors (percentage points)
Change driven by
domestic factors
Change driven by
external factors
18.5
4.4
0.2
12.8
-2.1
-2.3
-3.5
-0.4
9.9
-0.4
16.7
18.9
24.6
16.9
6.2
-4.0
3.5
0.7
2.6
-1.6
-1.9
5.1
6.1
-22.3
-1.6
0.7
-1.1
1.9
1.0
-0.7
1.4
-1.6
0.8
1.0
-2.6
-2.8
Jun-19
Jul-19
-1.4
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Aug-19
To measure the domestic change, we entered the weekly changes in the exchange rate of the BRL to the currencies of 40 developed and emerging countries that have had a floating exchange
rate since 2009 into a Ridge regression model. We used the last 25 weeks to evaluate the model's hyperparameter.
Source: European Central Bank, Credit Suisse
1
September 11, 2019
116
External factors drove USD/BRL up in 2019
 Assuming the breakdown of the change in the USD/BRL exchange rate into domestic and external factors,
the USD/BRL rate since the beginning of 2019 would be the following:
–
USD/BRL 4.14: considering only the impact of external factors.
–
USD/BRL 3.87: considering only the impact of internal factors.
Dynamics of USD/BRL exchange rate based only on domestic and external factors
4.20
4.15
BRL
BRL foreign
BRL domestic
4.10
4.05
4.00
3.95
3.90
3.85
3.80
3.75
3.70
3.65
3.60
Dec-18
Jan-19
Mar-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Source: Bloomberg, Credit Suisse
September 11, 2019
117
Real exchange rate suggests a balanced USD/BRL in July
 Assuming a mean-reverting process for the real exchange rate, we estimated that a level close to USD/BRL
3.85 is compatible with the long-term mean.
 However, reversion to the mean could take long. For example, the real exchange rate remained more than
20% above the model-implied exchange rate from 2010 to 2012.
Distance of real exchange rate to model-implied exchange rate (% change)
40
30
20
10
0
-10
-20
-30
-40
Jan-05
Jun-06
Dec-07
May-09
Oct-10
Apr-12
Sep-13
Mar-15
Aug-16
Feb-18
Jul-19
The mean-reverting process for the real exchange rate is based on the Ornestein-Uhlenbeck model. This assessment is based on the purchasing power parity theory, which states that the real
exchange rate should revert to the mean.
Source: Central Bank of Brazil, Credit Suisse
1
September 11, 2019
118
Strong performance of Ibovespa since 2016
 The Ibovespa increased 133% in BRL terms and 123% in USD terms between January 2016 and August
2019. Despite this upward trend in recent years, in August the Ibovespa was 45% below (in USD terms) the
peak of May 2008.
Ibovespa in USD and BRL terms (points)
50,000
120,000
Ibovespa Index in USD terms
Ibovespa Index in BRL terms
45,000
100,000
40,000
35,000
80,000
30,000
25,000
60,000
20,000
40,000
15,000
10,000
20,000
5,000
0
Jan-95
Dec-99
Nov-04
Oct-09
Sep-14
Aug-19
0
Jan-95
Dec-99
Nov-04
Oct-09
Sep-14
Aug-19
Source: Bloomberg, Credit Suisse
September 11, 2019
119
External factors drove recent decline in Ibovespa
 External factors contributed almost 3 percentage points to the negative performance of the Ibovespa in
August. Despite that, the year-to-date performance remains positive, as the strong gains at the beginning of
the year were only partially offset by the impact of the external factors. Domestic factors continue to make a
positive contribution to the Ibovespa for the second straight year.
Breakdown of Ibovespa’s performance into external and domestic factors (percentage points)
120
100
Change driven by domestic factors
Change driven by external factors
Change driven by domestic factors
Change driven by external factors
2.8
80
60
0.2
8.1
40
5.3
20
3.0
2.9
3.9
0.0
0
-20
-2.7
-2.5
Feb-19
Mar-19
1.4
0.4
-2.0
0.9
-2.5
-4.2
-60
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-40
Jan-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
To estimate the effect of the external factors on the Ibovespa, we used a ridge regression of weekly changes in the Ibovespa compared to 48 stock market indexes in developed and emerging
countries since 2000. Domestic factors are the residuals of the regression.
Source: Bloomberg, Credit Suisse
1
September 11, 2019
120
Sharp decline in real rates and CDS boosted Ibovespa
 The sharp decline in real interest rates and credit default swap (CDS) explains an important part of the strong
expansion of the Ibovespa in the past few years.
 The free cash flow (FCF) methodology1 implies a negative free cash flow growth in the following years
considering the current level of Ibovespa. Simulations based on assumptions for FCF and its growth indicates
that a resumption of economic activity in Brazil should have a significant positive impact on Ibovespa.
Ibovespa, free cash flow, CDS, and NTNB real rates
and implied growth of the free cash flow (points, %)
Date
Ibovespa
Free cash
flow (FCF)(2)
CDS
Implied
NTNB 5Y growth of the
free cash flow
Ibovespa under different scenarios for the free cash
flow growth for the next years (points, %)
140,000
130,000
Dec-2012
60,952
2547.7
108
2.8
0.5
Dec-2013
51,507
6434.7
194
6.2
-3.6
Dec-2014
50,007
9672.7
201
6.1
-9.3
Dec-2015
43,350
3627.5
495
7.3
4.0
100,000
Dec-2016
60,227
3410.2
281
5.9
2.9
90,000
Dec-2017
76,402
3584.1
162
4.9
2.2
Dec-2018
87,887
4920.9
208
4.4
1.3
Aug-2019
100,786
5935.0
140
3.1
-0.9
120,000
110,000
Implied growth of free
cash flow on August
80,000
70,000
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
Free cash flow methodology equalizes the sum of the discounted future cash flows to the value of the Ibovespa. The future cash flow is given by the current free cash flow accrued by an implied
growth. The discount is given by the real interest rate (NTNB yield curve) plus the risk premium (CDS). 2 Free cash flow estimates collected from Bloomberg.
Source: Bloomberg, Credit Suisse
1
September 11, 2019
121
Ibovespa’s P/E below mean of emerging economies
 Ibovespa’s price-to-earnings ratio (P/E) increased to 11.2 in August 2019. Despite this increase, Ibovespa’s
P/E remained below the average of emerging economies in recent years.
Price-to-earnings ratio of emerging economies
25.0
Brazil
Average
20.0
15.0
11.22
10.0
5.0
0.0
Jan-12
Aug-12
Mar-13
Oct-13
May-14
Dec-14
Jul-15
Feb-16
Sep-16
Apr-17
Nov-17
Jun-18
Jan-19
Aug-19
The selected countries were Brazil, China, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, United Arab Emirates.
Source: Bloomberg, Credit Suisse
September 11, 2019
122
Ibovespa’s price-to-book ratio relatively stable in 2019
 The stability of the price-to-book ratio (P/B) of the Ibovespa suggests that the rise in the index in 2019 was
followed by a relatively similar increase in the net assets of Brazilian companies. The Ibovespa’s P/B has
remained relatively higher than the average P/B of the emerging economies since mid-2018.
Price-to-book ratio of emerging economies
4.5
4.0
Brazil
Average
3.5
3.0
2.5
2.0
1.96
1.5
1.0
0.5
0.0
Jan-12
Aug-12
Mar-13
Oct-13
May-14
Dec-14
Jul-15
Feb-16
Sep-16
Apr-17
Nov-17
Jun-18
Jan-19
Aug-19
The selected countries were Brazil, China, India, Indonesia, Malaysia, Mexico, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, United Arab Emirates.
Source: Bloomberg, Credit Suisse
September 11, 2019
123
Most global stock market indexes remained positive in 2019
 Most stock market indexes posted a positive performance in 2019. The Ibovespa was among the bestperforming indexes, keeping the positive momentum seen for the past few years.
Global stock market indexes (Index-number, 1-Jan-19 = 100, change in local currency)
150
Ibovespa
S&P 500
140
130
120
110
100
90
80
70
Jan-19
Feb-19
Mar-19
Apr-19
May-19
Jun-19
Jul-19
Aug-19
Source: Bloomberg, Credit Suisse
September 11, 2019
124
Brazil in numbers
Brazil in numbers
Economic activity
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019F
2020F
Nominal GDP (R$ bn)
2,720
3,110
3,335
3,885
4,375
4,815
5,330
5,780
5,996
6,267
6,554
6,828
7,172
7,675
Nominal GDP ($ bn)
1,396
1,690
1,671
2,208
2,613
2,463
2,468
2,460
1,800
1,796
2,053
1,871
1,939
2,060
6.1
5.1
-0.1
7.5
4.0
1.9
3.0
0.5
-3.5
-3.3
1.1
1.1
1.2
2.7
Agricuture (%)
3.2
5.8
-3.7
6.7
5.6
-3.1
8.4
2.8
3.3
-4.3
12.5
0.1
1.0
2.0
Industry (%)
6.2
4.1
-4.7
10.2
4.1
-0.7
2.2
-1.5
-5.8
-4.0
-0.5
0.6
0.3
3.4
Services (%)
5.8
4.8
2.1
5.8
3.5
2.9
2.8
1.0
-2.7
-2.6
0.5
1.3
1.4
2.4
Household Comsumption (%)
6.4
6.5
4.5
6.2
4.8
3.5
3.5
2.3
-3.2
-4.3
1.4
1.9
1.8
2.8
Government consumption (%)
4.1
2.0
2.9
3.9
2.2
2.3
1.5
0.8
-1.4
-0.1
-0.9
0.0
-0.1
0.0
12.0
12.3
-2.1
17.9
6.8
0.8
5.8
-4.2
-13.9
-10.3
-2.5
4.1
3.7
5.8
6.2
0.4
-9.2
11.7
4.8
0.3
2.4
-1.1
6.8
1.9
5.2
4.1
2.3
3.5
19.6
17.0
-7.6
33.6
9.4
0.7
7.2
-1.9
-14.2
-10.2
5.0
8.5
3.7
5.1
Unemployment - IBGE (% of EAP)
-
-
-
-
-
7.3
7.2
6.8
8.3
11.3
12.8
12.3
11.8
10.6
Habitual earnings (%)
-
-
-
-
-
-
3.3
1.1
-0.3
-2.3
2.3
0.6
1.7
2.1
Working Population (%)
-
-
-
-
-
-
1.4
1.5
0.0
-1.9
0.4
1.4
1.9
2.5
Wage bill (%)
-
-
-
-
-
-
4.8
2.6
-0.3
-3.9
2.6
2.1
3.6
4.6
34.7
39.7
42.6
44.1
46.5
49.2
50.9
52.2
53.9
49.7
47.3
47.4
48.8
49.7
Unmarked lending (% of GDP)
23.1
26.8
27.1
27.2
28.1
29.0
28.2
27.3
27.4
24.9
24.2
25.6
27.6
28.7
Earmarked lending (% of GDP)
11.6
12.9
15.5
16.9
18.3
20.2
22.6
25.0
26.5
24.8
23.1
21.8
21.2
21.0
Economic Activity
Demand
Supply
Real GDP growth (%)
Gross fixed capital formation (%)
Exports (%)
Imports (%)
(1)
Banking credit (% of GDP)
(1) Average rate, measured by the National Household Sample Survey.
Fonte: IBGE, Banco Central, Tesouro Nacional, Credit Suisse
September 11, 2019
126
Brazil in numbers
Inflation, fiscal and monetary policies
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019F
2020F
4.5
5.9
4.3
5.9
6.5
5.8
5.9
6.4
10.7
6.3
2.9
3.7
3.7
4.0
1.77
2.34
1.74
1.67
1.88
2.04
2.35
2.65
3.90
3.26
3.31
3.87
4.00
4.09
Inflation, FX and interest rate
IPCA - IBGE (%)
End of period FX (R$/US$)
Average FX (R$/US$)
1.95
1.84
2.00
1.76
1.67
1.95
2.16
2.35
3.33
3.49
3.19
3.65
3.90
4.04
End-of-period target Selic interest rate(%)
11.25
13.75
8.75
10.75
11.00
7.25
10.00
11.75
14.25
13.75
7.00
6.50
5.00
5.00
Average Selic basic interest rate (%)
11.98
12.38
10.01
9.82
11.67
8.53
8.19
10.89
13.63
14.10
10.16
6.56
6.06
5.00
Nominal balance (% of GDP)
-2.7
-2.0
-3.2
-3.2
-2.5
-2.3
-3.0
-6.0
-10.2
-9.0
-7.8
-7.1
-6.5
-6.6
Primary balance (% of GDP)
3.2
3.3
1.9
1.8
2.9
2.2
1.7
-0.6
-1.9
-2.5
-1.7
-1.6
-1.0
-0.8
22.8
23.0
22.2
23.6
22.6
22.5
22.9
21.5
21.1
21.0
21.1
21.6
21.6
20.9
16.9
16.2
17.3
18.1
16.7
17.2
17.8
18.3
19.6
19.9
19.5
19.7
19.1
18.2
Gross debt of overall government (% of GDP)
56.8
56.0
59.3
51.8
51.3
54.8
53.3
57.2
66.5
69.9
74.0
76.7
77.3
79.2
Net debt of the public sector(% of GDP)
44.6
37.6
40.9
38.0
34.5
32.9
31.5
33.1
36.2
46.2
51.6
53.8
58.0
60.8
(2)
Fiscal Policy
Central government revenues (% of GDP)
Primary expenditures of central gov’t (% of GDP)
(3)
(2) As of 2009, Petrobras was excluded from the fiscal indicators of the public sector
(3) Amounts refer to new methodology of the Central Bank
Fonte: IBGE, Banco Central, Tesouro Nacional, Credit Suisse
September 11, 2019
127
Brazil in numbers
External sector
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019F
2020F
Current account balance (US$ bn)
0.4
-30.6
-26.3
-75.8
-77.0
-74.2
-74.8 -104.2
-59.4
-23.5
-5.5
-14.5
-23.6
-39.1
Current account balance (% of GDP)
0.0
-1.8
-1.6
-3.4
-2.9
-3.0
-1.3
-0.3
-0.8
-1.2
-2.0
Trade balance (US$ bn)
38.5
23.8
25.0
18.5
27.6
Goods exported (US$ bn)
161
198
154
201
256
Goods imported (US$ bn)
122
175
129
183
Services and income (US$ bn)
-42.1
-58.7
Remittances of profits and dividends (US$ bn)
-22.4
International travel and equipment rental (US$ bn)
Balance of Payments
-3.0
-4.2
-3.3
17.4
0.4
-6.6
17.7
45.0
64.0
53.6
46.9
45.2
242
242
224
190
184.5
217.2
239.0
237.5
243.6
228
225
241
231
172
139.4
153.2
185.4
190.6
198.4
-54.6
-97.2 -107.6
-94.5
-78.9 -100.3
-79.9
-71.5
-72.1
-70.6
-73.1
-86.9
-33.9
-25.2
-55.6
-56.6
-38.2
-13.7
-31.2
-20.8
-19.4
-15.8
-16.9
-21.5
-23.0
-9.0
-13.0
-15.0
-24.4
-31.4
-34.4
-37.6
-41.4
-33.0
-28.0
-30.0
-27.4
-31.8
-34.5
Foreign direct investment (US$ bn)
44.6
50.7
31.5
88.5
101.2
86.6
69.7
97.2
74.7
78.2
70.7
88.3
94.8
94.0
Foreign portfolio investments (US$ bn)
47.0
9.5
49.0
55.2
12.4
17.0
42.1
38.6
26.5
-16.1
0.6
-10.0
8.0
22.5
Equities (US$ bn)
26.2
-7.6
37.1
37.7
7.2
5.6
11.1
11.5
9.8
10.6
5.7
-5.6
3.0
15.0
Fixed Income(US$)
20.8
17.1
11.9
17.5
5.3
11.4
31.0
27.1
16.7
-26.7
-5.1
-4.3
5.0
7.5
Medium and long-term disbursements (US$ bn)
-2.3
8.8
6.8
30.1
47.7
18.7
2.5
21.6
-3.6
-15.5
-5.7
-7.4
-2.4
-10.0
Public sector (US$ bn)
34.4
29.4
33.1
60.6
82.1
56.3
60.5
71.2
72.9
55.2
58.7
63.6
62.5
61.0
Private sector (US$ bn)
-36.7
-20.6
-26.3
-30.6
-34.5
-37.6
-58.0
-49.6
-76.5
-70.8
-64.3
-70.9
-64.9
-71.0
240
263
278
352
416
455
487
561
540
548.6
545.1
559.2
563.2
563.2
86
85
96
106
110
121
120
136
128
127.9
133.1
71.0
75.0
75.0
154
179
181
246
306
334
367
425
413
420.7
412.0
594.8
594.8
594.8
External debt (% of GDP)
17.2
15.6
16.6
15.9
15.9
18.5
19.7
22.8
30.1
30.5
26.5
29.9
28.6
26.8
External debt / Goods exported (%)
150
133
181
175
163
188
202
250
284
297.4
250.9
233.9
221.7
210.9
Gross international reserves (US$ bn)
180
207
239
289
352
379
376
374
369
372.2
382.0
374.7
379.7
385.7
75
79
86
82
85
83
77
67
68
67.8
70.1
67.0
67.4
68.5
External debt and international reserves
External debt (US$ bn)
Public (US$ bn)
Private (US$ bn)
Gross international reserves / External debt (%)
Fonte: IBGE, Banco Central, Tesouro Nacional, Credit Suisse
September 11, 2019
128
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