Feelin groovy Alexandre Schwartsman September 2004 1 I
Feelin’ groovy Alexandre Schwartsman September 2004 1
I. Economic Activity II. Inflation III. External Sector IV. Fiscal Policy and Debt Management 2
I. Economic Activity 3
Dismal performance? SEASONALLY ADJUSTED 2 Q 04 vs Last 4 YTD 2 Q 03 3 Q 03 4 Q 03 1 Q 04 2 Q 03 quarters GDP -1. 2 0. 4 1. 8 1. 7 1. 5 5. 7 4. 2 1. 7 Agriculture Industry Mineral Manufacturing Construction Utilities Services Commerce Transport Communication Government Financial Rents Other 0. 1 -3. 5 -3. 0 5. 0 1. 7 3. 3 1. 5 -0. 3 0. 2 - - - - - -0. 5 0. 1 1. 1 0. 5 2. 5 - - - - - - - - - 5. 0 6. 6 -1. 9 8. 5 6. 7 2. 7 4. 4 9. 9 6. 5 -0. 1 1. 8 5. 3 1. 5 7. 5 5. 7 4. 7 -2. 9 7. 3 2. 0 2. 8 7. 6 6. 9 -1. 0 1. 5 3. 6 1. 3 2. 6 3. 4 1. 4 0. 4 3. 7 -4. 9 1. 4 1. 3 1. 9 3. 6 -1. 7 0. 9 0. 8 1. 3 Consumption Government Investment Exports Imports -2. 2 0. 3 -7. 4 4. 7 -0. 7 0. 0 3. 1 0. 9 0. 6 2. 0 0. 2 4. 5 7. 5 8. 5 0. 8 2. 2 5. 2 2. 9 1. 5 0. 2 1. 5 2. 2 1. 6 5. 0 1. 3 11. 6 16. 5 14. 1 3. 1 1. 4 6. 8 17. 8 13. 0 0. 4 1. 1 -0. 6 12. 1 7. 2 4
Seasonally adjusted GDP 140 138 (1990 = 100) 136 134 132 130 128 126 124 122 Q 1 99 Q 3 99 Q 1 00 Q 3 00 Q 1 01 Q 3 01 Q 1 02 Q 3 02 Q 1 03 Q 3 03 Q 1 04 5
Recovery reflects domestic demand Quarterly Growth Rate 8 6 GDP % 4 2 0 -2 Domestic Demand -4 -6 Q 1 99 Q 3 99 Q 1 00 Q 3 00 Q 1 01 Q 3 01 Q 1 02 Q 3 02 Q 1 03 Q 3 03 Q 1 04 6
Investment is finally on the rise Gross capital formation 24. 5 23. 5 22. 5 % 21. 5 20. 5 Annual 19. 5 Quarterly 18. 5 17. 5 Q 1 92 Q 1 93 Q 1 94 Q 1 95 Q 1 96 Q 1 97 Q 1 98 Q 1 99 Q 1 00 Q 1 01 Q 1 02 Q 1 03 Q 4 03 7
Domestic demand remains on the rise 110 Seasonally adjusted retail sales 3 -month moving average 108 2003 = 100 106 104 102 100 98 3 -month average 96 Jan Apr Jul Oct Jan Apr 01 01 02 02 03 03 04 04 8
Not at the same speed though Seasonally adjusted retail sales - breakdown 130 125 2000 = 100 120 Supermarkets, food & beverage Clothing & shoes Furniture & electronics 115 110 105 100 95 90 Jan Apr Jul Oct Jan 01 01 02 02 03 03 04 Apr 04 9
Industrial growth accelerated in 2 Q 04 Seasonally Adjusted Industrial Output 108 106 Average annual growth rate (Jul-03 to Jun-04): 10. 8% 2002 = 100 104 102 100 98 96 94 Jan 01 May 01 Sep 01 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 Apr 04 10
Industrial employment followed production 77. 5 1992 = 100 77. 0 76. 5 76. 0 75. 5 75. 0 Jan 01 May 01 Sep 01 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 11
Net job creation at record high levels Net Job Creation (thousand) Jul 04 Jul 03 Change TOTAL % 2004 202. 0 37. 2 164. 8 443 1, 236. 7 Created 982. 6 Destroyed 780. 6 Industry 56. 0 Created 214. 5 Destroyed 158. 5 Commerce 33. 6 Created 216. 3 Destroyed 182. 7 Services 42. 7 Created 312. 8 Destroyed 270. 1 Construction 10. 7 Created 91. 7 Destroyed 81. 0 812. 4 775. 2 -9. 8 154. 3 164. 1 7. 7 185. 7 178. 1 8. 2 275. 5 267. 3 3. 5 82. 9 79. 4 170. 2 5. 4 65. 8 60. 2 -5. 5 25. 9 30. 5 4. 6 34. 5 37. 3 2. 8 7. 2 8. 7 1. 6 21 1 -674 39 -3 338 16 3 419 14 1 205 11 2 6, 682. 2 5, 445. 5 382. 4 1, 495. 7 1, 113. 3 164. 4 1, 470. 0 1, 305. 6 309. 5 2, 205. 9 1, 896. 4 71. 3 592. 5 521. 2 2003 Change % 598. 1 638. 5 107 5, 847. 8 5, 249. 7 118. 3 1, 232. 2 1, 114. 0 69. 0 1, 291. 5 1, 222. 5 169. 0 1, 991. 1 1, 822. 1 -17. 1 542. 4 559. 5 834. 3 195. 8 264. 1 263. 5 -0. 6 95. 4 178. 5 83. 1 140. 5 214. 8 74. 3 88. 4 50. 0 -38. 3 14 4 223 21 0 138 14 7 83 11 4 -518 9 -7 12
Labor income benefited from low inflation Seasonally Adjusted Total Industrial Wages 109 107 1992 = 100 105 103 101 99 97 95 Jan 01 May 01 Sep 01 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 13
Retail sales react to labor income 102 101 100 Labor Income 2001 = 100 99 98 97 96 95 94 Supermarket Sales 93 92 Jan 01 May 01 Sep 01 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 14
Inventories seem to be decreasing 125 120 Jun 03 = 100 Industrial Sales 115 110 Industrial Output 105 100 Jun 03 Aug 03 Source: IBGE, CNI Oct 03 Dec 03 Feb 04 Apr 04 Jun 04 15
Domestic interest rates: Selic x Swap 360 days 33 31 Swap 360 29 % 27 25 23 21 19 17 Over-Selic Rate 15 Jan May Sep Jan 00 00 00 01 01 01 02 02 02 03 03 03 04 May 04 16
Real Interest Rates (360 -day swap) 40 36 % p. a. 32 Avg 04 10. 2% 28 24 Avg 97/99 21. 4% Avg 01/02 17. 6% 20 16 Avg 00 12. 3% Avg 03 13. 2% 12 8 Jan Jul Jan Jul Jan Aug 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 17
There is still impulse in the pipeline 24 Jun/04 110 108 106 104 16 102 Sep/03 Dec/03 12 2003 = 100 % p. a. 20 100 98 96 8 Jan May Sep Jan Jun 02 02 02 03 03 03 04 04 Real interest rate Retail sales (t+6) Jan May Sep Jan Jun 02 02 02 03 03 03 04 04 Real interest rate Retail sales (t+9) 18
II. Inflation 19
12 -Month Inflation 19 Market Expectations 16 13 % Jul 04 6. 8% 10 Jul 05 6. 3% 7 4 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 20
Core inflation has risen IPCA: Core measures (3 -month average) 1. 6 % 1. 2 0. 8 0. 4 0. 0 Jan 01 Exclusion Jul 01 Jan 02 Jul 02 Smoothed trimmed mean Jan 03 Jul 03 Jan 04 Jul 04 Non-Smoothed trimmed mean 21
Pressure on tradable inflation IPCA: Market prices (3 -month average) 3. 5 3. 0 2. 5 % 2. 0 1. 5 1. 0 0. 5 0. 0 -0. 5 Jan 00 Jul 00 Jan 01 Jul 01 Tradables Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Non Tradables 22
Inflation: (% of items with price increases) 90 80 % 70 Jul 64. 3% 60 50 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 23
Inflation expectations: 2 Q 04 1. 6% % 1. 5 1. 4 1. 3 1. 2 1. 1 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 Jun 04 Jul 04 24
Inflation expectations: 3 Q 04 2. 2% 2. 1 % 2. 0 1. 9 1. 8 1. 7 1. 6 1. 5 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 Jun 04 Jul 04 Aug 04 25
Inflation expectations: 2004 8. 2 7. 6 7. 3% % p. a. 7. 0 6. 4 5. 8 5. 2 4. 6 4. 0 3. 4 Mar 02 Jul 02 Nov 02 Mar 03 Jul 03 Nov 03 Mar 04 Aug 04 26
Inflation expectations: 12 -month 14 13 12 % 11 10 9 8 7 6. 3% 6 5 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 May 04 Jul Aug 04 04 27
III. External Sector 28
Trade Leads CA Deficit Reduction 14 35 12 -month Trade Balance and Current Account – US$ billion 30 7 0 20 -7 15 10 Current account left scale -14 5 -21 0 Trade balance right scale -28 Trade balance Current account 25 -5 -35 -10 Jan 96 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jul 04 29
Exports Remain Upbeat Seasonally adjusted trade balance 7. 5 7. 0 Exports US$ billion 6. 5 Imports 6. 0 5. 5 5. 0 4. 5 4. 0 3. 5 Q 1 96 Q 1 97 Q 1 98 Q 1 99 Q 1 00 Q 1 01 Q 1 02 Q 1 03 Q 1 04 30
Quantities Are Still Growing Seasonally adjusted trade balance 205 Exports (volume) 165 145 Imports (volume) 125 105 Jan 04 Jul 03 Jan 03 Jul 02 Jan 02 Jul 01 Jan 01 Jul 00 Jan 00 Jul 99 Jan 99 Jul 98 Jan 98 Jul 97 Jan 97 Jul 96 85 Jan 96 1996 = 100 185 31
75 Jan 04 Jul 03 Jan 03 Jul 02 95 Jan 02 Jul 01 Jan 01 Jul 00 Jan 00 Jul 99 105 Jan 99 Jul 98 Jan 98 80 Jul 97 Jan 97 Jul 96 Jan 96 1996 = 100 Prices Are Finally Improving Terms of Trade 100 Import prices 90 85 Export prices 32
Prices Vs. Quantities Jan-Jun 2004 US$ mn Quantity Price US$ mn % Exports Primary Semimanufactures Manufactures 10 333 6 327 61% 4 043 985 5 304 1 389 34% 500 51% 4 438 84% 3 484 34% 2 347 449 687 58% 46% 13% Last 12 months US$ mn Quantity Price US$ mn % Exports Primary Semimanufactures Manufactures 15 077 9 152 61% 4 900 1 425 8 752 704 14% 382 27% 8 066 92% Cross US$ mn % 522 5% 307 36 180 8% 4% 3% Cross US$ mn % 5 507 37% 418 3% 3 957 1 020 531 239 23 156 81% 72% 6% 5% 2% 2% 33
Export Growth Remains Diversified Exports by Product Jan-Jul US$ mn % % change 12 -month US$ mn % % change Transport equipment 2 367 18% 42% Transport equipment 3 148 17% 32% Soy 2 107 16% 47% Soy 2 261 13% 28% Metal 1 584 12% 40% Metal 2 019 11% 29% Meats 1 248 9% 60% Meats 1 746 10% 49% Mechanical 901 7% 45% Mechanical 1 451 8% 44% Ore 756 6% 38% Chemicals 972 5% 22% Wood 596 5% 56% Ore 892 5% 25% Chemicals 585 4% 22% Wood 782 4% 41% Oil & derivatives 437 3% 16% Oil & derivatives 703 4% 15% Sugar 350 3% 38% Textiles 470 3% 34% Other 2 261 17% 20% Other 3 637 20% 17% 13 192 100% 34% Total 18 082 100% 27% Total 34
Export Growth Remains Diversified Exports by Country Jan-Jul US$ mn Argentina USA China Mexico Germany Netherlands Italy Venezuela Spain France Other Total 1 774 1 117 815 687 600 588 508 475 398 361 5 870 13 192 Last 12 months % % total change 13% 8% 6% 5% 5% 4% 4% 4% 3% 3% 44% 100% 80% 12% 32% 47% 34% 27% 42% 205% 51% 40% 36% 34% US$ mn Argentina China USA Netherlands Mexico Germany Italy Spain Chile Venezuela Other Total 2 959 1 295 1 264 994 865 755 657 579 548 533 7 633 18 082 % % total change 16% 7% 7% 5% 5% 4% 4% 3% 3% 3% 42% 100% 88% 32% 8% 26% 34% 25% 32% 42% 33% 97% 26% 27% 35
Foreign Direct Investment FDI: 3 and 6 -Month Moving Average 4, 000 3, 600 US$ million 3, 200 2, 800 2, 400 2, 000 1, 600 1, 200 800 400 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 6 -month Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 3 -month 36
Net reserves evolution Net International Reserves 37 Net reserves US$ billion 33 29 25 21 17 Adjusted net reserves 13 Jan 99 Sep 99 May 00 Jan 01 Sep 01 May 02 Jan 03 Sep 03 Jul 04 37
IV. Fiscal Policy and Debt Management 38
Federal Fiscal Performance (% of GDP) Jan-June 1998 1999 2000 2001 2002 2003 2004* 2003 2004 change I - NATIONAL TREASURY 1. 5 3. 2 2. 9 3. 0 3. 7 4. 4 4. 7 5. 2 5. 6 0. 37 Revenues Transfers Net revenues Expenditures Payroll Unemployment benefits LOAS/RMV OCC Subsidies 15. 1 3. 0 12. 1 10. 3 5. 0 0. 5 16. 6 3. 5 13. 2 9. 7 5. 1 0. 6 16. 4 3. 7 12. 8 9. 6 5. 1 0. 5 17. 5 3. 8 13. 6 10. 3 5. 4 0. 6 18. 6 4. 2 14. 5 10. 6 5. 4 0. 6 4. 8 0. 3 4. 0 0. 3 4. 4 0. 4 4. 6 0. 2 18. 3 4. 0 14. 3 9. 5 5. 2 0. 6 0. 3 3. 5 0. 4 18. 8 3. 9 14. 9 9. 8 5. 0 0. 6 0. 4 3. 8 0. 4 18. 9 4. 2 14. 7 9. 3 5. 3 0. 5 0. 3 3. 3 0. 2 19. 7 4. 0 15. 6 9. 8 5. 1 0. 5 3. 7 0. 2 0. 75 -0. 20 0. 95 0. 55 -0. 20 0. 05 0. 21 0. 48 0. 03 II - INSS -0. 8 -1. 0 -0. 9 -1. 1 -1. 3 -1. 7 -1. 8 -1. 4 -1. 5 -0. 12 Revenues Benefits 5. 1 5. 9 5. 0 6. 0 5. 1 6. 0 5. 2 6. 3 5. 3 6. 5 5. 3 7. 1 5. 5 7. 3 4. 9 6. 3 5. 3 6. 8 0. 39 0. 51 III - CENTRAL BANK 0. 0 -0. 1 0. 00 0. 7 2. 2 1. 9 1. 8 2. 4 2. 6 2. 8 3. 8 4. 0 0. 25 20. 2 3. 0 16. 5 21. 7 3. 5 16. 0 21. 5 3. 7 15. 9 22. 7 3. 8 17. 0 23. 9 4. 2 17. 4 23. 6 4. 0 17. 1 24. 3 3. 9 17. 6 23. 8 4. 2 15. 8 25. 0 4. 0 16. 9 1. 13 -0. 20 1. 08 Central Gov. Primary Result Memo: Total Revenues Transfers Primary expenditures * 12 -month to June 2004 39
Public Sector Borrowing Requirements % of GDP Jan-Jul 1998 1999 2000 2001 2002 2003 2004* 2003 2004 change Nominal deficit 7. 5 5. 8 3. 6 4. 6 5. 2 3. 3 5. 3 2. 1 -3. 2 Primary deficit 0. 0 -3. 2 -3. 5 -3. 6 -3. 9 -4. 4 -4. 7 -5. 2 -5. 6 -0. 4 Central Government -0. 5 -2. 3 -1. 9 -1. 8 -2. 4 -2. 6 -2. 9 -3. 8 -4. 2 -0. 4 Subnational governments States Municipalities 0. 2 0. 3 -0. 1 -0. 2 -0. 1 -0. 5 -0. 4 -0. 1 -0. 9 -0. 6 -0. 3 -0. 8 -0. 6 -0. 2 -0. 9 -0. 8 -0. 1 -1. 0 -0. 9 -0. 1 -1. 0 -0. 1 -1. 2 -1. 1 -0. 1 0. 0 Public companies Federal Local 0. 4 0. 2 0. 1 -0. 6 -0. 7 0. 0 -1. 1 -0. 9 -0. 6 -0. 3 -0. 7 -0. 5 -0. 3 -0. 9 -0. 6 -0. 3 -0. 8 -0. 6 -0. 2 -0. 3 0. 0 -0. 3 -0. 2 0. 6 -0. 2 0. 1 0. 6 0. 1 7. 5 9. 0 7. 1 7. 2 8. 5 9. 6 8. 0 10. 5 7. 7 -2. 8 Nominal Interest on Debt * 12 -month to Jul 2004 40
Stable debt to GDP ratio 62 57 62 60 58 56 52 47 54 52 Jan Apr Jul Oct Jan Apr Jul 02 02 03 03 04 04 04 42 37 32 27 Jan Jan Jan Jan 91 92 93 94 95 96 97 98 99 00 01 02 03 Source: Bacen Jul 04 41
Debt dynamics back to positive ground Debt to GDP Decomposition 1999 Net debt increase 2000 2001 2002 2003 2004 7. 4% -0. 2% 3. 2% 0. 0% 3. 2% -3. 4% -3. 0% -3. 3% -3. 5% -3. 3% -4. 3% 2. Pure interest on the debt 8. 4% 6. 8% 6. 9% 7. 2% 9. 3% 4. 2% 3. Depreciation on domestic debt 3. 8% 0. 8% 1. 5% 4. 8% -1. 5% 0. 2% 4. Depreciation on foreign debt 4. 2% 0. 8% 1. 5% 4. 5% -1. 6% 0. 6% 5. Skeletons 0. 0% 0. 8% 1. 5% 0. 9% 0. 0% 6. Privatization proceeds -0. 9% -1. 8% -0. 1% -0. 2% 0. 0% 7. Effect of GDP growth -5. 2% -4. 3% -4. 6% -13. 9% 1. 2% -5. 3% Debt dynamics (1+2+7) 0. 2% -0. 8% -1. 2% -10. 0% 6. 3% -4. 2% Currency (3+4) 8. 0% 1. 6% 3. 0% 9. 3% -3. 1% 0. 8% -0. 9% -1. 0% 1. 4% 0. 7% 0. 0% 1. Primary surplus -3. 1% Memo: Net "skeletons" (5 -6) 0. 0% 42
Share of USD-linked debt is declining 60 56% 55 Total USD-linked debt vs. net debt 50 45 % 40 35 30 25 20 15 Domestic USD-linked debt vs. domestic debt 10 5 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jul 04 43
Absolute decline 140 130 US$ billion 120 110 100 90 80 US$ 39. 5 billion reduction in 12 -months 70 60 50 40 Jan 97 Nov 97 Sep 98 Jul 99 May 00 Mar 01 Jan 02 Nov 02 Sep 03 Jul 04 44
Feelin’ groovy Alexandre Schwartsman September 2004 45
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