Brazil: a macroeconomic analysis

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Oct 28, 2013 (3 years and 9 months ago)

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1
Economic Research Department
Economic Research Department
1
April 2010
Brazil: a
macroeconomic
analysis Enestor Dos Santos Economic Research Department
April2010
Economic Research Department
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Economic Research Department
Economic Research Department
2
April 2010
Main messages
Current macroeconomic environment:
The crisis is over and the country is already growing at pre-
crisis pace. The robustness of the domestic demand is starting to drive both inflation and current
account deficit high. While the fiscal policy will remain expansive, the Central Bank will soon have to
adjust interest rates upwards.
Positive structural factors:
Some factors support a positive view towards Brazil.
￿
institutional stability
￿
the size of the domestic market
￿
the demographic bonus
￿
the strategic position as a commodity producer
￿
the diversification of external markets
￿
soundness of the banking system
Risks and challenges:
But the current optimism seems to be drawing the attention awayfrom the
existent risks and challenges.
￿
excessive public intervention
￿
management of oil resources
￿
low saving rates
￿
slow progress of economic reforms
￿
private sector imbalances
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Economic Research Department
Economic Research Department
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April 2010
Index
Current macroeconomic environment
Positive structural factors
Risks and challenges
Conclusion
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April 2010
The international crisis had a strong but temporary impact on the Brazilian economy.
Current macroeconomic environment
The GDP dropped two quarters in a row, in Q4 08 and Q1 09, due to a strong contraction of
external demand (global trade), a reduction in commodity prices,the deterioration of the
perspectives and liquidity problems. However, the economy has been recovering solidly in
the last quarters.
Stock Exchange: IBOVESPA
0
10.00020.00030.00040.00050.00060.00070.00080.000
ene-07
abr-07
jul-07
oct-07
ene-08
abr-08
jul-08
oct-08
ene-09
abr-09
jul-09
oct-09
ene-10
Source: Bloomberg
GDP
(% q/q)
-4-3-2-1
0
1
2
3
1Q 06
3Q 06
1Q 07
3Q 07
1Q 08
3Q 08
1Q 09
3Q 09
1Q 10
3Q 10
Source: Bloomberg, BBVA
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April 2010
Due to structural advances observed in the last years (improved public and external
accounts), during this crisis the country was able to implement countercyclical measures
for the first time.
The government cut taxes and kept expenditures growing at a highpace. Loans from public
banks accelerated to compensate for a drop in the loans from private banks. In the
monetary front, the Central Bank cut rates to historical lows (8.75%).
0
2
4
6
8
10121416
ene-07
abr-07
jul-07
oct-07
ene-08
abr-08
jul-08
oct-08
ene-09
abr-09
jul-09
oct-09
ene-10
Reference Interest Rates - SELIC
(yearly rate)
Source: Bloomberg
Current macroeconomic environment
15202530354045
ene-07
mar-07
may-07
jul-07
sep-07
nov-07
ene-08
mar-08
may-08
jul-08
sep-08
nov-08
ene-09
mar-09
may-09
jul-09
Public Credit Growth
(y-o-y %)
Source: Central Bank of Brazil
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April 2010
Another important support to face the crisis came from the strength of private
consumption. Retail sales, for example, continued to grow strongly despite some initial
deterioration. Car sales, for another example, reached the highest levels ever in 2009.
Many factors contributed to the resilience and the strength of private consumption:
availability of credit (currently at 46% of the GDP vs. 24% in 2002), countercyclical
measures, improvements on the labor market front and structural advances such as
poverty and inequality reductions.
Current macroeconomic environment
Car Sales
(units)
0
500.000
1.000.0001.500.0002.000.0002.500.0003.000.0003.500.000
2002
2003
2004
2005
2006
2007
2008
2009
Source: Bloomberg
Retail Sales Index
(seasonolly adjusted)
130135140145150155160
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Source: IBGE
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April 2010
The labor market provided significant support to private consumption. Both the
unemployment rate and employment creation deteriorated less thanexpected and are
already recovering very positively.
The unemployment rate is close to historical lows. This is in part due to the reduction in
informality rates and in the structural reduction of the equilibrium unemployment rate
(NAIRU).
-800.000-600.000-400.000-200.000
0
200.000400.000
ene-08
mar-08
may-08
jul-08
sep-08
nov-08
ene-09
mar-09
may-09
jul-09
sep-09
Source: Bloomberg
Brazil: Net Job Creation
Unemployment Rate
(%)
6
7
8
9
1011121314
oct-01
abr-02
oct-02
abr-03
oct-03
abr-04
oct-04
abr-05
oct-05
abr-06
oct-06
abr-07
oct-07
abr-08
oct-08
abr-09
oct-09
Source: BBVA
Current macroeconomic environment
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April 2010
All in all, the country was able to face the crisis better than in the past and also better than
most countries.
GDP Evolution
(Index Q2 08 = 100)
86889092949698
100102
Jun-08Sep-08Dec-08Mar-09Jun-09Sep-09
Source:BBVA
BRA
RUS
USA
EUR
100101102103104105106
t-2t-1tt+1t+2
GDP Performance During Different Recessions
(Index)
current
( t = Q2 2009 )
1998
2001
2003
Source: IBGE, BBVA
Current macroeconomic environment
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April 2010
The crisis in Brazil is already over. Pre-crisis growth levels were already reached. The main
drivers of this good performance are expansion of private consumption and investments.
Despite the recent recovery, the GDP dropped 0.2% in 2009. For the next year a strong
domestic demand should continue providing support and the GDP should grow slightly
less than 6%.
Current macroeconomic environment
GDP Forecasts: demand components
(%)
0
5
1015202530
GFFCPrivate ConsPublic ConsExportsImports
2010
2011
2012
GDP
(%)
-1
0
1
2
3
4
5
6
7
200520062007200820092010(f)2011(f)2012(f)
Source: IBGE, BBVA
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April 2010
The current dynamism of the economy, stimulated by expansive fiscal and monetary policies,
has caused some inflationary pressures. The downward inflation trend observed
throughout 2009 is already over. Market’s expectations for the end of 2010 are already at
5.1%, above the 4.5% inflation target.
Current macroeconomic environment
Inflation
(y/y %)
2,002,503,003,504,004,505,005,506,006,507,00
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Source: IBGE; BBVA
Exchange Rate
(Real / USD)
1,502,002,503,003,504,00
Mar-02
Dec-02
Sep-03
Jun-04
Mar-05
Dec-05
Sep-06
Jun-07
Mar-08
Dec-08
Sep-09
Jun-10
Mar-11
Dec-11
Sep-12
Source: Central Bank of Brazil; BBVA
Strong growth and higher interest rates should put pressure overthe exchange rate, but the
perspectives of intervention in FX markets by the government, electoral noise and
increasing current account deficit should avoid a strong appreciation of the Real, at least
this year.
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April 2010
We expect the CB to hike rates in response to higher inflation by 50bps in the April
meeting. The adjustment would continue in the next two meetings and rates would reach
10.50% in Q3 10. The inflation is by far the main driver of interest rate decisions although
political issues could have a (limited) impact on the decision.
Current macroeconomic environment
Interest rates - Selic
(yearly rate)
0,005,00
10,0015,0020,0025,0030,00
Mar-02
Dec-02
Sep-03
Jun-04
Mar-05
Dec-05
Sep-06
Jun-07
Mar-08
Dec-08
Sep-09
Jun-10
Mar-11
Dec-11
Sep-12
Source: Central Bank of Brazil; BBVA
Neutral Interest Rates
(in real terms)
0
1
2
3
4
5
6
7
Chile
Mexico
Peru
Colombia
Brazil
Fuente: BBVA
Although the Selicis currently at historical lows, interest rates continue at very high levels in
comparison to other countries.
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April 2010
The dynamism of both public and private domestic demand in Brazil has been leading to a
deterioration of external accounts. The current account deficit has started to rise and in
2010 it could easily reach 3% of the GDP after many years of surpluses or limited deficits.
External solvency is not a risk, as the country is currently a net creditor due to its large
international reserves (15% of the GDP). Up to now foreign capitals have been very
pleased to finance Brazil’s external deficit, but if the mood changes, foreign inflows could
slowdown and then the exchange rate would depreciate. External deficits should increase
exchange rate volatility in the coming years.
Current macroeconomic environment
Current Account
(% GDP)
-5-4-3-2-1
0
1
2
3
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Central Bank of Brazil; BBVA
External Accounts
(% GDP)
-10
0
102030405060
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
External Assets
External Debt
Net Debt
Source: Central Bank of Brazil; BBVA
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April 2010
The countercyclical fiscal policy implemented by the government last year worked as a buffer
against the crisis but it caused a deterioration of the net public debt. In 2010, the
government should be able, with some effort, to reach a primary surplus close to 3% this
year. In addition, public debt should return to the pre-crisis downward trend.
Solvency is not an issue again, but the mix of fast rising expenditures (especially non-
investment expenditures) and high taxes creates an inefficient fiscal environment.
Increase in current expenditures fuel current account and inflationary pressures and high
taxes (40% of GDP) represent a heavy burden for the private sector.
Current macroeconomic environment
Fiscal Accounts - Nominal Result
(% GDP)
-6-4-2
0
2
4
6
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Public Debt - Net
(% GDP)
-20-10
0
10203040506070
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Domestic Debt
External Debt
Total
Source: Central Bank of Brazil; BBVA
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April 2010
We use a financial programming model to estimate the impact of three exogenous shocks –drop in
commodity prices, rise in risk premium, and a currency depreciation –on three external and fiscal
indicators.
The results show that the deterioration of the fiscal result is more important in the case of an increase in
risk premium than in the case of lower commodity prices and thanin the case of an exogenous
currency depreciation. And even in the case a 100 bps rise in risk hits the economy in the 2010-12
period, fiscal results would continue displaying a downward trend in the forthcoming years. The
exercise reinforces our view about the strength of the fiscal accounts in Brazil. On the other hand,
external indicators are much more sensitive to a currency depreciation. More precisely, in the event
of 10% depreciation in the 2010-12 period, the current account deficit would shrink by 0.7 bps and
the indicator “international reserves/current account”would increase 1.77 (i.e. reserves would rise
from 4.3 times the size of the current account deficit to 6.0 times). A strong appreciation should, on
the other hand, imply a big deterioration of current account butinternational reserves would still be
large enough in comparison to financial needs.
Current macroeconomic environment
Fiscal Balance
Current Account
International Reserves
(% GDP)
(% GDP)
/ Current Account
10% fall in key commodity prices
-0,15
-0,18
-0,24
100 bp increase in risk premium
-0,40
0,01
-0,70
10% devaluation
-0,04
0,70
1,77
Brazil - Summary Table Sensitivity Analysis
(percent points difference with respect to baseline)
Exogenous Shock
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April 2010
We perform a second exercise to check the sensitivity of fiscal and external accounts to stress periods.
This time we construct a risk macroeconomic scenario (growth around 3%, lower inflation and a
more depreciated exchange rate which could be the result of a strong deterioration of the external
environment) and then check how fiscal and external indicators would change in comparison to our
base macroeconomic scenario.
Under this more negative scenario public accounts deteriorate incomparison to the base scenario but
both nominal result and total net debt continue to trend downwards. External indicators, on the
other hand, improve following the moderation of activity and thedepreciation of the currency. All in
all, these exercises corroborates the view that neither externalsolvency nor fiscal solvency aran
issue in the short and medium term.
Current macroeconomic environment
2008
2009
2010
2011
2012
2010
2011
2012
Fiscal Indicators
Primary Result
3,68
2,14
3,13
3,18
3,37
2,85
2,47
2,21
Nominal Result
-1,98
-3,46
-2,22
-1,34
-0,73
-2,24
-1,69
-1,63
Total Net Debt
39,92
44,54
42,34
40,09
37,07
43,19
42,14
40,63
External Indicators
Trade Balance
1,58
1,64
0,43
0,11
-0,07
0,62
0,48
0,29
Current Account
-1,79
-1,58
-2,75
-3,31
-3,89
-2,54
-2,75
-3,14
Capital and Financial Account
1,87
4,58
3,56
3,68
4,26
1,79
2,04
2,38
Net External Debt
-1,76
-3,97
-3,13
-2,15
-1,15
-1,80
-0,13
1,60
Source: BBVA
Forecasts: Main ScenarioForecasts: Risk Scenario
Fiscal and External Indicators under Main and Risk Scenarios (% GDP)
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April 2010
Index
Current macroeconomic environment
Positive structural factors
Risks and challenges
Conclusion
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April 2010
1) Institutional stability:
The election of Lula in 2002 was a very important test for the country.
Since then political and economic stability have been important drivers of Brazil’s
development.
On the economic front, the positive performance of the Brazilianeconomy in the last years is a
direct consequence of the option for implementing orthodox economic polices (basically
inflation target, a flexible exchange rate and a fiscal discipline).
0
500
10001500200025003000
Jan-95
Oct-95
Jul-96
Apr-97
Jan-98
Oct-98
Jul-99
Apr-00
Jan-01
Oct-01
Jul-02
Apr-03
Jan-04
Oct-04
Jul-05
Apr-06
Jan-07
Oct-07
Jul-08
Apr-09
Country Risk: EMBI +
Source: Datastream
2002 Elections: Lula I
2006 Elections: Lula II
Positive structural factors
Potential GDP and Components
(yearly %)
-2%-1%
0%1%2%3%4%5%6%
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
Capital
TFP
Labor
Source: BBVA
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April 2010
2) The size of the domestic market:
domestic demand is, and will continue being, the
main driver of the growth in Brazil.
Positive structural factors
GDP and Domestic Demand
(y-o-y %)
-1,00
0,001,002,003,004,005,006,007,008,00
2009201020112012
Source: BBVA
In the last 5 years, almost 20 million people left the poverty condition. There are still around
40 million people to be incorporated by consumption markets.
Poverty
(millions of people)
0,0
10,020,030,040,050,060,070,0
2002
2003
2004
2005
2006
2007
2008
Source: IPEADATA
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April 2010
3) The demographic bonus
: Brazil is in the beginning of a cycle in which the weigh of both
children and elderly in total population is small. The bonus period is estimated to last
around 25 years more.
Positive structural factors
Demographic Bonus
0
5
1015202530354045
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
2016
2019
2022
2025
2028
2031
2034
2037
2040
2043
2046
2049
Source: IBGE
Children
(% Total Population)
Elderly
(% Total Population)
Beginning Demographic Bonus
End Demographic Bonus
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April 2010
4) Strategic position as a commodity producer
: as a commodity exporter, Brazil will
continue benefiting from high commodity prices.
Positive structural factors
0
5.000
10.00015.00020.00025.00030.00035.00040.000
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Future
Brazilian Oil Reserves
(millions of barrels)
Source: Petrobras, Brazilian Government
Recent Discoveries
(only Iara, Tupi and Baleias Fields)
Commodity abundance:•
recent oil findings

comparative advantage in
biofuels•comparative advantage as well
as in many agriculture and metal
commodities•
abundance of arable land and
water
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April 2010
5) Diversified external markets:
an alternative explication for the Brazilian resilience against
the international crisis is that the country benefited from the dynamism of Chinese
economy. Although partial, this explication illustrates the increasing dependence to
China. More generally, Brazil’s at some extent is being able to balance the dependence
of USA, Europe and Asia.
Positive structural factors
Weight of Asia in Brasil Exports
(%)
0%3%6%9%
12%15%
200020012002200320042005200620072008
Source: COMTRADE. Asia: India, China, Korea and Japan.
Exports by Regions - 2009
(USD millions)
0
5.000
10.00015.00020.00025.00030.00035.00040.00045.000
Europe
Asia
North
America
Latin America
Africa
Middle East
Oceania
Source: ALICEWEB
Europe Union
China
USA
Argentina
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April 2010
6) Sound financial system:
Capitalization rates are higher than in the past and higher than in
most countries. Leverage is very limited despite some recent expansion. Currency mismatch
improved recently but during the crisis banks were threatened byclient’s exposition to FX
derivatives. Current liquidity levels are adequate, but during crisis periods smaller banks are
much more exposed than the big ones due to their relatively large dependence on non-
deposit funding. In the next years, banks will face an increasing competition in the coming
years as banking spreads should continue moving downwards.
Positive structural factors
Basel Index
0
5
10152025
Francia
Italia
España
China
Chile
EE.UU.
Reino Unido
Alemania
India
Mexico
Brasil
Rusia
Turquia
Source:IMF
Banking Spread
(yearly rate %)
202224262830323436
jun-00
sep-01
dic-02
mar-04
jun-05
sep-06
dic-07
mar-09
Source; Central Bank of Brazil
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April 2010
Index
Current macroeconomic environment
Positive structural factors
Risks and challenges
Conclusion
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April 2010
Signs of larger interventionism:•Public banks have now a higher share of
total credit •Tax on foreign flows
•Intervention on FX markets
•Public sector’s higher role in oil sector
production and regulation •Emergence of an explicit industrial policy
•Main presidential candidates, especially
DilmaRousseuf, seem to favor a larger
interventionism
Risks and challenges
Public Loans (% Total Loans)
3031323334353637383940
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Source: Central Bank of Brazil
1) Increasing public intervention:
As in many other countries, the intervention of the
public sector in Brazil has been increasing since the beginning of the crisis.
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April 2010
2) Low saving rates
: public and private consumption rates are very high and therefore
domestic saving rates are small and make more difficult a significant expansion of
investment levels. External savings arises as an alternative, but it increases the
dependence of external capital inflows…
Risks and challenges
0
5
101520253035404550
BrazilRussiaIndiaChinaLATAM
Source:World Bankl
Gross Fixed Capital Formation
(%PIB,2004-2006)
t
Saving Rate
(% GDP)
0
5
10152025
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Source: IPEADATA
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April 2010
3) Elections:
Presidential elections will
be held in October of 2010 and they can
potentially add some volatility to
financial markets. The main candidates
(DilmaRousseffand Jose Serra) have
recently criticized the current economic
model and they could favor a more
active intervention in foreign exchange
markets, or restrictions on Central
Bank’s independency. The risks
associated to presidential elections are
not null, but they have diminished
compared to the past thanks to a
growing consensus about main
economic policies. On the other hand it
is not clear whether any candidates will
be able to implement the economic
reforms that are still needed.
Risks and challenges
Presidential Poll
(February 2010)
N.A
20%
Ciro
11%
Dilma
25%
Serra
36%
Source: IBOPE / Diario de Comercio
Marina
8%
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April 2010
4) Slow progress of economic reforms
: the optimism regarding the country seems to have
take the attention away from the needed reforms (tax system, political system, pension
system, judiciary system…) Some progress has been made, but at a slow rate…
"Doing Business" Indicators
0
20
40
60
80
100
120
140
160
180
200
0123456789101112
Indicators
Ranking
Singapur
Mexico
Spain
China
Argentina
Brazil
Indicator
1
Ease of Doing Business Rank
2
Starting a Business
3
Dealing w/ Construction Permits
4
Employing Workers
5
Registering Property
6
Getting Credit
7
Protecting Investors
8
Paying Taxes
9
Trading Across Borders
10
Enforcing Contracts
11
Closing a Business
Risks and challenges
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April 2010
5) Commodities dependence and management of oil
resources:
Although less than other Latin American
countries, Brazilian exports are very concentrated in
basic products. In the last years the share of basic
products in total exports is increasing and this trend
is likely to continue as the country will continue to
feed the Chinese appetite. The perspectives of
becoming an important oil exporter also contribute
to the “commodity specialization”risk which make
the country more sensitive to commodity price
fluctuations. Management issues will be especially
important as the country will benefit from
increasing oil resources which will require an active
attitude to prevent rent-seeker activities and to
accommodate the interests of different players. It’s
not clear at this point whether the government will
have the required maturity to manage these issues.
Another risk associated to oil findings: Dutch-
disease.
Risks and challenges
Exports by Products - 2009 (% total)
Semi-
manufactured
14%
Basic
41%
Manufactured
45%
Source: IPEADATA
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April 2010
6) Private sector vulnerability to financial shocks:
the private sector holds an increasing
share of the Brazilian external debt. This and the still precarious management of FX risks
(as shown by the recent problems related to exposition to FX derivatives) could be a
future source of problems. On another front, despite increasing disposable income,
families’debt burden is higher than in the recent past as lending rates continue at very
high levels (more than 40% in yearly terms) and as credit continues expanding
significantly.
Risks and challenges
Families' Debt Burden
(% GDP)
10111213141516171819
feb-01
nov-01
ago-02
may-03
feb-04
nov-04
ago-05
may-06
feb-07
nov-07
ago-08
may-09
Source: BBVA; Central Bank of Brazil
Gross External Debt
(% GDP)
0
5
10152025
2005
2006
2007
2008
2009
Private Debt
Public Debt
Source: Central Bank of Brazil
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April 2010
Index
Current macroeconomic environment
Positive structural factors
Risks and challenges
Conclusion
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April 2010
Conclusion
Positive structural factors:
Some factors support a positive view towards Brazil:
￿institutional stability
￿the size of the domestic market
￿the demographic bonus
￿the strategic position as a commodity producer
￿the diversification of external markets
￿soundness of the banking system
Risks :
current optimism seems to be drawing the attention away from the risks and challenges.
￿excessive public intervention
￿management of oil resources
￿low saving rates
￿slow progress of economic reforms
￿private sector imbalances
Overall the balance of risks is positive, but the optimism towards the country seems to
have taken the attention away from existent risks.