O Contexto Global e O Brasil

30 setembro 2010

Outline

• Antecedents– Real Estate Boom

– Financial Sector Expansion

• The Great Recession Begins and Spreads– The United States

– European Union

– The Developing World

• Recovery Starts in 2009 and Continues On• Brazil

2

A Global Real Estate Boom Appears

• Residential Construction Becomes a Growing Percentage of Real Investment Responding to Low Interest Rates– But Prices Rise Rapidly Too: In the Early 21st Century Values Rise from

$40 Trillion to More Than $70 Trillion• The Biggest Bubble in History: The US, Spain, Britain, Ireland

• There Is a Wealth Effect Encouraging Consumption– Additionally, People Can Borrow More Against Their Increased Capital

• Values Peak at End of 2005 in US, Later Elsewhere• Then There is Substantial Debt, But No Matching Assets

3

The Bubble: Going Up

Q 1 2005 Q 1 2004 1997-2005

Spain 15.5% 17.2% 145%

France 15.0 14.7 87

Germany - 1.3 - 0.8 - 0.2

Ireland 6.5 13.2 192

UK 5.5 16.9 154

Australia 0.4 17.9 114

US 12.6 8.4 73

Japan - 5.4 - 6.4 - 28

4

The Financial Sector Expands

• Financial Intermediation Rises– New financial instruments created

• Collateralized Debt Obligations• Credit Default Swaps

– Much kept off the balance sheets• Structured Investment Vehicles

– Rise of hedge funds

• Occurs Internationally• Even US Nasdaq decline is temporary• Leverage Goes Up

5

The “New Economy” Begins To Fray

• A Jobless Recovery After 2001 With No Wage Growth– Income Distribution Worsens Perceptibly

• Stock Options For the Rich

• Consumption Drives the Economy: Despite Initial Stock Market Decline

• A Sense of Economic Irrationality Prevails:– Capital Inflows Replace Domestic Savings

• Federal Reserve Only Raises Interest Rates in June 2004– Continues Upward Until June 2006: 5 ½%

6

But Global Collapse Is Around the Corner…

• The Process First Begins to Unravel in the US in 2007– Credit Crisis Occurs Briefly at End of August

• Central Banks Begin to Collaborate

– Growth Begins to Show Effects of Housing Contraction

• Recession Seems Imminent– Federal Reserve Begins Reducing Interest Rate in September and

Again in December

• But Few Predict Magnitude of the Shock

7

US Financial System Under Increasing Strain

• Federal Reserve Lowers Interest Rate in January 2008 By 125 Points to 3%

• Then Comes A Record Tax Rebate of $167 Billion in February– Doubts –Later Shown To Be Correct- About Positive Effects

• A Dramatic Decision in March : Bear, Stearns Is Acquired By JP Morgan– The Federal Reserve Has to Guarantee Asset Value First

• Right Afterwards, Fed Rate Falls to 2.25%– And Quickly Goes to 2% in April As Fed Seeks to Provide Unlimited

Resources In Uncertain Market

• Freddie Mac and Fannie Mae Are Nationalized In August• Is This Intervention Enough?

8

September Is the Cruelest Month

• A Weekend FBNY Conference: Who Wants Lehman Brothers?– No One

• Then the Lights Begin To Go Out– AIG Has to Be Publicly Acquired Soon After

– Merrill, Lynch Acquired by Bank of America

– JP Morgan Chase Buys Washington Mutual

– Wells Fargo Later Takes Over Wachovia

• Congress Considers A Major Financial Assistance Package, TARP– It Doesn’t Pass Right Away: The Stock Market Declines by 22%

– Then It Does: $700 Billion to Save The Banks

• Thereafter, the Fed Increases the Money Supply Without Limit

9

The Rest of the Developed World Is in Trouble, Too

• Unlike the Past, This Time Europe and Japan Follow the US– It Began With the UK and Black Rock in September 2007

• No Surprise: Residential Housing Is A Major Cause in Many Countries

– But It is Also Purchase by EU Banks of US Mortgage Securities

• Policy Coordination Still Weak– ECB Raises Interest Rate by .25% in July 2008

• Reason Is Fear of Inflation: Rising Food and Fuel Prices

– But Rates Already Higher Than US and Japan

– Large Lending to Commercial Banks Occurs

• Japan Declines As Exports Begin to Weaken– High Fiscal Deficits and Low Interest Rates Do Not Help Much

• A Carry Trade Develops, and Extends to Emerging Countries

10

Some 4th Quarter 2008 Results

Country Negative Fourth Quarter Growth

South Korea 20.8

Brazil 13.4

Japan 12.7

Mexico 10

US 6.2

EU 5.8

India 4.7

Canada 3.4

11

Fiscal deficits rise within developed countries

• Fiscal deficits increase – Compensatory finance automatically adjusts

– Additional governmental outlays and tax cuts occur

• But not enough to avoid sharply rising unemployment– Construction is labor intensive activity

• Increased indebtedness occurs as a consequence– For the US, much of the increase is external

• Almost 40% of public debt, half in Japan and China

• Short-term adjustment can translate into longer-term problem– Will foreign debt holders accept current low interest rates

– Will fiscal accounts improve in time to avoid a mounting disequilibrium

12

Financial sector takes priority

• Magnitude of bad loans is impressive– IMF calculates as $2.8 trillion problem

• Concentrated in US and EU

• Decision to treat immediately and not delay as in Japan• Central question emerges

– Bankruptcy or bail-out?• Some favor buy-out

– Main street against wall street

• Bail-out selected on the whole– “Too big to fail”

• Changes in financial regulation legislation and Basel rules come a year later

13

Recovery begins to take shape: the US

• Obama’s policies for recovery– Monetary expansion by Fed continues into 2010 and beyond

• Credit availability grows slowly– Housing market difficult to fix as mortgage defaults rise

– Aggressive fiscal help• $787 billion stimulus plan approved early on

– Would it be enough?

• Internal deficit grows to almost double digits • Politics increasingly divides rather than unites• Unemployment lags, and goes higher than predicted

– Household wealth reduced by more than $10 trillion in 2008• Most due to stock market fall

• Increasingly, corporate earnings recover and stock market goes up• Growth projections are first raised, but then lowered

14

Macroeconomic indicators: US

2006 2007 2008 2009 2010 2015

Growth rate 2.7 2.1 0.4 -3.2 3.1 2.4

Inflation 3.3 2.9 2.1 1.2 0.7 1.9

Fiscal deficit 2.0 2.7 6.6 12.5 11.0 6.5

Structural balance -2.5 -2.9 -5.4 - 7.9 - 9.2 -6.6

Current account deficit 6.0 5.2 4.9 2.9 3.3 3.5

Net debt 41.9 42.3 47.2 58.3 66.2 85.5

15

Recovery begins to take shape: Japan

• Japan had grown from 2002-2007, recuperating its position among the OECD countries– In fact, the longest post-war continuous positive period

– Export growth was the secret, increasingly to China and rest of Asia

– With spreading recession in 2008, decline occurs with recuperation only in 2009 and continuing in 2010

– Internal deficit grows some more• It adds to very large debt, viable because of low interest rate and internal

savings

– External surplus threatened by appreciating currency

• Domestic investment lags as does recovery

16

Macroeconomic indicators: Japan

2006 2007 2008 2009 2010 2015

Growth rate 2.0 2.4 -1.2 -5.2 1.9 1.7

Inflation -0.9 -0.7 -0.8 -1.0 -1.7 0.6

Fiscal deficit 4.0 2.4 4.2 10.3 9.8 7.3

Structural balance -3.9 -2.5 -3.5 -7.4 -7.5 -7.5

Current account deficit -3.9 -4.8 -3.2 -2.8

-2.8 -1.8

Net debt 83.8 81.5 96.9 111.6 121.7 154.0

17

Europe, another crisis in the making?

• The EU does not go on unaffected– Housing boom in Britain, Ireland, Spain comes to a halt

• Financial sector is hit as a consequence, and elsewhere as well– Deleveraging is necessary and public sector is available to help

– Internal deficits rise, and Maastricht targets disappear

– Growth is negative and some countries pay a heavy price• IMF is involved in Baltic countries, Iceland, Hungary• Russia hurt by fall in petroleum prices, but has ample reserves

– A fundamental disequilibrium within the euro area• Germany sells and the rest buy too much

– No easy way to rebalance with fixed exchange rate

– The Greek problem threatens and now Ireland: IMF help needed

18

Macroeconomic indicators: Euro area

2006 2007 2008 2009 2010 2015

Growth rate 3.0 2.8 0.6 -4.1 1.0 1.7

Inflation 2.0 2.4 2.3 1.1 0.6 1.8

Fiscal deficit 1.3 0.6 2.0 6.3 6.8 4.2

Structural balance -2.0 -1.7 -2.6 -4.3 -4.7 -4.1

Current account deficit -0.4 -0.4 0.8 0.4 0 -0.1

Net debt 59.6 57.0 59.5 68.3 73.9 84.2

19

Developing Economies Lead Recovery

• After the downturn in 2008, China and India lead the world economy forward– Delinking didn’t occur: globalization is real

– But financial systems are less integrated

• Recovery in the developing economies is rapid– Involves lesser fiscal deficits

– For most, involves lesser consumption

• Responsible for a majority of world growth 2010-2015

20

Developing Countries: Rate of Growth

2007 2008 2009 2010 2015

Asian NICs 5.8 1.8 -0.9 5.2 4.3

Asia 10.6 7.9 6.6 8.7 8.5

China 13.0 9.6 8.7 10.0 9.5

India 9.4 7.3 5.7 8.8 8.1

Sub SaharanAfrica

6.9 5.5 2.1 4.7 5.4

Western Hemisphere

5.8 4.3 -1.8 4.0 4.0

Brazil 6.1 5.1 -0.2 5.5 4.1

21

Developing Countries: Real Export Growth

2007 2008 2009 2010 2012-15

Asian NICs 9.6 3.8 -5.5 7.3 7.3

Asia 13.2 6.0 -9.0 11.0 13.2

Sub SaharanAfrica

7.2 0.8 -7.2 7.4 5.5

Western Hemisphere

3.3 0.1 -9.0 9.6 5.9

22

Developing Countries: Current Account Balances

2007 2008 2009 2010 2015

Asian NICs 6.1 4.9 8.9 6.6 6.0

Asia 7.0 5.7 4.1 4.1 5.0

China 11.0 9.4 5.8 6.2 8.0

India -1.0 -2.2 -2.1 -2.2

-2.0

Sub-SaharanAfrica

1.2 0.9 -2.1 -1.7 -1.4

Western Hemisphere

0.4 -0.6 -0.5 -1.0 -1.6

Brazil 0.1 -1.7 -1.5 -2.9 -3.2

23

Developing Countries: Domestic Savings

2007 2008 2009 2010 2012-15

Asian NICs 32.4 32.8 32.4 31.8 31.7

Asia 45.0 43.9 41.6 45.4 46.0

Sub-SaharanAfrica

22.8 23.3 20.3 21.6 21.6

Western Hemisphere

22.5 22.8 19.2 19.9 21.2

24

Developing Countries: Central Gov’t Net Lending

2007 2008 2009 2010 2011

Asian NICs 4.4 1.5 -0.7 -0.2 0.2

Asia 2.5 1.8 1.3 1.2 1.5

China 6.3 6.2 6.1 5.4 5.2

India -2.8 -5.2 -6.7 -5.7 -4.7

Sub-Saharan Africa

0.6 -2.1 -4.6 -4.2 -3.6

Western Hemisphere

-1.1 -0.5 -3.1 -2.1 -2.4

Brazil -2.2 -0.4 -3.4 -1.2` -2.0

25

If Delinking Didn’t Succeed the First Time, Try, Try Again

• Many Are Still Searching For An Exclusive South-South Tie– Has Long-standing Origins

• UNCTAD• OPEC

– Regional Trade Agreements In Latin America and Africa

– Unifying Feature Is Some Element of Discrimination

• Now Intercontinental– IBSA

• Dates Back to 2003

– BRICs• Second meeting, 2010 •

26

South-South Unity: Myth or Reality?

• South-South Trade: Complementary or Competitive or Not Very Important– IBSA

• High Growth, But Without Great Significance– China

• Now a Leading Global Trader– Asia, North America, Latin America– Absorbs Raw Materials, Exports Manufactures

» Benefits From Foreign Investment and Technology Transfer

• Exchange Rate Policy Under Attack– Regional Trade Pacts

• New Strategies– Payments in Domestic Currencies– South Investment in the South

»

27

Brazil: Next Year

• Slower Real Growth– After more than 7% in 2010 hardly surprising

• Estimates 4.5 to 5%

– But need for adjustment• Inflation may remain a problem: higher than Central Bank target

– More rapid World recovery may strengthen increase

– Unemployment already down

– Capacity utilization running at high level

– Selic rate projected to rise• 150 basis points to 12.25%

– Exchange rate around 1.75 Reais per dollar

• Will Such short-term measures be enough?•

28

Brazil: The Medium Term I

• Domestic investment is too low: 19% GDP– China and India show rates more than twice as great

• And there are many future needs– Petroleum pre-sal investments substantial– Infrastructure: Housing, Ports, Roads, Railways– World Cup, Olympics– Education

• To grow at 5% a year, I has to be close to 25% because of capital intensity of investments

• To keep foreign inflows at a level of 3%, domestic savings has to increase from 16% to 22%

• Where will it come from?– One place: Public pension deficit >3%GDP

29

Brazil: The Medium Term II

• Other reforms are needed as well– Fiscal

• Magnitude and efficiency• State value added taxes

– Labor• Ease in absorption

– International trade• Brazilian tariffs, unlike Chinese and Indian, have not come down

30

Productivity Change Is Basis of Advance

• Secrets of Rapid and Continuous Growth– Productivity Advance

• High Levels of Investment (And Domestic Savings)• Improvement in Quality of the Labor Force• Changing Technology

– Trade and Foreign Investment As Positive Elements• Globalization

– As a Strategy Rather Than Passive Response

– Institutional Change• Participation• Continuity of Rules• A Sense of Fairness

31