Brazil Economic

Outlook
1Q20

January 2020
 BBVA Research / Brazil Economic Outlook 1Q20 2

Main messages

The Brazilian economy will The improvement of the In order for Brazil to grow
continue to recover gradually global environment, the significantly above 2%, it is
in the coming years. After expansionary monetary essential to implement
having grown around 1.1% in policy in a context of inflation structural reforms that increase
2019, GDP is expected to under control, the gradual productivity. Although there are
expand 1.9% in 2020 and increase in confidence, the signs that the current
2.0% in 2021, when it will reduction of the fiscal risk government intends to do so,
finally reach the level allowed by the recent there are many obstacles to
exhibited before the severe approval of the social finally making progress in this
crisis of 2015-16. security reform, among other direction, such as political
factors, will allow the growth polarization and concerns
pace to increase somewhat about sparking social protests.
in the biennium 2020-21.
01
Global environment: the
lower uncertainty paves
the way for global growth
stabilization
 BBVA Research / Brazil Economic Outlook 1Q20 4

The trade agreement between the US and China has significantly

reduced uncertainty, but not protectionism levels
TARIFFS AND ECONOMIC UNCERTAINTY* US-China “phase one” trade deal is positive
(%, INDEX: 0 TO 100) news, but partial:
25 80
• Import tariffs will continue to be high despite
20 75 the announced reductions.
70
15 • We are still far from a definitive solution to
65 structural problems.
10
60 The risk of disorderly brexit in the short-term
5 55 has disappeared, contributing to reduce
global uncertainty, but it can resurface in
0 50
the second half of the year.
Apr-18

Oct-18

Apr-19

Oct-19
Jul-18

Jul-19
Jan-18

Jan-19

Economic uncertainty (rhs) Jan-20

China's average tariffs on US exports (lhs)
US' average tariffs on China imports (lhs)

* Av erage tariffs at the beginning of each quarter. BBVA Research Index of Economic Uncertainty: tone of the
news about economic uncertainty; quarterly average (except 1Q20: average until January 9, 2020).
Source: BBVA Research, PIIE
 BBVA Research / Brazil Economic Outlook 1Q20 5

Global growth has remained relatively low

throughout 2019
WORLD GDP GROWTH* The world economy expanded around
(% Q/Q) 0.75% in quarterly terms throughout
1.2 2019, below what was observed in
previous years.
1.1

1.0 In addition to the high uncertainty,

the structural moderation of China
0.9
and the cyclical slowdown of the US
0.8 were behind the weak global growth
in 2019.
0.7

0.6
In any case, global growth has been
slightly higher than expected in
0.5 the second half of the year.
Sep-15

Sep-16

Sep-17

Sep-18

Sep-19
Dec-15

Dec-17

Dec-18
Dec-16

Dec-19
Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

* Estimations based on BBVA-GAIN model.

Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 6

Signs of stabilization: the slowdown of both exports and services

as well as the contraction in manufacturing seem to be over
EXPORTS* PMI INDICATORS
(% Y/Y, ANNUAL GROWTH AVERAGE IN EACH QUARTER) (HIGHER THAN 50: EXPANSION; LOWER THAN 50: CONTRACTION)

8.0 54.0

7.0 53.5
53.0
6.0
52.5
5.0 52.0
4.0 51.5

3.0 51.0
50.5
2.0
50.0
1.0 49.5

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19
Dec-15

Dec-16

Dec-17

Dec-19
Dec-18
Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Jun-15

Jun-16

Jun-17

Jun-18

Jun-19
0.0
Sep-15

Sep-16

Sep-17

Sep-18

Sep-19
Dec-15

Dec-17

Dec-18
Dec-16

Dec-19
Mar-15

Mar-16

Mar-17

Mar-18

Mar-19
Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Global PMI - Manufacturing Global PMI - Services

* 4Q19 av erage only includes Oct/19 and Nov/19 data.
Source: BBVA Research Source: BBVA Research based on Haver data
 BBVA Research / Brazil Economic Outlook 1Q20 7

Financial markets exhibit a better mood

SOVEREIGN DEBT YIELDS AND EQUITY VOLATILITY The recent improvement of the global
(%, INDEX) environment has spurred some optimism
3.0 40 in the financial markets:
2.5 35 • Volatility reduction
2.0 30
10Y US Bond Yields • Recovery of long-term rates
(left)
1.5 25
• Stock Market improvement
1.0 20
• Increased appetite for risk
0.5 15
VIX volatility
0.0 (right) 10

-0.5 10Y Germ and Bond Yields 5

(left)

-1.0 0
Nov-19

Dec-19
Apr-19

Aug-19

Sep-19

Oct-19
Feb-19

Mar-19

Jul-19
May-19
Jan-19

Jun-19

Jan-20

Source: BBVA Research based on Haver data

 BBVA Research / Brazil Economic Outlook 1Q20 8

The environment will favor a soft landing

of global growth

LOWER TRADE COUNTER-CYCLICAL LIMITED FINANCIAL COMMODITY PRICES

TENSIONS POLICIES VOLATILITY UNDER CONTROL

US-China positive The Volatility will be Oil prices around

but partial deal. expansionary limited by the 61 dollars in
tone of monetary actions of 2020-21
Protectionism will policy will be central banks.
continue to be a maintained, Relative
source of concern, following recent Some appetite weakness of
also in other rate cuts. for risk. demand and
regions. increase in the
A limited fiscal supply of non-
A less disruptive stimulus in OPEC countries.
brexit, at least in Europe and
the short-term. somewhat
greater in China.
 BBVA Research / Brazil Economic Outlook 1Q20 9

Pause at both the Fed and the ECB: no prospects

for changes in interest rates on the horizon
FED AND ECB: INTEREST RATES* Fed: the relative resistance of the
(%, END OF PERIOD) economy improves the balance of risks
3.0 and generates the conditions for a long
2.5 monetary pause.
2.0
ECB: growth stabilization and the
1.5
communication by the new presidency
1.0 reinforce the expectations of interest rate
0.5 stability.
0.0

-0.5

-1.0
Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21
May-15

May-16

May-17

May-19

May-20

May-21
May-18
Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Fed ECB
* In the case of the ECB, deposits interest rates. Forecasts from Jan/19 onwards.
Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 10

Better prospects for commodity prices, which,

however, will remain relatively low
COMMODITIES: AVERAGE ANNUAL PRICES Moderate upward revision in forecast for
(INDEX, 2016 AVERAGE = 100) commodity price, due to less pessimism
170 about the global environment:
160
• Oil: 2020 forecasts revised 8% up to 61 dollars.
150
• Copper and soybean: 2020 forecasts revised 4%
140 Oil
and 1% to the upside, respectively.
130
Cooper
120 Anyway, prices will remain under control
110 given the relative robustness of supply in a
context of lower demand.
100 Soybean
90
The escalation of tensions in the Middle East
80 represents a risk: an oil price of $ 70 in 2020
2020 (f)

2021 (f)
2016

2018

2019
2017

would reduce world growth by one or two

decimal points.
(f ) Forecast.
Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 11

Global growth will converge to 3.2% in 2020

and 3.3% in 2021

USA Latam Eurozone China World

2018 2.9 1.6 1.9 6.6 3.6

2019 2.3 0.6 1.2 6.1 3.2

2020 1.8 1.4 0.9 5.8 3.2

2021 2.0 2.1 1.2 5.5 3.3

Upward revision
Unchanged forecast
Downward revision

Source: BBVA Research

 BBVA Research / Brazil Economic Outlook 1Q20 12

USA: the prospects of a smooth deceleration

ahead remain in place
GDP GROWTH Private consumption shows strength, in
(%) contrast with the weakness of investment.
Actual Previous
2.9% Inflation will remain close to 2.0%, with
more balanced risks.

2.3% Probability of recession has declined.

2.2%
2.0% The 2020 presidential elections may
2.3% 1.8% increase political and geopolitical tensions.

1.8%

2017 2018 2019 (f) 2020 (f) 2021 (f)

(f ) Forecast.
Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 13

China: growth slowdown, somewhat slower than expected

GDP GROWTH A generalized economic slowdown is still

(%) in place
6.8% Actual Previous
Upward revision of the forecast for 2019:
6.6% the recent growth deceleration has been
smoother than expected.

6.1% Small upward revision of 2020 GDP

growth forecast:
5.8%
• Improved relation with the US.
6.0% 5.5%
• Greater willingness to increase
5.6% the fiscal stimulus.

Monetary stimulus: gradualism moving

forward, in a context of temporarily high
2017 2018 2019 (f) 2020 (f) 2021 (f)
inflationary pressures.
(f ) Forecast.
Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 14

Eurozone: slightly upward revision of growth forecasts,

due to better than expected incoming data
GDP GROWTH Growth is stabilizing at low levels.
(%)

Actual Previous The economic dynamism will increase from

2.7% mid-2020, partly due to higher exports.

The growth divergence among large

countries will be reduced, mostly due to
1.9% a better performance in Germany.

Inflation will remain very low, despite

1.2% 1.2% the strong monetary stimulus and some
0.9% fiscal support.

1.1%
0.8%
2017 2018 2019 (f) 2020 (f) 2021 (f)

(f ) Forecast.
Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 15

Reduction in the cyclical global risks, but not in

the structural ones

USA
EUROZONE
Econom ic
recession Econom ic
recession
CHINA
Fall in
Tensions in Disorderly
bond
“peripheral” deleveraging
prices due
bond m arkets
to higher
inflation

Riesgos transversales

Protectionism
and deglobalization

Geopolitical tensions

Secular stagnation in
Changes in likelihood developed econom ies
+ Global severity - vs. last quarter
Clim ate change
02
Brazil: reinforced
recovery prospects
 BBVA Research / Brazil Economic Outlook 1Q20 17

GDP will grow around 2% in 2020 and 2021,

somewhat more than in previous years
GDP GROWTH
(Q/Q %)

Actual Previous
4.0%
3.0%
2.0%
1.9%
1.3% 1.3%
1.9% 1.1% 1.6%
0.5%
-3.3% 0.9%
-3.6%
2011 2012 2013 2014 2015 2016 2017 2018 2019 (f) 2020 (f) 2021 (f)
(f ) = f orecast.
Source: BBVA Research, IBGE
 BBVA Research / Brazil Economic Outlook 1Q20 18

A particularly long recovery,

after a particularly severe recession
GDP EVOLUTION DURING RECESSIONS (*) OUTPUT GAP (*)
(T = GDP LEVEL AT THE QUARTER BEFORE EACH RECESSION) (% OF POTENTIAL GDP)

102 6

101 2003
1998
2001 4
100

99
2008-09 2
98

97 0

96
-2
95
2015-16
94
-4
93

92 -6

2010
2011
2012

2014

2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2013

2015
t

t+10

t+12

t+14

t+16

t+18

t+20

t+22

t+24

t+26
t+2

t+6

t+8
t+4

(*) Quarterly GDP in reat terms, seasonally adjusted. Beginning of the recessions (t + 1): 4Q98, 2Q01,
1Q03, 4Q08, 1Q15. For the 2015-16 crisis line, data from 4Q19 on are forecasts. (*) Output gap = 100* (actual or forecast GDP – potential GDP)/ potencial GDP.
Source: BBVA Research, IBGE Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 19

Investment will be the most dynamic component of GDP

in the coming years
GROWTH OF GDP AND ITS COMPONENTS (*)
(%)
8

0
GDP Investment Private consumption Public consumption Exports Imports

2019(f) 2020(f) 2021(f)

(*) (f ) = f orecast.
Source: BBVA Research, IBGE
 BBVA Research / Brazil Economic Outlook 1Q20 20

The expected slow pace recovery is in line with the

current balance of positive and negative factors

Factors supporting growth Factors constraining growth

Improvement in Weak global
Relatively low
global environment Recovery signs exhibited growth
commodity
by incoming activity data prices
Increase in Recession
confidence in Argentina Scarce room for
Aprobación de
la reforma de la countercyclical
Relatively low seguridad social fiscal policy
Risk of protests
inflation y menor riesgo fiscal and social
unrest Low
productivity
Expansionary
monetary Government’s apparent Political risks and obstacles to
policy willingness to adopt the approval of economic
economic reforms reforms
 BBVA Research / Brazil Economic Outlook 1Q20 21

Activity indicators have surprised to the upside in recent

months, contributing to drive confidence up
ACTIVITY INDEXES CONFIDENCE INDEXES
(JAN/17 = 100, SEASONALLY ADJUSTED) (JUN/10–JUN/15 AVERAGE=100, SEASONALLY ADJUSTED )
107 100

105 95

103 90

101 85

99 80

97 75
Mar-17

Jul-18
May-17
Jul-17

Mar-18
May-18

Mar-19
May-19
Jul-19
Nov-17

Nov-18
Jan-17

Sep-17

Jan-18

Sep-18

Jan-19

Sep-19

Jul-17

May-19
Mar-17
May-17

Mar-18
May-18
Jul-18

Mar-19

Jul-19
Jan-17

Jan-18

Jan-19
Sep-17
Nov-17

Sep-18
Nov-18

Sep-19
Nov-19
Economic activity index (IBC-Br) Business confidence
Retail sales Consumer confidence

Source: BBVA Research, BCB, IBGE Source: BBVA Research, FGV

 BBVA Research / Brazil Economic Outlook 1Q20 22

The approval of the social security reform improves the prospects

for public accounts and reduces uncertainty
GROSS PUBLIC DEBT (*) ECONOMIC UNCERTAINTY INDEX (*)
(% OF GDP) (INDEX FROM 0 TO 100)
83 100
The fall in interest rates also 90
82 favored the in the prospects
for public debt 80
81 70
60
80
50
79 40
30
78
20
77 10
0
76

May-17
Apr-17

Jul-17

Mar-18
May-18
Jul-18

Mar-19
May-19
Feb-17

Oct-17

Feb-18

Oct-18
Sep-17

Dec-17

Aug-18

Dec-18

Aug-19
Sep-19
Nov-19
Jan-17

Jan-20
Jan-19

Jun-19
2019 (f) 2020 (f) 2021 (f) 2022 (f)
Jun/19 forecasts Current forecasts
(*) (f ) = f orecast. (*) Tone of the news on economic uncertainty weighted by media coverage. 10-day moving
Source: BBVA Research based on market consensus forecast (reports av erage.
“Prima Fiscal” by the Ministry of Economy) Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 23

There will be no much room for countercyclical fiscal policy, despite the
social security reform; support to activity will come from monetary policy
PRIMARY FISCAL RESULT (*) REAL INTEREST RATE: SELIC RATE (*)
(% OF GDP) (%)
3 9
8
2
7
1 2010-18 average:
6
0 5 4.4%
-1 4
3
-2
2
-3
1
-4 0

-5 -1

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21
Apr-21
Apr-17

Apr-18

Oct-18

Apr-19

Apr-20
Oct-17

Oct-19

Oct-20

Oct-21
Jan-20
Jan-17

Jan-18

Jan-19

Jan-21
2019 (f)

2020 (f)

2021 (f)
2011

2012

2013

2014

2015

2016

2017

2018

(*) (f ) f orecast. (*) Ex-ante real rate. Forecasts from Jan/20 onwards.
Source: BBVA Research, BCB Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 24

The easing cycle is soon coming to an end; the SELIC rate will then be
kept unchanged until 2021, when it will be raised to control inflation
NOMINAL INTEREST RATE: SELIC RATE (*) INFLATION: IPCA (*)
(%) (Y/Y %; END OF PERIOD)
14 8

12
7

6
10
5
8
4
6
Feb-20: a 25bp cut 3
4 is expected to
bring the easing 2
2
1

0 0
Jul-17

Jul-18

Jul-19

Jul-20

Jul-21
Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Oct-21
Oct-17

Oct-18

Oct-19

Oct-20
Jan-20
Jan-17

Jan-18

Jan-19

Jan-21

2016 2017 2018 2019 2020 (f) 2021 (f)

Current forecasts Inflation targets

(*) Forecasts from Jan/20 onwards. (*) (f ) = f orecast.

Source: BBVA Research Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 25

The economic recovery process will create room for a slight exchange
rate appreciation and a gradual increase in the current account deficit
NOMINAL EXCHANGE RATE (*)
CURRENT ACCOUNT BALANCE
(BRL/USD) (% DEL PIB)
4,4 0,0

-0,5
4,2
-1,0
4,0
-1,5
3,8 -2,0

3,6 -2,5

-3,0
3,4
-3,5
3,2 -4,0

3,0 -4,5

2020 (p)

2021 (p)
2011

2012

2013

2014

2015

2016

2017

2018

2019
Apr-18

Apr-19
Apr-17
Jul-17
Oct-17

Jul-18
Oct-18

Jul-19

Apr-20
Jul-20

Apr-21
Jul-21
Oct-19

Oct-20

Oct-21
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

(*) Forecasts from Jan/20 onwards. (*) (f ) = f orecast.

Source: BBVA Research Source: BBVA Research
 BBVA Research / Brazil Economic Outlook 1Q20 26

Structural reforms are key to increase productivity and allow the

economy to grow significantly more than 2%
POTENTIAL GDP: CONTRIBUTION BY COMPONENTS
(P.P.)

-2
1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026
Capital Labor Productivity Potential GDP

Source: BBVA Research

 BBVA Research / Brazil Economic Outlook 1Q20 27

The government seems willing to implement reforms, but political

polarization and a fear of protests are two of the many obstacles
PRIVATIZATION AND ADMINISTRATIVE AND TAX GOVERNMENT APPROVAL DURING THE FIRST
REFORMS: WEB SEARCHES (*) YEAR OF THE PRESIDENTIAL MANDATE
(INDEXES FROM 0 TO 100) (%)
100 80
90 75
80 70
70 65
60 60
50
55
40
50
30
45
20
10 40
0 35
Apr-17

Apr-18

Apr-19
Jul-17

Oct-17

Jul-18

Oct-18

Jul-19

Oct-19
Jan-17

Jan-18

Jan-19

Jan-20
30
First quarter Second quarter Third quarter Fourth quarter

Administrative reform Tax reform

Lula (2003) Rousseff (2011) Bolsonaro (2019)
Privatization
(*) Google searches about the terms "administrative reform", "tax reform" and "privatization".
Source: BBVA Research based on Google Trends data. Source: BBVA Research based on CNI data.
03
Brazil:
forecast table
 BBVA Research / Brazil Economic Outlook 1Q20 29

Brazil forecasts

2018 2019 (f) 2020 (f) 2021 (f)

GDP (%) 1,3 1,1 1,9 2,0

Private consumption (%) 2,1 1,9 1,9 1,9
Public consumption (%) 0,4 -0,6 -0,8 -0,3
Investment in fixed capital (%) 3,9 4,0 5,9 4,5
Exports (%) 3,3 -3,4 1,3 4,2
Imports (%) 7,5 3,0 5,7 4,1
Unem ploym ent rate (average, %) 12,3 12,0 11,0 9,8
Inflation (end of period, YoY %) 3,8 4,3 4,0 4,3
SELIC interest rate (end of period, YoY %) 6,50 4,50 4,25 7,25
Exchange rate (end of period) 3,88 4,11 4,00 4,00
Current account (% of GDP) -2,2 -2,8 -2,5 -3,2
Public sector prim ary fiscal balance (% of GDP) -1,6 -1,4 -1,1 -0,6
(f ) = f orecast.
Source: BBVA Research