Apresentação do Diretor de Assuntos Internacionais e Gestão de Riscos Corporativos do Banco Central do Brasil, Tiago Couto Berriel, no evento

Investor Seminar, organizado pelo J.P. Morgan, na cidade de Washington, Estados Unidos.

Washington, 7 de outubro de 2016.

Challenges for Monetary Policy

Tiago Berriel Deputy Governor for International Affairs

and Corporate Risk Management

Investor Seminar – JP Morgan Washington DC

October 7th 2016

2

Overview

1. Brazilian Context: Regaining confidence in a virtuous transition

2. Monetary Policy: Inflation Convergence and Risks

3. Resilience Factors in the recovery

3

Starting Point

4

Starting Point

Improving scenario after economic and political turmoil

Recent changes in the economic policy agenda and a recover in

confidence are changing the outlook

5

Gross Debt Jan/14: 52,8%

Gross Debt:

Ago/16: 70,1%

2530354045505560657075

jan 1

4

abr

14

jul 1

4

out 1

4

jan 1

5

abr

15

jul 1

5

out 1

5

jan 1

6

abr

16

jul 1

6

Public Debt

general government gross debt

general government gross debt (less international reserves)

Gross Debt (-) Intern. Reserves

Jan-14: 36,5% Ago -16: 50,5%

% o

f G

DP

% o

f G

DP

(a

cc

um

ula

ted

in

12

mo

nth

s)

Source: BCB

Fiscal Problem since 2014

Nominal Ago-16: 9,6%

Primary Ago-16: 2,7%

-5

-1

3

7

11

jan

14

ab

r 1

4

jul 1

4

ou

t 14

jan 1

5

ab

r 1

5

jul 1

5

ou

t 15

jan

16

ab

r 1

6

jul 1

6

Nominal and Primary Deficit

nominal fiscal deficit primary deficit

6

3,91

1,9

3,0

0,1

-3,8 -3,3

-5

-4

-3

-2

-1

0

1

2

3

4

5

201

1

201

2

201

3

201

4

201

5

201

6*

%

Annual Growth

Sources: BCB / IBGE %

GDP Growth - %

3,0 3,0 3,0 3,1

1,9

0,9

0,1

-1,2

-1,7

-2,5

-3,8

-4,7

-4,9

-6

-5

-4

-3

-2

-1

0

1

2

3

4

ma

i 1

3

jul 13

se

t 1

3

nov 1

3

jan 1

4

ma

r 14

ma

i 1

4

jul 14

se

t 1

4

nov 1

4

jan 1

5

ma

r 15

ma

i 1

5

jul 15

se

t 1

5

nov 1

5

jan 1

6

ma

r 16

ma

i 1

6

jul 16

IBC-Br GDP

*average of 12 months/average of the previous 12 months

Economic Activity has been Decreasing

7

New Economic and Political Outlook

The announcement of a new Economic Policy Agenda and the

reduction of uncertainty changed expectations for 2016 and

2017.

8

60

70

80

90

100

110a

br

13

ago

13

dez 1

3

abr

14

ago

14

dez 1

4

abr

15

ago

15

dez 1

5

abr

16

ago

16

services

industry

Source: FGV

Regaining Confidence: Businessmen Expectations

Obs.: proportion of favorable answers – proportion of unfavorable answers + 100 (100=neutral)

3m

ma,

s.a

.

3m

ma,

s.a

.

70

80

90

100

110

abr

13

ago

13

dez 1

3

abr

14

ago

14

dez 1

4

abr

15

ago

15

dez 1

5

abr

16

ago

16

construction

commerce

9

basis

poin

ts

Source: Bloomberg

5Y CDS

Feb-11-2016: 500,5

Sep 30: 273

100

150

200

250

300

350

400

450

500

5501

/1/1

5

31

/1/1

5

2/3

/15

1/4

/15

1/5

/15

31

/5/1

5

30/6

/15

30/7

/15

29/8

/15

28/9

/15

28/1

0/1

5

27/1

1/1

5

27/1

2/1

5

26/1

/16

25/2

/16

26/3

/16

25/4

/16

25/5

/16

24/6

/16

24/7

/16

23/8

/16

22/9

/16

Brazil average BBs average BBBs

Regaining Confidence: Lower Risk Premmia

10

Nominal Interest Rates have been falling

Sources: BM&FBovespa; BCB.

11

12

13

14

15

16

3M

6M 1Y

2Y

3Y

4Y

5Y

7Y

10

Y

% a

.a.

Yield Curve

jan-16

mar-16

jun-16

set-16

out-16

11 Source: BCB (Focus)

Regaining Confidence: Market Expectations for 2016/17 GDP %

of

gro

wth

through Sep 30th

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

1,6

-4,0

-3,9

-3,8

-3,7

-3,6

-3,5

-3,4

-3,3

-3,2

-3,1

-3,0

14/04/2016 06/05/2016 30/05/2016 20/06/2016 11/07/2016 01/08/2016 22/08/2016 13/09/2016

2016

2017

April Expectations: 2016: -3,79% 2017: 0,30%

Sep-30 Expectations: 2016: -3,14% 2017: 1,30%

(rhs)

(lhs)

20

16

20

17

12

5,07

4

5

5

6

6

7

7

8

8

01/02/2016 01/03/2016 01/04/2016 01/05/2016 01/06/2016 01/07/2016 01/08/2016 01/09/2016 01/10/2016

2016

2017

2018

2019

2020

7.25

Source: BCB (Focus)

IPCA Market Expectations are Being (Re)Anchored

%

4.50 4.50

through Sep 23rd

4.50

13

Falling Real Interest Rates after 1Q-2016 peak

5,0

5,5

6,0

6,5

7,0

7,5

8,0

8,5

5 anos (1260)

10 anos (2520)

30 anos(7560)

Sources: Bloomberg; BCB.

14

Price adjustments favors external competitiveness recovery

External adjustment evolves even facing unfavorable terms of trade

deterioration

Comfortable current account financing

External Accounts: Fast Adjustment despite Global Scenario

15

External Adjustment: Unit Labour Cost Decreasing

Source: BCB.

90

100

110

120

130

140

150

160

170

180

Brazilian Unit Labour Cost J

un

19

94

= 1

00

16

External Adjustment: Terms of Trade

Source: Funcex.

90

100

110

120

130

140

ag

o 0

7

ag

o 0

8

ag

o 0

9

ag

o 1

0

ag

o 1

1

ag

o 1

2

ag

o 1

3

ag

o 1

4

ag

o 1

5

ag

o 1

6

20

06

=1

00

17

External Adjustment: Current Account x FDI

Source: BCB.

US

$ B

I

- 76 - 77 - 74 - 75

- 104

- 59

- 17 *

88 101

87 69

97

75 65*

2 010 2 011 2 012 2 013 2 014 2 015 2 016

CA FDI

* Focus (median of projections) as of Sep-30th.

18

Comprehensive New Economic Policy Agenda: Structural Fiscal Reform

Structural Fiscal Reform: Spending Ceiling - Constitutional Amendment

sent to Congress as of Jun-16

Social Security Reform is a Priority

Review in Government Programs

19

Fiscal Reforms: Main Initiatives

Source: National Treasury.

1. Spending Ceiling – Constitutional Amendment sent to Congress as of Jun-16

- 2007-2015: net revenues decreased from 19.0% to 17.7% GDP, while primary spending

increased from 16,9% to 19.6 % GDP (in the Federal Gov’t level)

- 2008-2015: revenues decreased 7.8%, while spending grew 51% in real terms

- Curbing discretionary spending is insufficient

2. Social Security Reform is a Priority

- Increase minimum retirement age

- Shrink the gap between gender and public vs private sector workers

3. Review in Government Programs

- Since 1988 Constitution every administration have been creating Programs – Need to reassess

them

- Crucial item in the spending review agenda

20

New Fiscal Regime Proposal: set a limit for spending growth over time

New Fiscal Regime Proposal: Amendment to Constitution to limit public spending increases for the

next 20 years to strengthen the public finances.

Concepts

Total Primary Expenses: real growth will not be allowed from 2017 on;

All Government Expenses readjustments (including Legislative and Judicial) will be limited by 12 month CPI of last year (IPCAt-1).

Duration

20 years. Possibility of reviewing the correction criteria from the 10th year ahead.

General

On the first year (2017), the expenses limit will be equal to the last year expenses corrected by the last year inflation;

Minimum health and education expenses will be readjusted by variation of last year inflation, and no more by revenues, protecting the expenses from falling revenues.

* All information are available on https://www.fazenda.gov.br/novo-regime-fiscal

and https://www.fazenda.gov.br/novo-regime-fiscal/pec-241/perguntas-e-respostas#o-que-e-o-novo-regime-fiscal

Source: Ministry of Finance / BCB.

21

Ongoing Fiscal Reforms: Initiatives are already under consideration or

being prepared for discussion and presentation to society

Simulations show that implementation of these policies can bring fiscal

equilibrium and assure debt sustainability

When reforms are delivered a virtuous cycle will be reinforced

Structural Fiscal Reform Agenda

22

Spending on the long run with and without Limits

Source: National Treasury

* National Treasury Model’s Projections

23 Source: National Treasury

(Gross) Debt Dynamics with and without Spending Cap

» A significant part of the GG Gross Debt responds to: 1. Loans to Public Banks → This policy has been reversed as of Jan-2015 → which represents 9.6% GDP 2. REPO Operations → Collateral for sterilization → Increase in FX-reserves → which represents 20.8% GDP

The projections are made based in a real GDP growth of -3.1%, 1.2%, 2.5% and 2.5% in 2016 , 2017, 2018 and 2019, respectively. *Market projection (FOCUS) takes into account market macroeconomic parameters and the National Treasury’s model.

General Government Gross Debt

77,6%

80,1% 81,6%

76,6% 77,9%

79,2%

48%

53%

58%

63%

68%

73%

78%

83%

88%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016*

2017*

2018*

2019*

GGGD Market GGGD with Spending Cap

Market*

Budget with

Spending Cap

24

Primary Balance on on the long run: with and without Limits

Source: National Treasury / Ministry of Finance / Ministry of Planning

-588

404

-800

-600

-400

-200

0

200

400

600

2011 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020** 2021** 2022** 2023** 2024** 2025** 2026**

Primary Balance without spending cap

Primary Balance with spending cap

R$ Billion

* LDO 2016 Data and PLDO 2017. ** From 2020 data Simulator (SEPLAN / MP: Real GDP + 2.5% and Primary Expenditure + 6.0%)

25

Revenues/Expenses on the long run: with and without Limits

Source: National Treasury / Ministry of Finance / Ministry of Planning

2.375

2.963

1.971

0

500

1.000

1.500

2.000

2.500

3.000

3.500

2011 2012 2013 2014 2015 2016* 2017* 2018* 2019* 2020** 2021** 2022** 2023** 2024** 2025** 2026**

Net Primary Revenues

Net Primary Expenses without the cap

Net Primary Expenses with Spending Cap

R$ Billion

* LDO 2016 Data and PLDO 2017. ** From 2020 data Simulator (SEPLAN / MP: Real GDP + 2.5% and Primary Expenditure + 6.0%)

26

Asset Sales and Privatization Agenda

Improving Business Environment

Concessions to the Private Sector: Logistics Investment Program (PIL)

with regulatory stability

Comprehensive New Economic Policy Agenda: Productivity and Growth

27

Focus on addressing Constraints to productivity and growth

Asset Sales and Privatization Agenda

• Encompasses Federal and Local Gov’t

• Local Gov’t are encouraged to reach BNDES to seek technical support

Improving Business Environment

• Tax reform

• Reinforce regulatory framework

• Diminishing red tape constraints

• Increasing productivity

Source: National Treasury

28

Brazil launched the second stage of infrastructure investment program: estimated investment of about R$200 billion.

Regulatory stability

Logistics Investment Program (PIL)

Source: Ministry of Planning, Development and Management

29

Transparency and Clear Objectives in Monetary Policy

Floating Exchange Rate Regime

Comprehensive New Economic Policy Agenda: Monetary Policy

30

Focus on Monetary Policy: Inflation Convergence and Factors Monitored

31

2

3

4

5

6

7

8

9

10

11

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

Focus

Lower LimitAug 16

8.97%

Sources: BCB and IBGE

Regaining Confidence – CPI (IPCA) converging to the target %

in 1

2 m

on

ths

target (4.5%)

32

Central Bank is monitoring the following factors for Monetary Policy

Food Prices evolution and secondary effects

Inflation persistence and sensitivity to monetary policy and output gap

Clear progress in implementing fiscal reforms

33 Source: IBGE

Consumer Inflation (IPCA) and Food Prices

Food weight: 26.1%

y-o

-y c

hange

(%

)

13,9

7,3

9,0

3

5

7

9

11

13

15ago

11

fev 1

2

ago

12

fev 1

3

ago

13

fev 1

4

ago

14

fev 1

5

ago

15

fev 1

6

ago

16

food IPCA ex-food IPCA

34 Source: IBGE

Services Inflation %

in

12

mo

nth

s

7.4%

7.8%

7.3%

6

7

8

9

10

11ago

13

nov 1

3

fev 1

4

mai 14

ago

14

nov 1

4

fev 1

5

mai 15

ago

15

nov 1

5

fev 1

6

mai 16

ago

16

total

labor intensive

other services

35 35

% o

f la

bor

forc

e

% (

q/q

-4)

last month of the quarterly moving average

-4

-3

-2

-1

0

1

2

3

4

5

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

10,0

10,5

11,0

11,5

12,0

12,5abr

12

jun 1

2

ago

12

out 1

2

dez 1

2

fev 1

3

abr

13

jun 1

3

ago

13

out 1

3

dez 1

3

fev 1

4

abr

14

jun 1

4

ago

14

out 1

4

dez 1

4

fev 1

5

abr

15

jun 1

5

ago

15

out 1

5

dez 1

5

fev 1

6

abr

16

jun 1

6

ago

16

real earnings (rhs)

Real Wages and Unemployment

Source: IBGE (Continuous PNAD)

36

Resilience factors

37 37 Source: BCB

US

$ b

illio

n

377.7

-33.3

-150

-100

-50

0

50

100

150

200

250

300

350

400

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

international reserves FX swap position

*data until September 29th

Reduced CB Vulnerability: FX Repos and Reserves Cushion

38 38 Source: IMF (FSI) *latest available data

12,4

12,7

13,8

13,8

13,9

14,1

14,2

14,3

14,5

14,8

15,5

15,6

16,2

17,1

17,9

18,0

0 5 10 15 20

Russia

India

Australia

Canada

South Africa

USA

Korea

Spain

Mexico

Italy

Japan

Turkey

Brazil

France

UK

Germany

Capital Adequacy Ratio

-32,3

-24,0

-18,0

-8,3

-7,2

-5,8

-4,5

-3,9

-3,8

4,6

12,0

14,3

17,0

-50 -40 -30 -20 -10 0 10 20

Spain

Japan

South Africa

Australia

USA

Canada

UK

Turkey

Korea

Mexico

Brazil

Russia

India

(Provisions – NPL) / Capital

24,6

33,4

36,8

38,7

39,3

44,5

47,7

69,6

91,2

93,1

118,4

121,8

153,1

195,2

0 70 140 210

India

South Africa

UK

Japan

Australia

Mexico

Canada

Turkey

USA

Italy

Korea

Russia

Germany

Brazil

Liquid Assets to Short Term Liabilities

% % %

Brazil: Comparative Financial Soundness Indicators*

39

EM and Brazil: Banking sector in an stronger position

Source: IMF (FSI).

0,0

5,0

10,0

15,0

20,0

25,0

Regulatory Capital to Risk Weighted Assets (RWA)

2016

2010

0,0

2,0

4,0

6,0

8,0

10,0

12,0

Non-performing Loans (NPL) to Total Gross Loans

2016

2010

40

Outlook: Resilience Factors amid a Virtuous Transition

Low exposure to forex liabilities and sound current account financing

assure resilience to (negative) headwinds from the international

economy and limit contagion from external volatility

Financial system with solid capital structure and limited leverage open

room for consumer, investment and housing financing

41

Outlook: Conclusions

Brazil can withstand external headwinds

There is a firm commitment to new comprehensive policy agenda.

Despite transitional risks, Brazil can show gradual but firm progress

addressing domestic challenges

Final goal is to recover sound fiscal dynamics, converge to inflation

target and achieve sustainable growth

Thank You!

Tiago Berriel Deputy Governor for International Affairs

and Corporate Risk Management

Investor Seminar – JP Morgan Washington DC

October 7th 2016