Economic Outlook BACC meeting August, 18 th 2020 Fernando Honorato - PowerPoint PPT Presentation

Economic Outlook BACC meeting August, 18 th 2020 Fernando Honorato Barbosa Chief Economist Director DEPEC/Bradesco fernando.honorato@bradesco.com.br

BACC 08/18/2020 CLASSIFIED This document has been classified by DEPEC and its access is authorized exclusively to the participants of the BACC meeting. 2

Domestic activity is recovering at a surprisingly decent rate on the back of unprecedented stimuli 3

COVID-19 Deaths / mobility 0 0 Brasil EUA Mundo (eixo da direita) -20 -200 -40 -60 -400 -80 -100 -600 -120 -800 -140 -160 -1000 -180 -200 -1200 1-mar 29-mar 26-abr 24-mai 21-jun 19-jul 16-ago Source: Google/mobility, Bloomberg 4

REAL INTEREST RATE Swap pre deflated by IPCA expectation 11% 9% 7% 5% 3% 1% -0.64% -1% 14 15 16 17 18 19 20 Source: Bloomberg, Bradesco 5

CREDIT AND INDUSTRIAL PRODUCTION Corporate credit stock and industrial production (YoY%) Corporate credit stock 30.0% 24.8% 24.2% 22.4% 21.8% Industrial output 20.0% 13.1% 12.0% 10.0% 0.0% -0.3% -0.9% -3.7% -10.0% -9.0% -20.0% -21.9% -30.0% -27.5% -40.0% Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Source: Bradesco, BCB – YoY 6

CREDIT AND JOBS Credit for families and job creation (YoY%) 20.0% Households credit stock 16.7% 16.6% 15.5% Jobs 15.0% 11.3% 9.0% 8.9% 10.0% 5.0% 2.0% 2.0% 0.4% 0.0% -5.0% -3.4% -7.5% -10.0% -9.0% -15.0% Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Source: Bradesco, BCB, IBGE – YoY 7

EFFECTIVE REAL EXCHANGE RATE BASKET Last point = average current value 6,4 5,9 5,4 5,27 4,9 4,4 3,9 3,59 3,4 2,9 2,4 jan-95 jan-00 jan-05 jan-10 jan-15 jan-20 Source: Bloomberg, Bradesco 8

EXPORTS AND IMPORTS US$ millions, daily average 1200.0 Exports Imports 1000.0 800.0 600.0 400.0 200.0 0.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: MDIC, Bradesco 9

LABOR INCOME + GOVERNMENT TRANSFERS Effect of transfers Actual scenario R$ 200 extension Labor Income + Labor Income Labor Income + extension of YoY (%) YoY (%) YoY before stimuli gov. transf. (BRL gov. transfers (BRL billions) billions) (BRL billions) 1Q 894 5,8% 894 5,8% 894 5,8% 2Q 798 -1,20% 934 15,6% 934 15,6% 3Q 840 -0,10% 972 15,7% 972 15,7% 4Q 898 0,0% 900 0,3% 950 5,8% 2020 3.430 1,10% 3.700 9,1% 3.750 10,6% Source: IBGE, BCB, Bradesco 10

RETAIL SALES Level, in real terms 105.0 Retail 100.0 Broad retail 95.0 90.0 85.0 80.0 75.0 70.0 65.0 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: IBGE, Bradesco 11

MANUFACTURING PMI INDEX Level Brazil 60.0 Mexico 57.0 54.0 51.0 51.0 48.0 45.0 42.0 40.4 39.0 36.0 33.0 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Bloomberg 12

Will there be an “income cliff” or rising NPLs when transfers are ceased? 13

CONSUMPTION AND LABOR INCOME Retail sales and labor income 17.0% Growth + banking + credit = Improved labor market 12.0% 7.0% 2.0% -3.0% -8.0% Consumption falls preventively (fear of losing job) Retail Sales (3m, YoY) -13.0% Labor Income - MM3M -18.0% 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: IBGE, Bradesco 14

“SAVINGS” PROXY Monetary aggregate – M2 52,0% 50,3% 50,0% 48,0% 46,0% 44,0% 42,0% 40,0% 38,0% 36,0% 34,0% 13 14 15 16 17 18 19 20 Source: BCB, Bradesco. M2 = paper money + cash deposit + savings accounts + term deposits (CDB/LF) 15

EMPLOYMENT AND LABOR FORCE Seasonally adjusted, in millions 95,0 107 93,0 105 91,0 103 89,0 101 Employment (LHA) 87,0 99 Labor Force (RHA) 85,0 97 96,4 83,8 83,0 95 12 13 14 15 16 17 18 19 20 Source: IBGE, Bradesco 16

UNEMPLOYMENT RATE Actual and counterfactual – participation rate Feb/20 21.0 Counterfactual Actual 19.3 19.0 17.0 15.0 13.0 12.5 11.0 9.0 7.0 5.0 12 13 14 15 16 17 18 19 20 Source: IBGE, Bradesco 17

FORMAL JOPB CREATION Caged, seasonally adjusted 400 200 0 -29 -200 -400 -600 -800 -1,000 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: CAGED, Bradesco 18

GDP % QoQ 8,0 6,8 6,0 4,0 2,0 1,2 0,7 0,7 0,7 0,7 0,4 0,0 -2,0 -1,5 -4,0 -6,0 -8,0 -10,0 -9,2 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Source: IBGE, Bradesco 19

Challenges ahead 20

21 Source: EIU, Bradesco Increase between 2019-2020 (p.p. of GDP) GROWTH OF GROSS PUBLIC DEBT 20 25 30 10 15 0 5 Singapore 28 27 26 26 25 Italy Spain United Kingdom Japan France 23 22 Portugal Brazil 20 20 18 18 16 16 15 15 14 13 12 12 11 11 11 10 10 10 9 9 9 8 8 8 8 7 6 6 6 4 Greece Canada USA Germany South Africa Peru Saudi Arabia New Zealand Colombia Poland Norway Mexico Malaysia Chile Australia Hong Kong India Sweden Thailand Philippines Peru Switzerland Russia South Korea Argentina Hungary China Taiwan Indonesia

22 Source: EIU, Bradesco % of GDP GROSS PUBLIC DEBT 200 300 250 100 150 50 0 252 Japan 197 Greece 162 Italy 154 Singapore 140 Portugal 12212111411297 97 96 Spain France Canada United Kingdom USA Argentina Brazil South Africa 77 76 73 68 63 59 58 56 54 52 51 504946 44 44 42 42 41 39 39 35 34 23 20 Germany Hungary Colombia Malaysia Mexico Poland India Hong Kong Norway Australia Thailand Philippines South Korea Saudi Arabia Sweden Peru New Zealand Indonesia Peru Chile Switzerland Taiwan China Russia

INCREASE OF TAX BURDEN Estimates for the primary budget balance, R$ billion Sem reformas Aumento de carga ex-CPMF Without reforms Increasing tax burden (without CPMF) 50 Increasing tax burden Maintaining the spending cap Aumento de carga tributária manutenção do teto 0 -50 -100 -150 -200 -250 -300 2021 2022 2023 2024 2025 2026 Assumptions: extension of FUNDEB (fund for basic education) and there are no expenditure reforms. Taxation of dividends (20%), extinction of health and education deductions within income taxes, taxation of LCA/LCI (15%) and creation of tax on financial transactions (“CPMF”). Source: Bradesco, Tesouro Nacional 23

INCREASE OF PUBLIC DEBT Gross Public Debt/GDP simulations 100 93 90 89 84 80 70 Flex spending cap + 2 p.p. increase tax burden (GDP 2%). 2% Real Interest Rate 60 Flex spending cap + 2 p.p. increase tax burden (GDP 3%). 2% Real Interest Rate 50 Baseline (Reforms + Keep. Spend. Cap) 40 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Flexible spending cap: Renda Brasil expenses and investments are excluded from the rule and grow by IPCA + 1%. Increase tax burden: taxing dividends, LCA/LCI, end of IRPF health and education deductions and CPMF creation. Source: Bradesco, BCB 24

EXCHANGE RATE: BRL vs EMERGING MARKETS Accumulated change in the BRL against the median and emerging percentiles 5,9 75% 25% EM basket BRL 5,6 5,48 5,3 5,0 4,7 4,41 4,4 4,1 3,8 3,5 jan/2019 jul/2019 jan/2020 jul/2020 Source: Bloomberg, Bradesco 25

5-YEAR CDS Brazil x EMs (*) 600 75% - 90% 50% - 75% 25% - 50% 500 Brazil Median 400 300 227 200 100 80 0 11 12 13 14 15 16 17 18 19 20 (*) Mexico, S. Africa, Chile, China, Croatia, Hungary, Malaysia, Poland, Russia, Turkey, India, Thailand, Colombia, Indonesia, Peru Source: EIU, Bradesco 26

FORWARD INTEREST RATES % per year 10% 9.42% 3-Aug 9% 8.69% 10-Aug 8.45% 7.83% 8% 17-Aug 7% 6.74% 6% 5% 4% 3.39% 3% 3.02% 2% 2020 2021 2022 2023 2024 2025 - 2027 2027 - 2029 Source: Anbima, Bloomberg, Bradesco 27

10-YEAR INTEREST RATES In the past two weeks, % Average: South Africa, Australia, Canada, Chile, India, Indonesia, Mexico, New Zealand, Peru and Russia 7.20 4.25 Brazil Average 7.12 7.10 4.24 4.2 7.00 4.23 6.90 4.22 6.80 4.21 6.70 4.20 6.60 4.19 6.50 4.18 6.40 4.17 6.30 4.16 6.20 4.15 3-Aug 4-Aug 5-Aug 6-Aug 7-Aug 11-Aug 12-Aug 13-Aug 10-Aug 14-Aug 3-Aug 4-Aug 5-Aug 6-Aug 7-Aug 10-Aug 11-Aug 12-Aug 13-Aug 14-Aug Source: Bloomberg, Bradesco 28

OUR SCENARIO… 2017 2018 2019 2020 2021 GDP growth (%) 1,3 1,3 1,1 -4,5 3,5 Consumer inflation - IPCA (%) 2,95 3,75 4,31 1,9 3,1 Wholesale inflation - IGP-M (%) -0,5 7,5 7,3 8,5 4,0 Selic Rate (%, eop) 7,00 6,50 4,50 2,00 3,00 Exchange Rate (BRL/USD, eop) 3,31 3,87 4,03 5,10 5,10 Industrial Production (%) 2,5 1,0 -1,1 -4,5 3,0 Retail Sales (%) 4,0 5,0 3,9 -6,0 4,5 Job Creation (in thousands) 1899 966 1816 -5200 1904 Unemployment Rate (% of labor force, avg) 12,7 12,3 12,1 13,5 13,5 Outstanding Credit Growth (%) -0,4 5,1 6,5 5,0 7,6 Trade Balance (USD bn) 64,0 53,0 39,4 58,0 66,9 Current Account (USD bn) -15,0 -41,5 -50,8 -7,7 -7,8 Primary Balance (BRL bn) -111 -108,3 -61,9 -864 -225 Gross Debt (% of GDP) 74,1 76,5 75,8 96,0 96,7 Bradesco economic forecasts are revised at the beginning of each month. During moments of greater volatility, the level of uncertainty and error margins naturally rise, especially between revisions. Our forecasts are based on the assumption that the adjustments necessary to ensure the sustainability of Brazil’s macroeconomic framework will be implemented over the next few years. If these adjustments do not materialize or are better than expected, the forecast could be altered significantly. Last updated on July, 28 2020 Source: Bradesco 29