Brazilian Economy outlook and its impacts on Real Estate sector Joao Cesar Tourinho - CIO
Agenda I. Brazil s Fundamentals II. Challenges i. Fiscal Consolidation, ii. Investment and iii. Productivity III.Near-Term Outlook IV.Mortgage Market V. Conclusion
I - Brazil s Fundamentals & Buffers Against Shocks Very Large Liquidity Buffers in FX and RR : International Reserves and banking sector reserves at CB Strong Fiscal Position & Declining Public Debt-to-GDP Well-Capitalized & Supervised Financial System 3
Dez 06 Dez 07 Ago 08 Dez 08 Dez 09 Dez 10 Dez 11 May Ago-12 US$ billions Buffer (1): FX Reserves (USD Billion) 400 350 352 377 300 289 250 200 180 205 194 239 150 100 86 50 0 4
Dez 06 Dez 07 Set 08 Dez 08 Dez 09 Dez 10 Dez 11 May July-12 R$ Billions Buffer (2): Bank Reserves at CB (R$ Billion) 500 450 400 395 449 383 350 300 250 200 150 164 197 253 172 194 100 50 0 5
Fiscal Position & Declining Public Debt-to-GDP Fiscal Primary Surplus (% GDP) Net Public Debt (p.p. of GDP) 4 3,7 3,8 3,5 3 2,5 2 3,2 3,3 3,2 3,3 3,4 2 2,7 3,1 3,1 Cutting 24.7 % of GDP 1,5 1 0,5 0 6
International Comparisons of Fiscal Positions Fiscal Nominal Position (% GDP) Gross Public debt - % GDP(2011) Rússia 1,6 Rússia 10 Alemanha -1,0 China 26 China -1,2 México 44 Brasil -2,6 Brasil 54 México -3,4 Índia 68 Itália -3,9 Alemanha 82 Canadá -4,5 Reino Unido 83 França -5,3 Canadá 85 Índia -8,7 França 86 Reino Unido -8,7 Estados Unidos 103 Estados Unidos -9,6 Itália 120 Japão -10,1 Japão 230-15 -10-5 0 5 0 50 100 150 200 250 7
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Domestic credit to private sector (% of GDP) 250 200 150 100 50 0 Brazil Euro area United States World 8
dez/01 jun/02 dez/02 jun/03 dez/03 jun/04 dez/04 jun/05 dez/05 jun/06 dez/06 jun/07 dez/07 jun/08 dez/08 jun/09 dez/09 jun/10 dez/10 jun/11 dez/11 Total Debt (Credit) by sector (% of GDP) Brazil 100 80 60 40 20 Corporate Sector Debt as 35% of GDP Household Debt as 15% of GDP Net Consolidated Internal Public debt - 54% GDP Net Consolidated External Public debt - 18% of GDP 0-20 9
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Banks - Capital Adequacy Ratio 20 15 13,8 14,8 16,6 19,0 18,5 17,4 17,8 17,3 17,7 18,9 16,9 16,3 16,0 10 5 0 Brazilian banks capital ratio regulatory minimum capital ratio Basel minimum capital ratio 10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Non-Performing Loans (% of total) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Brazil United States Euro area 11
Household Indebtedness 50 18 45 40 35 30 25 20 15 10 5 0 Household Debt Service Ratio of 22% annual income LHS Household Debt as percentage of annual Income at 43% - LHS Household Debt participation on Banking Loans as 15% of GDP - RHS 16 14 12 10 8 6 4 2 0 12
II - Brazil s Challenges Fiscal consolidation: Public Sector Social Security Reform (FUNPRESP); Investment: tax reduction on payroll and investment (such as in Ports, Telecoms and Energy); Private Concessions and Infrastructure Investment: Airports (4 already granted and others under way); highways, ports and railways; Training and Human Capital Investment: National Scientific Program 100,000 scholarships; Pronatec Program for improvement of professional and technical education 13
Investment (percent of GDP) Brazil: Savings and Investment G-20: Saving, Investment, and Growth 2004-2011(1) 45 40 China 35 India 30 25 20 15 Turkey Brazil Indonesia Russia Mexico 10 0 20 40 60 National saving (percent of GDP) 1/ Average since 2004 - Size of bubbles reflects real per-capita GDP growth. 14
Brazil: Savings and Inflation 25% Gross national savings to GDP and yoy variation in consumer price index 20% 2011: 18.4% 15% 10% 2011: 6.5% 5% 0% 1994 1998 2002 2006 2010 Inflation Savings rate 15
Social Mobility: New Middle Class Consumption 200 150 13 million (7%) Social Classes 23 million (12%) 29 million (15%) 100 66 million (38%) 105 million (55%) 118 million (60%) 47 million (27%) 50 0 49 million (28%) 39 million (20%) 32 million (16%) 25 million (13%) 17 million (9%) 2003 2011 2014* E D C A/B *FGV forecast 16
jan 03 jul 03 jan 04 jul 04 jan 05 jul 05 jan 06 jul 06 jan 07 jul 07 jan 08 jul 08 jan 09 jul 09 jan 10 jul 10 jan 11 jul 11 jan 12 Financial Inclusion the rise in banks clients number of clients with credit operations over BRL 5,000 32 29 26 23 20 17 14 11 8 5 2002 2009 2011 Accounts (banking sector) 55.708.468 83.308.800 91.944.421 Customers (CCS data) 87.630.527 151.102.765 174.791.126 Branches Banking sector 17.049 20.046 21.278 All financial institutions 17.756 21.287 22.628 Banking outposts 32.769 53.628 60.375 ATM s 129.913 165.567 174.920 Correspondents 78.539 151.351 177.925 Municipalities Without financial services 222 - - With financial services 5.337 5.565 5.565 % Municipalities covered by the National Financial System 96% 100% 100% 31.8 17
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 US$ billions Foreigners leading Investment - FDI destination 70 60 FDI in Latin America (2011) Brasil: US$ 67 bi. México: US$ 19 bi. 66,7 63,2 50 40 Chile: US$ 14 bi. Colômbia: US$ 13 bi. Argentina: US$ 7 bi. 32,8 45,1 34,6 48,5 30 28,9 28,6 25,9 20 19,0 22,5 16,6 18,1 15,1 18,8 10 0 2,5 3,1 1,3 1,5 1,4 0,3 1,2 2,8 1,1 1,0 1,1 2,1 1,3 2,1 4,4 10,8 10,1 18
Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Competitiveness Brazil: ULC and CPI based Real Effective Exchange Rates, 2006-2011 140 130 (Index, average 2008=100) CPI - based REER ULC - based REER 1/ 120 110 100 90 80 70 60 Sources: INS; and IMF staff estimates 1/ Based on ULC in the manufacturing sector of Brazil's main trade partners, as provided by the OECD. 19
III - Outlook for Economic Recovery in 2013 Recovery drivers to sustain demand are in place: o Unemployment at very low historical levels o Formal employment and real wages growing o Credit maintains moderate but continuous growth o Although Inflation remains resilient Accumulated monetary policy action: improve conditions in credit markets together with other economic incentives; Forecast: economic recovery is gaining traction and will accelerate during the 2nd half of this year and 1st half of next year. 20
Unemployment & Real Income (% of total) 14% 12% 10% 8% 6% 4% 2% 0% 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 Mar - 02 Dec - 02 Mar - 05 Dec - 05 Mar - 08 Dec - 08 Sep - 03 Jun - 04 Sep - 06 Jun - 07 Sep - 09 Jun - 10 Unemployment rate - seasonally adjusted (LHS) Average real income (R$), quarterly averaged (RHS) Mar - 11 Dec - 11 21
70 60 50 40 30 20 10 0 Mar - 01 Dec - 01 Mar - 04 Dec - 04 Mar - 07 Dec - 07 Mar - 10 Dec - 10 Jun - 00 Sep - 02 Jun - 03 Sep - 05 Jun - 06 Sep - 08 Jun - 09 Sep - 11 Bank Lending Spreads (%) July 2012 > Average Spread: -3,9 %. Corporates: -1,9 p.p. Households: -5,3 p.p. Non earmarked funds (fixed rate) - Individuals Non earmarked funds (fixed, inflation linked and floating - rate) - General Non earmarked funds (fixed, inflation linked and floating - rate) - Corporate 22
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % from GDP Total Credit YoY Average Growth: + 18 p.p. > Corporates: + 17 p.p. and Households: +19 p.p. 60 50 2005-2008: 25.2% (average growth of nominal credit) 2009-2011: 18.3% (average growth of nominal credit) 40 30 20 10 0 Imobiliário Real Estate Crédito Earmarked direcionado Crédito livre Non-earmarked 23
ago 11 set 11 out 11 nov 11 dez 11 jan 12 fev 12 mar 12 abr 12 mai 12 jun 12 % Long Term Interest Rate 13 12 July 2021: 9,5% Average Interest Rate: -2,4 p.p. Corporates: -6,3 p.p. Households: -8,9 p.p. 11 10 9 24
jan-04 jun-04 nov-04 abr-05 set-05 fev-06 jul-06 dez-06 mai-07 out-07 mar-08 ago-08 jan-09 jun-09 nov-09 abr-10 set-10 fev-11 jul-11 dez-11 mai-12 Resilient Inflation 7,0 1-Year Forward IPCA Inflation - Market Expectations 6,5 6,0 5,5 5,65 5,0 4,5 4,0 3,5 3,0 25
12-Month Rolling Inflation (%) Consumer Price Inflation (observed) 16 Regulated Prices Food Away from Home Apparel Services (ex - food away from home) Food at Home Durables & Semi (ex - apparel) Non Durables (ex - food) 11 9.3 6 1-4 abr-12 jan-12 out-11 jul-11 abr-11 jan-11 out-10 jul-10 abr-10 jan-10 out-09 jul-09 abr-09 jan-09 out-08 jul-08 abr-08 jan-08 out-07 jul-07 abr-07 jan-07 out-06 jul-06 abr-06 jan-06-4.0 26
Real GDP Chained Index Recovery Granted by Investments onto 2015 112 110 Brazil: GDP Growth Recoveries Since 1994 108 106 104 102 100 98 96 94 92 Q3-2005 Q2-2006 Q4-2008 Q3-2011 0 1 2 3 4 5 6 Quarters following trough in QoQ growth 27
IV. Mortgage Market: Is there a Housing bubble? New Home Sales : More than 80% of homes are sold to first time buyers avoiding speculation; Absence of Leverage : Less than 5% of households have a home equity, meaning no borrowing being used into consumption; Banks Credit Policy : Most loans come from banks and existing credit standards are highly restricted, as an example, buyers should prove that mortgage payments cannot represent more than 30% of a family s income; Guarantees : In general Developers and Banks have strict lending policies, with no more than 70% loan-to-value; Mortgage Financing : Still represents less than 5% of GDP, although it will keep growing to reach 15% over the next 10 years.
Credit to Mortgage Market Total Credit Related to the Sector Increased 31% in 2011 R$ in billions 2006 2007 2008 2009 2010 2011 mortgages for individuals 35.7 45.9 63.3 91.9 138.7 200.5 construction financing loans 25.9 28.2 35.3 39.6 41.1 35.4 Total mortgage and const. loan Portfolio 61.6 74.0 98.6 131.5 179.9 235.9 Net increase 10.2 12.4 24.6 32.9 48.4 56.0 from FGTS 4.2 6.9 10.5 15.8 27.7 34.2 from SBPE 12.1 18.3 30.0 33.9 56.0 79.9 Total New Mortgage Origination 16.3 25.2 40.5 49.7 83.7 114.1 Source: Central Bank. 29
Strong growth path over last 6 years Mortgage Growth vs. Total Loan Growth 51% 45% 45% 38% 29% 22% 23% 28% 31% 21% 20% 19% 13% 15% 2005 2006 2007 2008 2009 2010 2011 Total Mortgages Total Loans 30
Mortgage Financing to Households Total Amount of Mortgages to Individuals (Ex-construction financing) 230 210 R$160 bi 190 170 150 130 110 90 70 50 30 10 31
Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Mortgage Financing gaining market share Mortgages as % of GDP 5.0 4.5 4.8% 4.0 3.5 3.0 2.5 2.0 1.5 1.0 32
Market Share : more to grow 106 Mortgages as % of GDP 88 84 82 81 65 54 48 22 19 11 11 6 5 2 2 33
Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Savings Accounts growth rate Interest Rate Impact on Saving Accounts Growth 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% (RHS) 5% 0% -5% 34
Brazilian Real Rates Brazil 2yr Gov. Bond IPCA-Linked Curve % Yield 12 10 8 6 4 1,7% 2 35
Securitization growing CRI s Securitization Issuance backed by Real Estate Credits (in R$ millions) 36
Securitization growing CRI s CRI - Real Estate Receivables Inventories 30 25 20 15 10 5 0 37
Banks Securities backed by Mortgage loans Yearly Change on LCI plus LH Outstanding Balance (in R$ millions) 38
Banks Securities backed by Mortgage loans Inventories of Real Estate Credit Bills (LCI) issued 53 48 43 38 33 28 23 18 13 8 3 39
Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-10 Apr-10 Jul-10 Oct-10 NAV (R$ millions) Number of Funds (Units) Real Estate Investment Funds History of FII NAV and Number of funds 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 Source: Uqbar 40
V - Conclusion Macroeconomic Stability : low inflation + low debt + sustainable GDP growth & external CA position; Financial Stability: well capitalized banks + sustainable credit growth + strong supervision & regulation; Very Large Buffers: sufficient conditions to accommodate external and domestic liquidity shocks; Sustainable credit expansion: with declining interest rates and spread margins; expected fall of delinquency rates and NPLs ratios; Economic recovery is underway: and will accelerate during 2nd half of 2012, as a result of favorable monetary and financial conditions. 41
Thank you All