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Ernani Teixeira Torres Filho

Lessons from the Crisis: The Experience of the Brazilian Development Bank. Ernani Teixeira Torres Filho. UFRJ - BRAZIL. New Economic Thinking, Teaching and Policy Perspectives – A Brazilian Perspective within a Global Dialogue November 8, 2011. 1.

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Ernani Teixeira Torres Filho

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  1. Lessons from the Crisis: The Experience of the Brazilian Development Bank Ernani Teixeira Torres Filho UFRJ - BRAZIL New Economic Thinking, Teaching and Policy Perspectives – A Brazilian Perspective within a Global Dialogue November 8, 2011 1

  2. Pânico Financeiro provocou uma recessão global forte Panic of 2008 was a rare and unexpected event fenômenos raro fora de guerras Source: J.P. Morgan

  3. Crisis is a result of three different shocks Structural Shock 1st Degree • Explosion of the Housing Bubble • Deleveraging of Financial and Family Sector Structural Shock 2nd Degree • Sovereign debt and Banks US DevelopedEurope Europe - GIIPS OtherEmerging Economies Cyclical Shocks • Financial Liquidity, confidence

  4. First time Brazil confronted a major international crisis as a net external creditor Foreign indicators (% of GDP) 4 Source: Brazilian Central Bank and Ministry of Finance.

  5. Brazilian Fiscal Deficit is quite low on a cross country basis Fiscal Deficit in % of GDP Source: IMF

  6. Brazil economy was hit much harder than expected Brazil: GDP Growth Rate (%, Q-Q-40) 6 Source: IBGE Source: BCB

  7. Investors confidence collapsed Brazil: CompaniesConfidenceIndex Fonte: APE/BNDES Source: CNI

  8. Investment downturn was rapidly reversed by interest rate subsidies Brazil: GDP and GFCF Growth Rate (%, Q-Q-40) Growth Rate and GFCF (Q/Q-4) 8 Source: IBGE Source: BCB

  9. Downturn on Exports hit industrial production much harder than expected Participation of Exports on Downturn of Manuacturing Sector (In%) Fonte: APE/BNDES Source: BNDES

  10. … but families went on consuming as employment and wages were not affected by the crisis Rate of Growth of Consumption of Families (Q-Q4) in % Source: IBGE.

  11. Exchange rate devalued by more than 50% Exchange Rate: R$ to USD (monthly average) Source: BCB

  12. Impacts of the exchange rate devaluation • Devaluation had limited impact on prices: inflation came from 6,4% a year to 4,2 % … • … but 200 hundred large companies were distressed by derivative operations (target forward) : more than US$ 30 billion losses • 60 to 70 of them were hardly hit: Aracruz case 12

  13. Aracruz case: the world’s leading market pulp producer • Market Capitalization: US$ 7.1 Billion ( July 8th, 2008) • More than US$ 2 billion losses Aracruz Foreign Currency Liabilities, Assets and Derivatives Short position (US$ million) – 1999-2008 Source: Rodrigo Zeidan and Bruno Rodrigues, The Failure of Risk Management for Non-Financial Companies in the Context of the Financial Crisis: Lessons from Aracruz Celulose and Hedging with Derivatives, 2011

  14. Brazilian real interest rates are among the world’s highest Central Bank Basic Rate (Selic) and Inflation (monthly average % annualised) Source: BCB

  15. Private Banks froze their loans for almost a year after the crisis Source: BCB

  16. Total Period of Bank Loans had increased by 80% while deposits were – and still are - mostly on demand Average maturity of Bank loans (in days) Source: BCB

  17. Iniatives by the Central Bank • Cut Selic Rate from January 2009 on • Liquidity injection in local currency: R$ 170 billion • Liquidity injection in foreign currency: US$ 70 billion 17

  18. The impact on the diminishing trend of the debt was null PublicDebt to GDP (%) Source: Brazilian Central Bank and Ministry of Finance. Fonte: BCB

  19. BNDES Role during the crisis • Supply long term funds for investment projects, particularly those already started • Coordinate actions along with private banks to support financially distressed companies 24

  20. Lessons from the crisis • Brazil went through two decades of economic crisis (1984-2004): low growth, high volatility, hyperinflation etc • Learning by doing: inflation curbed (1994), primary surplus (1999), net foreign creditor (2004) • Advanced regulatory system, based on laws and regulations as well as financial contracts, shareholders agreements and cooperative experiences . 25

  21. Lessons from the crisis • The most important lesson from the crisis is to act as fast as you can: stop the downward cycle and keep confidence among private banks and companies • Crisis management institutions have to be already in place: it takes too long to build them up • Central banks and fiscal authorities have a very important role but they have limits • State owned banks, particularly, development banks are institutions that can act as micro-regulators to help to stabilize the market on a micro level 26

  22. Lessons from the Crisis: The Experience of the Brazilian Development Bank Ernani Teixeira Torres Filho UFRJ - BRAZIL New Economic Thinking, Teaching and Policy Perspectives – A Brazilian Perspective within a Global Dialogue Rio de Janeiro/Brazil November 7-9, 2011 27

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