2. 1 Afonso Bevilaqua / Alexandre Schwartsman June 2004 Brazil: Recent Economic Developments

3. 2 I. Economic Activity II. Inflation III. External Sector IV. Fiscal Policy and Debt Management V. Strengthening Resistance to Shocks

4. 3 I. Economic Activity

5. 4 GDP Growth -1.2 -0.9 0.5 1.4 1.6 1Q032Q03 1Q04 % Seasonally Adjusted

6. 5 GDP Growth 1Q04 vsLast 4 1Q032Q033Q034Q031Q04 1Q03quarters GDP-1.2%-0.9%0.5%1.4%1.6%2.7%0.0% Agriculture2.9%1.0%-4.6%5.6%3.3%6.4%4.0% Industry-2.7%-3.7%3.0%1.8%1.6%2.9%-1.0% Mineral------3.9%0.7% Manufacturing-----6.0%1.2% Construction------2.3%-8.9% Utilities-----1.3%0.3% Services-0.6%-0.1%0.2%0.8%0.4%1.2%0.1% Commerce-----5.1%-1.4% Transport-----7.4%1.8% Communication------1.9%-0.9% Government-----1.1%0.7% Financial-----1.9%0.8% Rents-----1.1% Other------2.1%-1.0% Consumption-1.6%-1.2%0.5%1.5%0.3%1.2%-2.3% Government0.4%0.3%0.0%0.2%0.8%1.5%1.0% Investment-5.1%-7.1%3.2%4.0%2.3%2.2%-5.7% Exports-3.1%6.2%0.8%5.7%5.6%19.3%14.6% Imports3.1%-1.9%0.7%8.2%4.0%11.7%2.1% Seasonally adjusted

7. 6 GDP After FX Crises 3.5% -0.2% -4.9% -6.2% -6.7% -7.4% -10.5% -10.8% -11.0% -13.3% Brazil (2004) Brazil (2003) Russia (1998) Mexico (1995) Korea (1998) Malaysia (1998) Thailand (1998) Uruguay (2002) Argentina (2002) Indonesia (1998) Source: IMF, Brazil 2004: Central Bank estimate

8. 7 Real Retail Sales Seasonally Adjusted, 3-Month Moving Average 97 99 101 103 105 107 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Mar 04 Average 2003 = 100

9. 8 Mar 2004 Mar 2003 1Q2004 1Q2003 Total+6.71+6.29 Furniture & Electronics+24.75+21.75 Fuel and Lubricants+8.26+5.87 Supermarket, Food, Beverage and Tobacco +3.55+3.18 Vehicles & Autoparts+12.56+9.87 Clothing+2.36-0.20 Retail Sales %

10. 9 Accumulated growth since June 2003, seasonally adjusted -2 0 2 4 6 8 10 12 14 16 18 20 22 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Supermarket Clothing Furniture & Electronics Vehicles & Autoparts %

11. 10 Credit x Demand Source: Bacen 98 99 100 101 102 103 104 105 106 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 1.65 1.70 1.75 1.80 1.85 1.90 Credit to Individuals right scale R$ billion Retail Sales left scale 2003 = 100

12. 11 Total Credit 98 100 102 104 106 108 110 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Jun 2003 = 100 Apr 04

13. 12Source: Bacen 62 66 70 74 78 82 86 90 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Apr 04 29 32 35 38 41 Lending Interest Rates Individuals left scale Corporates right scale %p.a.

14. 13 Real Interest Rates (360-day swap) 8 16 24 32 40 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 % p.a. Avg 01/02 17.6% Avg 97/99 21.4% Avg 00 12.3% Avg 03 13.2% Avg 04 9.9% Source: Bacen

15. 14 100 105 110 115 120 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Jun 03 = 100 Industrial Sales x Industrial Output Industrial Output Industrial Sales Source: IBGE, CNI

16. 15 -20 -15 -10 -5 0 5 10 Apr 03Jul 03Oct 03Jan 04Apr 04 Insufficient Excessive Balance Quarterly Industrial Survey: Level of Inventories % of Sample Source: FGV

17. 16 Real Industrial Sales 95 100 105 110 115 120 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 s.a., Jun 2003 = 100 Source: CNI

18. 17 Industrial Output s.a., Jun 2003 = 100 98 100 102 104 106 108 110 Jun 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Jul 03 Source: IBGE

19. 18 Industrial Output Source: IBGE Total+11.9+5.8 Capital Goods+36.5+20.9 Intermediate Goods+6.8+4.5 Consumer Goods+13.7+4.6 Durable+43.9+20.5 Semi-Durable e Non-Durable+7.4+1.1 % Mar 04 Mar 03 1Q04 1Q03

20. 19Sources: IBGE, Bacen Industrial Output (1994-2004) 80 85 90 95 100 105 110 Jan 94 Apr 95 Jul 96 Oct 97 Jan 99 Apr 00 Jul 01 Oct 02 Mar 04 s.a., 2002 = 100

21. 20 Formal Employment s.a., Jun 2003 = 100 99 100 101 102 103 104 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Source: Ministry of Labor and Employment

22. 21 Industrial Employment s.a., Jun 2003 = 100 99,5 100,0 100,5 101,0 101,5 Jun 03 Jul 03 Ago 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 São Paulo (Fiesp)Brazil (CNI)

23. 22 Industrial Real Wages s.a., Jun 2003 = 100 Mar 04 / Jun 03 = 6.9% Mar 04 / Mar 03 = 8.8% 98 99 100 101 102 103 104 105 106 107 Jun 03 Jul 03 Ago 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Source: CNI

24. 23 Urban Average Real Earnings Source: IBGE Mar 2002 = 100 86 88 90 92 94 96 98 100 102 104 106 108 Mar 02 Aug 02 Jan 03 Jun 03 Nov 03 Apr 04

25. 24 Steel Output 91 94 97 100 103 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 s.a., Jun 2003 = 100 Source: IBS

26. 25 Power Consumption: São Paulo 98 101 104 107 110 113 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 s.a., Jun 2003 = 100 Source: Eletrobrás

27. 26 Packing Paper Shipments s.a., Jun 2003 = 100 98 102 106 110 114 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Source: ABPO

28. 27 Business Confidence -40 -30 -20 -10 0 10 20 30 40 50 60 70 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Future Conditions Current Conditions Net Expectations Source: FGV Industrial Survey

29. 28 In a Nutshell Economic activity recovered since 3Q03, but: –Recovery is not symmetric and does not occur at the same pace in all sectors. –Sales outpaced production growth, affecting level of inventories. –Industrial output growth led by durable and capital goods. –Industrial employment and payroll have reacted since 4Q03. –Positive leading indicators for 2Q04.

30. 29 II. Inflation

31. 30 IPCA Inflation Rate IPCA-15IPCA % -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 May 04

32. 31 Wholesale Industrial Prices 1.66 2.29 0.0 0.5 1.0 1.5 2.0 2.5 IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M DI IPA - 10 IPA - M Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 %

33. 32 Wholesale Industrial Prices x Consumer Industrial Prices Wholesale industrial prices Retail Industrial prices % -2 0 1 2 3 4 5 6 7 Jan 96 Jul 97 Jan 99 Jul 00 Jan 02 Jul 03 Apr 04

34. 33 Commodities Prices Chicago Commodities Bureau (CRB) Price Index 60 70 80 90 100 110 Jan 02 Aug 02 Mar 03 Oct 03 1995 = 100 Apr 04 Food Metals

35. 34 Core Inflation IPCA: 3-Month Moving Average % 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Apr 04 Smoothed trimmed meansExclusionNon-Smoothed trimmed means

36. 35 Tradable x Non-Tradable Inflation % -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Apr 04 TradablesNon-Tradables IPCA: 3-Month Moving Average

37. 36 Inflation: (% of Items with Price Increases) % Apr 04 65.2 50 60 70 80 90 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04

38. 37 Market Inflation Expectations: 2004 3.0 4.0 5.0 6.0 7.0 8.0 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 % p.a. 6.5%

39. 38 Quarterly Inflation Expectations: 2004 1.1 1.3 1.5 1.7 1.9 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 % 1T20042T20043T20044T2004

40. 39 Inflation Expectations: 12-Month % 5 6 7 8 9 10 11 12 13 14 Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 May 04 6.0%

41. 40 12-Month Inflation 4 7 10 13 16 19 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 % Apr 04 5.3% ActualMarket Expectation

42. 41 III. External Sector

43. 42 Current Account vs. Trade Balance -36,000 -30,000 -24,000 -18,000 -12,000 -6,000 0 6,000 Jan 96 Dec 96 Nov 97 Oct 98 Sep 99 Aug 00 Jul 01 Jun 02 May 03 Apr 04 Current account -8,000 -4,000 0 4,000 8,000 12,000 16,000 20,000 24,000 28,000 Trade balance

44. 43 Current Account Surplus: 1994/2004 -0.3 - 4.7 0.8 -5 -4 -3 -2 0 1 2 1994199519961997199819992000200120022003 % of GDP *2004: 12-month to April 2004* 1.1

45. 44 Quarterly Trade Balance US$ billion 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 199619971998199920002001200220032004 Exports Imports

46. 45 Exports and Imports Quantum 1996 = 100 Seasonally Adjusted 60 80 100 120 140 160 180 200 220 19961997 1998199920002001200220032004 Exports Imports 215.8 107.4

47. 46 Export and Import Prices 1996 = 100 75 80 85 90 95 100 105 110 199619971998199920002001200220032004 Exports Imports 92.7 86.3

48. 47 Exports US$ mn % % % Exports5 2833 43065%1 70132% 2094% Primary1 945 61231%1 20662% 1287% Semimanufactures 556 30956% 22541% 224% Manufactures2 8372 50988% 2699% 592% US$ mn % % % Exports12 7229 97578%2 59420% 2912% Primary4 2262 22253%1 77242% 2336% Semimanufactures1 979 87044%1 01151% 985% Manufactures6 6556 883103%- 189-3%- 39-1% QuantititesPricesCross-effect Jan-Apr 2004 Jan-Dec 2003 QuantititesPricesCross-effect

49. 48 Imports Substitution 92 96 100 104 108 112 116 120 124 128 132 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 96 98 100 102 104 106 108 110 112 114 116 Imported Quantum left scale Industrial Output right scale Dec 1995 = 100

50. 49 Export Growth Remains Diversified Exports by Product Jan- Apr 200412-month USD millionShare Transport equipment 1.027 19%35% Metal 685 13%32% Soy 664 13%36% Meats 546 10%47% Mechanical 502 9%47% Chemicals 308 6%22% Wood223 4%37% Sugar 211 4%53% Shoes & Leather 167 3%19% Other648 12%9% Total5.282100%25% Product group Absolute change % change USD millionShare Transport equipment 2.287 17%24% Soy 1.925 14%28% Metal 1.618 12%25% Mechanical 1.321 10%44% Meats 1.287 9%38% Chemicals 1.012 7%25% Ore545 4%16% Paper & pump547 4%23% Textiles 475 3%37% Wood 435 3%23% Other2.328 17%10% Total13.781100%21% Product group Absolute change % change Ore301 6%26%

51. 50 Export Growth Remains Diversified Exports by Country Jan- Apr 200412-month USD millionShare Argentina90217%82% China3827%32% Netherlands3246%29% Italy2685%41% Germany2605%28% Venezuela2495%221% France1864%38% Spain1753%43% Mexico1603%21% South Korea1573%53% Other2.21942%16% Total5.282100%25% Market Absolute change % change USD millionShare Argentina2.61719%92% China1.62312%49% Netherlands1.1298%33% Germany6024%22% Italy5314%27% Korea4763%53% Spain4613%36% Mexico4313%17% Chile4073%25% United States4003% Other5.10337%18% Total13.781100%21% Market Absolute change % change

52. 51 Foreign Direct Investment US$ billion 0 5 10 15 20 25 30 35 199519961997199819992000200120022003 2004* FDI Inflows Related to Privatizations *2004: BCB estimate

53. 52 IV. Fiscal Policy and Debt Management

54. 53 Consolidated Public Sector Primary Surplus % of GDP Apr 04 4.23 -2 0 1 2 3 4 5 6 Jul 94Feb 96Sep 97Apr 99Nov 00Jun 02Jan 04

55. 54 Fiscal Result 199819992000200120022003 2004change I - NATIONAL TREASURY1.5%3.2%2.9%3.0%3.7%4.4%6.62%6.61%-0.01% Revenues15.1%16.6%16.4%17.5%18.6%18.3%20.42%20.91%0.49% Transfers3.0%3.5%3.7%3.8%4.2%4.0%4.52%4.32%-0.21% Net revenues12.1%13.2%12.8%13.6%14.5%14.3%15.90%16.60%0.70% Expenditures10.3%9.7%9.6%10.3%10.6%9.5%9.17%9.80%0.62% Payroll5.0%5.1% 5.4% 5.2%5.30%5.23%-0.07% Unemployment benefits0.5%0.6%0.5%0.6% 0.42%0.48%0.06% LOAS/RMV0.3%0.27%0.46%0.20% OCC4.8%4.0% 4.4%4.6%3.5%3.19%3.62%0.43% Subsidies0.3% 0.4%0.2%0.4%0.10%0.19%0.09% II - INSS-0.8%-1.0%-0.9%-1.1%-1.3%-1.7%-1.27%-1.65%-0.38% Revenues5.1%5.0%5.1%5.2%5.3% 4.95%5.34%0.39% Benefits5.9%6.0% 6.3%6.5%7.1%6.22%6.99%0.77% III - CENTRAL BANK0.0%-0.1%0.0%-0.1% 0.0%-0.04% 0.00% Central Government Primary Result0.7%2.2%1.9%1.8%2.4%2.6%5.31%4.92%-0.39% Memo: Total Revenues20.2%21.7%21.5%22.7%23.9%23.6%25.37%26.25%0.88% Transfers3.0%3.5%3.7%3.8%4.2%4.0%4.52%4.32%-0.21% Primary expenditures16.5%16.0%15.9%17.0%17.4%17.1%15.54%17.02%1.48% Jan-Apr

56. 55 Fiscal Result 1998199920002001200220032003*2004* change Nominal deficit 7.5%5.8%3.6% 4.6%5.2%4.0%1.7%-2.2% Primary deficit0.01%-3.19%-3.46%-3.64%-3.89%-4.37%-7.0%-6.4%0.6% Central Government-0.5%-2.3%-1.9%-1.8%-2.4%-2.6%-5.4%-5.0%0.4% Subnational governments0.2%-0.2%-0.5%-0.9%-0.8%-0.9%-1.3% 0.0% States0.3%-0.2%-0.4%-0.6% -0.8%-1.2% 0.0% Municipalities-0.1% -0.3%-0.2%-0.1% 0.0% Public companies0.4%-0.6%-1.1%-0.9%-0.7%-0.9%-0.3%-0.1%0.3% Federal0.2%-0.7%-0.9%-0.6%-0.5%-0.6%-0.1%0.2%0.3% Local0.1%0.0%-0.1%-0.3% 0.0% Nominal Interest on Debt7.5%9.0%7.1%7.2%8.5%9.6%11.0%8.1%-2.9% Jan-Apr

57. 56 Public Sector Primary Surplus % of GDP Federal Government and BacenSub-national Governments State-Owned EnterprisesConsolidated Public Sector 0 1 2 3 4 5 Dec 98 Aug 99 Apr 00 Dec 00 Aug 01 Apr 02 Dec 02 Aug 03 Apr 04

58. 57 Debt-to-GDP Ratio 27 36 45 54 63 Jan 91 Apr 92 Jul 93 Oct 94 Jan 96 Apr 97 Jul 98 Oct 99 Jan 01 Apr 02 Jul 03 % do PIB Apr 04 56.6% Jan 02 May 02 Sep 02 Jan 03 May 03 Set 03 Apr 04

59. 58 Debt Dynamics 199920002001200220032004 Net debt increase7.4%-0.2%3.2%2.8%3.2%-2.1% 1. Primary surplus-3.0%-3.3%-3.5%-3.3%-4.3%-2.0% 2. Pure interest on the debt8.4%6.8%6.9%7.2%9.3%2.5% 3. Depreciation on domestic debt3.8%0.8%1.5%4.8%-1.5%0.1% 4. Depreciation on foreign debt4.2%0.8%1.5%4.4%-1.6%0.2% 5. Skeletons0.0%0.8%1.5%0.9%0.0% 6. Privatization proceeds-0.9%-1.8%-0.1%-0.2%0.0% 7. Effect of GDP growth-5.2%-4.3%-4.6%-11.0%1.2%-2.9% Memo: Debt dynamics (1+2+7)0.2%-0.8%-1.2%-7.1%6.3%-2.4% Currency (3+4)8.0%1.6%3.0%9.3%-3.1%0.3% Net "skeletons" (5-6)-0.9%-1.0%1.4%0.7%0.0%

60. 59 FX-Linked Debt Rollover Rate 0% - 0% - 0% - 0% - 0 10 20 30 40 50 60 70 80 90 100 Jan 03 Feb 03 Mar 03 Apr 03 May 03 Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 % 0% - May 04

61. 60 USD Debt - % of debt % 31 56 16 5 15 25 35 45 55 65 Jan 97 Mar 98 May 99 Jul 00 Sep 01 Nov 02 Apr 04 Total USD-linked debt vs total net debt Domestic USD-linked debt vs. domestic debt

62. 61 USD Linked Public Debt Apr/04 97.3 136.0 40 60 80 100 120 140 Jan 97 Sep 98 May 00 Jan 02 Sep 03 US$ billion

63. 62 V. Strengthening Resistance to Shocks

64. 63 Net International Reserves Net Reserves Adjusted Net Reserves US$ billion 10 15 20 25 30 35 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04

65. 64 External Debt Ratios *2004: BCB estimate 969798990001020304* Interest payments/exports (%) 26.7 27.2 31.0 36.4 31.0 30.3 25.3 21.0 19.9 Net external debt/exports 2.0 2.3 3.2 3.6 3.1 2.8 2.7 2.1 1.8 Net external debt/GDP (%) 12.1 15.2 20.9 32.5 28.4 31.9 35.9 30.6 26.0

66. 65 Interest Payments/Exports Ratio % 18 22 26 30 34 38 199619971998199920002001200220032004* *2004: BCB estimate

67. 66 1.5 2.0 2.5 3.0 3.5 4.0 199619971998199920002001200220032004* Net External Debt/Exports Ratio % *2004: BCB estimate

68. 67 Net External Debt/GDP Ratio 10 15 20 25 30 35 40 19961997199819992000200120022003 % 2004* *2004: BCB estimate

69. 68 Impact of a 1% FX change on Debt/GDP ratio 0,17 0,19 0,21 0,23 0,25 0,27 0,29 0,31 0,33 0,35 Jan 00 Sep 00 May 01 Jan 02 Sep 02 May 03 Apr 04 %

70. 69 Afonso Bevilaqua / Alexandre Schwartsman June 2004 Brazil: Recent Economic Developments