1. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 HOW DOES BRAZIL FACE THE GLOBAL CRISIS: SHORT-TERM AND MEDIUM-TERM CHALLENGES São Paulo, 30 de Novembro de 2009

2. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 ABSTRACT The author presents the reasons in which Brazil has been doing much better than expected by confronting the international financial crisis. Among the reasons given by the author, some of them may be considered significant, such as: A solid Financial System, both public and private; Public Accounts in order with high primary surplus past eight years; High Exchange Reserves; Relatively Low Foreign Economic Deregulation; GDP structured 65% in domestic consumption; High Import Capacity ; Political Stability; Key Words: Financial system, primary surplus, exchange reserves, Gross Domestic Product, monetary stability.

3. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 INTRODUCTION Brazil is getting out much better of the international financial crisis than we could expect. In fact, Brazilian macroeconomic performance has been acknowledged not only by G-20, but also by multilateral organizations such as International Monetary Fund – IMF, International Bank for Reconstruction and Development – IBRD, also known as the World Bank. But, what reasons would enable Brazil to get out of this crisis more quickly and effectively than expected? The answer to this question takes into account macroeconomic factors that already existed a long time ago and may be analyzed as follows, without taking into account a chronological order or importance among them. They are:

4. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 a)Solid Financial System, both public and private Long before the current government, still during the President Fernando Henrique Cardoso’s management, two big plans for recovery of Brazilian financial system were organized: PROER and PROES. The first one (PROER) was for private banks and promoted banks mergers and acquisitions, the time when the monetary authority, in that case, Central Bank of Brazil intervened by closing private banks that did not have conditions to survive any longer a market where the monthly inflation rate was less than seven per cent. The second one (PROES) was for state public banks and promoted a complete reorganization of a banking system which wouldn’t have any chance to survive an inflationary scenario less than nineteen per cent (19%) a month. Those two extremely hard interventions taken by Central Bank of Brazil strengthened all the national financial system, putting it on the route of a high profitability, without any need to use spurious mechanisms such as American subprime as a way to get more profits. This was really one of the main factors that would enable Brazil to move off the international banking crisis.

5. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 b) Monetary Stability Brazil was the only country in the world to live a systematic and long-term with hyper inflationary process. In order to survive this process, our country adopted the Institute restatement, utilized for both incomes policy and pricing. The restatement fueled inflation rate. Beating inflation meant ending the indexation of the economy. This happened from July 1, 1994 on. In a gradual way Brazilian inflation became one of the lowest in the world. Well, this stability can be considered a key factor in the defeat of the economic crisis in the short term, by Brazil.

6. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 c) Public accounting with Primary surplus For eight consecutive years, Brazil has managed to control public spending in such a way that created a strong primary surplus, which was used to pay part of the interest account of domestic public debt and reduced the need for primary issuance currency. In 2009, public spending increased again and the federal government has been warned of this policy future risks.

7. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 –c) Public accounting with Primary surplus –For eight consecutive years, Brazil has managed to control public spending in such a way that created a strong primary surplus, which was used to pay part of the interest account of domestic public debt and reduced the need for primary issuance currency. In 2009, public spending increased again and the federal government has been warned of this policy future risks. –d) High Foreign Exchange Reserves –Brazilian foreign exchange reserves are at very high levels, moreover, ever wondered. Currently such reserves shall be placed around US$ 230 to US$ 240 billion. Reservations at this level protect our country from any risk of speculative attack from abroad to Real.

8. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 c) Public accounting with Primary surplus For eight consecutive years, Brazil has managed to control public spending in such a way that created a strong primary surplus, which was used to pay part of the interest account of domestic public debt and reduced the need for primary issuance currency. In 2009, public spending increased again and the federal government has been warned of this policy future risks. d) High Foreign Exchange Reserves Brazilian foreign exchange reserves are at very high levels, moreover, ever wondered. Currently such reserves shall be placed around US$ 230 to US$ 240 billion. Reservations at this level protect our country from any risk of speculative attack from abroad to Real.

9. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 e) Domestic GDP Estimates indicate that the Brazilian Gross National Product is sixty five percent structured in the domestic market. As people's income has not decreased in Brazil during the crisis, the consumption industrial production was directed to our market, keeping a certain level of GDP, but much less than might be expected, if the crisis had not reached Brazil. f) Low Foreign Economic Deregulation One negative point (low foreign economic deregulation) became positive in this crisis. For being less dependent on foreign trade and domestic industry producing a wide range of products, and rely on the domestic market, Brazil has not being that impacted by decreasing of our exports.

10. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 g) High Import Capacity The balances in the balance of trade, although smaller in the last two years, they still allow Brazil a good level regarding to import capacity. In addition, the dollar down, on one side it made a loss to the export sector it allowed to buy larger quantities of raw materials, and machinery and equipment at lower prices. h) Political stability The strengthening of the Brazilian democratic process that has lasted twenty-five years, allowed our country a political stability that has direct impact on the economy. Government changes and ministers give up no longer has any effect on markets and economic activity in Brazil.

11. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 The eight factors above do not exhaust the issues involved in the process of facing the financial crisis by Brazil, by all means; they were fundamental so that the country overcame this crisis in a lighter and quicker way. These are noticing and no anti-cyclical policies and represent over the past fifteen years the short and medium term challenges for Brazilian society.

12. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872  Conclusão

13. Rua Joaquim Nabuco, 708, Graças Recife/PE CEP 52011-000 Fone: 081 3222 1872 HOW DOES BRAZIL FACE THE GLOBAL CRISIS: SHORT-TERM AND MEDIUM-TERM CHALLENGES São Paulo, 30 de Novembro de 2009. JOSUÉ SOUTO MAIOR MUSSALÉM