1. BRAZIL: ECONOMIC PERSPECTIVES Gustavo Loyola gloyola@tendencias.com.br

2. 2 Plan of presentation Macroeconomic perspectives Brazil in the financial crisis

3. 3 Macroeconomic perspectives Brazil in the financial crisis

4. 4  Three main channels of contagion of international financial crisis into the country:  Credit;  Exports and foreign trade;  Expectations and confidence.  Impacts on the domestic economy were both mild and short. Main reasons for these were:  Strong fundamentals of Brazilian economy prior to the crisis;  Sound state of financial sector in Brazil;  Recent growth mainly spurred by domestic factors;  Countercyclical policies (fiscal and monetary). Domestic Scenario Overview

5. 5 Credit – New bank loans (monthly averages, seasonally adjusted, constant values, R$ million) Source: Brazilian Central Bank

6. 6 Industrial production (index, seasonally adjusted) Source: IBGE (forecast Tendencias)  Peak-to-through fall of 20.9% in 2008 Q4; Recovered 13.5% since then. % yoy: 2007: 6.0%2008: 3.1%2009(f): -8.7%2010(f): 9.3%

7. 7 Industrial production (index, seasonally adjusted) Source: IBGE

8. 8 Domestic activity Source: IBGE Spectacular fall since 2004, reaching lowest ever levels in Dec 08. Reversal of downward trend in early 2009. % yoy: 2007: 9.7% 2008: 9.1% 2009(f): 5.1% 2010(f): 7.0%

9. 9 GDP growth (annual rates) Source: IBGE (forecast Tendencias)

10. 10 Macroeconomic perspectives Brazil in the financial crisis

11. 11 Forecast for 2009-2010 Indicator20092010 GDP Growth (%)(0.0)4.8 Inflation (CPI) - %4.2 Benchmark interest rate (Selic) - %8.7510.00 F/X (R$/US$)1.751.70 Trade Balance (US$ bi)15.625.0 Current Account (US$ bi)(18.7)(22.6)

12. 12 Brazil outlook Why does Brazil have good perspectives? Reduced geopolitical as well as political risks (contrast with other Bric’s): Democratic institutions Market economy Absence of ethnic conflicts Pacific relations with neighbouring countries Safeguard of macroeconomic stability: Law of Fiscal Responsibility Inflation targeting regime Floating exchange rate De facto Central Bank independence Vast and increasing domestic market for consumption goods

13. 13 Brazil outlook Expanding credit markets: Credit to GDP ratio went from 30% in Dec 06 to 45% (currently) Important regional player: 35% of Latin American and Caribbean (LAC) GDP 33% of LAC population Diversified economy, sophisticated financial markets Important producer of several commodities: Brazil is one of the largest world producer and exporter for: soya beans, corn, coffee, cotton, sugar, orange juice, cattle and veal, poultry, iron ore Important player on different energy sources: biofuel (ethanol), oil (pre salt) Big events: Football World Cup (2014), Summer Olympic Games (2016) Brazil will be in the spotlight Investment in infra-structure and services

14. 14  Coming years will be good for Brazil.  Economic growth led by domestic sectors (consumption and investment) based on employment growth, income and credit.  Exchange rate keeps strong value due to the flow of resources into Brazilian economy.  Risks: medium-term economic growth is constrained by growth of potential GDP, which, in turn, is affected by (lack of) investment in infrastructure, human capital, and micro structural reforms (tax, labor, social security). Summary

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