1. Oct 2008 The Brazilian Economy

2. Global Slowdown …

4. Commodity Prices to Fall…

5. …affecting Brazil Stress: Direct effect (lower export growth) Stress: Total effect (lower export growth, consumption and investment) Base case

6. Clear downside risks to Brazilian growth

7. Expanding potential output productivity capital human capital natural capital utilization natural unemployment rate potential output

8. Public Debt Premises: Social security expenses, transferences to state and local governments and wages are considered rigid, they represent 2/3 of total expenditures. Other expenditures growth with GDP. GDP growth of 2.8% in 2009 and 2010. Currency devaluation impact is considered with an exchange rate of R$/US$ 2.0

9. Balance of payments projections

10. Brazilian Liabilities

11. Policy Options The central bank is addressing the scant international credit lines instead of wide intervention on the exchange rate Monetary policy faces the challenge of keeping inflation on target in an uncertain international environment. The prudent decision is to adopt a wait and see stance Tighter fiscal policy may help to avoid crowding out of private investment

12. Baseline Scenario Main hypotheses: –Monetary policy: is 7% more effective (due to increased funding cost) and aims at bringing inflation back to the target in 2009 –Primary fiscal surplus: raised to 4.3% of GDP in 2008 and 2009 –GDP trend growth: 5% p.a. in the forecasting horizon –Exchange rate: remains constant in real terms –Inflation expectations: 6.5% for 2008, 5.0% for 2009, 4.5% for 2010 –Administered prices: 4.0% in 2008 and 6.2% in 2009 –Average commodity prices fall 6.5% from current levels in 2008 and an additional 7% in 2009; the quantum of international trade grows 0% p.a. in 2009 and 2% in 2010

13. Baseline Scenario

15. For further information please contact: Sérgio Werlang sergio.werlang@itau.com.br F: (55 11) 5029-1381