1 Afonso Bevilaqua June 2004 Brazil: Recent Economic Developments

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

3 I. Economic Activity

4 GDP Growth Q032Q03 3Q034Q031Q04 % Seasonally Adjusted

5 GDP x Domestic Demand Q022Q023Q024Q021Q032Q033Q034Q031Q04 Domestic DemandGDP 2Q03 = 100

6 GDP x Investment Growth -8% -6% -4% -2% 0% 2% 4% 6% GDPInvestment 1Q032Q033Q034Q031Q04

7 Industrial Output Source: IBGE, May 2004 = BCB estimate Jan 99 Sep 99 May 00 Jan 01 Sep 01 May 02 Jan 03 Sep 03 May 04 s.a., 2002 = 100

8 Industrial Output Source: IBGE Total Capital Goods Intermediate Goods Consumer Goods Durable Semi-Durable e Non-Durable+0.2 % Apr 04 Apr 03 Jan-Apr 04 Jan-Apr 03

tt+1t+2t+3t+4t+5t+6t+7t+8t+9 Jul 95Feb 99Nov 01Jul 03 Compared Economic Recoveries in Brazil Previous Trough = 100 Industrial Output

Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Capital Goods Intermediate Goods Durable Goods Non-Durable Goods % Source: IBGE Accumulated growth since June 2003, seasonally adjusted Industrial Output by Categories of Use

11 Real Retail Sales Jan 01 May 01 Sep 01 Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 Apr 04 Seasonally Adjusted, 3-Month Moving Average Average 2003 = 100 Source: IBGE, Banco Central

12 Apr 04 Apr 03 Jan-Apr 04 Jan-Apr 03 Total Furniture & Electronics Fuel and Lubricants Supermarket, Food, Beverage and Tobacco Vehicles & Autoparts Clothing Retail Sales % Source: IBGE, Banco Central

13 Retail Sales Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Accumulated growth since June 2003, seasonally adjusted Supermarket Clothing Furniture & Electronics Vehicles & Autoparts % 26 Source: IBGE, Banco Central

14 Real Interest Rates (360-day swap) Source: Bacen Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 % p.a. Avg 01/ % Avg 97/ % Avg % Avg % Avg %

Jan/02 Mar/02 May/02 Jul/02 Sep/02 Nov/02 Jan/03 Mar/03 May/03 Jul/03 Sep/03 Nov/03 Jan/04 Mar/04 May/ Real Interest RateRetail Sales (t+9) Real Interest Rate vs. Retail Sales % p.y. 2003=100

16 Supermarket Sales vs. Total Payroll Jan/02 Mar/02 May/02 Jul/02 Sep/02 Nov/02 Jan/03 Mar/03 May/03 Jul/03 Sep/03 Nov/03 Jan/04 Mar/04 May/04 Supermarket Sales (2003=100)Total Payroll (1992=100)

17 Industrial Sales x Industrial Output Source: IBGE, CNI Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Jun 03 = 100 Industrial Output Industrial Sales

Apr 03Jul 03Oct 03Jan 04Apr 04 Insufficient Excessive Balance Quarterly Industrial Survey: Level of Inventories % of Sample Source: FGV

19 Industrial Employment Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 s.a., Jun 2003 = 100 São Paulo (Fiesp)Brazil (CNI)

20 Formal Employment s.a., Jun 2003 = Jun 03 JulAug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 Source: Ministry of Labor and Employment 03

21 Industrial Real Wages s.a., Jun 2003 = 100 Source: CNI Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr

22 Urban Average Real Earnings Source: IBGE Mar 2002 = Mar 02 Aug 02 Jan 03 Jun 03 Nov 03 Apr 04

23 Packing Paper Shipments s.a., Jun 2003 = 100 Source: ABPO Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04

24 Power Consumption: São Paulo Source: São Paulo State Energy Department Jun 03 Jul 03 Aug 03 Sep 03 Oct 03 Nov 03 Dec 03 Jan 04 Feb 04 Mar 04 Apr 04 May 04 s.a., Jun 2003 = 100

25 Business Confidence 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

26 In a Nutshell 1 st quarter GDP growth confirms economic rebound. Result is consistent with the 3.5% growth estimate for the year. Industrial output continued to expand in 2004, with positive prospects for the near future due to increasing domestic and external demand. Sales have been outpacing production growth, affecting level of inventories. Credit growth and payroll increase explain sales expansion, still led by durable goods. Unemployment rate affected by increase in labor force. However, formal employment rising.

27 II. Inflation

28 IPCA Inflation Rate % Jan 02 Apr 02 Jul 02 Oct 02 Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 May 04 Source: IBGE

29 Accumulated in 12 months % IPCA Inflation Rate Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04

30 Wholesale Industrial Prices % 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 Jan 04Feb 04Mar 04Apr 04May 04 Source: FGV

31 Commodities Prices Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 May 04 Food Chicago Commodities Bureau (CRB) Price Index 1995 = 100 Metals Source: CRB

IGP 10 IGP M DI IGP 10 IGP M DI IGP 10 IGP M DI IGP 10 IGP M DI IGP 10 IGP M DI Jan 04Feb 04Mar 04Apr 04May 04 Wholesale Agricultural Prices 2.70 Source: FGV

33 Core Inflation IPCA: 3-Month Moving Average Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 May 04 % Smoothed trimmed meansExclusionNon-Smoothed trimmed means Source: Bacen

34 Market Inflation Expectations: 2004 % p.a Jan 02 May 02 Sep 02 Jan 03 May 03 Sep 03 Jan 04 Jun % Source: Bacen

35 Inflation Expectations: 12-Month % Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 Jun % Source: Bacen

36 III. External Sector

37 Current Account Surplus: 1994/ % of GDP *2004: 12-month to April 2004* 1.1

38 Current Account vs. Trade Balance -36, , , , ,000 -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 8,000 12,000 16,000 20,000 24,000 28,000 Trade balance

39 Trade Balance Source: Ministry of Development, Industry and Foreign Trade Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 May 04 US$ billion 12-Month, Accumulated Imports Exports

40 Exports and Imports Volume 1996 = 100 Seasonally Adjusted Exports Imports

41 Export and Import Prices 1996 = Exports Imports

42 Imports Substitution Imported Quantum left scale Industrial Output right scale Dec 1995 = Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec Dec 1995 = 100

43 Export Growth Diversification Contribution by Country to Exports Growth - last 12 Months - Argentina 19% China 12% Netherlands 8% Germany 4% Italy 4% United States 3% Others 50%

44 Last 12 Months Others 41.2% Germany 4.4% Mexico 3.8% Italy 3.2% United States 21.9% Japan 3.2% Chile 2.7% Netherlands 6.0% China 6.4% Argentina 7.1% Brazilian Exports by Market

45 External Private Debt Rollover 20% 40% 60% 80% 100% 120% 140% 160% Jul 01 Nov 01 Mar 02 Jul 02 Nov 02 Mar 03 Jul 03 Nov 03 Mar 04 6-month moving average Source: Bacen

46 IV. Fiscal Policy and Debt Management

47 Consolidated Public Sector Primary Surplus % of GDP Apr Jul 94 Feb 96 Sep 97 Apr 99 Nov 00 Jun 02 Jan 04 Source: Bacen

% % of 1H Fiscal Target Accomplished in the Jan-Apr Period Fiscal Target

49 Debt-to-GDP Ratio Jan 91 Apr 92 Jul 93 Oct 94 Jan 96 Apr 97 Jul 98 Oct 99 Jan 01 Apr 02 Jul 03 % of GDP Apr % Source: Bacen Dec 03Jan 04Feb 04Mar 04Apr 04

50 Debt Dynamics 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%

51 FX-Linked Debt Rollover Rate % Source: Bacen 0% - 0% - 0% - 0% - 0% Jan 03 Mar 03 May 03 Jul 03 Sep 03 Nov 03 Jan 04 Mar 04 May 04 From January to May, the government did not roll over any FX- linked bond or swap Avg 2003: 61.3%

52 FX-Linked and Fixed Domestic Debt as a Share of the Total Debt Source: Bacen FX-Linked Domestic Debt/Total Debt % Jan 02 Sep 02 May 03 May Jan 02 Sep 02 May 03 May Fixed Domestic Debt/Total Debt

53 V. Strengthening Resistance to Shocks

54 Net International Reserves Net Reserves Adjusted Net Reserves US$ billion Jan 99 Aug 99 Mar 00 Oct 00 May 01 Dec 01 Jul 02 Feb 03 Sep 03 Apr 04 Source: Bacen

55 Interest Payments/Exports Ratio % * * 2004: BCB estimate

* Net External Debt/Exports Ratio % * 2004: BCB estimate

57 Net External Debt/GDP Ratio % 2004* * 2004: BCB estimate

58 Impact of a 1% FX change on Debt/GDP ratio Jan 00 Sep 00 May 01 Jan 02 Sep 02 May 03 Apr 04 % Source: Bacen

59 Afonso Bevilaqua June 2004 Brazil: Recent Economic Developments