1 Brazil: Economic Ooutlook, Opportunities and Challenges Andrea Goldstein

Brazil has resumed growth after a long hibernation, and is bound to grow above the global average over the coming years

GDP per capita (constant prices 2009) GDP per capita has been increasing since 2004 Source: WDI - World Bank

GDP per capita growth (%) The growth trend is positive since early the 2000s Source: WDI - World Bank

5 Schooling Source: Barro and Lee 2011

Productivity – growth rate Source: Wilson 2011

GDP performance by sector – 1995=100 Source: Central Bank of Brazil

Manufacturing value added 2011 (% GDP) Source: World Bank

Trade openness - % GDP Source: World Bank

Exports – share (%) Source: MDIC

Export coefficient and import penetration - manufacturing Source: CNI

Export and import – main partners, % total Source: MDIC Export destinationImport origin

Brazil-China trade

Recent growth performance Source: IBGE and Ministry of Finance *forecast Average 1.7%Average 3.5%Average 4.6%Average 4.7% After the currency crisis of 1998, a macro policy tripod was introduced: fiscal responsibility law, inflation targeting and floating exchange rate

Recent growth performance Source: IBGE Decomposition of GDP growth

Falling income inequality is boosting consumption Growth rate of per capita income (%) – average Source: IBGE

Job creation is on the rise Source: Ministry of Labor Net, private sector jobs, thousands

18 Falling unemployment Unemployment rate – record lows August, 2003 July, 2012 Source: IBGE

Brazilian population (millions) Source: FGV * Based on PNAD (IBGE) data An increasing middle class is feeding the domestic market Brazil: world’s seventh-largest domestic market

Fast credit expansion Source: Central Bank of Brazil

Navigating an increasingly complex world  Slow recovery in the US  Crisis in the Euro zone  Slowdown in China and other emerging economies  Rising geopolitical risks (protectionism, Northeast Asia, in oil countries)  Capital market distortions and uncertainties associated to highly heterodox policies, e.g. Qes and Abenomics  Risk aversion on the rise  Slowdown in trade, capital flows and FDI

Output growth forecast – 2013 Source: WEO Oct 2012, IMF

Brazil: Economic indicators 2013 Source: Citi Research (August 2012)

24 Sources of future growth Domestic demand, but also … –Increasing competitiveness –Investments –Well regulated financial sector -- banking system not exposed to toxic assets

Competitiveness is on the move 23 new Innovation Institutes 43 new Technological Centers Sectorial Innovation Funds 4 million people in vocational training per year Science without Borders – 100,000+ scholarships abroad in engineering and other tech. areas MNCs state-of-the-art innovation labs PISA-OECD – “Brazil, a successful reformer” –“The federal government has launched a major effort to improve education, increasing spending in classrooms and on teacher salaries and providing extra help for poorer families in order to get children into classrooms. By setting quality targets and leaving schools free to choose how best to achieve them, its National Education Plan has transformed the country into a laboratory of best education practices.” OECD

Other policies that will enhance competitiveness Electricity tax cut and new regulatory framework Payroll tax cuts Temporary and targeted business tax cuts Huge investments in public services Concessions and PPPs – ports, railways, roads, airports Active exchange rate policy SELIC down by 500 b.p. 26

New sources of savings and long-term funding New long-term funding instruments, secondary market, buy out markets New public pension fund (FUNPRESP) and rapid expansion of private pension funds FDI has been picking up –US$ 66 billion in 2011 –10% of total going to developing countries 27

The interest rate is declining Source: Central Bank of Brazil

29 Growth Acceleration Program 2 - PAC 2 Electric Energy Ports Airports Highways/Railways Urban Mobility 2014 World Cup 2016 Olympic Games

Investment perspectives are firm Investment outlook Source: BNDES

BNDES disbursements and approvals (US$ billion) Source : BNDES. *not including Petrobrás disbursements. **projection Forecast Thew role of BNDES

Counter-cyclical role, e.g. 2008/09 Strong support to SMEs Infrastructure – about 1.5% of GDP Equity financing Innovation Environment Start-ups, especially in tech. areas Venture capital Export finance 32

Is future growth sustainable? Source: National Treasury Sound fiscal conditions and room to maneuver Net public debt excludes assets and liabilities of Petrobras and Eletrobras

Sound external vulnerability indicators (% GDP) Source: Central Bank of Brazil

Rising investment rate (%) Investment will keep growing at a stronger pace than GDP Source: IBGE. *Projections - Finance Ministry

Social inclusion will sustain the domestic market Source: FGV Poverty rate – (%) share of population

37 Risks China/Asia slowdown Stagnation in the US and Europe Protectionism, uncertainties and market distortions created by unconventional policies Tightening of international credit

38 The way forward – challenges and reform agenda Accelerate labor productivity Increase savings and investments Improve competitiveness in manufacturing Tackle infrastructure bottlenecks Accelerate the transition towards a knowledge-based economy

Structural reforms Diversify sources of long-term funding Foster innovation Fiscal reform – ICMS (VAT) Pension reform Labor legislation reform Diversify exports and reduce dependency on commodities 39

Conclusions Domestic market will enlarge further Investments and increasing competitiveness will also drive growth Expanding investment opportunities in several areas 40

A bumpy road ahead: poor international environment and uncertainties But plenty of room for policy activism at the Government disposal Government is aware of the need to address a reform agenda to foster competitiveness and to foment sustained growth 41

Obrigado!! 42