Can Brazil Qualify for the Investment Grade League? Shelly Shetty Senior Director

Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

Brazil in a Snapshot Real GDP growth (%) Consumer prices (ann. avg. % change) CXR (% change) CAB (% of GDP) Govt. balance (% of GDP) Source: Fitch Ratings.

Brazil’s likely to be more resilient to external turmoil >Ample international liquidity >Lower external financing needs >Liability management has reduced FX exposure of public debt >Central bank has the choice to let FX act as a shock absorber External Financing Needs (USD Bn) Source: Fitch Ratings.

Brazil Exports to Major Markets Note: Europe – EU & Eastern Europe countries, Latin America – Aladi & Mercosur Source: Ministerio do Desenvolvimento, Industria e Comercio Exterior In 2007, Brazil exported USD$11bn to China, up from USD$2bn in Brazil’s more diversified export base provides cushion

Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

Brazil upgraded to ‘BB+’ in May 2007 >Rapid growth in international reserves has reduced Brazil’s external vulnerability >Solid improvement in external solvency ratios >Brazil has emerged as a net public sector external creditor >Continued macroeconomic and political stability Source: Fitch Ratings.

What is slowing Brazil’s ascent to Investment Grade? >A heavy public debt burden >Unfavorable domestic debt profile >Weaker growth prospects compared with IG Sovereigns >Public debt dynamics not improving fast enough Brazil Key Indicators 2008 BBB Median Real GDP growth (%, 5 yr avg) GDP per capita (USD)8,0317,286 Consumer prices (% change) CAB (% of GDP) Govt. balance (% of GDP) Govt. debt (% of GDP) Govt. debt (% of revenue) Net external debt (% of CXR) Net public external debt (% of CXR) External debt service (% of CXR) Liquidity ratio (%)

Still Unfavorable Domestic Debt Composition Average term of fed securities (number of months) Source: Bacen. Domestic Debt by Type Source: Fitch estimates using BCB data.

>Brazil’s resilience in the unfavorable external environment >Central bank’s monetary and currency management >Signs of sustained investment and GDP growth >Improvements in external solvency and liquidity ratios >Fiscal performance >Reform progress Real Interest Rate – Selic* *Note: Uses average nominal Selic and prospective inflation (IPCA index) for the next 12 months. Source: Bacen. What will Fitch Ratings monitor in the coming months?

Why Peru was upgraded first to IG BrazilPeruBBB Median Source: Fitch Ratings.

But Brazil outshines Peru on Governance Indicators Source: World Bank and Fitch.

Agenda Brazil’s Macro Picture Brazil’s Credit Dynamics Brazil versus India: Comparing Two of the BRICs

Brazil and India: Similar in many respects >Large and closed economies –Brazil GDP (2007 e ): USD1.2 trn –India GDP: (2007 e ): USD 1.1 trn >Weak Public Finances >Deep and sophisticated domestic bond markets >Robust external liquidity and solvency ratios >Suffer from cumbersome coalition politics but India was assigned IG in August GDP Growth by sectors Source: National Authorities

India’s growth story more sustainable >Higher saving and investment levels >India’s manufacturing sector restructured since mid-90s >India has shifted towards knowledge economy >India is less commodity dependent but Brazil’s Per Capita Income is nearly 7 times that of India. Saving and Investment rates Source: Fitch Ratings.

India’s Debt Dynamics more favorable >GOI issues mainly long-term fixed rate bonds >GOI issues 10-year fixed rate bond at 8% >GOI domestic markets very captive in nature >GOI has no external bond debt General Government Debt (%GDP) Source: Fitch Ratings.

India’s fiscal problems may have easier solutions Source: Fitch Ratings. Revenues (% GDP)

External strengths: India’s international reserves more robust International Liquidity ratio (%) International Reserves/GDP (%) Source: Fitch Ratings.

Brazil’s Relative Strengths >Brazil’s financial markets have been repeatedly tested >Brazil’s has consistently run primary surpluses >Improvement in Brazil’s external solvency ratios more dramatic >Higher level of per capita income and greater political stability Source: Fitch Ratings.

Fitch Ratings New York One State Street Plaza New York, NY FITCH Fitch GroupFitch Ratings Fitch Solutions Algorithmics London 101 Finsbury Pavement London EC2A 1RS Singapore 6 Temasek Blvd. #35-03/04/05 Suntec Tower Four Singapore