1. Remarks by Teresa Ter-Minassian At the Wilson Center seminar: “Brazil’s 2016 Challenging Outlook” Jan. 8, 2016

2. The bottom line President Dilma is reported to have acknowledged 2015 as a “difficult year”. 2016 is unlikely to be significantly better on average, but, depending on policies, may see the beginning either of an improvement or of a slide towards crisis in the latter part of the year The first half or so of the year is likely to continue to be dominated by the political uncertainties associated with the impeachment process and the further fallout of the Lava Jato and other corruption scandals. These uncertainties are likely to affect deeply the economy in a number of ways discussed below Assuming that the political uncertainties are largely resolved by mid-year, the outlook for the rest of 2016 and especially beyond will be very much affected by the evolution of policies. Different scenarios are possible, but their respective likelihood is difficult to assess at this time

3. Effects of the political uncertainties on the real economy The first several months of 2016 are likely to see: A continued fall in private consumption, reflecting fears of further rises in unemployment and the burden of household debt No recovery in private investment, probably even a further decline, reflecting very low business confidence and tight credit conditions Consequently, a continued decline in output and rise in unemployment Only limited progress on inflation, which will remain in the high single digits, reflecting lingering effects of the recent increases in administered prices and depreciation of the exchange rate The improvement in the external trade balance continuing to be driven by falling imports, rather than rising exports, given the weakness in external demand, especially from China, and in commodity prices. FDI is unlikely to make a strong comeback.

4. Prospects for the public finances The government will be under pressure to increase spending, in an attempt to revive demand, arrest the deterioration in the labor market, and buy political support during the impeachment proceedings Moreover, the Social Security’s finances will be adversely impacted by the recent large increase in the minimum wage. Spending on unemployment benefits will also continue to rise. There will be growing pressure from state governors and mayors of some cities to obtain the Treasury’s authorization to resume borrowing, especially abroad Some implicit contingent liabilities (e.g. need to support some public enterprises) may materialize The worse than projected economic outlook may result in a shortfall of revenues, compared with the recently passed 2016 budget, even if all the revenue-raising measures proposed by the government are approved and implemented on schedule As a result, the primary balance is unlikely to improve as much as targeted Even if the BCB does not raise interest rates further, interest payments on the growing stock of public debt will continue to increase, although, barring a large capital outflow, the fiscal cost of the foreign exchange swap program by the Central Bank may decline, compared with 2015 Therefore, the nominal deficit will remain very high and the public debt will continue to rise as a ratio to GDP, possibly approaching 70% in the authorities’ definition (which excludes part of the debt held by the Central Bank)

5. Possible scenarios for the second half of 2016 and beyond (I) Scenario One: The government (whichever it might be) is willing and able to initiate a serious and credible program of spending, tax, and other structural reforms (especially in the labor market and regulatory regimes) that boost productivity and confidence of investors and financial markets, and facilitate a gradual but sustained decline in interest rates Under such a scenario, one could expect a recovery of investment, especially in the tradables sector, and ultimately in output and employment. Inflation would decelerate, the current account stabilize at a sustainable deficit. The fiscal position would strengthen progressively and the public debt stabilize and eventually begin to decline This positive scenario would help shelter Brazil from possible external shocks, and substantially improve domestic welfare. There is, however, no guarantee that the political consensus needed to adopt such reforms will materialize in the near term

6. Possible scenarios for the second half of 2016 and beyond (II) Scenario Two: Muddling through, with little reform, but some improvement in the mix of macro-economic policies (some tightening of the fiscal stance and easing of monetary policy). The exchange rate would continue to slide, to avoid a renewed weakening of competitiveness Under this scenario, GDP would recover only slowly, to a clearly sub-par rate for the next few years, unemployment would not fall significantly, and inflation would remain in the high single digits The public debt would likely continue to rise as a ratio to GDP, albeit at a slower rate The main risks to the sustainability of such a scenario would be an intensification of social pressures to boost growth through fiscal stimulus, on the one hand, and mounting market concerns with the public debt dynamics, on the other. Scenario Three: Outright crisis engendered by significant fiscal laxity, further repeated rating downgrades, capital flight and large losses of external reserves. Under such a scenario, GDP would decline again, and inflation spiral upwards This scenario would likely take time to materialize, given the current size of external buffers, but cannot be ruled out for the medium term, in the absence of fiscal adjustment.