Brazil Economic Overview

London

Alexandre Tombini Governor

July 27, 2012

Brazil
Brazil is among the largest countries in terms of territory, population and GDP Brazil has vast natural resources, including recently discovered large offshore oil fields, a diverse industrial base, a dynamic and sophisticated private sector, and a well-structured public sector

Brazil is a vigorous democracy, with free multiparty elections and a stable political system
Brazil has good relations with all its neighbors and has increased its ties with all regions of the world 6th largest GDP: US$ 2,475 billion (2011) Continental country: 8,514,877 km2 5th largest area

5th largest population: 191 million people (2010)

Source: IBGE

Executive Summary
Macroeconomic and financial stability, sustainable
economic growth and targeted social policies have all contributed to poverty reduction and better income distribution

Economic growth will accelerate throughout 2H2012

and 2013 and inflation is converging to target

Outlook is for sustainable economic growth over the

coming years, with substantial particularly in infrastructure investments,

Index

Economic and Social Achievements Recent Economic Developments Looking Forward

Economic and Social Achievements

Macroeconomic Policy
Main features of the macroeconomic policy framework: - Inflation targeting - Fiscal responsibility - Exchange rate flexibility

The macroeconomic fundamentals, combined with adequate prudential policy and strong bank supervision, resulted in: - Capacity to absorb internal and external shocks - Macroeconomic and financial stability - Sustainable economic growth - Credit and capital market development - Investment growth
6

% yoy 10 12 16

14

18

Source: BCB dez 99 dez 00 dez 01 dez 02 dez 03 dez 04 dez 05 dez 06 dez 07 dez 08 dez 09 dez 10 dez 11

Achieved Inflation Target for 8th Year in a Row

Declining Real Interest Rate

25 20 15 10

% annual

5
0
Jul 20th 1.9%

jan 06

jan 02

jan 03

jan 04

jan 05

jan 07

jan 08

jan 09

jan 10

jan 11

360-day market rate discounted by the IPCA expected for the next 12 months (Focus)

up to Jul 20th

Source: BM&FBovespa / BCB

jan 12

Commitment to Fiscal Targets

4,0 3,5 3,0 2,5 % of GDP 2,0 1,5 1,0 0,5 0,0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*
*May 12

3,7 3,2 3,3

3,8

Primary fiscal surplus

3,2 3,3 3,4 3,1 2,7 3,0

2,0

Source: BCB

Declining Net Public Debt

60 57
60,4

54,8 52,0 50,6 48,4 47,3 45,5

54
51 % of GDP 48 45 42 39 36 33

-25.4 p.p. of GDP

42,1 38,5 39,1 36,4 35,0

2006

2001

2002

2003

2004

2005

2007

2008

2009

2010

2011

Source: BCB

2012*
*May 12

10

Robust International Reserves

400 350 300 US$ billion 250
239 194 289 352 375

200 150
100 50 0
4 12 12 7 5 7 9 10 10 9 24 32 39 52 60 52 45 36 33 36 38 49 53 54 86

180

1988

1994

2000

2006

1982

1984

1986

1990

1992

1996

1998

2002

2004

2008

2010

as of Jul 20th

Source: BCB

2012*
11

Brazil Has Become a Net External Creditor

210
190 190 182 163 165 131 103 106 96 97 105 108 100 99 88 92 101 151 136 101 75

170
130 US$ billion 90 50 10 -30 -70 -110 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
79 87 88 92

-12 -28 -62 -51 -73 -94

2002

2004

2006

2008

2010

*estimate Jun 12

Source: BCB

2012*
12

Strong External Debt Ratios

140 120
120,6%

100
80 %
63,4%

60 40 20 0 short term debt/intl. reserves debt services/exports Dec 03

Source: BCB
21,7% 16,1% 38,8%

12,6%

external debt/GDP

Jun 12*

*estimate

13

Sovereign Credit Ratings Reflect These Improvements

A3 / A-14 Baa1 / BBB+ 13 Baa2 / BBB 12 Baa3 / BBB11 Ba1 / BB+ 10 Ba2 / BB 9 Ba3 / BB-8 B1 / B+ 7 B2 / B 6 B3 / B- 5

Investment grade

upgrades in 2011: April: Fitch June: Moodys November: S&P

1994

1998

1995

1996

1997

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Moody's
Source: Moodys / S&P / Fitch

S&P

Fitch
14

2012

Social Development
Macroeconomic and social inclusion policies have led to a marked improvement in living conditions

A significant share of low income groups joined the middle class

15

Declining Poverty and Inequality

20 18 16 % of households 14 12 10 8 0,65 0,64 0,63 0,62 0,61 0,60 0,59 0,58 0,57 0,56 0,55 0,54 0,53 0,52 0,51 0,50 1981 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 Extreme Poverty
Source: IPEA

6
4 2 0

Gini Index (RHS)

16

Financial Inclusion is a Priority

All municipalities have a least one bank branch, outpost or correspondent. 2000 2010

# of points per 10,000 adults (% of municipalities) 0 (20%)

# of points per 10,000 adults (% of municipalities) 0 (0%)

>0 to 2 (22%)
>2 to 5 (40%) >5 to 10 (16%) >10 (2%)

>0 to 2 (0%)
>2 to 5 (6%) >5 to 10 (29%) >10 (65%)
Bank branches, bank advanced outposts (PAA), credit cooperatives (headquarters and outposts) and bank correspondents

Source: BCB / IBGE

17

Recent Economic Developments

Inflation Activity Credit & Financial System
18

Declining Consumer Inflation

7,5
7,0 6,5 % yoy 6,0 5,5 5,0 4,5 4,0 dez 10 jan 11 fev 11 mar 11 abr 11 mai 11 jun 11 jul 11 ago 11 set 11 out 11 nov 11 dez 11 jan 12 fev 12 mar 12 abr 12 mai 12 jun 12 jul 12 IPCA-15 and IPCA INPC IPC-Fipe
Source: IBGE / Fipe / FGV
5.31%
IPC-10 (Jul)

4.92%
IPCA (Jun)

4.90%
INPC (Jun)

4.30%
IPC-Fipe nd week Jul) (2

IPC (10, M and DI)

19

% yoy 4,0 dez 10 jan 11 fev 11 mar 11 abr 11 mai 11 jun 11 jul 11 ago 11 set 11 out 11 nov 11 dez 11 jan 12 fev 12 IPCA-15 and IPCA 4,5 5,0 5,5 6,0 6,5 7,0

7,5

Source: IBGE / Fipe / FGV

Declining Consumer Inflation

mar 12
abr 12 mai 12 jun 12 jul 12
4.92%
IPCA (Jun)

20

YoY 10 12 14 16

18

Source: BCB

dez 99 dez 00 dez 01 dez 02 dez 03 dez 04 dez 05 dez 06 dez 07 dez 08 dez 09 dez 10

dez 11
dez 12
Reference Scenario

Inflation Declining Towards the Central Target

dez 13
21

Recent Economic Developments

Inflation Activity Credit & Financial System
22

% 10 -4 0 2 4 6 8

-2

Source: IBGE / BCB (Focus)

Business Cycle
GDP real growth

Market expectations

1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 4Q 13
Focus July 20th

23

Economic Growth Expected to Accelerate Elements which explain growth acceleration

Drivers of domestic demand still present

Unemployment rate at record lows Formal job creation still strong Real labor income growing Credit growing at a sustainable pace

Monetary and financial stimuli already in place

Both interest rate and spread are decreasing Reserve requirements have been reduced

Fiscal stimuli

At the end of 2012 and the beginning of 2013,

Brazil will be growing 4% (quarterly annualized)
24

Unemployment Rate at Record Lows

14 13 % (seasonally adjusted) 12 11 10 9 8 7 6 5 jan 03 jan 04 jan 05 jan 06 jan 07 jan 08 jan 09 jan 10 jan 11 jan 12
up to May 12

May 12 5.4%

Source: IBGE / BCB

25

Formal Job Creation is Strong

2,5
2,1 2,0
1 million and 159 thousand jobs in the last 12 months (Jul 11 Jun 12)

million jobs

1,5

1,5

1,6 1,2

1,0

1,0

0,5

0,0 2008 2009 2010 2011 2012 *

*12 months up to Jun 12

Source: MTE / BCB

26

Real Wages and Real Payroll are Growing

120 118 average (Dec 08 = 100) 116 114 112 110 108

Average in the previous 12 months

+ 7.5%
May 12 / May 11

+ 4.9%
May 12 / May 11

106
104 102 100 mar 09 mar 10 mar 12

set 10

jan 11

mar 11

mai 09

jan 09

set 09

jan 10

set 11

mai 10

mai 11

nov 09

nov 10

real wages
Source: IBGE

real payroll
27

nov 11

jan 12

jul 09

jul 10

jul 11

Rebalancing of Industrial Inventories

Over the last few months, industrial firms rebalanced their inventories. Together with the strong drivers for domestic demand and the adjustment to monetary conditions, this favors the resumption of growth in industrial production in the coming months 120

115
110 105 100 95 abr 07 abr 08 abr 09 abr 10 abr 12 abr 11 out 07 out 08 out 09 out 10 jul 11

ndice

jan 09

jan 07

jan 08

jan 10

out 11

jul 07

jul 08

jul 09

jul 10

jan 11

Data until Jun 12

Source: FGV

jan 12

28

% 11 10 13 8 9

12

Source: BCB

jan 11 fev 11 mar 11 abr 11 mai 11 jun 11 jul 11

12.5

ago 11 set 11 out 11 nov 11 dez 11 jan 12 fev 12 mar 12 abr 12 mai 12 jun 12 jul 12 8.0

Monetary Policy Interest Rate

29

Household Credit Interest Rates

2 0 -2 -4

Rates Decline since August 2011

(pp per year)

-6 -910 bps -8 -10

ago 11 mar 12 fev 12 abr 12 set 11 jan 12 nov 11 dez 11 mai 12 jun 12 out 11

Source: BCB

30

Reserve Requirements
500 450 400 R$ billion 350 300 250 220 200 150
nov 10
fev 09 fev 10 mai 08 nov 08 mai 09 nov 09 mai 10 ago 11 fev 12 ago 08 ago 09 ago 10 mai 12 mai 11 fev 11 nov 11 29% 395 34% 449 35% 393 31% 35% 314 28%

45% 40%

30% 25%

173 18%

20% 15% 10%

100

Compulsory deposits / total deposits

Source: BCB

Reserve requirements (overall balance)

31

GDP Growth Will Accelerate Through 2012 and 2013

5,0 4,5 4,0 3,5 3,5

Quarterly GDP YoY Market expectations

4,5

4,5

3,0
% 2,5 2,0 2,2

1,5
1,0 0,5 0,8 0,9

0,0
1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13

Source: BCB (Focus)

32

IMF Forecasts
Difference from April 2012 WEO Projections 2012* World Output Advanced Economies United States Euro Area Japan United Kingdom Emerging and Developing Economies 3.5 1.4 2.0 -0.3 2.4 0.2 5.6 2013* 3.9 1.9 2.3 0.7 1.5 1.4 5.9 2012 -0.1 0.0 -0.1 0.0 0.4 -0.6 -0.1 2013 -0.2 -0.2 -0.1 -0.2 -0.2 -0.6 -0.2

Brazil
Russia India China Mexico

2.5
4.0 6.1 8.0 3.9

4.6
3.9 6.5 8.5 3.6

-0.6
0.0 -0.7 -0.2 0.3

0.5
-0.1 -0.7 -0.3 0.0

Source: IMF (World Economic Outlook Update, July 2012)

33

Recent Economic Developments

Inflation Activity Credit & Financial System
34

Credit and Financial System

Brazilian financial system is well capitalized

Provisioning is rigorous

Credit is growing at a sustainable pace

Access to banking services is increasing

35

Brazilian Banks Well Capitalized

20
16,6 19,0 18,5 17,4 17,8 17,3 17,7 18,9 16,9 16,3

15

14,8 13,8

10

2001

2000

2002

2003

2004

2005

2006

2007

2008

2009

Brazilian banks capital ratio regulatory minimum capital ratio

Basel minimum capital ratio

Source: BCB

2010

2011
36

Rigorous Provisioning
220% 210% 200% 190% 180% 170% 160% 150% 140% 130% 120% 110% 100% 90% 80% jan 04 jan 05 jan 06 jan 07 jan 08 jan 09 jan 10 jan 11 jan 12
up to May 12

jul 04

jul 05

jul 06

jul 07

jul 08

jul 09

provisions/NPLs
Source: BCB

3-mo moving average

jul 10

jul 11

37

Leading Indicator Points to Reduction in NPL

Auto Loans: Non Performing Loans four months after being granted

1,4
1,2 1,0 0,8 % 0,6 0,4 0,2 0,0 abr 10 ago 10

April 11 1.3%

Aug 11 1.2%

Jan 11 0.6%

ago 11

abr 11

fev 10

dez 09

dez 10

month which credit was granted

up to Jan 11 (reflected in May 12)

Source: BCB

dez 11

out 10

jun 10

out 11

fev 11

jun 11

38

Non-Performing Loans
Corporations
4,5 8,5

Individuals

4,0
3,5

8,0
7,5

3,0
2,5

7,0
6,5

2,0
1,5

6,0
5,5

1,0
0,5 out-11 ago-11 abr-11 abr-12

5,0
4,5 4,0 ago-11 out-11

abr-11

dez-11

dez-10

dez-10

dez-11

abr-12

fev-11

jun-11

fev-12

jun-12

fev-11

jun-11

fev-12

15 - 90 days

> 90 days

15 - 90 days

> 90 days

up to Jun 12

Source: BCB

jun-12
39

Credit Growing at a Sustainable Pace

2009-2011: 18.3%
2005-2008: 25.2%
(average growth of nominal credit) (average growth of nominal credit)

55
45 35 % of GDP 25 15 5 -5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
25,8 35,2 30,9 43,7 45,2

49,0

50,1

40,5

26,0

24,6

25,7

28,3

2011

*May 12

Source: BCB

2012*

40

Greater Access to Banking Services

2002 Accounts (for the banking sector) Customers 55,708,468 87,630,527 17,049 17,756 32,769 129,913 78,539 222 2009 83,308,800 151,102,765 20,046 21,287 53,628 165,567 151,351 2011 91,944,421 174,791,126 21,278 22,628 60,375 174,920 177,925 -

Branches
For the banking sector For all financial institutions Posts of service (for the banking sector) ATMs Domestic correspondents Municipalities Without banking services

With banking services

Municipalities banking services coverage

5,358
96%

5,566
100%

5,564
100%

Source: BCB

41

Looking Forward

42

Outlook for Brazil

Sustainable GDP growth over the coming years

Social gains and expansion of the middle class Demographic bonus until 2025 Major investment opportunities
Expanding and upgrading infrastructure Vast reserves of mineral commodities Offshore oil fields (pre-salt layer) Potential to expand cultivated area and agricultural production Major international sports events (FIFA World Cup and Olympics Games)

Fiscal and tax reforms to eliminate distortions, simplify the tax system and reduce costs Reforms to boost investments and increase competitiveness
43

Growing Middle Class Expanding Consumer Market

Social Stratification

200
7.6%

E
11.8%

C
23

A/B
14.9%

29

13

150 million people

37.6%

66

55.1%

105

60.2%

100
26.7%

118

47
20.3%

50
28.1%

39 49
12.9%

16.4%

32 17

25

0 2003 2011

8.6%

2014*
*FGV forecast

Source: FGV

44

Favorable Demographics
Population Pyramid (2010)
100+ 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4
-10

Dependency Ratio
100

men

women
75

50

25 1950 1960 1970 1980 1990 2000 2010 2020 2030

millions of people

Brazilian

population is highly concentrated within the Economically Active Population range

Brazils

dependency

ratio

is

2040

-5

10

declining

Note: The dependency ratio is the ratio of the sum of the population aged 0-14 and that aged 65+ to the population aged 15-64

Source: IBGE / UN

2050

still

45

Investment Rate at a New Level

20
19,5 19,1 19,3 19,1

19
18,3

18,7
18,1 17,4 17,4 17,0 17,0 16,8 16,4

18 % of GDP 17 16 15 14 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
16,9

16,3
16,1 15,9

16,4

15,7 15,3

2009

2010

2011

*1Q 2012 (12 months)

Source: IBGE

2012*

46

Brazil is a Major Recipient of FDI

70

67

64

60
50 US$ billion
49 45

40
33

35 26 22 17 18 15 19

30 20 10
3 1 2 1 11 3 2 2 4 19

29 29

10

0 1982 1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

*Jun 12 (12 months)

Source: BCB

2012*
47

Major Infrastructure Investments Planned for 2012-2015

Affordable Housing BRL 390 billion

Energy

BRL 300 billion

Oil and Gas

BRL 228 billion

Transportation

BRL 117 billion

Total: BRL 1.2 trillion

Other

BRL 160 billion

Source: Ministry of Planning and Budget

48

Investment Projects Map

Other 21 HPP (USD 21 bn) PPP HPP Belo Monte (USD 14.4 bn) - PPP Refineries and petrochemical plants (USD 76 bn) Natal Airport (USD 0.4 bn) concession Port of Manaus concession

Q
HPP Jirau (USD 7.3 bn) and Sto. Antonio (USD 2.3 bn) - PPP
Midwest integration railway East-West integration railway

Q Q Q

South Bahia and Deep Water ports - concession

North-South railway
Subways and urban trains (USD 7 bn) Brasilia Airport (USD 1.6 bn) - concession BR-040 and BR-116 (USD 3.0 bn) concession Power grid 42,000 km. (USD 27 bn) - concession

SP-Rio high speed train (USD 18 bn) concession So Paulo (USD 2.5 bn) and Campinas Airports (USD 4.8 bn) concession

Oil drilling and production development (USD 405 bn) - private

Social housing: 2 million houses (USD 69 bn) - PPP

Source: Ministry of Planning

49

Oil Reserves Set to Grow

crude oil, LNG and natural gas 45 billion barrel oil equivalent (boe) 40 35 30 25 20 15 10 5 0 deepwater offshore fields (pre-salt layer) *estimated volume
Franco* (4.5 billion boe)
Guara* (2 billion boe) Iara* (4 billion boe) Tupi and Iracema* (8 billion boe) Libra* (8 billion boe)

1993

2008

Source: Petrobras

future*
50

1989

1990

1991

1992

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2009

2010

Fiscal and Tax Reforms

Public sector pension reform
Tax incentives for investments in ports, railroads and telecommunications networks. Payroll tax rate cuts

Reduction in tax burden and fees charged on eletricity (work in progress) significant reduction in costs
Simplification and reduction of overall tax structure (work in progress)
51

Reforms to Increase Competitiveness

Private sector infrastructure concessions Airports (4 auctioned) New concessions on transport infrastructure highways, ports, railways and airports (upcoming on August 2012) Building a skilled labor force Science without frontiers program - 100 thousand scholarships for undergraduate and graduate studies abroad National Access to Technical Education and Employment Program (Pronatec) expansion of professional and technological education, totalling 8 million trainees over the next four years
52

Brazil Economic Overview

Alexandre Tombini Governor

53