Brazil Economic Overview

New York

Alexandre Tombini Governor

February 2013

Macroeconomic Policy and Social Development

Macroeconomic fundamentals, combined adequate prudential policies and strong supervision, resulted in: - Capacity to absorb internal and external shocks - Macroeconomic and financial stability - Sustainable economic growth - Credit and capital market development Macroeconomic and social inclusion policies have led to a marked improvement in living conditions
2

with bank

Solid Macroeconomic Fundamentals

18 16 14 12 10 8 6 4 2 0

Met Inflation Target 9 Consecutive Years

65 60 55 50 45 40 35 30 25 20

Declining Net Public Debt (% of GDP)

60 52 55 51 48 47 46 42 39

-25.3 p.p. of GDP

39 36 35

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011 2008

2005

1999

2000

2001

2002

2003

2004

2006

2007

2008

2009

2010

2012

2011

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2010

1989

2005

1983

1985

1987

1991

1993

1995

1997

1999

2001

2003

2007

Source: IBGE / BCB

2009

2011

2012 3

400 350 300 250 200 150 100 50 0

International Reserves (US$ billion)

Net External Debt (US$ billion)

379

60 33

210 170 130 90 50 10 -30 -70 -110

190

2012 -83

Main Questions and Answers

Inflation
Inflation resilient in the last few months 2013 CPI will decline in second half Growth is resuming

Growth

ER policy

Flexible exchange rate

Investments

Reforms to boost competitiveness Concessions and PPP

4

Inflation Outlook
Inflation has been persistent in the last few months,
however

inflation will be lower in the second half 2013 Why?

Food price inflation will moderate Lower wage increases (minimum wage) will reduce
pressure on services

Exchange rates unlikely to repeat 2012 depreciation Credit growth should remain moderate Weak global recovery should restrain global prices

Inflation on target for 10th consecutive year in 2013

5

Source: BCB
21/12/12 26/12/12 28/12/12 02/01/13 04/01/13 08/01/13 10/01/13 14/01/13 16/01/13

5.25%

5.50%

5.75%

6.25%

6.50%

6.00%

Breakeven Inflation is Declining in 2013

2013
18/01/13
22/01/13 24/01/13 28/01/13 30/01/13 01/02/13 05/02/13

2014 2015
up to February 21th

07/02/13 13/02/13 15/02/13 19/02/13 21/02/13 6

Growth is Resuming
Brazil underwent a typical business cycle downturn
Economic growth drivers
Monetary and financial stimuli already in place
Employment, wages and credit Business confidence and lower inventories will support
growth in manufacturing

Improved corporate balance sheets Agriculture: record grain crop expected for 2013 Tax reforms to simplify the tax system and reduce costs Reforms to boost productivity and competitiveness Infrastructure investments private sector oriented
7

Growth is Resuming
3.5 3.0 2.6 2.5 % 2.0

Quarterly GDP YoY Market expectations

3.0

3.4

3.4

1.7
1.5

1.0
0.5 0.0

0.8 0.5

0.9

1Q 12

2Q 12

3Q 12

4Q 12

1Q 13

2Q 13

3Q 13

Source: BCB (Focus Feb 18, 2013)

4Q 13

Monetary Policy Stimuli

Policy Rate
13 500

Reserve Requirements
45% 40% 35% 30% 300 25% 250 200 150

12 R$ billion

450
400

11 %

350

10

20%
15% 10%

8 7.25
Jul 12 May 11 Sep 12 Nov 12 Mar 11 Jan 12 May 12 Sep 11 Mar 12 Nov 11 Jan 13 Jan 11 Jul 11 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Jan 11 May 11 Sep 11 Jan 12 May 12 Sep 12

100

Reserve requirements / total deposits Reserve requirements (overall balance)

9

Source: BCB

Domestic Demand Drivers

Unemployment Rate at Record Lows
14 13 average (Dec 08 = 100) 12 11
% (seasonally adjusted)

Growing Real Wages and Real Payroll

Mean over previous 12 months

125 120 115 110 105 100 95

+ 6.4% Dec 12 / Dec 11

10 9 8 7
Dec 12 5.4%

+ 3.2% Dec 12 / Dec 11

6
5

Source: IBGE / BCB

Dec 08 Apr 09 Aug 09 Dec 09 Apr 10 Aug 10 Dec 10 Apr 11 Aug 11 Dec 11 Apr 12 Aug 12 Dec 12 real wages real payroll
10

2003

2002

2004

2005

2006

2007

2008

2009

2010

2012

2011

Business Confidence and Lower Inventories

115

Business confidence seasonally adjusted

110
112.8

Industrial inventories seasonally adjusted

113
111 109 107 index 105 103 101 99 97 95

108 106
106.5

102.3

index

104 102 100

98
96 Jul 12 Sep 12 May 11 Nov 12 Mar 11 May 12 Sep 11 Mar 12 Nov 11

May 11

Jan 12

Sep 12

May 12

Nov 12

Mar 11

Mar 12

Sep 11

Nov 11

Jan 13

Jan 11

Jul 12

Jul 11

Source: FGV

Jan 13
11

Jan 12

Jan 11

Jul 11

Stock Exchange Index (Ibovespa)

Sector Shares of Ibovespa Index (% Change in 2012) Retail Logistics Others* Manufacturing Financials Ibovespa Index Mining Real Estate Telecommunications -15.0 -25.0 -27.5 -40 -30 -20 -10 0 10 20 30 40 50 -4.3 12.1 7.4 4.1 23.4 21.0 20.3 42.5
Weight

11.5 4.2 1.5 11.3 20.4 100 13

11.6
3.8 6.6 16.3

Electricity & Utilities

Oil & Gas

* Others: Sugar & Ethanol and Health Care.

Source: BM&F Bovespa / Infomoney

12

Corporate Balance Sheets in Better Shape

Domestic Corporate Bond Issuances 100 R$ billion 80
91

Domestic Bond Issuances in 2012 Purpose 19 9 50 Refinance Liabilities Investment

60
40 20 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 22

Project Implementation Working Capital

Foreign Bonds and Loans

12 10

Foreign Bonds and Loans Maturities

100%

80%
60% 40% 20% 0%
Oct/11 Jan/11 Jan/12 Oct/12 Apr/11 Apr/12 Jul/11 Jul/12

27
47 29 19 45 16 37 47

44 68 39 18 31 0

US$ billion

8
6 4 2 0

34

2008 2009 2010 2011 2012 longer than 3yrs. betw. 1 and 3yrs. 1yr. or shorter
13

Source: BCB / Anbima

Record Grain Crop Expected in 2013

production of grains
185 180 175 170 165 million tons

2013/2012 = 14%
160
162

184

160
155 150 145 140 135 130

125
120 2007 2008 2009 2010 2011 2012 2013*

*Jan 13 estimate

Source: Conab

14

Exchange Rate Policy

Flexible exchange rate

First line of defense in the presence of shocks

International reserves accumulation, as market

conditions allow

Provision of forex liquidity in case of market

disruption

Mitigate excessive volatility

15

Exchange Rate
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Jan 04 Exchange Rate (BRL / USD) 2.15 2.10 2.05 2.00 1.95 Exchange Rate (BRL / USD)

1.90
Jan 06 Jan 08 Jan 10 Jan 12

Jan 02

Oct 12

Nov 12

Dec 12

Jan 13 May 12

Jul 12

Aug 12

35

Exchange Rate Volatility (1-Month ATM Implied)

35

Exchange Rate Volatility (1-Month ATM Implied)

25

25

15

15

5 May 10 Sep 11 May 12

Sep 12

May 11

Jan 11

May 10

Sep 12

Sep 10

Sep 11

Jan 10

Jan 12

May 11

Jan 10

Jan 12

Sep 10

BRL

EUR

JPY

Sep 12

Jan 13

BRL
*Up to February 18th

MXN

AUD

RUB 16

Source: BCB / Bloomberg

Jan 13

Jan 11

Feb 13

Reforms to Boost Growth

Tax reforms to simplify the tax system and reduce costs Payroll tax cuts

Public sector pension reform Tax-advantaged bonds for infrastructure and R&D investment
Reduce electricity costs due to lower taxes and renewal of concessions
Measures to increase competitiveness and investments

Building a skilled labor force (science without frontiers and pronatec) Concessions and PPPs (private sector oriented) Highways, railroads, ports and airports
17

Investment Opportunities
Expanding consumer market share A significant share of low income groups joined the middle class Major investment opportunities Expanding and upgrading infrastructure

Vast reserves of mineral commodities Offshore oil fields (pre-salt layer) Potential to expand cultivated area
Major international sports events (FIFA World Cup and Olympics Games)
18

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

19

Concessions Program Next Steps in 2013

Airports auctions scheduled for September
Rio de Janeiro (Galeao) Belo Horizonte (Confins)

Ports
Concession auctions for new public ports:
Manaus (AM), Imbituba (SC), Ilheus and Aguas Profundas (ES)

Re-auction over 50 privately operated terminals in public ports

Highways
7,500 km (4,660 miles) in 9 projects for 30 years

Railways
10,000 km (6,214 miles) in 12 projects for 25 years
20

Brazil is Leading Recipient of FDI

2010
USA 197.9 114.7 85.7 82.7 50.6 48.6 48.5 46.9 43.3 42.8 40.8 35.2 32.5 USA

2011
226.9 124.0 103.3 96.1 66.7 65.8 64.0 52.9 51.1 41.4 40.9 40.4 34.3 USA

2012
146.7 119.7 72.5 65.3 62.5 58.9 54.4 48.5 47.2 44.1 39.6 27.3 26.4

China
Belgium Hong Kong UK Singapore Brazil Germany Russian Ireland Spain Australia Switzerland France Saudi Arabia 0

China
Belgium Hong Kong Brazil Australia Singapore Russian UK Canada France Germany Italy India Spain

China
Hong Kong Brazil UK France Singapore Australia Canada Russian Ireland India Chile Luxembourg Belgium 0

30.6
29.2 50 100 150 200

31.6
29.5 0 50 100 150 200

22.6
19.3 50 100 150 21

Source: UNCTAD

Brazil Economic Overview

Alexandre Tombini Governor

22

Glossary
ABDIB ANBIMA BCB Conab CNI FGV IBGE Brazilian Association of Infrastructure and Basic Industries Brazilian Financial and Capital Markets Association Central Bank of Brazil National Food Supply Company National Confederation of Industry Getulio Vargas Foundation Brazilian Institute of Geography and Statistics

MTE
UN UNCTAD

Ministry of Labor
United Nations United Nations Conference on Trade and Development

23