Brazil Economic Overview Brazilian American Chamber of Commerce of Florida

Alexandre Tombini Governor March 26, 2012

1

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

2

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

• Inflation is converging to the target and economic growth will accelerate throughout 2012

• Outlook is for sustainable economic growth over the coming years, with substantial particularly in infrastructure

investments,

3

Index

• Economic and Social Achievements • Recent Economic Developments • Looking Forward

4

Economic and Social Achievements

5

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

Source: BCB

dez 11

dez 10

dez 09

dez 08

dez 07

dez 06

dez 05

dez 04

dez 03

dez 02

dez 01

dez 00

dez 99

% yoy

Achieved Inflation Target for 8th Year in a Row 18

16

14

12

10

8

6

4

2

0

7

Declining Real Interest Rate 25

20

% annual

15

10

5 Mar 16th 3.5%

jan 12

jan 11

jan 10

jan 09

jan 08

jan 07

jan 06

jan 05

jan 04

jan 03

jan 02

0

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

Source: BCB

8

Commitment to Fiscal Targets 4,0% 3,5%

3,7%

3,2%

3,3%

3,8%

Primary fiscal surplus 3,2%

3,3%

3,4%

3,3% 3,1%

3,0%

2,7%

% of GDP

2,5% 2,0%

2,0%

1,5% 1,0% 0,5% 0,0% 2002 2003 2004 2005 2006 2007 2008 2009 2010

2011 2012* *Jan 12

Source: BCB

9

Declining Net Public Debt 65 60

60,4

54,8

% of GDP

55

50,6

50

48,4

- 23.2 p.p. 47,3 45,5

45 42,1

40

39,2

38,5

36,5

37,2

2012*

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

35

*Jan 12

Source: BCB

10

Robust International Reserves 400 352 357

350 289

250

239

200

180

194

150 100

86

2012*

2010

49 53 54

2008

36

33 36 38

2004

45

2002

52

2000

60

1998

52

1996

24

1994

9 10 10 9

1990

7

1988

1986

1984

1982

0

4

12 12 7 5

1992

50

32 39

2006

US$ billion

300

as of Mar 8th

Source: BCB

11

Brazil Has Become a Net External Creditor 200

190 182190 163 165 151

150

US$ billion

100

136

131 103 106 79

87 88 92

96 97

105 108

100 99

88 92

101

101

75

50

0 -12 -28

-50

-51 -62

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

1988

1986

1984

1982

2012*

-79 -79

-100

*estimate Jan 12

Source: BCB

12

Strong External Debt Ratios 140 120

120,6%

100

%

80 63,4%

60 42,4%

40 20

21,5%

17,0%

12,1%

0 short term debt/intl. reserves

debt services/exports Dec 03

Source: BCB

Jan 12*

external debt/GDP

*estimate

13

Sovereign Credit Ratings Reflect These Improvements Baa1 / BBB+ 13

Upgrades in 2011: • April: Fitch (BBB- to BBB) • June: Moody’s (Baa3 to Baa2) • November: S&P (BBB- to BBB) Investment grade

12 Baa2 / BBB

11 Baa3 / BBBBa1 / BB+10 Ba2 / BB 9 Ba3 / BB- 8

Moody's Source: Moody’s / S&P / Fitch

S&P

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

5 1996

B3 / B-

6

1995

B2 / B

7

1994

B1 / B+

Fitch 14

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

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

18

% of households

16 14 12 10 8

6 4 2 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

0

Extreme Poverty Source: IPEA

Gini Index (RHS) 16

Financial Inclusion is a Priority All municipalities have a least one bank branch, outpost or correspondent. 2000

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

2010

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

0 (20%)

0 (0%)

>0 to 2 (22%)

>0 to 2 (0%)

>2 to 5 (40%)

>2 to 5 (6%)

>5 to 10 (16%)

>5 to 10 (29%)

>10 (2%)

>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

Inflation on a Downward Trend • Producer prices inflation (IPP) and wholesale prices inflation (IPA) are below 2% in 12 months

• General prices index (IGP) inflation is below 3.5% in 12 months

• These trends are already partially reflected in consumer prices inflation, which has been falling since the third quarter of 2011

• Consumer inflation is converging to the central target 19

Producer and Wholesale Inflation Below 2% 13.94%

15

% 12 months

12

7.78%

9 6

1.89% IPA-10 (Mar)

3

1.73%

Source: IBGE / FGV

mar 12

fev 12

jan 12

dez 11

out 11

set 11

ago 11

jul 11

jun 11

mai 11

abr 11

mar 11

fev 11

jan 11

IPP

nov 11

IPP (Jan)

0

IPA (10, M and DI)

20

General Prices Index (IGP) Inflation Below 3.5% 11.40%

12

% in 12 months

10 8 6 4

mar 12

fev 12

jan 12

dez 11

nov 11

out 11

set 11

ago 11

jul 11

jun 11

mai 11

abr 11

mar 11

fev 11

jan 11

2

3.29%

IGP (10, M and DI) Source: IBGE / FGV

21

Declining Consumer Inflation 7,5 7,0

% in 12 months

6,5 6,0

5.61% IPCA (Mar)

5,5

5.47% IPC-10 (Mar)

5,0

5.47% INPC (Feb)

4,5

4.50% IPC-Fipe (Mar)

IPCA-15 and IPCA Source: IBGE / Fipe / FGV

INPC

IPC-Fipe

mar 12

fev 12

jan 12

dez 11

nov 11

out 11

set 11

ago 11

jul 11

jun 11

mai 11

abr 11

mar 11

fev 11

jan 11

4,0

IPC (10, M and DI)

22

Inflation Declining Towards the Central Target 18 16 14

% yoy

12 10 8

Reference Scenario

6 4 2

Source: BCB

dez 11

dez 10

dez 09

dez 08

dez 07

dez 06

dez 05

dez 04

dez 03

dez 02

dez 01

dez 00

dez 99

0

23

Recent Economic Developments Inflation Activity Credit & Financial System 24

Economic Activity • 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

• Industry well positioned to resume production after rebalancing inventories over the last few months

 Economic growth expected to increase throughout the year 25

Unemployment Rate at Record Lows 14 13 12

% (s.a.)

11 10 9

8 7 6 Feb 12 5.5%

Source: IBGE / BCB

jan 12

jan 11

jan 10

jan 09

jan 08

jan 07

jan 06

jan 05

jan 04

jan 03

5

26

jan 10 fev 10 mar 10 abr 10 mai 10 jun 10 jul 10 ago 10 set 10 out 10 nov 10 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

Thousands (s.a.)

Formal Job Creation is Strong 240

180 1 million and 400 thousand jobs in the last 12 months (Mar 11 – Feb 12)

120

60

0

Source: MTE / BCB 27

Source: IBGE

fev 12

nov 11

ago 11

mai 11

95

fev 11

nov 10

ago 10

mai 10

fev 10

nov 09

ago 09

mai 09

fev 09

nov 08

ago 08

mai 08

fev 08

105

nov 07

ago 07

mai 07

fev 07

Average of 2010 = 100

Real Wages are Growing Average in the previous 12 months

100

+ 4.4%

Feb 12 / Feb 11

90

85

28

Source: IBGE

jan 12

out 11

jul 11

abr 11

95

jan 11

out 10

jul 10

abr 10

jan 10

out 09

jul 09

abr 09

jan 09

out 08

jul 08

abr 08

110

jan 08

out 07

jul 07

abr 07

jan 07

2010 = 100

Expanding Real Wage Bill Real wage bill in the previous 12 months

105

100

+ 6.4%

Feb 12 / Feb 11

90

85

80

75

29

Retail Sales Continue to Grow 110

Jan 12 / Jan 11 +7.3%

105

2011 = 100

100 Jan 12 / Jan 11 +7.7%

95

90 85 80

Retail Sales

Source: IBGE

jan 12

jul 11

jan 11

jul 10

jan 10

jul 09

jan 09

75

Retail Sales (including automobiles and construction materials) 30

Business Confidence is Improving Purchasing Managers Index (PMI) A PMI of more than 50 indicates a positive outlook for industrial companies

60 58 56 54 Index

52 50 48 46 44 42

Source: Markit

jan 12

jul 11

jan 11

jul 10

jan 10

jul 09

jan 09

jul 08

jan 08

jul 07

jan 07

40

31

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

Index

115 110

105 100

jan 12

set 11

mai 11

jan 11

set 10

mai 10

jan 10

set 09

mai 09

jan 09

set 08

mai 08

jan 08

set 07

mai 07

jan 07

95

Data until Feb 12

Source: FGV

32

GDP Growth

Source: BCB

1S 13

2S 12

1S 12

GDP growth over 12 months – market forecast

33

Top 10 World Economies in 2011 (1) GDP (US$ bi.)

GDP Growth (%)

Unemployment rate(%)

1º United States

15,065

1.7

8.5

2º China

6,988

9.3

4.1

3º Japan

5,855

-0.9

4.5

4º Germany

3,629

3.1

6.6

5º France

2,808

1.8

9.8

6º Brazil

2,518

2.7

4.7

7º United Kingdom

2,481

0.9

8.4

8º Italy

2,246

0.4

8.9

9º Russia

1,885

4.3

6.1

10º India

1,843

7.0

9.4

Source: CEBR / Bloomberg

34

Top 10 World Economies in 2011 (2) GDP (US$ bi.)

Consumer Price Index (%)

Producer Price Index (%)

1º United States

15,065

2.9

3.0

2º China

6,988

3.2

0.7

3º Japan

5,855

0.1

-0.3

4º Germany

3,629

2.3

3.4

5º France

2,808

2.3

4.2

6º Brazil

2,518

5.8

1.7

7º United Kingdom

2,481

3.4

4.0

8º Italy

2,246

3.3

3.4

9º Russia

1,885

3.7

8.4

10º India

1,843

8.8

6.6

Source: CEBR / Bloomberg

35

Recent Economic Developments Inflation Activity Credit & Financial System 36

Credit and Financial System • Brazilian financial system is well capitalized • Provisioning is rigorous − Provisions are based on expected losses (but consider incurred losses also), reducing procyclicality

− Full provisioning is required in a shorter time frame – 6 months after the first delinquency for many operations

− Write-offs are required in a shorter time frame – 6 months after full provisioning

• Credit is growing at a sustainable pace

• Access to banking services is increasing 37

Brazilian Banks Well Capitalized 16,6

%

15

18,9

18,5 17,4

17,8

2006

19,0

2005

20

17,3

17,7

16,9

16,3

14,8 13,8

10

5

Brazilian banks capital ratio regulatory minimum capital ratio

Source: BCB

2011

2010

2009

2008

2007

2004

2003

2002

2001

2000

0

Basel minimum capital ratio

38

Source: BCB

provisions/NPLs jan 12

jul 11

jan 11

jul 10

jan 10

jul 09

jan 09

jul 08

jan 08

jul 07

jan 07

jul 06

jan 06

jul 05

jan 05

jul 04

jan 04

Rigorous Provisioning

220%

210%

200%

190%

180%

170%

160%

150%

3-mo moving average

39

Credit Growing at a Sustainable Pace 2005-2008: 25.2%

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

(average growth of nominal credit)

49,1

50 43,7

45

40,5

40

35,2

24,6

25,7

2003

2004

26,0

2002

25

25,8

2001

% of GDP

35

30

45,2

28,3

30,9

20 15

10 5

Source: BCB

2011

2010

2009

2008

2007

2006

2005

0

40

Greater Access to Banking Services 2002

2009

2011

Accounts (banking sector)

55,708,468

83,308,800

91,944,421

Customers

87,630,527

151,102,765

174,791,126

banking sector

17,049

20,046

21,278

all financial institutions

17,756

21,287

22,628

32,769

53,628

60,375

129,913

165,567

174,920

78,539

151,351

177,925

222

-

-

5,358

5,566

5,564

96%

100%

100%

Branches

Posts of service (banking sector) ATMs Domestic correspondents Municipalities Without banking services

With banking services Municipalities banking services coverage

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 − Offshore oil fields (“pre-salt” layer)

− Vast reserves of mineral commodities − Potential to expand cultivated area and agricultural production

− Major international sports events (FIFA World Cup in 2014 and Olympics Games in 2016) 43

Brazil in a Select Group of Major Economies Countries with area over 2 million km²

Countries with population over 100 million

Brazil

Countries with nominal GDP over US$ 600 billion

Source: IMF / UN

44

Growing Middle Class → Expanding Consumer Market Social Stratification

250

E

D

C

A/B

200

Million people

7.6%

13

12.0%

23

15.5%

31

150 37.6%

66 102 53.6%

100 26.7%

20.7%

39

20.0%

40

8.0%

16

49 13.7%

26

0 2003

2011 monthly per capita incomes A/B: above BRL 923 D: BRL 135 – 214 C: BRL 214 – 923 E: below BRL 135

Source: FGV

113

47

50 28.1%

56.5%

2014* BRL 100 = USD56 USD = 1.8 BRL (March 14, 2012)

45

Favorable Demographics Dependency Ratio

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

100

men

women 75

50

2050

2040

2030

2020

2010

2000

millions of people

1990

10

1980

5

1970

0

1960

-5

1950

25 -10

Brazil

• Brazilian

population is highly concentrated within the Economically Active Population range

• Brazil’s

dependency ratio is still declining, while other countries already face an upward trend

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

46

Public Pensions Reform Advances in Congress • The Lower House of Congress recently passed a new, capitalization-based, supplementary pension scheme for civil service employees. The bill is now in the Senate

• The new system will lead to higher domestic savings and a stronger public sector fiscal position in the longterm

• It will also encourage the development of local capital markets, especially for long-term debt instruments 47

Investment Growing Faster Than GDP 25

forecast*

21,3

15

13,9 9,8

9,1

10

6,1

5,7 3,2 3,6

2,7

4,0

7,5 5,2 2,7

1,1

0

3,5

5,0

-0,3 -4,6 -6,7

GDP

2008

2007

2006

2005

2004

2003

2002

-10

2012*

-5,2

2011

-5

4,7

2010

5

13,6

2009

real growth (%)

20

Investment *forecast from Central Bank of Brazil (Inflation Report – Dec 11)

Source: IBGE / BCB

48

Investment Rate at a New Level 20% 19,5% 19,1%

19,3%

19% 18,1%

18% % of GDP

17,4%

17%

17,0% 16,8% 16,4%

16,4% 16,1%

16%

15,9%

15,3%

15%

Source: IBGE

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

14%

49

Brazil is a Major Recipient of FDI 69,1 66,7

70 60

48,5 45,1

40

34,6

32,8 28,928,6

30

25,9 22,5

19,0

20

16,6

10,8

2012*

2010

2008

2006

2004

2002

4,4

2000

1994

1992

1990

1988

1986

1982

0

2,8 1,3 1,5 1,4 0,3 1,2 1,1 1,0 1,1 2,1 1,3 2,1

1984

3,1

18,8 18,1 15,1

10,1

1998

10

1996

US$ billion

50

*up to Jan 12

Source: BCB

50

Major Infrastructure Investments Planned for 2012-2015 Affordable Housing

390 BRL Billion

300 BRL Billion

Energy

Oil and Gas

Transportation

Other

Source: Ministry of Planning

228 BRL Billion

117 BRL Billion

160 BRL Billion

51

Airports Will Receive Private Investment • Brazil is privatizing airport operations in order to boost investment and improve management

• 1st Round: São Gonçalo do Amarante (new airport) o Concession term: 25 years o Investment: US$ 350 million o Capacity: 8 million passengers

• 2nd Round: Guarulhos, Campinas and Brasília o Concession term: 20-30 years o Investment: US$ 9 billion o Capacity: increase from 50 to 180 million passengers 52

Oil Reserves Set to Grow crude oil, LNG and natural gas

billion – barrel oil equivalent (boe)

45 40

Libra* (8 billion boe)

35 deepwater offshore fields (pre-salt layer) *estimated volume

30 25

Franco* (4.5 billion boe) Guara* (2 billion boe) Iara* (4 billion boe)

20

Tupi and Iracema* (8 billion boe)

15 10 5

Source: Petrobras

future*

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

0

53

Brazil Economic Overview Brazilian American Chamber of Commerce of Florida

Alexandre Tombini Governor March 26th, 2012

54