Brazil: Economic Outlook and

Current Challenges

Aldo MendesJune 2011

2

Agenda

Brazilian Social Achievements

Brazilian Economic Achievements

Short Term Economic Challenges

Brazilian Economy Prospects

3

Brazilian Social Achievements

More than 20 million Brazilians overcame the line of poverty

More than 36 million Brazilians were included in the middle-

income class

Reduction of unequality – in 2009 the Gini Index reached a

record low for the last 30 years

Formal job creation reached record levels

The Brazilian society has the best welfare level of the last 30

years

4

Social Classes

Social Mobility

Source: FGV * FGV estimate

0

20

40

60

80

100

120

140

160

180

200

2003 2009 2014*

E D C A/B

mill

ion

people

5

Gini Index - Brazil

Source: Ipeadata data until 2009

54%

56%

58%

60%

62%

64%

81 83 85 87 89 92 95 97 99 02 04 06 08

66

Unemployment Rate

Source: IBGE

Apr 116.0 %

5

6

7

8

9

10

11

12

13

14

jan 0

3

jan 0

4

jan 0

5

jan 0

6

jan 0

7

jan 0

8

jan 0

9

jan 1

0

jan 1

1

% (

seasonally

adju

ste

d)

7

Brazilian Economic Achievements

Net public debt-to-GDP ratio in downward trajectory

Negative net external debt – Brazil is currently an international

creditor

International reserves above US$ 330 billion

Credit market: almost 50% of GDP

Solid financial system and conservative prudential regulation

Brazil has an investment grade credit rating, with prospects of

further improvement

8

Debt-to-GDP Ratio

Source: BCB

quarterly

% o

fG

DP

28

34

40

46

52

58

64

4Q 01

3Q 02

2Q 03

1Q 04

4Q 04

3Q 05

2Q 06

1Q 07

4Q 07

3Q 08

2Q 09

1Q 10

4Q 10

2013

Jun 24:

39.18

market

expectations for

annual data

2015:

34.2

62.9

9

Net Public Forex Debt

Source: BCB

-280

-240

-200

-160

-120

-80

-40

0

40

80

120

jan 01

jul 01

jan 02

jul 02

jan 03

jul 03

jan 04

jul 04

jan 05

jul 05

jan 06

jul 06

jan 07

jul 07

jan 08

jul 08

jan 09

jul 09

jan 10

jul 10

jan 11

domestic

external

US

$ b

illio

n

-29.1

-243.9

Feb:

10

Net External Debt (Private and Public)

Sources: BCB and S&P

Country Ratings

US

$ b

illio

n

-80

-40

0

40

80

120

160

200

1Q 02

3Q 02

1Q 03

3Q 03

1Q 04

3Q 04

1Q 05

3Q 05

1Q 06

3Q 06

1Q 07

3Q 07

1Q 08

3Q 08

1Q 09

3Q 09

1Q 10

3Q 10

1Q 11

1Q03:

165.24Q04:

135.7

Mar

-64.5BBB-

BB+

BB

BB-

B+

BB-

11

International Reserves

Source: BCB

8 4 512 12

7 7 9 10 10 9

2432

39

5260

5245

36 33 36 3849 53 54

86

180

194

239

289

334,6

0

50

100

150

200

250

300

350

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

2009

2011*

US

$ b

ilhõ

es

*3/jun

12

25,8 26,024,6 25,7

28,330,9

35,2

40,5

44,446,4 46,6

0

5

10

15

20

25

30

35

40

45

50

01 02 03 04 05 06 07 08 09 10 11*

Credit/GDP

Source: BCB * Apr 11

% o

f G

DP

13

Basel Capital Ratio – Banking System

Source: BCB *February

%

6

8

10

12

14

16

18

20

00 01 02 03 04 05 06 07 08 09 10 11*

16.9

Brazilian rules:

11%

minimum capital

according to

Basel: 8%

14

Short Term Economic Challenges

Making inflation converge to the target midpoint, even

facing the strong increase of agricultural commodities and oil

prices in the international context

Dealing with the intense foreign capital flow, which is

inflationary. The inflow is a consequence of the Brazilian

economy positive prospects, but also of expansionist

monetary policies adopted by other countries

1515

Inflation – Convergence to Targets

Sources: BCB / IBGE

market

expectation

target (4.5%)

market expectation: June 10th

0

2

4

6

8ja

n 0

4

jan 0

5

jan 0

6

jan 0

7

jan 0

8

jan 0

9

jan 1

0

jan 1

1

jan 1

2

% y

oy

1616

CPI ex-Food and Beverage

Source: IBGE

0

2

4

6

8

10

12

14

16

18

jun 0

7

de

z 0

7

jun 0

8

dez 0

8

jun 0

9

dez 0

9

jun 1

0

dez 1

0

% 1

2 m

onth

s

IPCA Food and Beverage IPCA ex-food and beverage

17

Foreign Capital Inflow

Source: BCB

US$ billion

Jan – Apr

2008 2009 2010 2011*

FDI 12.67 8.75 7.76 21.07

Bonds 0.29 -2.60 4.05 9.33

Loans 7.03 -1.97 10.37 19.69

Stocks 3.84 0.61 8.57 0.93

Fixed Income 9.23 -1.59 5.74 -0.66

Total 33.05 3.19 36.49 50.37

* data until April 18th

18

Measures to Fight Inflation

Monetary Policy (Over-Selic rate – Copom decision)

+ 0.50 p.p. (January 19, 2011)

+ 0.50 p.p. (March 2, 2011)

+ 0.25 p.p. (April 20, 2011)

+ 0.25 p.p. (June 8, 2011)

Fiscal Consolidation

– Expenditure cuts: R$ 50 billion

– Primary Surplus in 2011: R$ 117 billion

19

Brazilian Economy Prospects

Strong and sustainable growth in the coming years

Broadening of the middle income class

Demographic bonus until 2025

Several investment opportunities

– Exploration of the Pre-Salt layer

– Infrastructure modernization and expansion

– Vast reserves of mineral commodities

– Potential for broadening the arable land (global exception)

and increasing the agricultural production

– Soccer World Cup and Olympic Games

20Sources: Petrobras and OGX * occurred

1,972,10

2,30

2,50

2,70

2,98

2,30

2,48

2,70

2,95

3,24

3,60

2009* 2010 2011 2012 2013 2014

oiloil and gas

mill

ion

bp

d

projection 2020 for oil and gas:

Petrobras: 5.1 million boepd

(1.1 million Pre-Salt)

OGX: 1.4 million boepd(OGX)

boepd

Oil and Gas Production

21

Investment Prospects – 2011-2014

Source: BNDES (Feb 2011)

Infrastructure R$ billion growth share

2006-2009 2011-2014 % %

Electricity 92 139 51.1 36.5

Telecommunications 62 70 16.1 18.9

Sanitation 26 41 57.7 10.8

Railways 20 60 200.0 15.7

Highways 30 51 70.0 13.4

Ports 5 18 260.0 4.7

Total 235 381 62.1 100.0

22

Investment Prospects – 2011-2014

Source: BNDES (Feb 2011)

Industry R$ billion growth share

2006-2009 2011-2014 % %

Oil and Gas 205 378 84.4 62.7

Mining 59 62 5.1 10.3

Steel 27 33 22.2 5.5

Petrochemical 20 40 100.0 6.6

Automobile 25 33 32.0 5.5

Electric/Electronics 16 29 81.3 4.8

Pulp and Paper 18 28 55.6 4.6

Total 370 603 63.0 100.0

Brazil: Economic Outlook and

Current Challenges

Aldo MendesJune 2011