Brazil Economic Overview

Tokyo

Alexandre Tombini Governor

October 15, 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 is accelerating in the second half of

2012, with inflation under control

The outlook is for sustainable economic growth over

the coming years, with substantial investment opportunities, particularly in infrastructure
3

Economic and Social Achievements

Macroeconomic Policy
The main features of the macroeconomic policy framework are inflation targeting, fiscal responsibility, and exchange rate flexibility The macroeconomic fundamentals, combined with strong prudential policy and intensive bank supervision, have led to macroeconomic and financial stability and sustainable economic growth Economic growth and stability, together with inclusive social policies, have reduced poverty and inequality and helped 40 million people join the middle class
5

% YoY
14 16 18

10

12

Source: BCB

jan 00 jan 01 jan 02 jan 03

jan 04
jan 05

jan 06
jan 07 jan 08

jan 09
jan 10

jan 11
jan 12
5.3%

Achieved Inflation Target Eight Years in a Row

Declining Net Public Debt

63
60,4

60 57 54 51 % of GDP 48 45 42 39
38,5
42,1 52,0 54,8

50,6
48,4 47,3 45,5

-25.2 p.p. of GDP

39,2 36,4

36 33 30 2001
2002 2003 2004 2005 2006 2007 2008 2009 2010

35,1

2011

2012*
*Aug 12

Source: BCB

Robust International Reserves

400
352
378

350

300
US$ billion 250 200
194 180 239

289

150 100
50
4 12 12 7 5 7 9 10 10 9 24 86

32 39

52

60

52

45
36

33 36 38

49 53 54

*Oct 9th

Source: BCB

2012*

1988

1990

2000

2002

1982

1984

1986

1992

1994

1996

1998

2004

2006

2008

2010

Brazil Has Become a Net External Creditor

210 170 130 US$ billion 90 50 10 -30 -70 -110
-12 -28 79 87 88 92 131 103 106 96 97 190 190 182 163 165 151 136

105 108 100

99

88 92

101

101
75

-51
-62 -73 -95

1988

1990

2000

2002

1982

1984

1986

1992

1994

1996

1998

2004

2006

2008

2010

*Aug 12 estimate

Source: BCB

2012*
9

Improvements Reflected in Sovereign Credit Ratings

A3 / A-14

Baa1 / BBB+ 13 Baa2 / BBB 12

Baa3 / BBB11 Ba1 / BB+ 10

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

Ba2 / BB 9 Ba3 / BB-8

B1 / B+ 7 B2 / B 6

B3 / B- 5

1996

1997

2002

2003

2008

2009

1994

1995

1998

1999

2000

2001

2004

2005

2006

2007

2010

2011

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

S&P

Fitch
10

2012

Declining Poverty and Inequality

20
18 16

% of households

14

12 10
8 6 4

2 0
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

0,65 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

Extreme Poverty
Source: IPEA

Gini Index (RHS)

11

Recent Economic Developments

Activity Inflation Credit & Financial System
12

Economic Activity
Brazil underwent a typical business cycle downturn There are consistent signs that growth is accelerating Industrial production has grown for three consecutive
months

Agriculture: record grains crop expected for 2012

The services sector continues to expand faster than the
overall economy

Demand is underpinned by a strong labor market and

increasing incomes
13

Growth Will Accelerate in the 2nd half of 2012

5,0 4,5

Market Forecast Change over Previous Period (annualized)

4,3
4,0

4,0 3,5 3,0

%

2,5 2,0
1,5 1,0 0,5 0,0 1Q12 2Q12 2H12* 2013*
*Focus Market Forecast (Sep 28th)

1,6

0,5

Source: BCB (Focus)

14

Economic Stimulus Measures

A set of stimulus measures have been introduced since
2011 in order to help the economy resume its growth path

These measures impact the real economy with lags Stimulus measures in place:
Lower interest rates Improved liquidity conditions for the financial system Better financing conditions for households and firms Fiscal and tax incentives
15

Monetary and Liquidity Stimulus Measures

Policy Interest Rate (% annual) 13,0
12,0 11,0

Required Bank Reserves (R$ billion)

500

450
400

449

353 350 300

250

10,0
9,0

200 150
100

8,0
7,0

50 0
Sep 08

Dec 06

Dec 09

Dec 11

*Oct 5th

Source: BCB

Oct 12*
16

Dec 07

Dec 08

Dec 10

jul/11

abr/12

out/11

jan/12

jun/12

ago/11

mar/12

mai/12

nov/11

ago/12

dez/11

out/12

fev/12

jul/12

set/11

6,0

set/12

Source: IBGE

% (seasonally adjusted) 11
10 12 14

13

jan 03

jan 04

jan 05

jan 06

jan 07

jan 08

jan 09

jan 10

Unemployment Rate at Historical Low

jan 11

jan 12
Aug 12 5.2%

17

Growing Incomes and Payroll

110 109 108
Jan-Aug 12 / Jan-Aug 11 +5.9%

107
Jan 11 = 100

106 105
104 103 102
+4.0% +1.8%

101 100
99 98

Feb 11

Mar 11

Apr 11

Dec 11

Sep 11

Nov 11

Aug 11

Jan 12

Apr 12

Jul 11

Oct 11

May 12

May 11

Feb 12

Mar 12

Jun 12

Jan 11

Jun 11

Employment
Source: IBGE

Real Income

Real Payroll
18

Aug 12

Jul 12

Supply
Industry: consistent indications that a moderate recovery is
under way Three consecutive months of output growth

Improving business confidence Increased capacity utilization Growth in industrial employment Agriculture: 2012 grains crop to be record Services: expected to continue to grow faster than overall
economy Strong performance reflects structural changes in the Brazilian economy over the last decade
19

Growing Industrial Production

2,0 1,5

seasonally adjusted 1,5

1,0
0,5

0,0

-0,5 -1,0
-1,5 -2,0

abr 12

mar 12

monthly change
Source: IBGE
20

ago 12

mai 12

jun 12

jan 12

fev 12

jul 12

Agriculture: 2012 Grains Crop to be Record

production of grains
170 165
160 million tons 155

164

150 145
140 135

130
2007 2008 2009 2010 2011 2012*
*Sep 12 Estimate

Source: BCB

21

Services Growing Faster than Overall Economy

2,0 1,6 1,5
% Q / Q-4

1,5

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

0,0
1Q 12 2Q 12

Services
Source: IBGE

Total GDP
22

GDP Coincident Index

Quarterly Growth (annualized) Seasonally Adjusted
7,00%
6,00% 5,10% 5,00% 5,87%

4,00%
3,00% 2,00%

2,63% 1,88% 0,96%

1,00%
0,00% -1,00%

-0,17%

-2,00%
1 Q 11
Source: BCB

2 Q 11

-1,49% 3 Q 11

4 Q 11

1 Q 12

2 Q 12

3 Q 12*
23

* July-August average

Recent Economic Developments

Activity Inflation Credit & Financial System
24

Inflation is Under Control

Inflation is converging to the target in a nonlinear fashion Short term: adverse supply shock External: agricultural commodities due to weather
conditions in the United States

In the medium term, the global economy should have a

disinflationary influence on domestic prices

The outlook for inflation, although negatively impacted

in the short term by adverse supply shocks, is favorable in the medium term
25

Commodity Price Shock

Agricultural Commodities (IC-Br in US$)
175

160
Jun 10 = 100
Increase in Jul-Aug/12: +10.5%

145

130

115

100 abr 11

dez 10

ago 11

jun 10

jun 11

fev 12

ago 10

jun 12

Source: BCB

ago 12
26

out 10

fev 11

dez 11

abr 12

out 11

yoy %
14,0 16,0

10,0

12,0

18,0

4,0

6,0

2,0

8,0

Source: BCB

Achieved Inflation Target Eight Years in a Row

dez/99 jun/00 dez/00 jun/01 dez/01 jun/02 dez/02 jun/03 dez/03 jun/04 dez/04 jun/05 dez/05 jun/06 dez/06 jun/07 dez/07 jun/08 dez/08 jun/09 dez/09 jun/10 dez/10 jun/11 dez/11 jun/12 dez/12 jun/13 dez/13
Reference Scenario

27

Recent Economic Developments

Activity Inflation Credit & Financial System
28

Credit and Financial System

Credit is growing at a sustainable pace

The

Brazilian financial system is well capitalized, liquid and holds ample provisions

Access to banking services is improving

29

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

55
49,0

51,0

45

43,7 40,5 35,2 30,9 25,8 26,0 28,3 25,7

45,2

35 % of GDP 25
15 5
24,6

-5 2001 2004 2007 2010

2002 2003 2005 2006 2008 2009 2011 2012*
*Aug 12

Source: BCB

30

Real Estate Credit is Leading Credit Growth

50 45 40 35 30 25 20 15 10 5 0 -5 -10 -15 jan 03 jan 06 jan 07 jan 10
jan 02 jan 04 jan 05 jan 08 jan 09 jan 11 jan 12
37.1%

% YoY

18.5% 17.0% 15.7%

Total

Corporations

Households

Real Estate Credit

up to Aug 2012 / Real Estate up to Jul 12

Source: BCB

31

Regulatory Capital / Risk-Weighted Assets

20 18
17,5 17,1
16,5 15,7 15,7 15,5 15,1 14,7 14,7 14,6 14,2 14,0 13,9 12,7 12,7 11,6

16
14 12 %

10
8 6

4
2 0

South Africa

Mexico

Russia

Japan

South Korea

Argentina

United States

Canada

China

Brazil

India

Italy

United Kingdom

Indonesia

2012 Q2 or latest available data

Source: IMF / FSI - financial sector indicators

Australia
32

Turkey

Liquid Assets / Short Term Liabilities

120 100
81 111 109

80 %

73

67 56 52 45 43 43

60 40 20

41

38
32 32 22 3

United

China,

Russian

Korea,

United

0 Brazil

South

Mexico

Japan

Argentina

Turkey

Australia

Canada

2012 Q2 or latest available data

Source: IMF / FSI - financial sector indicators

Indonesia

India

Italy
33

Provisions Net of Non-performing Loans / Capital

20 10 0
9
8

4
-2

-10
%

-3

-5

-6

-9

-10 -16

-20 -30
-40 -50 -60 -70

-18

-18

-22 -30

-65

Russia

South Africa

China

Mexico

Brazil

India

Argentina

South Korea

Indonesia

United Kingdom

United States

2012 Q2 or latest available data

Source: IMF / FSI - financial sector indicators

Australia

Turkey

Canada

Japan

Italy
34

Access to Banking Services

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

2000

2010

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

0 (20%) >0 to 2 (22%) >2 to 5 (40%)

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

0 (0%) >0 to 2 (0%) >2 to 5 (6%)

>5 to 10 (16%)
>10 (2%)

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

Source: BCB / IBGE

35

Looking Forward

36

Outlook for Brazil

Sustainable GDP growth in the coming years
Demographic bonus until 2025

Social gains and expansion of the middle class Reforms to increase investment, productivity and competitiveness
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)
37

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

1960

2030

1950

1970

1980

1990

2000

2010

2020

2040

-5

5 millions of people

10

Brazilian

population is highly concentrated within the Economically Active Population range

Brazils

dependency

ratio

is

still

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

38

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

39

Reforms to Boost Growth

Pro-growth fiscal and tax reforms
Payroll tax cuts Public sector pension reform Tax-advantaged bonds for infrastructure and R&D
investment

Reduced electricity costs due to lower taxes and renewal of concessions

40

Reforms to Boost Growth

Building a skilled labor force
Science without frontiers 100 thousand scholarships for undergraduate and graduate studies abroad

Pronatec expansion of professional and technological education, totaling 8 million trainees over four years

Increased public infrastructure

and

private

investment
partnerships

in
for

Concessions and public-private highways and railways

Initiative for ports and airports to be announced (4 airport concessions already auctioned)
41

Major Infrastructure Investments Planned for 2012-2015

Affordable Housing
R$ 390 billion

Energy

R$ 300 billion

Oil and Gas

R$ 228 billion

Transportation

R$ 117 billion

Total: R$ 1.2 trillion

Other

R$ 160 billion

Source: Ministry of Planning and Budget

42

Logistics Investment Program

Highways US$ 20.6 bn
7,500 km

US$ 11.5 bn
within 5 years

US$ 9.1 bn
within 20 years

US$ 39 bn
within 5 years

Total Investment US$ 27.5 bn

US$ 65.3 billion

US$ 26.3 bn
within 25 years

Railways US$ 44.7 bn

10,000 km

within 5 years

US$ 17.2 bn
within 25 years

Exchange Rate on August 31st

Source: Federal Government of Brazil

43

Railways
Railways
Circular Railway SP Northbound
Vila do Conde

Circular Railway SP Southbound

Itaqui
Pecm

Access to the Port of Santos

Lucas do Rio Verde Uruau Uruau Corinto Campos Rio de Janeiro Campos Vitria

Suape

Belo Horizonte Salvador

Salvador Recife Estrela dOeste Panorama Maracaju

Salvador

Ilhus

Maracaju Mafra
So Paulo Mafra Rio Grande
Santos

Vitria

Rio de Janeiro Itagua Paranagu

Aailndia Vila do Conde New projects Under evaluation

Under construction (PAC)

Current railway system

Rio Grande

Source: Federal Government of Brazil

44

Highways

Highways
BR-101 BA
BR-262 ES/MG BR-153 TO/GO

Itaqui Pecm

BR-060 DF/GO,
BR-153 GO/MG BR-262 MG
Suape

BR-050 GO/MG
BR-163 MT BR-163 MS,

BR-116 MG BR-040 DF/GO/MG

Under construction (PAC) Current highway system
Itagua

Salvador

BR-262 MS, BR-267 MS

Vitria
Rio de Janeiro Santos Paranagu

Rio Grande

Source: Federal Government of Brazil

45

Energy Investment
Estimated Investment (2012-2021) R$ billion
R$ billion 2012-2021 269 213 56 749 547 198 174 24 4 79 71 7 1 1097

79 269

749

Supply of electricity Generation Transmission Oil and natural gas Exploration and production of oil and natural gas Supply of petroleum products Refining Transportation infrastructure Supply of natural gas Supply of liquid biofuels Ethanol (production plants) Ethanol (pipeline and port infrastructure) Biodiesel (production plants) Total

Supply of electricity Oil and natural gas Supply of liquid biofuels

Source: EPE

46

Major Hydroelectric Plants under Construction

Potency (GW)
Itaipu (including Paraguay) Tucuru I II Ilha solteira Xing Paulo Afonso IV Itumbiara So Simo Foz do Areia Jupi Porto Primavera Belo Monte Jirau Santo Antnio Teles Pires Santo Antnio do Jar Mau Simplcio Colder Ferreira Gomes Garibaldi Passo So Joo Batalha So Domingos

14,0

8,4
3,4 3,2 2,5 2,1 1,7 1,7 1,6 1,5

Major Existing Power Plants 86 GW

11,2

3,8 3,2 1,8

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

Power Plants Under Construction 22 GW

10

15
47

Source: ANEEL

Oil Reserves Set to Grow

crude oil, LNG and natural gas 45 billion barrel oil equivalent (boe)

40
35 30 deepwater offshore fields (pre-salt layer) *estimated volume

Libra* (8 billion boe)

Franco* (4.5 billion boe)

Guara* (2 billion boe)

Iara* (4 billion boe)

25
20

Tupi and Iracema* (8 billion boe)

15
10

5 0 1993 1998 2003 2006 2008

1989 1990 1991 1992 1994 1995 1996 1997 1999 2000 2001 2002 2004 2005 2007 2009 2010

Source: Petrobras

future*
48

Final remarks
Macroeconomic stability
Inflation under control Declining net public debt (long term trend)
Low external vulnerability net external creditor

Growth is accelerating

Financial stability
Financial sector is well capitalized, liquid and provisioned Room for credit growth

Expansion of the middle class (consumer class) Multiple investments opportunities

49

Brazil Economic Overview

Alexandre Tombini Governor

50