Goldman Sachs Global Economics, Commodities and Strategy Research The Global FX Monthly Analyst

Brazilian Real
FX Forecast: We are changing our 3-, 6- and 12-month forecasts for the BRL to R$1.75, R$1.85 and R$1.90 from a
previous R$1.60, R$1.65 and R$1.75. We also revised our forecast range for the BRL over the next 3 months to
R$1.65-R$2.00 from R$1.55-R$1.80, previously. GSDEER is 2.72. EUR/BRL forecasts are now 2.54, 2.68, and 2.57.

Motivation for Our FX View: For the next three months, we forecast that the BRL will appreciate to R$1.75 because
of a recovery in net capital inflows, driven by prospects of higher interest rates and a recovery in risk appetite
worldwide. Thereafter, we expect BRL depreciation for three reasons: (1) we expect the current account deficit to widen
rapidly; (2) investors will likely worry about potential changes in the macroeconomic policy framework ahead of the
presidential elections (October 2010) and (3) uncertainties related to the implementation of exit strategies in advanced
economies.

Monetary Policy and FX Framework: Since 1999, BACEN has pursued an inflation targeting regime. For 2008, 2009
and 2010, the IPCA inflation target is 4.5% +/- 2.0%. To this end, COPOM targets the interest rate, SELIC. Brazil has a
managed floating FX regime, marked by large, frequent and discretionary interventions in the spot and derivatives FX
markets.

Growth/Inflation Outlook: After expanding 1.3% (qoq, sa) in 3Q2009, we forecast that real GDP growth will rise to
2.0% in 4Q2009 (qoq, sa). Expansionary domestic demand management policies will boost domestic demand growth to
7.8% in 2010, accelerating real GDP growth to 5.8% in 2010 from -0.2% in 2009. IPCA inflation (yoy) will rise from to
4.6% by end-2010 from 4.3% in December 2009. Strong growth will raise IPCA inflation to 5.0% in 2011. The risks to
our inflation and growth forecasts are skewed to the upside.

Monetary Policy Forecast: We believe that COPOM will tighten monetary policy in two steps. First (March 2010),
COPOM will raise reserve requirements. Second, beginning in April 2010, we forecast that COPOM will raise SELIC
by 50bp, followed by three increases of 75bp per meeting, concluding with two hikes of 50bp per meeting, raising
SELIC to 12.50% in December 2010. If growth and inflation surprise to the upside COPOM will have to raise SELIC
more and faster.

Balance of Payments Situation: We forecast that the current account deficit will more than double to US$55bon in
2010, driven by a marked decline in the trade surplus (to US$4.1bn from US$25.3bn in 2009). We expect that in 2010,
capital inflows will decline marginally to US$69bn, with larger FDI inflows being offset by larger investments by locals
abroad. We forecast that the BoP surplus will decline to US$14.0bn in 2010 from US$46.7bn in 2009, shifting to a
small deficit in 2011.

Things to Watch: The main risks to our call are new measures to discourage capital inflows and avert an appreciation
of the BRL; and continued de-risking in global markets. Uncertainties with elections and the implementation of exit
strategies in developed countries could potentially create some volatility in the exchange rate in 2H2010.
Paulo Leme and Luis Cezario

% GDP
$/BRL Brazil: BBoP vs Current Account
4-qtr ma
4.0 8%
6%
3.5
4% CA BBoP
Spot
3.0
GSDEER 2%
2.5 0%
2.0 -2%

1.5 -4%
-6%
1.0
-8%
0.5
-10%
0.0 -12%
92 94 96 98 00 02 04 06 08 10 96 97 98 99 00 01 02 03 04 05 06 07 08 09

27 February 2010
Goldman Sachs Global Economics, Commodities and Strategy Research The Global FX Monthly Analyst

Brazilian Real
Industrial Production % yoy Money Growth: M3
% yoy
20 100

15
80
10
60
5

0 40
-5
20
-10

-15 0

-20
96 98 00 02 04 06 08 10 -20
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

%yoy Current Account Balance Index Terms of Trade

2000=100
220 220 125
200 200 120
Trade Balance (rhs) TOT
180 180 115
Imports (lhs) Improvement
160 160
Exports (lhs) 110
140 140
105
120 120
100 100 100
80 80 95
60 . 60 90
40 40 85
20 20 80
0 0
75
-20 -20
-40 -40 70
-60 -60 65
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

mths
Import Coverage Coefficient & % yoy Credit Growth & Credit M2 Ratio
ratio
Reserves/M2
30 1.4 40 2.4

Import Coverage Coefficient (lhs) 35 Credit/M2 (rhs) 2.2

25 1.2
Reserves/M2 (rhs) 30 Credit Growth (lhs) 2.0
1.0
20
25 1.8
0.8
15 20 1.6
.
0.6
15 1.4
10
0.4 10 1.2

5 0.2 5 1.0

0 0.8
0 0.0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
96 98 00 02 04 06 08 10

28 February 2010