BRAZIL: ECONOMIC PERSPECTIVES

Gustavo Loyolagloyola@tendencias.com.br

2

Plan of presentation

Macroeconomic perspectives

Brazil in the financial crisis

3

Macroeconomic perspectives

Brazil in the financial crisis

4

Three main channels of contagion of international financial crisis into the country: Credit;

Exports and foreign trade;

Expectations and confidence.

Impacts on the domestic economy were both mild and short. Main reasons for these were: Strong fundamentals of Brazilian economy prior to the crisis;

Sound state of financial sector in Brazil;

Recent growth mainly spurred by domestic factors;

Countercyclical policies (fiscal and monetary).

Domestic ScenarioOverview

5

Credit – New bank loans (monthly averages, seasonally adjusted, constant values, R$ million)

Source: Brazilian Central Bank

80,000

85,000

90,000

95,000

100,000

105,000

110,000

115,000

Jan

-07

Fe

b-0

7

Ma

r-0

7

Ap

r-0

7

Ma

y-0

7

Jun

-07

Jul-0

7

Au

g-0

7

Se

p-0

7

Oct

-07

No

v-0

7

De

c-0

7

Jan

-08

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Jun

-08

Jul-0

8

Au

g-0

8

Se

p-0

8

Oct

-08

No

v-0

8

De

c-0

8

Jan

-09

Fe

b-0

9

Ma

r-0

9

Ap

r-0

9

Ma

y-0

9

Jun

-09

Jul-0

9

Au

g-0

9

45,000

47,000

49,000

51,000

53,000

55,000

57,000

59,000

Companies Individuals

Sep. 08

6

Industrial production (index, seasonally adjusted)

Source: IBGE (forecast Tendencias)

100

105

110

115

120

125

130

135

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Projection

Peak-to-through fall of 20.9% in 2008 Q4; Recovered 13.5% since then.% yoy: 2007: 6.0% 2008: 3.1% 2009(f): -8.7% 2010(f): 9.3%

7

Industrial production (index, seasonally adjusted)

Source: IBGE

Capital goods

110

130

150

170

190

210

Jan-

05

May

-

Sep

-

Jan-

06

May

-

Sep

-

Jan-

07

May

-

Sep

-

Jan-

08

May

-

Sep

-

Jan-

09

May

-

Durable consumption

80

100

120

140

160

180

200

Jan-

05

May

-

Sep

-

Jan-

06

May

-

Sep

-

Jan-

07

May

-

Sep

-

Jan-

08

May

-

Sep

-

Jan-

09

May

-

Intermediary goods

95

105

115

125

Jan-

05

May

-

Sep

-

Jan-

06

May

-

Sep

-

Jan-

07

May

-

Sep

-

Jan-

08

May

-

Sep

-

Jan-

09

May

-

Semi & Non Durable consumption

100

102.5

105

107.5

110

112.5

115

Jan-

05

May

-

Sep

-

Jan-

06

May

-

Sep

-

Jan-

07

May

-

Sep

-

Jan-

08

May

-

Sep

-

Jan-

09

May

-

8

Domestic activity

Unemployment rate

6%

7%8%

9%10%

11%

12%13%

14%

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Source: IBGE

Spectacular fall since 2004, reaching lowest ever levels in

Dec 08.Reversal of downward trend in

early 2009.

Retail sales (index, seasonally adjusted)

90

100

110

120

130

140

150

160

170

180

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Projection

% yoy: 2007: 9.7%2008: 9.1% 2009(f):

5.1% 2010(f): 7.0%

9

GDP growth (annual rates)

GDP Households Government Investment Exports ImportsYear/weight 100.0% 60.7% 20.2% 19.0% 14.3% 14.2%

2004 5.7% 3.8% 4.1% 9.1% 15.3% 13.3%2005 3.2% 4.5% 2.3% 3.6% 9.3% 8.5%2006 4.0% 5.2% 2.6% 9.8% 5.0% 18.4%2007 5.7% 6.3% 4.7% 13.5% 6.7% 20.8%2008 5.1% 5.4% 5.6% 13.8% -0.6% 18.5%2009 -0.1% 2.6% 2.9% -12.7% -10.5% -14.6%2010 4.8% 5.2% 5.1% 7.2% 6.5% 13.0%

Demand

Source: IBGE (forecast Tendencias)

Agriculture Industry Services TaxesYear/weight 6.7% 27.9% 65.3% 15.5%

2004 2.3% 7.9% 5.0% 6.4%2005 0.3% 2.1% 3.7% 4.4%2006 4.5% 2.3% 4.2% 5.7%2007 5.9% 4.7% 5.4% 8.4%2008 5.8% 4.3% 4.8% 7.4%2009 -2.3% -5.1% 3.6% -2.3%2010 3.9% 7.1% 4.6% 4.9%

Supply

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Macroeconomic perspectives

Brazil in the financial crisis

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Forecast for 2009-2010

Indicator 2009 2010

GDP Growth (%) (0.0) 4.8

Inflation (CPI) - % 4.2 4.2

Benchmark interest rate (Selic) - % 8.75 10.00

F/X (R$/US$) 1.75 1.70

Trade Balance (US$ bi) 15.6 25.0

Current Account (US$ bi) (18.7) (22.6)

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Brazil outlook

Why does Brazil have good perspectives?

Reduced geopolitical as well as political risks (contrast with other Bric’s):

• Democratic institutions

• Market economy

• Absence of ethnic conflicts

• Pacific relations with neighbouring countries

Safeguard of macroeconomic stability:

• Law of Fiscal Responsibility

• Inflation targeting regime

• Floating exchange rate

• De facto Central Bank independence

Vast and increasing domestic market for consumption goods

13

Brazil outlook

Expanding credit markets:

• Credit to GDP ratio went from 30% in Dec 06 to 45% (currently)

Important regional player:

• 35% of Latin American and Caribbean (LAC) GDP

• 33% of LAC population

• Diversified economy, sophisticated financial markets

Important producer of several commodities:

• Brazil is one of the largest world producer and exporter for: soya beans, corn, coffee, cotton, sugar, orange juice, cattle and veal, poultry, iron ore

Important player on different energy sources: biofuel (ethanol), oil (pre salt)

Big events: Football World Cup (2014), Summer Olympic Games (2016)

• Brazil will be in the spotlight

• Investment in infra-structure and services

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Coming years will be good for Brazil.

Economic growth led by domestic sectors (consumption and

investment) based on employment growth, income and

credit.

Exchange rate keeps strong value due to the flow of

resources into Brazilian economy.

Risks: medium-term economic growth is constrained by

growth of potential GDP, which, in turn, is affected by (lack

of) investment in infrastructure, human capital, and micro

structural reforms (tax, labor, social security).

Summary

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