Brazil Economic Outlook

Brazil Economic Outlook London School of Economics Alexandre Tombini Governor January 2014 1

Brazil overview 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 7 th largest GDP: US$ 2,253 billion (2012) Continental country: 5 th largest area 8,515,767 km 2 5 th largest population: 199 million people (2012) Source: IBGE / BCB / IMF 2

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Demographics Population Sources: Pyramid IBGE (2012) / UN 90+ 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 men women -10-5 0 5 10 Dependency Ratio 100 75 50 25 million people Brazil China India Russia Brazil s population is highly concentrated within the Economically Active Population range Brazil s dependency ratio is low and 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 3

Social achievements in the past decade Reduced poverty: from 27% to 12% of the households Reduced inequality Grew the middle class: +40 million people Created jobs: more than 18 million additional formal jobs (2003-2012); record low unemployment at present Increased access to credit and banking services Source: IPEA / IBGE / FGV / BCB 4

Main topics Inflation Central bank is acting to bring inflation to target Growth Moderate economic expansion Rebalancing consumption and investment Supply-side initiatives to raise potential growth UMP Exit Net positive for emerging markets Brazil has flexible policy framework BCB has buffers to smooth the adjustment process 5

Inflation 6

Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 YoY % Inflation high but within target band 18 16 14 12 Ten consecutive years of year-end inflation within target band 10 8 6 4 2 0 CPI Inflation Report (Dec 13) Source: IBGE / BCB 7

ER depreciation pressuring inflation BRL/USD (inverted scale) Dec 06 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Central bank acting to limit pass-through to domestic prices 1.5 Jul 11 1.56 1.7 1.9 2.1 2.3 2.35 2.5 Source: BCB 8

s.a. % Labor market remains tight 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 million 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Labor market continues to tighten, but some signs of moderation can be observed Unemployment Rate Formal Jobs Creation 14 12 10 8 3.0 2.5 2.0 1.5 1.0 1.0 0.9 1.9 1.8 1.7 1.61.5 1.4 2.6 2.0 1.4 1.1 6 4 5.1 0.5 0.0 Up to Nov 13 Source: IBGE / MTE 9

Food price shocks in 2012-2013 hit inflation % YoY Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 Brazil suffered idiosyncratic shocks on top of the global food commodity shocks 15 Apr 13 14.0% 12 9 8.5% 6 3 0 1 st supply shock (commodities) 2 nd supply shock (fresh foods) Food and Beverages Source: IBGE 10

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 % % Central bank acting to bring inflation to target 20 15 18 12 16 14 9 12 10 10.5 6 4.8 8 3 6 0 Policy rate Swap reference rate - 360-day term Real Interest Rate (ex ante) Source: BCB / BM&FBOVESPA 11

Growth 12

Moderate economic expansion Moderate growth to continue in 2014 Economic growth drivers Employment, wages and credit support consumption Pent-up demand for infrastructure investment More favorable contribution from net exports Rebalancing consumption and investment Faster growth requires strengthening confidence 13

Growth Demand 14

Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 YoY % 12 months % 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 s.a. % million Support for domestic demand 14 Unemployment Rate 3.0 Formal Jobs Creation 2.6 12 10 8 6 Nov 13 5.1 2.5 2.0 1.5 1.0 0.5 1.0 0.9 1.8 1.6 1.5 1.9 1.7 1.4 2.0 1.4 1.1 4 0.0 40 35 30 25 20 15 10 5 0 Credit Outstanding 14.6% 7.7% 7 6 5 4 3 2 1 0 Employment and Labor Income 2.8% 1.8% 1.0% Total Households (nonearmarked credit) Employment Real Income Real Payroll Source: IBGE / MTE / BCB * 12 months up to november 15

Consumption remains strong 2011 = 100 Nov 07 Mar 08 Jul 08 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 Retail Sales 120 110 100 4.4% (12 months) 3.8% (12 months) 90 80 70 60 Retail Sales Expanded Retail Sales (includes vehicles and building materials) Source: IBGE 16

Investment strong in 2013 12-month change (%) Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 25 Capital Goods Output 20 15 10 11.5% 5 0-5 -10-15 -20-25 Source: IBGE 17

Neutral = 100 Confidence key for investment Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 1 Q 11 2 Q 11 3 Q 11 4 Q 11 1 Q 12 2 Q 12 3 Q 12 4 Q 12 1 Q 13 2 Q 13 3 Q 13 4 Q 13 114 112 Industry Confidence 14% Gross Fixed Capital Formation Annual growth 110 10% 108 106 104 102 100 98 96 6% 2% -2% -6% 3.7% Source: FGV / IBGE 18

% Net exports drivers 2010 2011 2012 2013 2014 2015 % Jun 1994 = 100 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 6 Global activity and trade gain traction 14 Real exchange rate has depreciated 60 5 4 2.7 3.0 4.5 3.7 5.2 3.9 10 6 70 80 Jul 11 71.9 3 2 90 2 1-2 -6 100 96.3 0-10 110-1 -14 120 Global GDP Growth World Trade (RHS) Real Effective Exchange Rate Source: IMF / BCB 19

Net exports should contribute to growth percentage points 2006 2007 2008 2009 2010 2011 2012 2013* 2014** 12 10 10.3 8 7.5 6.9 6 5.3 4 2 3.4 1.0 3.3 2.1 0.2 0-2 -4-1.4-1.4-1.7-0.2-0.1-2.7-0.7 0.03-1.0 External Sector Domestic Demand * Forecast (Inflation Report Dec 2013) ** Up to 3rd quarter (accumulated over 4 quarters) Source: IBGE / BCB 20

Growth Supply 21

Industrial sector recovery 2002 = 100 Jan 11 Mar 11 May 11 Jul 11 Sep 11 Nov 11 Jan 12 Mar 12 May 12 Jul 12 Sep 12 Nov 12 Jan 13 Mar 13 May 13 Jul 13 Sep 13 Nov 13 132 131 Industrial production (3 month moving average) 130 129 128 127 126 125 124 123 Source: IBGE 22

% Change Over 12 Months Improved industrial competitiveness Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 3mma s.a., 2008 = 100 Nov 08 Mar 09 Jul 09 Nov 09 Mar 10 Jul 10 Nov 10 Mar 11 Jul 11 Nov 11 Mar 12 Jul 12 Nov 12 Mar 13 Jul 13 Nov 13 15.0 Real Output Costs and Components 140 Unit Labor Cost in Industry 10.0 130 Aug 11 127.2 5.0 0.0 2.3 1.4 1.1 120 110 100 98.2-5.0 90-10.0-11.9 80-15.0 70 Output Cost Intermediate Goods Employees Energy ULC in USD Source: CNI / IBGE / BCB 23

Service sector shows moderate growth neutral = 50 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 Sep 13 Dec 13 60 PMI in service sector 58 56 54 52 50 51.7 48 46 44 42 40 Source: Markit 24

million tons Record grain harvests in 2013 and 2014 190 185 180 175 170 165 160 155 150 145 140 135 130 125 120 grain production World Producer Rank (FAO 2011) Soybean: 2º Corn: 3º 161.9 188.2 189.6 2007 2008 2009 2010 2011 2012 2013* 2014* *December 2013 estimate Source: IBGE / FAO 25

Supply-side initiatives to boost growth Investment in human capital Infrastructure (airports, roads, railways and ports): attracting private sector capital and expertise Development of the oil and gas sector 26

Investment in human capital Programs aimed at increasing access to technical schooling and higher education: o Technical and professional education: Pronatec: 5.5 million students in technical and professional education since 2011 (goal is 8 million by end of 2014) o Higher education: Prouni: almost 250,000 undergraduate scholarships in private institutions for disadvantaged students in 2013 Science without frontiers: 100,000 scholarships abroad up to 2015 Currently almost four thousand undergraduate and graduate students in the UK Source: MEC 27

Education: room for further improvement Mean years of schooling of adults increased sharply in the last decades, but Brazil still lags developed and many developing nations Countries 1990 2000 % Change 2010 % Change Brazil 3.8 5.6 47.4 7.2 28.6 Chile 8.1 8.8 8.6 9.7 10.2 China 4.9 6.6 34.7 7.5 13.7 India 3.0 3.6 20.0 4.4 22.2 Russian Federation 9.2 11.3 22.8 11.7 3.5 South Africa 6.5 8.2 26.2 8.5 3.7 United States 12.3 13 5.7 13.3 2.3 Average number of years of education received by people ages 25 and older Source: UN 28

Infrastructure and energy reforms Infrastructure (airports, roads, railways and ports) and energy: attracting private sector capital and expertise Concession auctions have proved attractive o 6 airports: 85 million passengers transported in 2012 o 5 roads: 4,268 km (2,652 miles) o Oil and gas auctions in 2013: 11 th and 12 th rounds of oil and gas concessions 1 st production sharing round (pre-salt layer: Libra) BRL15 billion signing bonus 29

UMP Exit 30

Brazil prepared for UMP exit Net positive for emerging markets, which will benefit including through international trade Sound financial system Strong external indicators 31

Classic policy response Exchange rate flexibility Policy tightening Use of buffers 32

UMP exit prospects led to higher volatility Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13 Nov 13 Dec 13 Jan 14 17.5 BRL Volatility (3-Months At-the-money Implied) 15.0 12.5 10.0 7.5 5.0 Source: Bloomberg 33

Sound financial system Germany Brazil United Kingdom Mexico Turkey South Africa Japan Canada United States France South Korea Regulatory Capital to Risk-Weighted Assets Italy Russia India Spain Australia 12.0 11.6 14.0 13.9 13.4 13.3 14.8 14.7 14.4 14.4 14.3 16.4 16.1 15.7 17.1 19.1 10 12 14 16 18 20 ( Provisions NPL) / Capital Brazil 10.6 Mexico 7.7 Turkey -3.2 South Korea -3.9 Canada -6.0 Russia -10.9 India -13.6 United States -13.6 United Kingdom -14.5 Australia -14.7 Japan -19.2 South Africa -22.2 Spain -31.9 Italy -86.3-120 -20 80 Liquid Assets to Short Term Liabilities Brazil Germany South Korea Italy Russia United States Turkey Japan Mexico Australia Canada United Kingdom South Africa India 49.9 46.7 45.0 44.9 40.0 36.1 26.1 82.0 76.4 72.5 96.9 140.3 121.4 160.0 0 50 100 150 200 Source: IMF (FSI latest available data) 34

Banks: low reliance on cross-border funding Origin of Bank Funding 100% 4.1 11.0 15.1 8.8 80% 95.9 89.0 84.9 91.2 60% Public-owned Private-owned Foreign-controlled Total Domestic Cross-border Sep 13 Source: BCB 35

US$ billion Brazil is net external creditor 1984 1989 1994 1999 2004 2009 2014* US$ billion 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013* International Reserves Net External Debt 400 350 300 250 375.5 210 170 130 90 200 150 100 50 0 50 10-30 -70-110 -86.8 *as of Jan 20 th *Nov 2013 Source: BCB 36

Strong external debt indicators External Debt / GDP (%) Short Term External Debt / Total (%) Turkey 49.3 Turkey 27.5 Chile 44.5 India 26.1 South Africa 40.1 Indonesia 25.7 Peru 31.4 Mexico 24.1 Mexico 30.3 South Africa 20.3 Indonesia 29.8 Chile 15.9 Brazil 29.6 Peru 13.6 India 21.8 Colombia 13.6 Colombia 21.4 Brazil 9.4 0 20 40 60 0 10 20 30 2013 forecasts Source: IIF * Brazil data includes intercompany debt transactions and domestic debt in hands of foreign investors 37

Low nonresident public debt share France Germany Australia South Africa Spain Mexico Italy US UK Turkey Canada Russia Brazil South Korea Japan India % of outstanding domestic public debt securities* 41.3 37.5 36.9 35.8 33.8 32.7 31.3 24.7 23.6 16.5 13.7 8.4 7.8 61.3 59.9 55.2 0 20 40 60 80 * The latest data reported by the IMF Fiscal Monitor in October 2013. For Brazil, data from November, as reported by Secretaria do Tesouro Nacional (STN). Source: IMF / STN 38

Leading destination for FDI 2010 2011 2012 US 197.9 US 226.9 US 146.7 China 114.7 China 124.0 China 119.7 Belgium 85.7 Belgium 103.3 Hong Kong 72.5 Hong Kong 82.7 Hong Kong 96.1 Brazil 65.3 UK 50.6 Brazil 66.7 UK 62.5 Singapore 48.6 Australia 65.8 France 58.9 Brazil 48.5 Singapore 64.0 Singapore 54.4 Germany 46.9 Russia 52.9 Australia 48.5 Russia 43.3 UK 51.1 Canada 47.2 Ireland 42.8 Canada 41.4 Russia 44.1 Spain 40.8 France 40.9 Ireland 39.6 Australia 35.2 Germany 40.4 India 27.3 Switzerland 32.5 Italy 34.3 Chile 26.4 France 30.6 India 31.6 Luxembourg 22.6 Saudi Arabia 29.2 Spain 29.5 Belgium 19.3 Source: UNCTAD 0 50 100 150 200 Milhares 0 50 100 150 200 Milhares 0 50 100 150 Milhares 39

Brazil Economic Outlook London School of Economics Alexandre Tombini Governor January 2014 40

Glossary BCB BM&FBOVESPA CNI EME FAO FDI FGV IBGE IIF IPEA MEC MTE STN UMP UNCTAD Banco Central do Brasil Brazilian Securities, Commodities and Futures Exchange Confederação Nacional da Indústria Emerging Market Economy Food and Agriculture Organization of the United Nations Foreign Direct Investment Fundação Getúlio Vargas Instituto Brasileiro de Geografia e Estatística Institute of International Finance Instituto de Política Econômica Aplicada Ministério da Educação Ministério do Trabalho e Emprego Secretaria do Tesouro Nacional Unconventional Monetary Policy United Nations Conference on Trade and Development 41