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SCENARIOS OF THESCENARIOS OF THE

BRAZILIAN ECONOMYBRAZILIAN ECONOMY

Carlos GeraldoCarlos Geraldo LangoniLangoni

September / 2010

PricewaterhouseCoopersPricewaterhouseCoopers

THE ECONOMIST

P R O J E T A

P R O J E T A

STRUCTURAL CHANGES

• WORLD LEVEL: MULTIPOLARITY;

• DOMESTICALLY: MACRO CONSENSUS.

P R O J E T A

MULTIPOLAR WORLD

• RECESSION x DEPRESSION: CENTRAL BANK

POWER / GROWING ROLE OF EMERGING

COUNTRIES;

• CHINA AND INDIA (SLOWDOWN)

BRAZIL (FLAT)

RUSSIA (DEEP RECESSION).

The emerging economies, essential to absorb the crisis, should continue to lead the world

growth . . .

MULTIPOLAR WORLD

WORLD ECONOMY

Region 2004 2005 2006 2007 2008 2009 2010 2011 - 2014

INTERNATIO NAL TRADE 10.7 7.8 9.1 7.2 3.0 -12.2 13.5 6.0

WO RLD 4.9 4.5 5.1 5.2 3.0 -0.6 4.2 4.5

ADVANCED ECONOMIES 3.2 2.6 3.0 2.7 0.6 -3.2 2.3 2.5

UnitedStates 3.6 3.1 2.7 2.1 0.4 -2.4 3.1 2.6

Euro Area 2.2 1.7 2.9 2.7 0.7 -4.1 1.0 1.5

Japan 2.7 1.9 2.0 2.3 -0.7 -5.2 1.9 2.0

EMERGING ECO NOMIES 7.5 7.1 7.9 8.3 6.0 2.4 6.3 6.5

China 10.1 10.4 11.6 13.0 9.0 8.7 10.0 9.5

India 7.9 9.2 9.8 9.4 7.3 5.7 8.8 8.4

Russia 7.2 6.4 7.7 8.1 5.6 -7.9 4.0 3.5

Brazil 5.7 3.2 4.0 6.1 5.1 -0.2 7.8 5.5

P R O J E T A

P R O J E T A

BRICS GDP GROWTH

1992 – 2011 2003 – 2010 *

CHINA 10% 10.6%

INDIA 7.6% 8.4%

RUSSIA ------ 6.0%

BRAZIL 4.3% 4.7%

* excludes 2009.

Despite recent acceleration, Brazilian performance is the lowest among the BRICS . . .

P R O J E T A

BRICS INFLATION

2002 – 2011

CHINA 2.5%

INDIA 6.7%

RUSSIA 11.0%

BRAZIL 6.5%

China has been able to combine high growth with low inflation . . .

P R O J E T A

SUSTAINABILITY

• SOURCE OF GROWTH: LIBERALIZATION;

• EXPORT PLATFORM;

• INTERNAL MARKET;

• HIGH INVESTMENTS / SAVING RATIOS;

• HUMAN CAPITAL;

• INFRASTRUCTURE.

P R O J E T A

BRAZIL’S MAIN FEATURE I

• LATE COMER (AFTER 2004);

• CONSISTENT MACRO ARCHITECTURE (1999 ON);

• STABILIZATION / EXTERNAL VULNERABILITIES;

• STRESS TEST;

• QUICK EXIT OUT OF THE CRISIS;

• CONTRAST WITH OTHER SHOCKS;

• INVESTMENT GRADE.

Recession lasted only 2 quarters and Brazil was one of the first to leave the crisis . . .

REBOUND

GDP GROWTH

(In relation to the last quarter)

Sector 4th Q. 2008 1st Q. 2009 2nd Q. 2009 3rd Q. 2009 4th Q. 2009 1st Q. 2010 2nd Q. 2010

G D P - 2.9 - 1.5 1.5 2.1 2.4 2.7 1.2

Agriculture - 3.1 - 5.9 - 2.3 1.0 2.8 3.8 2.1

Manufacturing - 8.1 - 4.5 1.8 3.3 3.9 4.0 1.9

Services - 2.3 0.9 1.5 1.6 0.8 1.8 1.2

Source: IBGE.

P R O J E T A

Domestic consumption, leveraged by incentives and credit explosion, has led the exit out fromcrisis. The growth in real wage mass sustains the recovery. There is also a healthy acceleration ofinvestment . . .

REBOUND

COMPONENTS OF DEMAND

(In relation to the same quarter of last year)

Sector 2nd Q. 2009 3rd Q. 2009 4th Q. 2009 1st Q. 2010 2nd Q. 2010

G D P - 1.6 - 1.2 4.3 9.0 8.8

Families’ Consumption 3.0 3.9 7.7 9.3 6.7

Government’s Consumption 3.9 1.6 4.9 2.0 5.1

Investment - 16.0 - 12.5 3.6 26.0 26.5

Exports - 11.4 - 10.1 - 4.5 14.5 7.3

Imports - 16.5 - 15.8 2.5 39.5 38.8

Source: IBGE.

P R O J E T A

P R O J E T A

BRAZIL’S MAIN FEATURE II

• CENTRAL BANK AUTONOMY: INFLATION TARGET;

• FISCAL ADJUSTMENT (PRIMARY SURPLUS);

• NET EXTERNAL CREDITOR (BUILDING UP RESERVES);

• A SOLID FINANCIAL SYSTEM: CREDIT EXPANSION;

• THE ROLE OF PUBLIC INSTITUTIONS (BNDES x B.B.).

P R O J E T A

BRAZIL’S MAIN FEATURE III

• COMMODITY BOOM: CHINA IMPACT;

• INCREASING SHARE OF PRIMARY PRODUCTS;

• PRE-SALT IMPACT;

• A DIVERSIFIED / SOPHISTICATED ECONOMY;

• NO CONFLICT BETWEEN COMMODITIES AND INDUSTRIALIZATION;

• POLITICAL STABILITY.

Commodity’s prices are key indicator of the world economy’s activity: even more

influenced by China . . .

COMMODITIES

P R O J E T A

50

75

100

125

150

175

200

225

250

275

20

00

20

02

20

04

20

06

Ja

n./

…

Ma

r

Ma

i

Ju

l

Set

No

v

Ja

n./

…

Ma

r

Ma

i

Ju

l

Set

No

v

Ja

n./

…

Ma

r

Ma

i

Ju

l

Set

COMMODITIES’ INDEX

$ basis 2000 = 100

Total: +16.5% / Food: +12.0% / Metals: +15.1% (% a year).

The rising price of commodities, pushed by China, is changing the composition of

Brazilian exports . . .

COMMODITIES BOOM

P R O J E T A

EXPORT COMPOSITION

January - August (%)

Period Primary Semimanufacturing Industrialized

1991 27.84 16.21 54.94

2010 44.27 13.81 39.74

P R O J E T A

Despite a deep fall in 2009, GDP average growth was higher during Lula government . . .

FHC x LULA

-2

-1

0

1

2

3

4

5

6

7

8

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

GDP GROWTH%

F H C L U L A

P R O J E T A

INFLATION

Inflationary expectations have somehowadjusted, reflecting Central Bank credibility . . .

4,25

4,50

4,75

5,00

5,25

5,50

5,75

Jan

Fev

Mar

Abr

Mai

Jun

Jul

Ag o Set

%

INFLATIONARY EXPECTATIONS(IPCA)

2 0 1 0

2 0 1 1

8

9

10

11

12

13

14

Jan

/08

Mar

Abr

Jun

Jul

Set

Out

Dez

Jan

/09

Mar

Abr

Jun

Ago

Out

Dez

Jan

/10

Mar

Abr

Jun

Jul

Set

%

INTEREST RATES(SELIC)

The Central Bank’s autonomy was crucial to minimize the impact of crisis by cutting compulsory

rates and the SELIC. This year, it had to tighten up again . . .

THE CENTRAL BANK AUTONOMY

2008 2009

P R O J E T A

2010

P R O J E T A

1,50

1,60

1,70

1,80

1,90

2,00

2,10

2,20

2,30

2,40

Jan

/08

Mar

Mai Jul

Set

No

v

Jan

/09

Mar

Mai Jul

Set

No

v

Jan

/10

Mar

Mai Jul

Set

R$ / US$EXCHANGE RATE

In contrast with other shocks, there was no explosion of devaluations due to the cushion of international

reserves. There is a new equilibrium level, more appreciated . . .

20092008

EXCHANGE FLOATING

2010

The external turbulence has not changed the favorable perception of country-risk, that received

from Moody’s the investment grade. With the end of elections and improvement in the fiscal

area, a new upgrade may happen . . .

COUNTRY-RISK

P R O J E T A

150

200

250

300

350

400

450

500

550

Jan /2008

Mar May Jul Set Nov Jan /2009

Mar Mai Jul Set Nov Jan /2010

Mar Mai Jul Set

BRAZILIAN RISKBasis Points

P R O J E T A

SUSTAINABILITY

• STRONG EXPANSION OF INTERNAL DEMAND;

• PRIVATE CONSUMPTION AND INVESTMENT;

• HIGH LEVEL OF CONFIDENCE;

• IT IS NOT A BUBBLE: REAL WAGE MASS / CREDIT;

• INTEREST RATES ARE STILL HIGH.

Brazilian growth should be sustained by the impressive inflow of external investments,

reflecting macro stability and a declining political risk . . .

SUSTAINED GROWTH

0

5

10

15

20

25

30

35

40

45

50

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

US$ billion

FOREIGN DIRECT INVESTMENT

P R O J E T A

15

16

17

18

19

20

21

22

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

% of GDP

INVESTMENT RATE

It should also reflect a fast expansion of investment . . .

SUSTAINED GROWTH

P R O J E T A

P R O J E T A

SOCIAL DIMENSION

• STABILITY AS PRE-CONDITION;

• ACCESS TO EDUCATION;

• GAINS IN REAL WAGES / FORMAL EMPLOYMENT

• POLICIES OF INCOME TRANSFER: MINIMUM WAGE AND

“BOLSA FAMÍLIA”;

• REDUCTION IN INEQUALITY AND POVERTY;

• THE NEW MIDDLE CLASS.

A new pattern of development is being characterized by the systematic fall of inequality

and the increase of social mobility with a growing middle class . . .

SOCIAL DIMENSION

P R O J E T A

0,480

0,490

0,500

0,510

0,520

0,530

0,540

0,550

2002 2003 2004 2005 2006 2007 2008 * 2009 * 2010 *

GINI INDEX

Source: IBGE.

The combination of stability, increasing access to education and programs of income transfer, led

to a strong fall in poverty . . .

SOCIAL DIMENSION

17

19

21

23

25

27

29

31

Mar

/03

Jun

Set

Mar

/04

Jun

Set

Dez

Mar

/05

Jun

Set

Dez

Mar

/06

Jun

Set

Dez

Mar

/07

Jun

Set

Dez

Mar

/08

Jun

Set

Dez

Mar

/09

Jun

Set

Dez

EXTREME MISERY

(Average in 12 Months)

Source: Marcelo Neri, FGV (Centro de Políticas Sociais).

P R O J E T A

P R O J E T A

CHALLENGES

- TRANSITION TO SUSTAINED GROWTH;

- COMPETITIVENESS (REFORMS);

- DUALISM: PUBLIC SECTOR x PRIVATE SECTOR;

- DOMESTIC SAVING x INVESTMENT;

- INFRASTRUCTURE: REGULATORY FRAMEWORK;

- EDUCATION;

- WORLD CUP / OLYMPICS.

P R O J E T A

RISKS

- MACRO MISTAKES (CENTRAL BANK AUTONOMY / FISCAL

POLICY / EXCHANGE CONTROLS);

- THE ROLE OF THE STATE;

- WORLD RECESSION (W).

P R O J E T A

EXTERNAL INTERNAL SCENARIO

SCENARIO

Gradualism Competitiveness Neo-populism

Sustained 5% 6% 2%

Soft Landing 4% 5% 0%

Discontinuity 1% 3% recession

EXPECTED GDP GROWTH